Construction Trusts Can Apply to Funds Received by CCAA Monitor: the Court of Appeal’s Decision in Urbancorp

There is good news from the Ontario Court of Appeal for contractors dealing with insolvent owners. In a recent decision in Urbancorp Cumberland 2 GP Inc. (Re) (“Urbancorp”),[1] the Court of Appeal held that statutory trusts can arise under the Construction Act[2] over sale proceeds received by a court officer in a court-supervised sale process under the Companies’ Creditors Arrangement Act (“CCAA”).[3] The decision also limited the application of the Court of Appeal’s earlier decision in Re Veltri Metal Products Co. (“Veltri”).[4] Veltri does not stand for a blanket rejection of construction trusts over the proceeds of a court-supervised sale in insolvency proceedings.

Contractors now have further assurance that they can rely on construction trusts even where owners are in financial distress. Lenders and other creditors in the construction industry should take note of the impact that construction trusts may have on their recoveries within Canadian insolvency proceedings.

Background to the Urbancorp Decision

A residential condominium developer, the Cumberland Group (“Cumberland”), obtained protection from its creditors under the CCAA. As part of the CCAA proceeding, a court-appointed monitor sold condominium units that Cumberland owned. The net proceeds from the sales totaled over $4.2 million.

Several of Cumberland’s contractors on the project had supplied work and materials for the units that were sold. One of the Cumberland entities, Urbancorp, owed these contractors a total of nearly $4 million. The contractors claimed that a trust in their favour had arisen over the condominium sale proceeds pursuant to section 9(1) of the Construction Act. That section provides that when an owner sells its interest in a property that contractors have improved through labour or materials, a trust arises in favour of those contractors in an amount equal to the sale proceeds minus certain deductions. Where a debtor holds funds that are impressed with a trust, the funds do not form part of the debtor’s estate. They are consequently not subject to the priority and distribution rules in insolvency legislation, which typically limit recoveries for contractors and other unsecured creditors.

The motion judge in Urbancorp initially denied the contractors’ trust claim. He held that an asset sale by the monitor in a CCAA proceeding cannot give rise to a construction trust over the sale proceeds. He relied on the Veltri decision for this proposition. The contractors appealed to the Ontario Court of Appeal.