Insolvency Strategies on Construction Claims

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Insolvency Strategies on Construction Claims

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Duncan GlaholtPrincipalGlaholt Associates
Howard Wise Partner Goodmans
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Liquidation Remedy
Federal BIA
Trust Issues
S. 68 CLA Super-Priority
Federal CCAA
Provincial CLA
Livent Case Study
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Part IX Construction Lien ActExtraordinary
Remedies

• Section 68
• Appointment of Trustee

• Section 69
• Labour Material Payment Bonds

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Section 68

• 68(1) Application for Appointment of Trustee
• 68(2) Powers of Trustee
• 68(3) Liens a Charge on Amounts Recovered
• 68(4) Sale Subject to Encumbrances
• 68(5) Orders for Completion of Sale

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Typical s. 68 Situation

• Cash flow problems
• Owner abandons
• Work stops
• Premises exposed to elements, vandalism

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Remedy

• Appointment of Receiver

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s. 68(1)

• Any person having a lien, or any other  person
  having an interest in the premises may apply to
  the court for the appointment of a trustee and
  the court may appoint a trustee upon such terms
  as to the giving of security or otherwise as the
  court considers appropriate.

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s. 68(1)

• Any person having a lien, or any other  person
  having an interest in the premises may apply to
  the court for the appointment of a trustee and
  the court may appoint a trustee upon such terms
  as to the giving of security or otherwise as the
  court considers appropriate.

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s. 68(1)

• Any person having a lien, or any other  person
  having an interest in the premises may apply to
  the court for the appointment of a trustee and
  the court may appoint a trustee upon such terms
  as to the giving of security or otherwise as the
  court considers appropriate.

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s. 68(1)

• Any person having a lien, or any other  person
  having an interest in the premises may apply to
  the court for the appointment of a trustee and
  the court may appoint a trustee upon such terms
  as to the giving of security or otherwise as the
  court considers appropriate.

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s. 68(1)

• Any person having a lien, or any other  person
  having an interest in the premises may apply to
  the court for the appointment of a trustee and
  the court may appoint a trustee upon such terms
  as to the giving of security or otherwise as the
  court considers appropriate.

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s. 68(1)

• Any person having a lien, or any other  person
  having an interest in the premises may apply to
  the court for the appointment of a trustee and
  the court may appoint a trustee upon such terms
  as to the giving of security or otherwise as the
  court considers appropriate.

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s. 68(2)

• Subject to the supervision and direction of the
  court, a trustee appointed under subsection (1)
  may,
• (a) act as a receiver and manager and, subject to
  the Planning Act and the approval of the court,
  mortgage, sell or lease the premises or any part
  thereof
• (b) complete or partially complete the
  improvement
• (c) take appropriate steps for the preservation
  of the premises and
• (d) subject to the approval of the court, take
  such other steps as are appropriate in the
  circumstances.

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s. 68(3)

• Subject to subsection 78 (7), all liens shall be
  a charge upon any amount recovered by the trustee
  after payment of the reasonable business expenses
  and management costs incurred by the trustee in
  the exercise of any power under subsection (2).

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s. 68(3)

• Subject to subsection 78 (7), all liens shall be
  a charge upon any amount recovered by the trustee
  after payment of the reasonable business expenses
  and management costs incurred by the trustee in
  the exercise of any power under subsection (2).

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s. 68(4)

• Any interest in the premises that is to be sold
  may be offered for sale subject to any mortgage,
  charge, interest or other encumbrance that the
  court directs.

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s. 68(5)

• The court may make all orders necessary for the
  completion of any mortgage, lease or sale by a
  trustee under this section.

