Canada: Court Of Appeal Summaries (July 14 To July 18, 2014)

Last Updated: July 25 2014
Article by John Polyzogopoulos

Hi everyone.  Here are this week's Court of Appeal summaries.  Not many civil cases were released this week, so the list is short.  This week's topics include bankruptcy, priority, construction, and insurance.

Enjoy your weekend. 

306440 Ontario Ltd. v 782127 Ontario Ltd. (Alrange Container Services), 2014 ONCA 548
[Doherty, Simmons and Tulloch JJ.A.]
M. G. Hearn, for the appellant Textainer Equipment Management (US) Ltd.
D. Van Sickle, for the respondent 306440 Ontario Ltd.
J. N. Birch, for the Receiver 

Keywords:   Bankruptcy, Secured Creditor, Unsecured Creditor, Constructive Trust

This litigation over the distribution of a bankrupt's estate pits the secured claim of the lender against the claims of an unsecured business creditor.  Under Bankruptcy and Insolvency Act's priority scheme, the secured creditor would have priority.  However, the business creditor asserts a constructive trust over certain funds held by the Receiver.  Trust property does not form part of the bankrupt's estate and is not subject to the priorities established under the bankruptcy scheme.

The bankrupt, Alrange Container Services ("Alrange"), operated a business storing shipping containers.  It also serviced, refurbished and bought then resold those containers to third parties. 

By January 2013, Alrange's business was in dire financial straits.  In February, the respondent, 306440 Ontario Ltd. ("306 Ontario"), Alrange's sole secured creditor and source of financing, successfully applied for the appointment of a Receiver over Alrange's affairs.  Alrange made an assignment in bankruptcy in May.  Alrange owed 306 Ontario approximately $750,000, most of which had been advanced to Alrange during the latter part of 2012.

The appellant, Textainer Equipment Management (US) Ltd. ("Textainer"), was a customer of Alrange and stored containers at Alrange's yard.  Alrange provided storage space and serviced the containers pursuant to a written agreement (the "Depot Agreement").  Alrange also refurbished and bought containers Textainer designated for resale.  Alrange resold these containers to other buyers. 

In January 2013, Textainer learned that Alrange was in serious financial distress.  Textainer had about 800 containers at Alrange's facility and took steps to inventory and recover.  Ultimately, Textainer could not account for 127 containers.  Alrange sold them.  Textainer's review of Alrange's records suggested that Alrange had been paid for 76 of the containers.

In the course of the bankruptcy, Textainer asserted a priority over the claim of 306 Ontario in an amount equal to the proceeds of the sale of the missing 127 containers.  Textainer fixed that amount at $291,800. Textainer brought a motion seeking an order imposing a constructive trust over funds received by the Receiver in the amount of the proceeds of the sales of the containers.

The Receiver investigated Textainer's claim to a priority over the proceeds of the sales of the missing containers.  They reported that 90 of the containers were disposed of by Alrange before October 3, 2012.  Alrange used the proceeds to cover ongoing business expenses.  Alrange sold the remaining 37 containers after October 3, 2012, but before January 25, 2013. The proceeds were also comingled with other monies in Alrange's bank account and used to cover operating expenses.  Alrange's bank account was in overdraft and did not begin to accumulate a positive cash balance until after January 21, 2013. 

The Receiver identified five transactions involving the sale of Textainer containers by Alrange.  The Receiver identified $27,244 in Alrange's bank account as proceeds the five transactions.  The Receiver estimated that Textainer would have billed Alrange approximately U.S. $10,800 for the five containers.

The motion judge assumed that Alrange was unjustly enriched by the sale of the Textainer containers.  He declined to impose a constructive trust on any of the funds held by the Receiver. He gave two reasons for dismissing Textainer's claim for a constructive trust.  First, there was no connection between the asset over which the appellant sought a constructive trust. The proceeds had been comingled with other funds and spent before January 21 when Alrange had a zero balance in its account.  Consequently, the proceeds from the sale of the containers were not part of or related to the funds held by the Receiver.  The motion judge did not reference the proceeds from the sale of the five containers ($27,244) in his analysis. The motion judge relied on Soulos v. Korkontzilas, [1997] 2 S.C.R. 217 and held that the legitimate intervening interest of 306 Ontario would render the imposition of a constructive trust in favour of Textainer unjust in the circumstances.

Is Textainer entitled to a constructive trust?

Appeal allowed in party. A constructive trust was imposed in favour of Textainer over $27,244 held by the Receiver.

