



COURT OF APPEAL FOR ONTARIO

CITATION: Urbancorp Cumberland 2 GP Inc. (Re), 2020 ONCA 197

DATE: 20200311

DOCKET: C66812

Pepall, Lauwers, van Rensburg, Zarnett and
    Thorburn JJ.A.

IN THE MATTER OF the
Companies Creditors Arrangement Act
,
    R.S.C. 1985, c. C-36, as amended

AND IN THE MATTER OF a plan of compromise or arrangement of
    Urbancorp Cumberland 2 GP Inc., Urbancorp Cumberland 2 L.P., Bosvest Inc., Edge
    on Triangle Park Inc., Edge Residential Inc., and Westside Gallery Lofts Inc.

Kevin D. Sherkin and Jeremy Sacks, for the appellants,
    Toro Aluminum (A Partnership), Speedy Electrical Contractors Ltd., and Dolvin
    Mechanical Contractors Ltd.

Kenneth D. Kraft and Neil S. Rabinovitch, for the
    respondent, Guy Gissin, in his capacity as the Israeli Court Appointed
    Functionary Officer of Urbancorp Inc.

Adam M. Slavens and Jonathan Silver, for the respondent,
    Tarion Warranty Corporation

Robert J. Drake, for Fuller Landau Group Inc.

Hart Schwartz, for the intervener, the Attorney General
    of Ontario

Heard: October 3, 2019

On appeal from the order of Justice Frederick L. Myers of
    the Superior Court of Justice, dated November 27, 2018.

Zarnett J.A.:

OVERVIEW

[1]

Those involved in the construction industry add
    value to real estate by their provision of work and materials. In order to
    protect them against the risk of non-payment and the unjust enrichment of
    others, Ontario enacted the
Construction

Lien Act
, R.S.O.
    1990, c. C.30 (the CLA), now the
Construction Act
, R.S.O. 1990, c. C.30,
    with a comprehensive scheme of liens, holdbacks, and trusts. One situation
    where the need for protection can be most acute is when contractors have
    improved a real estate project, have not been paid, and the owner becomes
    insolvent. Insolvency, however, is a federal matter, with its own processes and
    priorities.

[2]

This case concerns the scope and effectiveness
    of s. 9(1) of the CLA

in an insolvency proceeding.
[1]
Subsection 9(1) of the CLA
    provides for a trust over sale proceeds of property in favour of unpaid
    contractors.

[3]

The Cumberland Group, a residential condominium
    developer, was granted insolvency protection under the
Bankruptcy and
    Insolvency Act
, R.S.C. 1985, c. B-3 (the BIA) and continued under the
Companies
    Creditors

Arrangement Act
, R.S.C. 1985, c. C-36

(the CCAA)
.
It owned unsold condominium units in a project it constructed. The appellants, Toro
    Aluminum (A Partnership), Speedy Electrical Contractors Ltd., and Dolvin Mechanical
    Contractors Ltd., had supplied work and material to these units. They were owed
    significant unpaid sums.

[4]

The condominium units were ultimately sold
    during the insolvency proceedings. As a result of the sale, the appellants
    claimed that a trust arose over the proceeds to the extent of the amounts owing
    to them, which would give them an effective priority for these amounts. The motion
    judge rejected the trust claim, reasoning that he was bound to reach that
    conclusion due to the court-appointed Monitors involvement in the sale and
    this courts decision in
Re Veltri Metal Products Co
. (2005), 48
    C.L.R. (3d) 161 (Ont. C.A.).

[5]

The appellants obtained leave to appeal the
    motion judges decision. This court granted leave and, as the correctness of
Veltri
was in issue, it also convened a five-judge panel.

[6]

For the reasons that follow, I would allow the
    appeal.

[7]

In summary, the trust created by s. 9(1) of the CLA
    can be effective in a CCAA sales process. It would only be displaced under the
    doctrine of paramountcy if it conflicted with a specific priority created under
    the CCAA. In this case, nothing displaces the operation of the s. 9(1) trust
    over the proceeds to the extent of the amounts owed to the appellants.

[8]

I do not interpret
Veltri
as standing
    for the proposition that the substantial involvement of the CCAA Monitor in the
    sales process prevents a s. 9(1) trust from arising.
Veltri
was
    correctly decided on its facts, which were very different from this case. On
    these facts, the s. 9(1) trust arose.

FACTS


(I)

The Cumberland Group and Edge Project

[9]

The Cumberland Group consisted of a number of
    related entities: Edge on Triangle Park Inc. (Triangle), Edge Residential
    Inc. (Residential), Bosvest Inc., (Bosvest), Urbancorp Cumberland 2 L.P.,
    and Urbancorp Cumberland GP Inc.

[10]

Triangle was the registered owner and developer
    of a residential condominium development municipally located at 2-6 Lisgar
    Street, consisting of two towers and 665 residential units (the Edge
    Project). Triangle held legal title in trust for Bosvest, which held the
    beneficial interest in trust for Urbancorp Cumberland 2 L.P.

[11]

In 2011, Triangle began construction on the Edge
    Project and entered into agreements with the appellants to provide labour and
    materials for the project. Between May and July 2015, Triangle sold the vast
    majority of the condominium units.

[12]

In July 2015, Triangle transferred 32
    residential units, parking spots, and storage units to Residential for $2.
    Residential also held these units in trust for Bosvest, and ultimately for
    Urbancorp Cumberland 2 L.P. Given that there was no change in beneficial
    ownership, there is no suggestion here that this transfer affected the rights
    of the appellants.


