Iona Contractors Ltd. v. Guarantee Company of North America,

• Judge: Paperny,Slatter,Yamauchi
• Neutral Citation: 2015 ABCA 240
• Citation: (2015), 602 A.R. 295,2015 ABCA 240,602 AR 295,(2015), 602 AR 295,602 A.R. 295
• Date: 08 April 2015
• Court: Court of Appeal (Alberta)

Iona Contractors Ltd. v. Guarantee Co. (2015), 602 A.R. 295; 647 W.A.C. 295 (CA)

MLB headnote and full text

Temp. Cite: [2015] A.R. TBEd. JL.079

Ernst & Young Inc. in its capacities as Receiver and Manager and Trustee in the Bankruptcy of Iona Contractors Ltd. (respondent/applicant) v. The Guarantee Company of North America (appellant/respondent)

(1401-0159-AC; 2015 ABCA 240)

Indexed As: Iona Contractors Ltd. v. Guarantee Company of North America

Alberta Court of Appeal

Paperny and Slatter, JJ.A., and Yamauchi, J.(ad hoc)

July 16, 2015.

Summary:

Calgary Airport Authority (Airport) hired Iona Contractors to work on its north airfield. Iona substantially completed its work, but Airport withheld further payment because certain of Iona's subcontractors had not been paid. Iona applied for protection under the Companies' Creditors Arrangement Act and was subsequently assigned into bankruptcy and a trustee was appointed. In the meantime, the Airport called upon Guarantee Co. (surety) to settle the unpaid subcontractor claims under a Labour and Material Bond that had been provided to Iona as principal and the Airport as obligee. Guarantee Co. paid out the subcontractors. The Airport used part of its holdback funds to complete the work. The net withheld by the Airport on the $15 million plus contract was $997,715.83 (the funds). An issue arose as to entitlement to the holdback funds. Guarantee Co. claimed that: (1) it was entitled to the remaining funds as the subrogee of the subcontractors because there was no money owed to Iona under the contract; and (2) the remaining funds were impressed by a trust under the Builders' Lien Act. Iona's bankruptcy trustee claimed that the funds should be paid to it and then it proposed to forward them to the secured creditor of Iona, the Alberta Treasury Branches.

The Alberta Court of Queen's Bench, in a decision reported [2014] A.R. Uned. 366, concluded that Iona's trustee in bankruptcy was entitled to receive the unpaid funds from the Airport, and to pay them to Alberta Treasury Branches. Guarantee Co. appealed, raising the same two arguments.

The Alberta Court of Appeal, Paperny, J.A. dissenting, allowed the appeal. The court held that Guarantee Co. could not succeed on its first argument. However, the court held that the disputed holdback funds were impressed by a trust under the Builders' Lien Act, and were therefore not property of the bankrupt. The disputed funds should be paid to Guarantee Co.

Bankruptcy - Topic 3641

Creditors - General - Priorities - General - [See all Building Contracts - Topic 1661 ].

Bankruptcy - Topic 3642

Creditors - General - Priorities - Precedence of Bankruptcy and Insolvency Act over provincial legislation - The Alberta Court of Appeal stated that "The categorization of a claim for the purposes of relative priority is a matter of federal law. Thus, the provinces cannot define what is a 'trust' or a 'secured party' for the purposes of bankruptcy law; which claims are included in those various categories is a matter of federal law. This ensures the uniformity of bankruptcy law across Canada. But while uniformity of bankruptcy law is an important value, that does not mean that results will not vary from province to province. Since 'property and civil rights' can vary depending on provincial law, a type of creditor in one province may be in a different position after bankruptcy than the same type of creditor in another province" - See paragraph 27.

Bankruptcy - Topic 3642

Creditors - General - Priorities - Precedence of Bankruptcy and Insolvency Act over provincial legislation - The Alberta Court of Appeal discussed the interaction of federal bankruptcy law with provincial law - The court stated that "Because federal bankruptcy legislation is enacted against the background of provincial laws respecting property and civil rights, there will be occasions when a different outcome will result depending on which law is applied. As mentioned, in case of operational conflict federal law prevails. Obviously a deliberate attempt by a province to change the order of priority in bankruptcy will be ineffective, but an operational conflict can arise short of that" - The court cited a number of examples where operational conflicts had arisen - The court stated that whether any provincial regime is in operational conflict with the bankruptcy regime had to be determined by examining the purposes and effect of the provincial legislation within its statutory context - See paragraphs 27 to 31.

