Canada: An Examination Of Constructive Trusts In The Insolvency Context

Last Updated: October 4 2007
Article by Mary I.A. Buttery

Third Annual Pan-Canadian Conference On Bankruptcy And Insolvency


Constructive trusts. The mere thought can make secured creditors and their lawyers shudder. After all, imagine having valid, perfected, first-ranking security defeated by a claim that the debtor holds the secured property in trust for another person, absent any formal trust arrangements! The horror! But it does happen. It could happen to your clients. And although not preventable, understanding what constructive trusts are, and how they could be claimed, will help you advise your clients in the event they do arise.


The constructive trust is a judicial construct that is often used as a remedy in cases of unjust enrichment. In the circumstances where it is employed, specific property that is owned or possessed by the defendant is alleged to be impressed with a trust in favour of the constructive beneficiary, thereby removing that property from the defendant’s estate.

Problems arise in the insolvency context where parties may be unaware of someone’s subsequent claim of constructive trust, which may reorder the priorities in a bankruptcy. In the relatively certain distribution scheme set out in the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended (the "BIA") this can wreak havoc with other creditors’ expected recovery. Constructive trusts can also cause problems in restructurings under the BIA or Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36, as amended (the "CCAA"), where proposals or plans can be affected or even unsuccessful if based on a scenario that changes as a result of a successful constructive trust claim.

The Evolution Of Canadian Constructive Trust Cases

The starting point with respect to an examination of constructive trusts in Canada must start with Pettkus v. Becker, [1980] S.C.J. No. 103.

As an aside, there has been much scholarly debate as to whether this case clarified the use of constructive trusts generally in Canada, or whether it simply addressed remedial constructive trusts. Such a discussion is outside the scope of this paper.

In any event, in Pettkus, Pettkus and Becker had a successful bee keeping business which operated on two Ontario properties. Although unmarried, the parties lived together as husband and wife for almost 20 years. When the relationship terminated, Ms. Becker brought an application alleging a constructive trust, seeking an entitlement to one-half interest in lands owned by Mr. Pettkus, and a share in the bee keeping business. The Supreme Court of Canada held that Mr. Pettkus held the property on constructive trust for Ms. Becker. The Court held that a constructive trust can be applied in the cases of unjust enrichment, and that unjust enrichment can be established if there is an enrichment of one party and a corresponding deprivation of the other party, in the absence of juristic reason for the enrichment.

The next major case in Canada that dealt with constructive trusts was Lac Minerals Ltd. v. International Corona Resources Ltd., [1989] S.C.J. No. 63. In this well-known case, International Corona Resources Ltd. ("Corona"), a junior mining company, carried out exploration on certain property known as the Williams property, and subsequently made attempts to acquire that property. Representatives from a senior mining company, Lac Minerals ("Lac"), arranged to visit the Williams property. Corona showed the Lac representatives confidential geographic findings and discussed the Williams property with Lac. Lac thereafter acquired the Williams property but never informed Corona of its intention to acquire the property. Corona sued Lac. The trial judge found that although there had not been a binding contract between Lac and Corona, Lac was nonetheless liable for breach of confidence and breach of fiduciary duty, and determined that the appropriate remedy with respect to breach of fiduciary duty would be the return of the Williams property to Corona. This finding was affirmed by the Court of Appeal which also confirmed that a finding of constructive trust was an appropriate remedy for breach of confidence and breach of fiduciary duty. This finding was upheld by the Supreme Court of Canada which determined that a constructive trust was the only just remedy in the circumstances regardless of whether the remedy was based on breach of confidence or breach of fiduciary duty.

The Lac Minerals decision was important in the development of the application of constructive trusts in Canada as previously Canadian courts had refused to impose a constructive trust absent a "special" relationship as between the parties. In this case, because of the disclosure of the information by Corona to Lac, and the corresponding loss as a result of that disclosure, Lac became bound as a fiduciary duty to Corona. This finding of constructive trust despite the absence of a clear-cut relationship between the parties shows how a claim of constructive trust may very well come "out of the blue" as it were and surprise and defeat other creditors.

In 1993, the Supreme Court of Canada again considered the issue of constructive trusts in Peter v. Beblow, [1993] 1 S.C.R. 980. In that case, there was a common law relationship between Ms. Peter and Mr. Beblow which had lasted for 12 years. Ms. Peter did the domestic work of the household and raised the children without compensation. It was determined by the court that a constructive trust was established arising from the unjust enrichment of Mr. Beblow. The Court held that a constructive trust is available where monetary damages are inadequate, and there is a link between the contribution that founds the action, and the property. The court further determined that a direct link between the contribution and the property is essential for a constructive trust to arise whether the situation at hand is commercial or familial. In other words, there are no special rules for family cases. Further, the court held that the test for the absence of juristic reason is flexible and in every case the fundamental concern is the legitimate expectation of the parties.