(II)

The Insolvency Proceedings

[13]

In 2016, each member of the Cumberland Group
    filed a Notice of Intention to Make a Proposal under s. 50.4(1) of the BIA. On
    April 29, 2016, Fuller Landau Group Inc. was named as Proposal Trustee. At the
    time of the BIA filing, Triangle and Residential collectively held title to 37
    residential condominium units, 5 retail units, 22 storage units, and 16 parking
    spots.

[14]

During the BIA Proposal proceedings:

·

the
    Proposal Trustee was authorized by the court to open one or more bank accounts
    on behalf of Triangle and Residential, manage their receipts and disbursements,
    and monitor their cash flows;

·

Triangle,
    Residential, and their shareholder, directors and officers were prohibited from
    taking steps with respect to the business or assets of either company, except
    under the direction of the Proposal Trustee; and

·

The
    Proposal Trustee was authorized under an Approval and Vesting Order dated
    August 24, 2016, and a Sales Process Order dated August 24, 2016, to conduct a
    sales process for the condominium assets of the Cumberland Group (discussed in
    more detail below).



[15]

On October 6, 2016, an order was made granting the
    Cumberland Group members protection under the
CCAA
    (the Initial Order)
. The Initial Order continued the
BIA

Proposal proceedings under
    the
CCAA
, appointed the
    Proposal Trustee as Monitor, and directed that the sales process authorized
    under the Approval and Vesting Order and Sales Process Order be continued in
    the
CCAA
proceedings. The Initial
    Order also authorized the creation of certain priority charges, including a
    charge for the fees and expenses of the Monitor and its counsel, and a charge
    to secure repayment of money advanced to fund operations during the
CCAA
proceedings, known as debtor-in-possession
    (DIP) financing.

[16]

At the time of the
CCAA
filing, the appellants were owed $3
,864,428.72
for work they had supplied to the
    condominium project.

(III)

The Sale of the Condominium Units

[17]

Pursuant to the Approval and Vesting Order and
    the Sales Process Order, the sales process was continued after the CCAA filing.
    A total of 32 residential units, 5 retail condominium units, 7 parking spots,
    and 4 storage units were sold. For the units registered in Triangles name, each
    agreement for the sales stipulated the vendor as Edge on Triangle Park Inc. as
    represented by the Fuller Landau Group Inc. solely in its capacity as Proposed
    (sic) Trustee of Triangle... It was implicit in the parties positions that a similar
    form was used for units registered in Residentials name.

[18]

On closing of a unit sale, when the Monitor was
    satisfied the purchasers obligations were fulfilled, it was required to deliver
    to the purchaser a certificate in a prescribed form. That delivery, pursuant to
    a provision of the Approval and Vesting Order as continued under the CCAA,
    vested in the purchaser all of the right, title, and interest of the
    respective Cumberland Group entity (Triangle or Residential, as the case may
    be) together with any beneficial interest of any Cumberland Group entity The Approval
    and Vesting Order also provided that the vesting of title in the purchaser
    would be free and clear of certain claims and encumbrances on the units. The
    proceeds of the sales were ordered to stand in the place of the units in order
    to determine the priorities of those claims and encumbrances, as though the
    units had not been sold.

[19]

Of the funds received on the sales (in excess of
    $11 million), some were used to fund the
CCAA
proceedings and repay the DIP financing under a Cash Funding Order, dated March
    16, 2017. No party objected to that order or the payments under it.

[20]

After those payments, and as of October 11,
    2018, $6,093,715.17 from the sales remained in bank accounts that were opened
    by the Monitor in Triangles name ($641,553.71) and Residentials name
    ($5,452,161.46). Funds were deposited into each account depending on which
    entity held registered title to the unit being sold. The Monitor estimated that
    $1,846,751.71 was owing to the mortgagees of the units, whose rights against
    the sale proceeds were preserved. The net proceeds remaining from the sales,
    after that mortgage indebtedness, was $4,246,963.46.

THE DECISION BELOW

[21]

The appellants claimed that, pursuant to s. 9(1)
    of the CLA, a trust had arisen in their favour by virtue of the sales. Section
    9 of the
CLA
provides:

9(1) Where the owners interest in a premises is sold by the
    owner, an amount equal to,

(a) the value of the consideration received by the owner as a
    result of the sale,

less,

(b) the reasonable expenses arising from the sale and the
    amount, if any, paid by the vendor to discharge any existing mortgage
    indebtedness on the premises,

constitutes a trust fund for the benefit of the contractor.

(2) The former owner is the trustee of the trust created by subsection
    (1), and shall not appropriate or convert any part of the trust property to the
    former owners use or to any use inconsistent with the trust until the
    contractor is paid all amounts owed to the contractor that relate to the
    improvement.

[22]


The Monitor brought a motion under the CCAA for
    a determination by the court of whether the sale proceeds were impressed with a
    trust in the appellants favour.

[23]

The motion judge held that they were not.
    Relying on
Veltri
, he found that a s. 9(1) trust could not arise on
    these facts because the sale proceeds were not received by the owners of the
    premises, but rather a CCAA Monitor. He stated that [r]egardless of whether
    one could argue that
Veltri
does not give sufficient recognition to
    the position of lien claimants, the Court of Appeal has ruled that the
    prerequisites of a ss. 7 or 9 trust are not met where a Monitor ultimately
    receives the proceeds of sale to be held for creditors. He drew attention to the
    court orders giving the Monitor in this case control over the sales process and
    its proceeds, as well as the limitations placed on the Cumberland Group entities.
    Despite the fact that the debtor in
Veltri
had no equity in the funds
    realized on the sales, the motion judge did not consider
Veltri
to be
    distinguishable. Ultimately, he concluded: [h]ere, the Monitor controlled the
    sale and proceeds completely.
Veltri
applies and binds me.