Constructive trust remedies demand a close link between the property over which the constructive trust is sought and the improper benefit bestowed on the defendant or the corresponding detriment suffered by the plaintiff.  Absent the close and direct connection, there is no basis regardless of the nature of the restitutionary claim for granting a remedy that gives the plaintiff important property-related rights over specific property.  A constructive trust remedy only makes sense where the property that becomes the subject of the trust is closely connected to the loss suffered by the plaintiff and/or the benefit gained by the defendant.  The close connection is strong in the commercial context.

Textainer claims a constructive trust based on Alrange's use of some unspecified amount of the proceeds of the sale of the containers to assist in maintaining Alrange's operation, thereby generating an unspecified portion of the accounts receivable which the Receiver ultimately realized and now sit in the bankrupt's estate. Any connection between the proceeds of the sales of the containers and the funds sitting in the bankrupt's estate is far too remote and indirect to justify imposing a constructive trust over some part of those funds.  Furthermore, the legitimate intervening interests of 306 Ontario can be viewed as additional justification for requiring a clear and direct connection between the money held by the Receiver and the money realized by the sales as a condition precedent to the imposition of a constructive trust.

The $27,244 from the sale of the five containers after January 21 stands on different footing than the proceeds from the sales of the other containers.  That amount was in Alrange's account and could be directly connected by the Receiver to the sale of five Textainer containers.  The motion judge did not make any reference to the five containers sold after January 21, 2013 or to the $27,244 in Alrange's account resulting from the sales.  According to the Courts of Justice Act, the Court of Appeal can draw inferences and make findings of fact as long as they do not contradict findings from the court below.  The evidence supports  that five containers sold after January 21, 2013 were not sold pursuant to any arrangement between Alrange and Textainer.  Textainer was aware by January that Alrange was in serious financial difficulty.  Whatever arrangement Textainer and Alrange had for the sale of Textainer containers was over before January 21, 2013.  The five containers were not sold pursuant to any arrangement.  Consequently, there was no juristic reason for Alrange to receive and retain the proceeds of those sales.  The proceeds are identifiable as part of the funds held by the Receiver.  A constructive trust is an appropriate remedy.

In regards to the amount of the constructive trust, Textainer is not entitled only to the amount that it would have been paid had the containers been sold pursuant to its earlier arrangement with Alrange.  They were not sold pursuant to that arrangement.  Alrange had no authority to sell those containers and it would be inappropriate for Alrange to retain its profit on the sales. Furthermore, Alrange led no evidence of the costs of any refurbishing that may have been done in respect of the containers.  It would be speculation to arbitrarily discount some amount for the costs of refurbishing.  A constructive trust in the amount of $27,244 is the appropriate remedy. 

Northbridge General Insurance Corporation v Langston Hall Development Corporation,2014 ONCA 551
[Hoy A.C.J.O., Gillese and Lauwers JJ.A.]
R. R. Watkins, for the appellants
D. Michaud, for the respondent

Keywords:   Summary Judgment, Insurance, Insurer's Entitlement to Payment, Commercial Real Estate Bond, Damages Award

The action arose out of a commercial real estate transaction to build a residential multi-unit condominium project.  Del Terrelonge, John Wee Tom and Naheel Suleman (the "Appellants") gave indemnities to Northbridge General Insurance Corporation (the "Respondent") in respect of a bond provided by Northbridge to Tarion Warranty Corporation for the condominium project advanced by the corporate defendants (the "Tarion bond"). The corporate defendants are in receivership and did not take part in the motion for summary judgment or in this appeal. On motion for summary judgment, the Respondent was awarded $53,416.73 personally against the three individual appellants The Respondent was also awarded partial summary judgment with respect to additional expenses it incurred.

Did the motion judge err in finding that there is no genuine issue for trial with respect to Northbridge's entitlement to payment?

Appeal dismissed.

As per the reasoning of the motion judge, there is no genuine issue requiring a trial in respect of Northbridge's entitlement to payment.  First, the Appellant's argument that Northbridge would be unjustly enriched if they are obliged to make these payments has no merit.  As indemnitors, the Appellants are required to pay if the corporate defendants do not.  Second, there is no merit to the Appellants' argument that Northbridge was obliged to take steps to have the Tarion bond released.  That was the responsibility of the corporate defendants.

Third, the Appellants argue that the motion judge made a procedural error in allowing Northbridge to file a second reply affidavit after the cross-examinations on the other affidavits.  The motion judge's manner of proceeding was entirely consistent with her discretion under the Rules of Civil Procedure, and with the approach urged by the Supreme Court of Canada in Hryniak v Mauldin, 2014 SCC 7.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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John Polyzogopoulos
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