Bankruptcy - Topic 3642

Creditors - General - Priorities - Precedence of Bankruptcy and Insolvency Act over provincial legislation - Section 22 of the Builders' Lien Act created a statutory trust as part of the regime to provide some assurance to subcontractors that they would get paid - The Alberta Court of Appeal discussed the operational validity of the trust provisions with respect to the bankruptcy priorities regime - The court held that the provisions of s. 22 met the requirements of a common law trust - There was no deliberate attempt to reorder priorities in bankruptcy, and the province was not attempting to achieve indirectly what it could not do directly - Those considerations, coupled with the fact that the trust provisions of s. 22 were merely a collateral part of a complex regime designed to create security for unpaid subcontractors, lead to the conclusion that there was no operational conflict between s. 22 and the bankruptcy regime - The court also discussed whether a trust under s. 22 had to be in effect prior to the bankruptcy in order to be effective after bankruptcy - See paragraphs 25 to 47.

Bankruptcy - Topic 3642

Creditors - General - Priorities - Precedence of Bankruptcy and Insolvency Act over provincial legislation - [See third Building Contracts - Topic 1661 ].

Building Contracts - Topic 1661

Completion - Completion by owner where contractor fails to complete - General - The Alberta Court of Appeal stated that "There is nothing objectionable about a provision in a contract allowing the owner to complete work that was not performed by a bankrupt contractor, and to deduct the amount from what was otherwise owing to the contractor. Section 97(3) of the Bankruptcy and Insolvency Act allows such set-offs. After a bankruptcy, however, no such clause is effective to the extent that it gives a discretion to the owner to pay creditors of the bankrupt contractor otherwise than as authorized in the Bankruptcy and Insolvency Act ... It is at this stage of the analysis that it is relevant that the owner has no 'obligation' to pay the subcontractors, but only the 'right' or 'discretion' under clause 6.3.3(d). After bankruptcy, that discretion cannot be exercised in such a way that it disturbs the priorities in the Bankruptcy and Insolvency Act" - See paragraph 15.

Building Contracts - Topic 1661

Completion - Completion by owner where contractor fails to complete - General - Calgary Airport Authority (Airport) hired Iona Contractors to do work - Iona substantially completed the work, but the Airport held back funds because certain of Iona's subcontractors had not been paid - Iona sought creditors' protection and was subsequently assigned into bankruptcy - In the meantime, a surety (Guarantee Co.) settled the unpaid subcontractor claims under a Labour and Material Bond that had been provided to Iona (principal) and the Airport (obligee) - The Airport used part of its holdback funds to complete the work - An issue arose respecting entitlement to the net holdback funds - Guarantee claimed that it was entitled to the remaining funds as the subrogee of the subcontractors because there was no money owed to Iona under the contract - Guarantee argued that the contract allowed the Airport to remedy breaches of the contract by Iona, which included paying subcontractors that Iona did not pay (clause 6.3.3(d)) - The Alberta Court of Appeal held that even if the paying of the subcontractors was authorized under clause 6.3.3(d) prior to any bankruptcy, after the bankruptcy any discretion under clause 6.3.3(d) could not be exercised in such a way that it disturbed the priorities under the bankruptcy legislation - The existence of a surety and a bonding arrangement did not change the outcome - It followed that Guarantee was unable to succeed based on its argument that no money was due to Iona under the contract - See paragraphs 11 to 18 and 50.

Building Contracts - Topic 1661

Completion - Completion by owner where contractor fails to complete - General - Calgary Airport Authority (Airport) hired Iona Contractors to do work - Iona substantially completed the work, but the Airport held back funds because certain of Iona's subcontractors had not been paid - Iona sought creditors' protection and was subsequently assigned into bankruptcy - In the meantime, a surety (Guarantee Co.) settled the unpaid subcontractor claims under a Labour and Material Bond that had been provided to Iona (principal) and the Airport (obligee) - The Airport used part of its holdback funds to complete the work - An issue arose respecting entitlement to the net holdback funds - Guarantee claimed that it was entitled to the remaining funds by virtue of the trust created by s. 22 of the Builders' Lien Act - Guarantee argued that the unpaid subcontractors were the beneficiaries of that trust, and that it was subrogated to their position - Iona's bankruptcy trustee replied that the trust created was inconsistent with the priorities set by the Bankruptcy and Insolvency Act - The Alberta Court of Appeal held that the disputed funds were impressed by a trust under the Builders' Lien Act, and were therefore not property of the bankrupt - The funds should be paid out to Guarantee - The court determined that there was no operational conflict between the trust created by s. 22 and the federal bankruptcy regime - The intervention of the surety (Guarantee) did not change the analysis - See paragraphs 19 to 48.

Building Contracts - Topic 2404

Payment - Holdback - General - Entitlement - [See second and third Building Contracts - Topic 1661 ].