THE PARTIES POSITIONS

[24]

For the proceedings in this court, in addition
    to appealing the motion judges decision, the appellants served a Notice of
    Constitutional Question: Does s. 9 of the
CLA

continue to have application following a bankruptcy or initial order under
    the
CCAA
? The Attorney General
    of Ontario intervened on that question.

[25]

On appeal, the appellants submit that the
    elements in s. 9(1) of the CLA are satisfied. They argue that each condominium sale
    was a sale by Triangle or Residential as the owner because the sale
    agreements were entered into
on their behalf
by
    the Monitor
as a representative
. They note that it
    was Triangle or Residentials interest in the units that was sold, and that the
    consideration from the sales was received by each of them as owner since
    the sale proceeds were deposited into bank accounts opened for them. The appellants
    also note, crucially, that the value of the consideration exceeded both the
    expenses of the sale and the amount of mortgage indebtedness, resulting in a
    positive balance that could constitute a trust fund for their benefit.

[26]

Accordingly, the appellants submit that the
    motion judge reached the wrong conclusion when he denied their s. 9(1) trust claim.
    They argue that this courts decision in
Veltri
did not mandate that
    result since it was distinguishable. If not distinguishable, they argue that it
    was wrongly decided. Finally, the appellants submitsupported by the Attorney
    Generalthat a
BIA
or
CCAA

proceeding does not prevent
    the recognition of a s. 9(1) trust, and that the constitutional question should
    therefore be answered by recognizing the validity of a s. 9(1) trust in an
    insolvency.

[27]

The respondents, the Israeli Court Appointed
    Functionary Officer and Tarion Warranty Corporation, do not argue that a
CLA

trust can never be
    recognized in an insolvency, but that the extent to which it can be is more
    limited than the appellants suggest. They submit that, on these facts, and
    given the various court orders in this insolvency, the motion judge was correct
    not to give effect to the assertion that a s. 9(1) trust arose. Like the motion
    judge, they say that the condominium sales were not made by the owner given
    the Monitors control over Triangle and Residentials activities, especially with
    respect to the sales process. They further note that the proceeds of sale were
    not received by the owner but rather by the Monitor
on
    behalf of creditors
. Accordingly, they take the position that
Veltri
was correctly decided and properly applied by the motion judge.

[28]

I will first address the constitutional question
    since it provides the context in which to consider the other issues, namely the
    correctness and applicability of
Veltri
and whether a s. 9(1) trust
    arose in this case.

ISSUE ONE: THE CONSTITUTIONAL QUESTION


(I)

The Context

[29]

Under the CLA, a s. 9(1) trust is triggered by the
    receipt of proceeds of a sale of premises that have been improved by a
    contractors labour or materials. The question of whether a s. 9(1) trust is
    effective in insolvency can therefore arise in two situations. The first is when
    the sale precedes the insolvency filing, but the proceeds remain in the insolvents
    possession when the filing occurs. In that circumstance, the question would be whether
    those funds continue to be held in a trust that will be recognized in the
    insolvency, or whether, upon insolvency, they lose that character and form part
    of the debtors assets to be dealt with in the insolvency. The second
    situation, which is the one applicable here, is when the sale that triggers the
    assertion of a s. 9(1) trust takes place after the insolvency filing.

[30]

Although the Constitutional Question is broadly
    worded, it is important to limit the discussion to the context of this case, in
    which it has arisen.


(II)

The Decision in
Guarantee

[31]

The starting point for the analysis is
The
    Guarantee Company of North

America v. Royal Bank of Canada
, 2019
    ONCA 9, 144 O.R. (3d) 225, a decision of a five-judge panel of this court.
Guarantee
considered the statutory trust created under s. 8(1) of the
CLA
in the context of a bankruptcy. Subsection
    8(1) of the
CLA
deems amounts
    owing to or received by the contractor, on account of the contract price of an
    improvement, to constitute a trust fund for the benefit of subcontractors who
    supplied services or materials to the improvement. In
Guarantee
,
the contractor became bankrupt. After
    the bankruptcy, its Receiver was paid amounts owing under contracts that the
    contractor had performed. The Royal Bank of Canada (RBC), as a secured
    creditor of the bankrupt, claimed the amounts received to be part of the assets
    of the bankrupt divisible among its creditors. Subcontractors and employees of
    the contractor, on the other hand, claimed the amounts received to be funds
    held in trust and excluded from the property of the bankrupt.

[32]

Writing for the court, Sharpe J.A. noted that s.
    67(1)(a) of the BIA excludes property held in trust by the bankrupt from
    property of the bankrupt that is divisible among its creditors. However, this
    exception applies only if the trust satisfies the three certainties of general
    trust law. As the Supreme Court of Canada held in
British Columbia v.
    Henfrey Samson Belair Ltd.
,
[1989] 2 S.C.R. 24, a statutory trust created by a province that does not meet
    the requirements of general trust law is ineffective in bankruptcy as a matter
    of federal paramountcy, but a statutory trust created by provincial legislation
    that does meet those requirements is effective: see
Guarantee
,
at paras. 36 and 47.