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Procedure

• 1. Marshall Support
• Strategize
• Evaluate

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Procedure

• 2. Get Trustee in Place
• Consent of Trustee to Act

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Procedure

• 3. Application to Court
• Notice of Application
• Affidavit

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Consent of Trustee to Act (Court and Title of
Proceeding) CONSENT   The ABC Trust Company
hereby consents to an Order appointing it Trustee
with power to act as receiver and manager of the
premises upon which the lien or liens in this
action are filed, such management to be under the
supervision and direction of this Honourable
Court with power when so directed by this
Honourable Court to mortgage, lease or sell the
said premises and/or to complete or partially
complete the said premises to take appropriate
steps for the preservation of the premises to
take such other steps as are appropriate in the
circumstances and in the event that mortgage
moneys are advanced to it as Trustee pursuant to
such power, such money to take priority over all
liens existing at the date of its appointment as
Trustee. In the alternative, The ABC Trust
Company consents to its appointment as Trustee as
aforesaid if the application for the appointment
of the Trustee is referred by the presiding Judge
in Chambers to the Judge or Officer having
jurisdiction to try the action.  
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Consent of Trustee to Act   (Court and Title of
Proceeding)   CONSENT (conclusion)     This
Consent is given by the ABC Trust Company at the
request of Glaholt Associates, Solicitors for
the Plaintiff herein, and on condition that the
appointment of the company as Trustee, if made,
will be pursuant to the provisions contained in
the Construction Lien Act, R.S.O. 1990, Chapter
C.30, and in particular sections 68 and 78(7)
thereof.   DATED at Toronto, this 2nd day of
October, 2001.   The ABC Trust
Company (Seal)
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Application for Appointment of Trustee   IN THE
ONTARIO COURT (GENERAL DIVISION)   IN THE MATTER
OF   The Construction Lien Act, R.S.O. 1990, c. C
30   (Title of Proceeding)   APPLICATION  
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The Plaintiff will make an application to the
presiding judge in chambers of this Honourable
Court, on Tuesday, the 2nd Day of October, 2001,
at 1000 oclock in the forenoon or so soon after
the time as the application can be heard at
Osgoode Hall, 130 Queen Street West,
Toronto.   THE APPLICATION is for an Order
pursuant to the provisions of section 68 of the
Construction Lien Act, and amendments thereto,
appointing the ABC Trust Company as a Trustee who
may act as receiver and manager and with power to
manage, mortgage, lease and sell the premises
upon which the liens in this action are filed,
such management and sale to be under the
supervision and direction of this honourable
Court and with power to complete or partially
complete the premises take appropriate steps for
the preservation of the premises take such other
steps as may be appropriate in the circumstances
and in the event that mortgage moneys are
advanced to the said Trustee to be appointed as
the result of such power, such moneys to take
priority over all liens existing as of the date
of its appointment, and for such further or other
Order as this Honourable court may deem just.
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THE GROUNDS FOR THE APPLICATION ARE that several
construction liens have been registered against
the lands and premises which are the subject of
this action which make it impossible for mortgage
funds to be advanced to finance the completion of
the improvement thereon. The contractor has
abandoned the project and it is in the best
interests of the lien claimants to have a Trustee
appointed pursuant to the provisions of section
68 of the Construction Lien Act, R.S.O. 1990, c.
C.30, in order that the improvement can be
completed and sold.  
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• THE FOLLOWING DOCUMENTARY EVIDENCE will be used
  at the hearing of the application
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• The affidavit of John Doe.
• The pleadings and proceedings herein to date.
• The Consent of The ABC Trust Company.
• Such further and other material as Counsel may
  advise and the Court permit.
•  
• Date October 2, 2001
•  
• GLAHOLT ASSOCIATES,
• 141 Adelaide Street West, Suite 800,
• Toronto, Ontario,
• Solicitors for the Plaintiff
•  
• TO etc.

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Case Study

• Atlas-Gest Inc. v. Brownstones Building Corp.
• (1992), 2 C.L.R. (2d) 275 (Ont. Gen. Div.)

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Facts

• Condominium development
• Several units already sold
• 200,000 required to bring to a state of
  completion that allows for sale of units
• Dispute between owner and general contractor
• Contractor leaves site

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More Facts

• Stalemate between owner and general
• 2.7 million in lien claims
• Mortgagee remains unpaid
• Condominium is not registered due to ongoing
  dispute between owner and mortgagee
• Purchasers who already have occupancy cannot
  secure title to their holdings until registration
  is completed

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Even More Facts

• Impasse between owner and mortgagee stems from
  obdurate position being taken by owner
• Impasse leaves purchasers helpless to secure
  final closing
• Real estate market is uncertain
• Debts for hydro and other services accrue

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Too Many Facts

• Interest charges continue to accrue
• Funds available to lien claimants will erode if
  impasse continues
• Security interest of mortgagee jeopardized

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General Principles (Stach J.)

• The appointment of a trustee is an extraordinary
  remedy, and must therefore be a remedy that is
  granted rarely but
• An order appointing a trustee will be made if it
  is just and convenient in all of the
  circumstances to do so

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Appropriate Considerations

• Is there a vacuum in the management of the
  premises?
• Has the owner abandoned the premises?
• Is the owner insolvent?
• Is the owner acting irresponsibly?
• Is there danger of deterioration of the property?

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Appropriate Considerations

• Is there an income flow to be taken in hand for
  the benefit of the lien claimants to avoid a sale
  of the property?
• Is the security of the lien claimants at risk?

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Application to Facts

• In the case before me, the luxury condominium
  building is "up", but unfinished and not in a
  state that permits the sale of several additional
  units to go ahead. Nor, in this artificial
  stalemate, can those units which are already
  "sold" proceed to final closings. If existing
  unit sales were allowed to complete and
  prospective sales permitted to go ahead, two
  separate streams of substantial income flow could
  be tapped.

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Application to Facts

• I am satisfied that the impasse is even now
  operating to the financial detriment of lien
  claimants and to the financial detriment of unit
  purchasers who are otherwise innocent. The
  impasse, if allowed to continue, will result in a
  proportionately greater erosion of their
  respective positions. Accordingly, I am satisfied
  that the impasse has resulted in the neglect of
  essential management functions.

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Application to Facts

• Although it cannot be said, particularly with
  the mortgagee having gone into possession of the
  unfinished premises, that there is any physical
  deterioration of the asset here in question yet
  it is plain that the value of the assets is
  deteriorating in an economic sense.

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Application to Facts

• Accordingly, I make an order appointing Coopers
  Lybrand Limited as trustee of the lands in
  question and as receiver and manager of The
  Breakers East Inc. .

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Ontario Court of Justice(General
Division)Stach J.ORDER
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1. THIS COURT ORDERS THAT Coopers Lybrand
Limited be and it is hereby appointed receiver
and manager with authority to manage and operate
the business
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4. THIS COURT ORDERS THAT The Breakers Inc do
forthwith deliver to Coopers all of the assets,
property of The Breakers Inc and all books,
documents, contracts, papers and records of every
kind
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5. THIS COURT ORDERS THAT Coopers be and it is
hereby empowered to complete any construction or
repairs that it feels are necessary, in order to
permit sales of units to close or to be entered
into
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6. THIS COURT ORDERS THAT Coopers be and it is
hereby authorized to take appropriate steps for
the preservation of the subject lands and premises
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7. THIS COURT ORDERS THAT Coopers be and it is
hereby fully authorized and empowered to
institute and prosecute all actions, applications
or procedures as may in its judgment be necessary
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9. THIS COURT ORDERS THAT Coopers shall be at
liberty to carry on the business of The Breakers
East Inc., including the power to sell, lease or
mortgage assets, to manage, rent or lease and
collect rents, to purchase or lease machinery and
equipment, to settle any indebtedness or claim,
to enter into any agreements
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12. THIS COURT ORDERS THAT Coopers may from time
to time move this court for advice and direction
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15. THIS COURT ORDERS THAT Coopers make a first
report to this court as to its administration
within 60 days of the date of this order
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Liquidation Remedy
Federal BIA
S. 68 CLA Super-Priority Trust Sections
Trust Issues
Federal CCAA
Provincial CLA
Livent Case Study
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Trust Scheme

• Q Do construction draws flow through a
  construction bankruptcy?
• Q What happens to trust money in a bankruptcy?
• Q Does bankruptcy discharge get me out of
  trust liability?

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Do construction draws flow through a
construction bankruptcy?

• No.
• Monies held by a party in trust do not form part
  of that partys estate in the event of a
  bankruptcy or other insolvency.
• British Columbia v. Henfrey Samson Belair
  (S.C.C., 1989)
• Trustee to apply to Court to resolve which assets
  are subject to the trust

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What happens to trust money in a bankruptcy?

• Three methods of distributing trust funds used by
  trustees in bankruptcy
• Reference to Registrar or officer of Court
• Trustee ascertains creditors entitled to trust
  funds, notifies all creditors of motion to be
  made for approval of distribution scheme
• Trustee obtains indemnity agreements from
  creditors entitled to trust funds and distribute
  funds without court order

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Does bankruptcy discharge get me out of trust
liability?

• A A finding of liability under the trust
  provisions of the CLA will not automatically fall
  within s. 178(1)(d) BIA. Depends on element of
  wrongdoing.
• Toro Aluminum Ltd. v. Revah
• Re Zumbo
• Simone v. Daley