Building Contracts - Topic 7844

Labour and material payment bonds - Rights of surety - Subrogation - [See second and third Building Contracts - Topic 1661 ].

Mechanics' Liens - Topic 4

General principles and definitions - General principles - Interpretation of mechanics' lien legislation - The Alberta Court of Appeal stated that "Neither the trust provisions, nor any other portion of the Builders' Lien statutory regime should be read in isolation. They are all a part of one comprehensive package relating to property and civil rights in the province" - See paragraph 21.

Mechanics' Liens - Topic 2864

The holdback - Use of holdback by owner to complete work after a default - [See second and third Building Contracts - Topic 1661 ].

Mechanics' Liens - Topic 3002

The holdback - Claims against holdback - Entitlement - [See second and third Building Contracts - Topic 1661 ].

Mechanics' Liens - Topic 7630

Trust fund - Priorities - Where contractor becomes bankrupt - [See third Bankruptcy - Topic 3642 and third Building Contracts - Topic 1661 ].

Cases Noticed:

Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co. et al. (2015), 599 A.R. 363; 643 W.A.C. 363; 2015 ABCA 121, refd to. [para. 10].

A.N. Bail Co. Ltée v. Gingras et al., [1982] 2 S.C.R. 475; 34 N.R. 536, refd to. [paras. 15, 76].

Horizon Earthworks Ltd. (Bankrupt), Re (2013), 556 A.R. 344; 584 W.A.C. 344; 87 Alta. L.R.(5th) 335; 2013 ABCA 302, refd to. [paras. 16, 81].

Greenview (Municipal District No. 16) v. Bank of Nova Scotia - see Horizon Earthworks Ltd. (Bankrupt), Re.

Minneapolis-Honeywell Regulator Co. v. Empire Brass Manufacturing Co., [1955] S.C.R. 694, refd to. [para. 24].

Canadian Bank of Commerce v. McAvity (T.) & Sons Ltd., [1959] S.C.R. 478; 17 D.L.R.(2d) 529, refd to. [paras. 24, 94].

Kerr Interior Systems Ltd., Re, [2009] 8 W.W.R. 1; 457 A.R. 274; 457 W.A.C. 274; 6 Alta. L.R.(5th) 279; 2009 ABCA 240, refd to. [paras. 24, 113].

Kerr Interior Systems Ltd. v. Kenroc Building Materials Co. - see Kerr Interior Systems Ltd., Re.

Bourgault's Estate v. Quebec (Deputy Minister of Revenue), [1980] 1 S.C.R. 35; 30 N.R. 24, refd to. [para. 28].

Jacs Jackets and Crest Ltd., Re; Worker's Compensation Board (Alta.) v. Deloitte, Haskins and Sells Ltd., [1985] 1 S.C.R. 785; 60 N.R. 81; 63 A.R. 321, refd to. [para. 28].

Deloitte Haskins & Sells Ltd. v. Alberta (Workers' Compensation Board) - see Jacs Jackets and Crest Ltd., Re; Workers' Compensation Board (Alta.) v. Deloitte Haskins and Sells Ltd.

Federal Business Development Bank v. Commission de la santé et de la sécurité du travail et al., [1988] 1 S.C.R. 1061; 84 N.R. 308; 14 Q.A.C. 140, refd to. [para. 28].

British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24; 97 N.R. 61, refd to. [paras. 28, 91].

Husky Oil Operations Ltd. v. Minister of National Revenue et al., [1995] 3 S.C.R. 453; 188 N.R. 1; 137 Sask.R. 81; 107 W.A.C. 81; 128 D.L.R.(4th) 1, refd to. [paras. 28, 97].

Bassano Growers Ltd. et al. v. Diamond S Produce Ltd. (Bankrupt) (1998), 216 A.R. 328; 175 W.A.C. 328; 66 Alta. L.R.(3d) 296; 1998 ABCA 198, refd to. [paras. 35, 105].

0409725 B.C. Ltd. (Bankrupt), Re, [2015] B.C.T.C. Uned. 561; 2015 BCSC 561, refd to. [paras. 36, 100].

Troup (John M.M.) Ltd. v. Ontario (Attorney General), [1962] S.C.R. 487; 34 D.L.R.(2d) 556, refd to. [paras. 39, 99].

Troup Ltd. v. Royal Bank of Canada - see Troup (John M.M.) Ltd. v. Ontario (Attorney General).

Factory Window and Door Ltd. (Bankrupt), Re, [1995] 9 W.W.R. 498; 135 Sask.R. 235; 34 C.B.R.(3d) 196 (Q.B.), refd to. [paras. 40, 108].