[33]

Under this framework, Sharpe J.A. concluded that
    the statutory trust created by s. 8(1) of the
CLA
satisfied the requirements for a trust under general principles of trust
    lawcertainty of intention, certainty of object, and certainty of subject
    matter. He found that certainty of intention to create a trust could be found
    in the Legislatures requirement that the funds be held in trust, regardless of
    the actual intention of the trustee. He also found that, although one effect of
    a s. 8(1) trust is to protect construction contract monies in bankruptcy, s.
    8(1) is not in pith and substance legislation in relation to bankruptcy; the
    priority-creating effects of s. 8(1) are purely incidental to a broader purpose
    of the legislation to protect the rights and interests of those engaged in the
    construction industry and to avoid the unjust enrichment of those higher up the
    construction pyramid:
Guarantee
, at para. 32. The s. 8(1) trust was
    therefore the proper subject-matter of provincial legislation:
Guarantee
,
    at paras. 30 and 32.

[34]

Accordingly, there was no conflict between the
    language or purpose of the
BIA
(which excluded property held in trust from the definition of property of the
    bankrupt) and s. 8(1) of the
CLA
(which created the kind of trust the
BIA
contemplated) such that paramountcy would render the provincial trust
    inoperative.  Giving effect to a s. 8(1) trust in a bankruptcy did not conflict
    with or frustrate the purpose of the
BIA
,
    which was to provide for the distribution of the bankrupts remaining assets
    (that is, those existing after giving effect to trusts in favour of other
    persons):
Guarantee
, at para. 38. As a consequence, a s. 8(1) trust
    was effective in a bankruptcy to preserve assets subject to that trust for its
    beneficiaries; the funds were not property of the bankrupt to be distributed to
    its creditors:
Guarantee
, at para 103.

(III)

The Effectiveness of a s. 9(1) Trust in Insolvency

[35]

In my view, the same reasoning applies to a s. 9(1)
    trust under the
CLA
. Section 9
    is part of a series of provisions, including ss. 7 and 8, which provide for
    trusts in favour of specified persons (contractors or subcontractors) over
    specified funds in the hands of owners (s. 7), contractors (s. 8), and owners
    who are vendors (s. 9). The effect of s. 9(1) may include the protection of trust
    beneficiaries on the insolvency of the trustee (by giving them a priority over
    creditors), but to the extent that it creates a trust under the general law of
    trusts, it may do so effectively without conflict with the
BIA
.

[36]

Subsection 9(1) of the CLA creates a trust which
    comports with the general law of trusts. There is certainty of subject matter: s.
    9(1) identifies precisely the subject matter of the trust as the value of the
    consideration on a specific sale by the owner of the owners interest, less
    expenses of the sale and the amount necessary to discharge mortgage
    indebtedness. There is certainty of object: s. 9(1) identifies precisely the
    object of the trust as unpaid contractors who supplied work and material to the
    improvement which was sold. There is also certainty of intention: s. 9(1) deems
    the creation of a trust and s. 9(2) requires that trust funds not be
    appropriated to any purpose inconsistent with the trust: see
Guarantee
,
    at para. 20.

[37]

Applying the decision in
Guarantee
, if
    a s. 9(1) trust may be effective under the CLA when the insolvency is subject
    to the
BIA
, it follows that it may
    be effective when the insolvency is subject to the
CCAA
. The
BIA
and CCAA are both part of Parliaments scheme for the regulation of insolvency,
    and to the extent possible, they should be interpreted to afford analogous
    entitlements to creditors:
Century Services

Inc. v. Canada
    (Attorney General
), 2010 SCC 60, [2010] 3 S.C.R. 379, at para. 23.
    Analogous entitlements would mean, at a minimum, that creditors of the
    insolvent would have no greater right to assets held by the insolvent in trust
    than they would in bankruptcy.

[38]

Of course, analogous entitlements do not connote
    identical entitlements
:
Sun
    Indalex

Finance, LLC v. United Steelworkers
, 2013 SCC 6, [2013] 1
    S.C.R. 271, at paras. 50-51. But to the extent there are relevant differences
    in the statutes, they lean toward an even broader recognition of provincially created
    trusts in the
CCAA
than under
    the
BIA
. Under the
BIA
, a provincial statutory trust
    granting priority to its beneficiaries is ineffective in bankruptcy if it does
    not meet the requirements of a trust under general trust law. Under the
CCAA, however,
even provincial trusts
    that do not meet those requirements may continue to apply (except for deemed
    trusts in favour of Her Majesty: CCAA, s. 37).

[39]

For example,
Indalex
dealt with the statutory deemed
    trust in favour of pension plan members under s. 57 of Ontarios
Pension
    Benefits Act
, R.S.O. 1990, c. P.8 (the PBA), and the priority given to
    the beneficiaries of that trust over secured creditors under Ontarios
Personal
    Property Security Act
, R.S.O. 1990, c. P.10 (the PPSA).

[40]

In rejecting an argument that those provincially
    created priorities were ineffective in the debtors
CCAA
proceeding because they did not create a trust that
    would be effective in bankruptcy, Deschamps J. stated (in a portion of her
    judgment concurred in by all other members of the court
[2]
), at paras. 51-52:

In order to avoid a race to liquidation under the
BIA
,
    courts will favour an interpretation of the
CCAA
that affords creditors
    analogous entitlements. Yet this does not mean that courts may read bankruptcy
    priorities into the
CCAA
at will. Provincial legislation defines the
    priorities to which creditors are entitled until that legislation is ousted by
    Parliament. Parliament did not expressly apply all bankruptcy priorities either
    to
CCAA
proceedings or to proposals under the
BIA
. Although the
    creditors of a corporation that is attempting to reorganize may bargain in the
    shadow of their bankruptcy entitlements, those entitlements remain only shadows
    until bankruptcy occurs. At the outset of the insolvency proceedings, Indalex
    opted for a process governed by the
CCAA
, leaving no doubt that although
    it wanted to protect its employees jobs, it would not survive as their
    employer. This was not a case in which a failed arrangement forced a company
    into liquidation under the BIA. Indalex achieved the goal it was pursuing. It
    chose to sell its assets under the
CCAA
, not the
BIA
.