The Canadian constructive trust case that appears to be the most controversial is Soulos v. Korkontzilas (1997), 146 D.L.R. (4th) 214 (S.C.C.). In that case, a real estate broker acted for a potential purchaser of commercial property. The purchaser made an offer for that property, it was rejected, and then the owner told the broker what it would accept for the property. Instead of telling the purchaser this, the broker arranged for the purchase of the property in his wife’s name. The purchaser sued and alleged damages and alternatively, claimed breach of fiduciary duty and remedial constructive trust. The claim for damages was abandoned (because the property had actually declined in value since the date of purchase) but the purchaser still sought a return of the property based on constructive trust. The trial judge found a breach of fiduciary duty but also found that the purchaser was not entitled to a constructive trust, as it was an alternative to damages, and the purchaser had not suffered any damage (due to the decline in the value of the property). This decision was overturned at the Court of Appeal, and the broker appealed. The Supreme Court dismissed the appeal. Madam Justice McLachlin (as she then was) said that a constructive trust is an appropriate mechanism to condemn wrongful acts committed by fiduciaries and to maintain the integrity of trust relationships. She called this type of constructive trust "real" or "institutional" vs. "remedial" as found in Pettkus, supra. In other words, this decision appears to have broadened the availability of constructive trusts, relying on the amorphous concept of "good conscience", to base a finding of constructive trust. Justices Sopinka and Iacobucci wrote strong dissents in this decision, finding, among other things, that because there was no loss and no enrichment, a remedy of constructive trust was inappropriate in the circumstances.

Constructive Trusts In The Insolvency Context

Given the priority over other people and creditors that a constructive trust beneficiary would enjoy, its not surprising that allegations of constructive trust are frequently made in the insolvency context.

Baltman v. Melnitzer (Trustee of), [1996] O.J. No. 3963 (O.C.J.), extended the principle of constructive trust into the insolvency context. This case gives an excellent overview of the relevant case law, and contains a helpful consideration of juristic reason. In this case, upon the bankruptcy of Mr. Melnitzer, it was determined that a line of credit with RBC was opened on the basis of fraudulent misrepresentation. Mr. Melnitzer had purchased some artwork using the line of credit. Ms. Baltman, Mr. Melnitzer’s wife, claimed ownership of the artwork on the basis that it had been given to her as a gift. RBC claimed ownership of the artwork on the basis of unjust enrichment, and thereby claimed a constructive trust. In this case, the court found that the first two requirements for a finding of constructive trust, namely, enrichment and a consequential deprivation, existed. However, the bank’s claim would ultimately fail based on a finding by the Court that there was a juristic reason for the deprivation. The court found that although there was a fraud in establishing the line of credit, there still remained a contractual relationship between Mr. Melnitzer and the bank, which provided sound juristic reason. The court further found that the bank could not establish that it had a reasonable expectation to acquire a proprietary interest in the subject paintings. The court determined that a court must consider the competing equitable interests and decide whether a proprietary or monetary remedy is appropriate. In this case, the court determined that a monetary remedy was appropriate.

In Ellingsen (Trustee of) v. Hallmark Ford Sales Ltd. (2000), 190 D.L.R. (4th) 47 (B.C.C.A.), Mr. Ellingsen purchased a truck from the respondent car dealership; part of the purchase price was to be financed through a bank. The dealer transferred ownership to Mr. Ellingsen prior to financing being confirmed, although blank conditional sales documentation was signed. The financing arrangements were delayed, and before the arrangements were finalized the purchaser assigned himself into bankruptcy. The trustee in bankruptcy sought a declaration that the truck vested in it free and clear of any claims by the dealer. The Court of Appeal held that the dealer did not retain a security interest, and that there was no enforceable interest on which to sue. However, the court determined that it was appropriate to impose a constructive trust in favour of the dealer to prevent an unjust outcome. The court determined that the dealer was entitled to the constructive trust as it did not stand on the same footing as the general creditors. It is worth noting that Chief Justice McEachern (as he then was) dissented and stated that he felt that the dealer ought to have registered a financing statement under the provincial personal property regime.

The decision in Melnitzer and the dissent by McEachern C.J.A. in Ellingsen mirrors the substantial debate that has occurred in cases and scholarly articles as to the whether parties to a commercial relationship can have available to them a constructive trust. Many feel that the existence of a contractual relationship creates a juristic reason for the deprivation, and should therefore preclude the finding of a constructive trust.

Certainly, in Caterpillar Financial Services Ltd. v. 360networks corp., [2007] B.C.J. No. 22 (C.A.), the Court of Appeal found that Caterpillar could not make a successful claim for a constructive trust when it had failed to perfect registration of its security interests.

