By: Jessica Hewlett & Fahad Warraich
The Court of Appeal has recently confirmed that the property of a bankrupt divisible among creditors does not include property that the bankrupt holds in trust for any other person, and a creditor may be able to assert a constructive trust following an assignment into bankruptcy to avoid the property vesting in the trustee.
In Sirius Concrete Inc. (Re) 2022 ONCA 524, the appellant, Ayerswood Development Corporation (“Ayerswood”), appealed an Order made on a motion for directions brought by the Respondent BDO Canada Limited as the trustee in bankruptcy of Sirius Concrete Inc. (“Sirius”). The Order at issue provided, among other issues, that $381,578.40 in funds paid by Ayerswood to Sirius one business day before the company made an assignment into bankruptcy formed a part of Sirius’s estate. As a result of the Order, the funds at issue would be distributed among all of Sirius’ creditors in the context of the bankruptcy estate.
In 2018, Ayerswood, a general contractor hired Sirius, a concrete forming company to provide labour, equipment and materials for the construction of several concrete structures on an apartment building project. The relationship between the parties began to deteriorate due to alleged delays and deficiencies. In January 2019, Sirius rendered an invoice in the amount of $381,578.40. Ayerswood’s evidence was that it refused to pay the invoice until Sirius demonstrated some progress in the project, however ultimately made payment after receiving a representation from Sirius that payment would assist in getting the project back on track. It was later disclosed that Sirius had in fact completed a statement of affairs for its bankruptcy on the very same day, and made an assignment into bankruptcy the following day.
Ayerswood submitted affidavit evidence in relation to its reliance on the representation made by Sirius, and further alleged that had the company disclosed they were working with the Trustee to make a subsequent assignment into bankruptcy, the company would never have made payment of the funds. The parties agreed that on a motion for directions in a bankruptcy matter, the Court may determine issues of entitlement to assets as between the estate and a third party, however Ayerswood argued that the bankruptcy Judge erred in concluding that Ayerswood’s evidence, taken as true, could not possibly establish a trust.
The Court of Appeal agreed with Ayerswood, finding that there was no reason why in law, the facts as alleged by Ayerswood could not give rise to a constructive trust as remedy for unjust enrichment and determined:
Since, accepting the evidence of Ayerswood as true, a trust was a legally viable potential remedy, the decision of the bankruptcy judge, rendered on the basis that it was not a viable potential remedy, cannot stand.
As a result, the Court allowed the appeal and set aside the determination that the funds at issue formed part of the estate of Sirius, and directed that the matter be returned to bankruptcy court for direction on the procedure to be followed for a determination of the issue of entitlement