The provincial
    deemed trust under the
PBA
continues to apply in
CCAA

proceedings, subject to the doctrine of federal paramountcy (
Crystalline
    Investments Ltd. v. Domgroup Ltd.
, 2004 SCC 3,

[2004] 1 S.C.R. 60, at para. 43). The Court
    of Appeal therefore did not err in finding that at the end of a
CCAA

liquidation proceeding, priorities may be determined by the
PPSA
s scheme rather than the federal scheme set out in the
BIA
.

[41]

As this passage from
Indalex
makes
    clear, there is one important exception to the recognition of provincial trusts
    (in favour of persons other than Her Majesty) in a
CCAA
proceeding: a provincial trust can lose its effect
    under the
CCAA
to the extent
    the doctrine of paramountcy requires that result.
[3]


(IV)

Paramountcy Considerations

[42]

A party relying on paramountcy must demonstrate
    that the federal and provincial laws are in fact incompatible by establishing
    either that it is impossible to comply with both laws or that to apply the
    provincial law would frustrate the purpose of the federal law:
Canadian
    Western Bank v. Alberta
, 2007 SCC 22, [2007] 2 S.C.R. 3, at para. 75.
    Moreover, the Supreme Court has in fact applied the doctrine of paramountcy in
    the area of bankruptcy and insolvency to come to the conclusion that a provincial
    legislature cannot, through measures such as a deemed trust, affect priorities
    granted under federal legislation:
Indalex
, at para. 56.

[43]

As the court further noted in
Indalex
, at para.
    57, a conclusion that paramountcy trumps a provincial priority is not to be
    reached lightly:

[I]n considering whether the
CCAA

court has, in exercising its discretion to assess a claim,
    validly affected a provincial priority, the reviewing court should remind
    itself of the rule of interpretation stated in
Attorney General of
    Canada v. Law Society of British Columbia
, [1982] 2 S.C.R.
    307 (at p. 356), and reproduced in
Canadian Western Bank
(at para. 75):

When a federal statute can be properly
    interpreted so as not to interfere with a provincial statute, such an
    interpretation is to be applied in preference to another applicable
    construction which would bring about a conflict between the two statutes.

[44]

In
Indalex
, the question was whether a
    provincial statutory deemed trust for pension benefits could prevail over the
    first priority given by the CCAA court to DIP financing, which the CCAA
    authorized:
Indalex
, at para. 48. The doctrine of paramountcy required
    that DIP financing have priority even though paramountcy had not been invoked
    when the order giving the DIP financing priority had been made. The application
    of paramountcy did not depend on such an invocation
: Indalex
, at paras.
    54-55.  Accordingly, Deschamps J. concluded, at para. 60:

In this case, compliance with the provincial law
    necessarily entails defiance of the order made under federal law.

On the
    one hand, s. 30(7) of the
PPSA
required a part of
    the proceeds from the sale related to assets described in the provincial
    statute to be paid to the plans administrator before other secured creditors
    were paid. On the other hand, the Amended Initial Order provided that the DIP
    charge ranked in priority to all other security interests, trusts, liens,
    charges and encumbrances, statutory or otherwise (para. 45). Granting priority
    to the DIP lenders subordinates the claims of other stakeholders, including the
    Plan Members. This court-ordered priority based on the
CCAA

has the same effect as a statutory priority. The federal and
    provincial laws are inconsistent, as they give rise to different, and
    conflicting, orders of priority. As a result of the application of the doctrine
    of federal paramountcy, the DIP charge supersedes the deemed trust.


(V)

Conclusion on the Constitutional Question

[45]

Based on the decisions in
Guarantee
and
Indalex
, it is clear that the s. 9(1) trust under the CLA may be
    effective on insolvency. In my view, given this conclusion, nothing prevents the
    trust from arising on a sale which takes place after a
CCAA
filing has
    occurred. However, as
Indalex
points out, a statutory trust may not be
    given effect if doing so would conflict with a specific priority in the
CCAA
, or an order giving effect to that
    specific priority, such that paramountcy would require that the trust be
    considered inoperative in whole or part. Before considering whether that
    occurred here, I turn to the question of the decision in
Veltri.

ISSUE TWO: VELTRI

[46]

In my view,
Veltri
was correctly
    decided, but it has been cited and criticized for a much broader proposition
    than it actually stands for.


(I)

What
Veltri
Decided

[47]

Veltri
addressed claims by construction lien claimants that a sale during
Veltri
s
    insolvency proceedings yielded funds that were subject to trusts under ss. 7(1),
    7(2), 7(3) or 9(1) of the
CLA
.
    Several factual components of that case are important:

·

The
    lien claimants had provided work or materials to a specific property that
Veltri
had leased;



·

The
    sale which generated proceeds was of all of Veltris assets which included, but
    was not limited to, the leasehold interest;

·

There
    was no evidence that the leasehold interest had any value or that any of the
    purchase price was allocated to the leasehold interest; and

·

Veltri
s lenders had security over all of
Veltri
s assets, and the debt
    to the secured creditors exceeded the purchase price of the assets.

[48]

It was in this context that the court in
Veltri
rejected the trust claims under ss. 7(1), (2) and (3) of the CLA. Subsection
    7(1) creates a trust fund for amounts received by an owner that are to be used
    in the financing of an improvement. There was no evidence in
Veltri
that any funds advanced were to be used in the financing of any improvement in
    respect of the leasehold interest, so this claim failed:
Veltri
, at para.
    23.