Duraco Window Industries (Sask.) Ltd. v. Factory Window and Door Ltd. - see Factory Window and Door Ltd. (Bankrupt), Re.

Roscoe Enterprises Ltd. v. Wasscon Construction Inc. et al. (1998), 169 Sask.R. 240; 161 D.L.R.(4th) 725 (Q.B.), refd to. [paras. 41, 108].

D & K Horizontal Drilling (1998) Ltd. (Bankrupt) v. Alliance Pipeline Ltd. et al., [2002] 6 W.W.R. 497; 216 Sask.R. 199; 33 C.B.R.(4th) 217; 2002 SKQB 86, refd to. [paras. 42, 100].

Royal Bank of Canada v. Atlas Block Co. (2014), 15 C.B.R.(6th) 272; 37 C.L.R.(4th) 286; 2014 ONSC 3062, refd to. [paras. 43, 108].

Schmidt (Andrea) Construction Ltd. v. Glatt (1979), 25 O.R.(2d) 567; 104 D.L.R.(3d) 130 (H.C.), affd. (1980), 28 O.R.(2d) 672; 112 D.L.R.(3d) 371 (C.A.), refd to. [para. 47].

E C & M Electric Ltd. v. Medicine Hat General and Auxiliary Hospital and Nursing Home District #69 and Klassen Electric Ltd. et al. (1987), 76 A.R. 281; 50 Alta. L.R.(2d) 48 (Q.B.), refd to. [para. 48].

Creston Moly Corp. v. Sattva Capital Corp. (2014), 461 N.R. 335; 358 B.C.A.C. 1; 614 W.A.C. 1; 2014 SCC 53, refd to. [para. 61].

Citadel General Assurance Co. v. Johns-Manville Canada Inc. et al., [1983] 1 S.C.R. 513; 47 N.R. 280, refd to. [para. 74].

Pearlman v. Reliance Insurance Co. (1962), 371 U.S. 132, refd to. [para. 87].

Canadian Indemnity Co. v. British Columbia Hydro and Power Authority, 1976 CarswellBC 1227 (C.A.), refd to. [para. 88].

St. Paul (County) No. 19 v. Genereux Workshop (Bonnyville) Ltd. and Toronto-Dominion Bank et al. (1984), 55 A.R. 9; 12 D.L.R.(4th) 238 (C.A.), refd to. [para. 88].

Mississauga (City) v. Greater Toronto Airports Authority et al. (2000), 138 O.A.C. 1; 50 O.R.(3d) 641 (C.A.), refd to. [para. 94].

Vancouver International Airport v. Lafarge Canada Inc. et al., [2009] B.C.T.C. Uned. 961; 82 C.L.R.(3d) 285 (S.C.), refd to. [para. 94].

350914 Alberta Ltd. (Bankrupt), Re (2000), 261 A.R. 96; 225 W.A.C. 96; 187 D.L.R.(4th) 23; 2000 ABCA 146, refd to. [para. 107].

British Columbia v. National Bank of Canada et al. (1994), 52 B.C.A.C. 180; 86 W.A.C. 180; 30 C.B.R.(3d) 215 (C.A.), refd to. [para. 107].

Points of Call Airlines Ltd. (Bankrupt), Re, [1991] B.C.T.C. Uned. 414; 54 B.C.L.R.(2d) 384 (S.C.), refd to. [para. 107].

Statutes Noticed:

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, sect. 67 [para. 26].

Builders' Lien Act, R.S.A. 2000, c. B-7, sect. 22 [para. 21].

Authors and Works Noticed:

Bristow, David I., Glaholt, Duncan W., Reynolds, R. Bruce, and Wise, Howard M., Construction Builders' and Mechanic Liens in Canada (7th Ed. 2005) (2010 Looseleaf Supp.), p. 2.12.1-2 [para. 94].

Grenon, Aline, Common Law and Statutory Trusts: In Search of Missing Links (1995), 15:2 Est. & Tr. J. 109, generally [para. 109, footnote 2].

Waters, Donovan W.M., The Law of Trusts in Canada (4th Ed.), para. 3.IV(e) [para. 74].

Counsel:

H.A. Gorman, Q.C., and S. Jenkins (student-at-law), for the respondent;

R.H. Shaban and J.W. MacLellan, for the appellant.

This appeal was heard on April 8, 2015, before Paperny and Slatter, JJ.A., and Yamauchi, J.(ad hoc), of the Alberta Court of Appeal. The judgment of the court was delivered on July 16, 2015, and included the following opinions:

Slatter, J.A. (Yamauchi, J.(ad hoc), concurring) - see paragraphs 1 to 49;

Paperny, J.A., dissenting - see paragraphs 50 to 118.