A finding of constructive trust was made in Ascent Ltd. (Re), [2006] O.J. No. 89 (O.C.J.), however, the court found that a prior commercial relationship was over-ridden by an intervening judicial event. In Ascent, Cafco financed the acquisition by Ascent of an insurance policy for the benefit of Ascent. Ascent defaulted on payments under the policy, which had been assigned to Cafco pursuant to a Payment Installment Contract ("PIC"). Ascent thereafter filed a Notice of Intention to make a proposal, and its proposal was ultimately rejected, resulting in its bankruptcy. Cafco argued that the creditors of Ascent were unjustly enriched by the insurance premium that was unearned. In this case, the issue squarely before the court was: "What is unjust enrichment, and can it form the basis for the use of the constructive trust in a commercial insolvency to provide an appropriate remedy?"

The court in Ascent determined that the three requirements of constructive trust were present. In turning to the discussion of whether there was a juristic reason for the enrichment and corresponding deprivation, the court determined that a decision of the trial court, during proposal proceedings, that the unearned premium was to be held in trust for Cafco dramatically changed the creditor landscape. It would be interesting to know what the court might have decided had it not been for that intervening court decision.

Ascent is an interesting case as the court also considered the impact of a finding of constructive trust on the distribution scheme laid out under the BIA. The court commented that it was satisfied that, "… it is, in certain cases appropriate to do injustice to the BIA in order to do justice to commercial morality." Further, the court found "… no offence in equity intervening, even at the expense of the formulaic aspects of the BIA scheme of distribution." (at para. 17).

In New Solutions Financial Corp. v. 952339 Ontario Ltd. 2007 CarswellOnt 46 (O.C.J.), an interim receiver appointed under the BIA operated an insolvent school. Parents of students of that school sought a refund of tuition and other fees they had made as advance payments before the school ceased to operate. The court found that the secured creditor had priority to the payments made by the parents since the parents failed on the third prong of the constructive trust test: they could not establish an absence of juristic reason for the enrichment of the school. Of note was the Admission Agreement that was signed by the parents in which they acknowledged that the fees must be paid whether or not the services are actually provided to the student.

The most recent case in the insolvency context dealing with constructive trusts is Melchior v. Cable (Trustee of), [2007] B.C.J. No. 158 (S.C.). This case involved an application by Ms. Melchoir, Mr. Cable’s common law spouse for a remedial constructive trust in relation to certain patents arising out of a business that Mr. Cable (a bankrupt) owned and operated. The business was also a bankrupt. Of note is that there had been no relationship breakdown; Mr. Cable and Ms. Melchoir were still co-habitating at the time of the application. The Court found that Ms. Melchoir did nothing to contribute to the creation of the patents, and that she received a salary from the business at the operative times. The court relied on the decision in Ellingsen and determined that a remedial constructive trust will not be imposed without taking into account the interests of others who may be affected by the remedy. Ms. Melchoir’s claim was thereby dismissed.


An examination of the case law discussed above shows clearly that all courts in Canada, with reference to constructive trusts, are in agreement that in order to make a finding of constructive trust there must be:

  1. an unjust enrichment;
  2. a corresponding deprivation; and
  3. no juristic reason for the deprivation.

These three conditions must be met regardless of whether the relationship is familial or commercial, and whether the parties are solvent or insolvent. All of the above considerations are based on a general overall theme of "good conscience", pursuant to which the court will look to the expectation of the parties, and also, consider the impact of a finding on constructive trust on the interests of others who may be affected by the finding of a constructive trust.

Should constructive trusts exist in the insolvency context? Because a constructive trust can be found to exist some time after bankruptcy, such a trust can prove problematic to affected creditors, who can do nothing to protect their interests in the case of any unknown constructive trust. However, what makes constructive trusts problematic in the insolvency context is that even after a finding of constructive trust, the court is called upon to look at its effect on creditors. This is where scholars tend to feel that constructive trusts are problematic, because such a consideration takes the finding of a constructive trust out of the realm of pure fact, and into the more treacherous realm of judicial discretion. Does this make a constructive trust inappropriate in a bankruptcy?

While concerning, discretion and equity already have a strong foothold in Canadian insolvency law. There is never complete certainty in the classification of, and the priority of payment to, creditors, due to the fact that a bankruptcy court is a court of equity. Further, if applied in a principled manner, a constructive trust would only give priority over other creditors when there was a legitimate reason for subordinating certain creditor’s rights. This application of discretion already exists in insolvency law in Canada, and although troubling, the existence of constructive trusts does not expand the danger for creditors from that which exists already.

So what can secured creditors do to protect themselves from constructive trusts? Frankly, not very much, since they are situation based, and often, the facts giving rise to such claims would be unknown to creditors. However, a thorough understanding of how constructive trusts arise, and how to analyze them when they do, is likely the best defense.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions