Insolvency Strategies on Construction Claims

Duncan Glaholt Principal Glaholt & Associates Howard Wise PartnerGoodmans

Federal CCAA Provincial CLA Federal BIA Liquidation Remedy Trust Issues Livent Case Study S. 68 CLA Super-Priority

Part IX Construction Lien Act Extraordinary Remedies Section 68 Appointment of Trustee Section 69 Labour & Material Payment Bonds

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

Typical s. 68 Situation  Cash flow problems  Owner abandons  Work stops  Premises exposed to elements, vandalism

Remedy:  Appointment of Receiver

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.

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.

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.

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.

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.

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.

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.

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).

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).

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.

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.

Procedure: 1. Marshall Support  Strategize  Evaluate

Procedure: 2. Get Trustee in Place  Consent of Trustee to Act

Procedure: 3. Application to Court  Notice of Application  Affidavit

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.

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 2 nd day of October, The ABC Trust Company (Seal)

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

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 10:00 o’clock 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.

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.

THE FOLLOWING DOCUMENTARY EVIDENCE will be used at the hearing of the application: 1.The affidavit of John Doe. 2.The pleadings and proceedings herein to date. 3.The Consent of The ABC Trust Company. 4.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.

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

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

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

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

Too Many Facts  Interest charges continue to accrue  Funds available to lien claimants will erode if impasse continues  Security interest of mortgagee jeopardized

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

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?

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?

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.”

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.”

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.”

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..”

Ontario Court of Justice (General Division) Stach J. ORDER

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

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

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

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

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

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

12. THIS COURT ORDERS THAT Coopers may from time to time move this court for advice and direction

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

Federal CCAA Provincial CLA Federal BIA Liquidation Remedy Trust Issues Livent Case Study S. 68 CLA Super-Priority Trust Sections

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?

Do construction draws flow through a construction bankruptcy? No. Monies held by a party in trust do not form part of that party’s 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

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

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