[49]

Subsections 7(2) and (3) create a trust over
    amounts certified as payable to a contractor or unpaid when substantial
    performance has been declared by the court, to the extent such amounts are in
    the owners hands or received by the owner. In rejecting those claims, the
    court held that the prerequisites of amounts in the owners hands or received
    by the owner were not met. Writing for the court, Cronk J.A. stated, at paras.
    28-29:

Veltri

s
    lenders have a general security interest in all or substantially all of
Veltris
assets. Paragraph 12 of the Sale
    Order provided that the sale proceeds were to stand in place and stead of
Veltris
assets without prejudice to any
    claim being advanced against them as could have been advanced against the
    assets.  Thus, the sale proceeds were substituted for
Veltris
assets and are subject to the
    claims of
Veltris
secured
    creditors. It is important to emphasize that the appellants have no claim to
Veltris
assets. Rather, their claims are
    trust claims under the Act in respect of the proceeds of the sale of
Veltris
assets. The sale proceeds,
    however, are insufficient to pay the claims of
Veltris
secured creditors in full and a significant
    shortfall will result (in excess of $10 million (U.S.) in the case of funds
    owed to Comerica).

The court-approved sale of
Veltris
assets included the sale of
Veltris

leasehold interest in the
    Lakeshore Plant, the premises upon which the appellants work was performed. 
    The asset sale to Ventra could not have taken place in the face of the claims
    of
Veltris
secured creditors
    without the consent of those creditors and court approval, and the sale was
    subject to the terms imposed by the court.  Under these terms, the gross
    proceeds of sale were applied in payment of specific items and, thereafter, the
    net sale proceeds, which stood in substitution for
Veltris
fully secured assets, were paid to the Monitor.
Thus,
Veltri

had no interest in or
    right to any of the net sale proceeds ultimately paid to and now held by the
    Monitor. At best,
Veltri
was a
    conduit for the receipt by the Monitor of the sale proceeds. Accordingly, the
    sale proceeds are not trust monies in [
Veltris
]
    hands or received by [
Veltri]
as owner, as is required to trigger the trust provisions of ss. 7(2) and 7(3)
    of the Act.
This distinguishes this case from
Structural Contractors
    Ltd. v. Westcola Holdings Inc.
(2000), 48 O.R. (3d) 417 (Ont. C.A.), leave
    to appeal to S.C.C. dismissed, [2000] S.C.C.A. No. 460 (S.C.C.) and similar
    cases. [Emphasis added.]

[50]

I do not read these conclusions as turning on
    freestanding considerations of the Monitor having been involved in the sale, or
    the proceeds having been paid to the Monitor. In my view, the operative factors
    were that the sale in question was of assets that extended beyond the leasehold
    interest; that all of the assets sold were subject to the creditors security;
    that the assets could not be sold without the creditors consent; that the
    court order permitting the sale preserved the ability of those secured
    creditors to claim against the proceeds; and that the secured creditors were
    owed more than the amount received on the sale. Under these circumstances,
Veltri

had no interest in or
    right to any of the net sale proceeds, and its temporary receipt of proceeds
    for the purpose of paying them to the Monitor (who had the responsibility of
    using them to pay the claims of the secured creditors) did not mean that the
    sale proceeds were trust monies in
Veltris
hands or received by
Veltri

as owner under ss. 7(2) and (3) of the
CLA
.

[51]

I am fortified in this conclusion by the way the
    court in
Veltri
dealt with the s. 9(1) claim. The court rejected that
    claim, noting that there was no showing that
Veltri
s
    leasehold interest had any value and no allocation of any part of the sale
    proceeds to that leasehold interest. Furthermore, and for the same reasons as
    given above, the temporary receipt of funds (in which
Veltri

had no interest) for the
    purpose of paying them to the Monitor (who would then pay secured creditors
    entitled to them) did not qualify as consideration received by the owner as a
    result of the sale of the leasehold interest:
Veltri
, at para 35.

[52]

Stepping back from the precise language used in
Veltri
,
    on its facts, no s. 9(1) trust could arise because the amounts received from
    the sale of all the property was less than the amount to discharge the lenders
    security over them, and no amount was shown to be proceeds of the sale of the
    leasehold interest. A s. 9(1)
t
rust
    only arises if the value of the consideration received by the owner from the
    sale of premises, which have been improved by the work or materials of the
    contractor, exceeds the amount of mortgage indebtedness. No trust arises if the
    value of the consideration is zero, or if the mortgage debt is equal to or
    greater than any sale proceeds.

[53]

Accordingly,
Veltri
does not stand for
    the proposition that the control by a
CCAA
Monitor of a sales process, or the receipt by the Monitor of the proceeds of
    sale, without more, prevents a s. 9(1) trust arising when the proceeds of sale
    of the improvement are shown to have a positive value that exceeds the mortgage
    debt on the property. That fact pattern was simply not present in
Veltri
.


(II)

The Deemed Receipt Rule
    Criticism

[54]

Veltri
has been
    criticized for ignoring the deemed receipt rule. Under it, for the purpose of
    determining whether a trust arises pursuant to legislation analogous to the
CLA
, the receipt of funds by an assignee
    or other representative of the person required to hold funds in trust is
    treated in the same way as if the person had itself received the funds: see
Minneapolis-Honeywell
    Regulator Co. v. Empire Brass Manufacturing Co
., [1955] S.C.R. 694; Duncan
    W. Glaholt, Veltri Metal Products: The Death of Minneapolis Honeywell (2006),
    48 C.L.R. (3d) 171.

[55]

In
Royal Bank v. Wilson
(1963), 42
    W.W.R. 1 (Man. C.A.), the deemed receipt rule was described, at p. 13, when
    considering a statutory trust in favour of subcontractors which arises on
    receipt by the contractor of money properly owing to it under the contract:

[A]ny money
properly owing
to [the contractor]
on account of the contract price
, and
paid
to
    [the contractor], or to its trustee in bankruptcy, or into court, for
    distribution, or to an assignee, is
received
by [the contractor] and is
    impressed with the trust. [Emphasis in original.]

[56]

I do not doubt that the deemed receipt rule is
    part of the law of Ontario. I note that it was implicitly applied in
Guarantee
,
    as the party receiving the payments found to be subject to a s. 8(1) trust was
    the Receiver of the insolvent contractor:
Guarantee
, at para. 6.

[57]

However, in my view, the deemed receipt rule has
    nothing to do with the reasoning or result in
Veltri
. The rule equates
    amounts properly owing to a person and received by the persons assignee as
    being subject to the trust as if the person had received the funds directly. In
Veltri
, no amount was properly owing to
Veltri
from the asset
    sale that was attributable to the leasehold interest or that exceeded the mortgage
    debt. There was no amount to which the trust could attach. There was nothing to
    which the deemed receipt rule could be applied.

(III)

Conclusion on
Veltri

[58]

In my view, the decision in
Veltri
does
    not require the rejection of the appellants trust claim.

ISSUE THREE: DID A S. 9(1) TRUST ARISE IN THIS CASE?

[59]

For ease of analysis, I repeat the requirements
    in s. 9(1):

9(1) Where the owners interest in a premises is sold by the
    owner, an amount equal to,

(a) the value of the consideration received by the owner as a
    result of the sale,

less,

(b) the reasonable expenses arising from the sale and the
    amount, if any, paid by the vendor to discharge any existing mortgage
    indebtedness on the premises,

constitutes a trust fund for the benefit of the contractor.

(2) The former owner is the
    trustee of the trust created by subsection (1), and shall not appropriate or
    convert any part of the trust property to the former owners use or to any use
    inconsistent with the trust until the contractor is paid all amounts owed to
    the contractor that relate to the improvement.


(I)

Factors Supporting the Finding of a Trust

[60]

Unlike
Veltri
, this is a case where
    what was sold were exclusively units that were, within the meaning of the
CLA
, premises to which improvements had
    been made through the work and materials supplied by the appellants.

[61]

In this case, the sales of the units that took
    place were sales by the owner. The agreements of purchase and sale were made
    by Triangle or Residential as represented by Fuller Landau, solely in its
    capacity as Proposal Trustee/Monitor of Triangle or Residential. That Triangle
    or Residential entered into the agreements through a representative does not
    detract from the fact that it was they who entered into the sale agreements as
    vendors. What was contracted to be sold were units registered in their names,
    that is, premises legally owned by them, and there is no dispute that they were
    effective agreements to convey the beneficial ownership in the premises of the
    other Cumberland Group members.

[62]

When the agreements were completed, what was
    transferred to the purchasers was all of the right, title and interest of the
    Cumberland Group in the unit. In other words, the sale by the owner was of the
    owners interest, notwithstanding that it occurred in an insolvency process.
    This result follows from the CCAA itself, under which sales must be authorized
    by the court, but what is authorized is nevertheless a sale by the debtor:

36

(1)
A
    debtor company in respect of which an order has been made under this Act may
    not sell or otherwise dispose of assets outside the ordinary course of business
    unless authorized to do so by a court. Despite any requirement for shareholder
    approval, including one under federal or provincial law, the court may
    authorize the sale or disposition even if shareholder approval was not
    obtained.

[63]

Unlike
Veltri
, the value of the
    consideration received on the sale was attributable to the sale of premises to
    which the improvement had been made. The value of the consideration exceeded
    the mortgage debt. And the value of the consideration was received by the
    owner, as it was deposited into bank accounts that had been opened for Triangle
    or Residential in accordance with their registered ownership of the units sold.
    The fact that the accounts into which the proceeds of sale were paid also
    received amounts from other sources does not detract from the certainty of the
    trust, since the amounts subject to the trust were separately accounted for and
    can be readily identified:
Guarantee
, at paras. 6 and 86.


(II)

Other Factors Do Not Displace the Trust

[64]

I agree with the motion judge that there is an
    important sense in which the Monitor controlled the sales process and the funds
    received. The orders granted or continued in the
CCAA
proceeding made the Monitor the decision maker (subject
    to court approval) for the Cumberland Group and specifically gave it the power
    to conduct, supervise and direct the sales process. But neither the
BIA
Proposal proceedings nor the
CCAA
proceeding ended the existence of
    the Cumberland Group members, or vested their property in the Monitor.

[65]

The Initial Order in the
CCAA

proceeding expressly stated:
    that the Cumberland Group shall remain in possession and control of their
    current and future assets (at para. 5); that the Monitor was appointed as an
    officer of the court to monitor the business and affairs of the Cumberland
    Group (at para. 29); and that the Monitor could cause or direct the Cumberland
    Group to do various things, but employees of the Cumberland Group remained
    theirs and not the Monitors (at paras. 30 and 33).

[66]

Similarly, the Sales Process Order approved Residential
    or Triangle, through the Proposal Trustee, entering into agreements as vendors
    to list the units for sale (at para.15) and approved the form of agreements
    which made Triangle or Residential vendors (at para. 17). The Approval and
    Vesting Order approved the delivery by the Monitor of certificates on closing
    to vest the right, title and interest of the Cumberland Group in the purchasers
    (at para. 3).

[67]

But the issue under s. 9(1) of the
CLA
is not who makes decisions for the
    owner in respect of making a sale, conveying its interest, or depositing its
    funds. It is simply whether the owner, regardless of who decides for it, had
    made a sale of its interest and received funds that exceeded mortgage
    indebtedness and the expenses of sale. Accordingly, the control the Monitor had
    over the process does not detract from the conclusion that the owner sold its
    interest and received consideration in excess of expenses and mortgage debt.

[68]

Nor, in my view, is the conclusion that the s.
    9(1)
trust
arose affected by
    the fact that, under the Cash Funding Order, amounts were paid from sales
    proceeds for the expenses of the
CCAA
proceedings and to repay the DIP loans.

[69]

First, such payments were not, in this case,
    inconsistent with the trust obligation since the extent of the trust is the $3,864,428.72
    owed to the appellants. Even after the payments that have been made, more than
    the amount required to be held in trust is being held.

[70]

Second, charges may be created under the
CCAA
which, as a matter of paramountcy,
    will take priority over a provincial statutory trust. The DIP Financing Charge
    in this case, as in
Indalex
, was given priority over all other security
    interests, trusts, liens, charges and encumbrances, claims of secured
    creditors, statutory or otherwise. (As noted above, no objection was taken to
    the payments on account of the DIP financing in this case.) But paramountcy
    renders the provincial trust inoperative only to the extent required to deal
    with the conflict, that is, by yielding priority to the DIP Financing Charge.
    The trust does not become wholly inoperative.

[71]

Finally, the provisions of paragraph 5 of the Approval
    and Vesting Order do not defeat that trust. Paragraph 5 provides that for the
    purposes of determining the nature and priority of Claims, the net cash
    proceeds from the sale of the Vacant Unit, if any, shall stand in the place and
    stead of the Vacant Unit, andall Claims and Encumbrances shall attach to the
    net cash proceeds from the sale of the  Vacant Unit with the same priorityas
    if the Vacant Unit had not been sold.

[72]

If this paragraph were read as meaning that, for
    all purposes, no sale of the units took place, it would arguably prevent the
    trust from arising because the trust is dependent on a sale having occurred.
    However, in my view, the Approval and Vesting Order cannot be read that way. This
    paragraph refers to a defined set of Claims and Encumbrances; the Order
    specifies that the purchaser will take title free and clear of them.
    Encumbrances are listed on Schedule B to the Approval and Vesting Order and are
    specific registered encumbrances. Claims is a broader term, but paragraph 3 of
    the Approval and Vesting Order makes it clear that they are claims that would
    or may otherwise have affected the purchaser or the purchasers title to the unit.
    It is those matters that are to be dealt with, as among the holders of the
    Claims and Encumbrances, and to determine their priority, as if the Vacant
    Unit had not been sold.

[73]

The trust which arises on a sale as contemplated
    in s. 9(1) of the
CLA
is not
    one of the Claims referred to in the Approval and Vesting Order, or one of the Encumbrances
    listed in Schedule B. The trust is not something which would or may have
    affected title to the unit or the purchaser. The trust is not a claim against
    the unit; it does not exist until after there has been a sale and net proceeds.
    The Approval and Vesting Order does not purport to direct that, for
all
purposes,
all
claims,
    including claims that a trust has arisen against the proceeds of sale when
    received by the vendor, are to be determined as if no sale took place.

[74]

Subsection 9(1) of the
CLA
is valid provincial legislation.
    Before a determination is made that its provisions become inoperative because
    of a conflict with a federal exercise of power, the federal exercise of power
    is to be interpreted with the goal that both it and the provincial legislation
    operate:
Indalex,
at para. 57.  Nothing in paragraph 5 of the Approval
    and Vesting Order requires that it be read more broadly than its actual terms,
    nor would doing so be consistent with this interpretive principle. Paragraph 5
    does not prevent the trust from coming into force.

CONCLUSION AND DISPOSITION

[75]

Accordingly, I would allow the appeal, set aside
    the order of the motion judge, and substitute an order that a s. 9(1) trust
    under the CLA applies to the sum of $3,864,428.72 held in the accounts of
    Triangle and Residential, for the benefit of the appellants, pro-rata in
    accordance with the amounts owing to each.

[76]

No party seeks costs of the appeal against any
    other party to this appeal. If necessary, the parties may make written
    submissions within ten days regarding payment of costs of the appeal from the
    Estate of the Cumberland Group.

Released: S.E.P. March 11, 2020

B. Zarnett
    J.A.

I agree.
    S.E. Pepall J.A.

I agree.
    P. Lauwers J.A.

I agree. K. van Rensburg J.A.

I Agree.
    Thorburn J.A.





[1]
As noted above,
the CLA has been amended and renamed the
Construction
    Act
, but s. 9(1) remains unchanged. For consistency,
these reasons
    refer to s. 9(1) of the old CLA.



[2]
See the reasons of Cromwell J. (McLachlin C.J. and Rothstein J. concurring) at
    para. 242 and the dissenting reasons of Lebel J. (Abella J. concurring) at
    para. 265. See, also, the Headnote to the decision under the heading 2.
Priority
    Ranking
.



[3]

It is not necessary to decide whether there are any
    circumstances in which a s. 9(1) trust might lose its effect under the BIA
    because of specific priorities in the BIA or specific processes under it.


