Carevest Capital Inc. v., 2011 ABQB 148

Court of Queen ’ s Bench of Alberta Citation: Carevest Capital Inc. v. 1262459 Alberta Ltd., 2011 ABQB 148 Date: 20110307 Docket: 1003 01050 Registry: Edmonton Between: Carevest Captial Inc. Plaintiff - and - 1262459 Alberta Ltd., 1281388 Alberta Ltd., 1256462 Alberta Ltd., Jagjit Dhami, Baljinder Dhot, Aqbal Gill and Ravinder Khandal Defendants _______________________________________________________ Reasons for Decision of L. A.

Smart, Master in Chambers ______________________________________________________ Background [ 1 ] 126245 Alberta Ltd. (“126") is a property development company that was carrying on business in the County of Leduc (“the County”). On April 17, 2007, the County issued conditional subdivision approval to 126 for development of lands within the County. 126 obtained a mortgage loan from CareVest Capital Inc. (“CareVest”), secured in part by land mortgages, and a General Security Agreement over all present and after acquired personal property (“the GSA”).

On December 19, 2007, the County and 126 entered into a development agreement (“the Development Agreement”).

Schedule “E” of the Development Agreement set out 126's responsibilities

regarding the levies payable to the County, which were subject to future adjustments based on the anticipated passage of a new proposed off-site levy bylaw (the “Off-site Levy Bylaw”). On April 15, 2008, Mr.

Thind, counsel for 126, received an advance of $801,350.00 (the “First Advance”) from CareVest, with the following condition: These funds are forwarded to you on the trust condition that you immediately pay the balance of the Leduc County Offsite Levy to the Leduc County in the amount of $801,350.00 and thereafter provide our office with proof of payment that the entire Offsite Levy has been paid in full. [ 2 ] Two other advances were also made, on June 27, 2008 and August 19, 2008, which brought the total sum of the advances to $3,341,902.40.

Both of these advances were made with the following condition: These funds are forwarded to you on the trust condition that you immediately provide our office with confirmation that the Leduc Country [sic] Offsite Levy has been paid in full. [ 3 ] On April 15, 2008, the same date as the First Advance, Mr. Thind sent two cheques to the County for an amount totaling $900,433.12 (one cheque was for $801,350.00, and the other for $99,083.12). Before the cheques were cashed, 126 applied for a reduced levy rate under the Off-site Levy Bylaw. As a result, the County did not immediately deposit those cheques.

The County eventually rejected 126's reduced rate request, and proceeded to review the calculation of the levies. At some point in this process, the cheques became stale-dated. [ 4 ] On December 31, 2008, the County advised 126 that the amount owing for the levies was $1,089,932.80 rather than $900,433.12. Shortly thereafter, 126 wrote back to the County and identified an error in the County’s calculations. The County reviewed the calculations, and replied on January 12, 2009 that the correct amount was $900,309.26. [ 5 ] Mr.

Thind e-mailed the County several times between November 13, 2008 and March 6, 2009 reminding the County that the cheques were stale-dated and uncashed, and that the County could request replacement cheques. Mr. Thind did not receive a response until October 9, 2009, at which point the County requested new cheques. 126 instructed Mr. Thind to refrain from sending new cheques. The funds remained in Mr. Thind’s trust account, until they were deposited into Court pursuant to a consent order granted by Master Laycock on January 13, 2010.

Entitlement to the approximately $900,000 deposit (the “Subject Funds”) is the issue in the current dispute. The County claims that it has entitlement to the Subject Funds by virtue of a Quistclose trust. CareVest claims entitlement on the basis of a security interest in the assets of 126 under its GSA, or alternatively, if a Quistclose trust exists, it is the rightful “beneficiary”. Positions of the Parties The County [ 6 ] The County takes the position that the Subject Funds were impressed with a Quistclose trust. CareVest advanced the funds specifically for the purpose of paying the off-site levies.

That purpose still remains capable of being carried out, as the levies remain unpaid and outstanding. Additionally, the formal requirements of a trust were met, as there was certainty of intention, subject-matter and object. Since the County is the beneficial owner of the Subject Funds, the Personal Property Security Act (“ PPSA ”) does not apply and the funds should be awarded to the County. CareVest [ 7 ] CareVest takes the position that a Quistclose trust was not created, or alternatively, that as the lender, CareVest is the beneficial owner of the Subject Funds.

In support of its first argument, CareVest submits that the trust conditions do not expressly or impliedly state that the monies were to be used exclusively to pay the off-site levies. The total amount of all three advances was $3,341,902.40, a substantially larger amount than the off-site levies. Therefore, clearly not all of these funds were intended to be paid to the County. Additionally, there is no evidence showing a distinction between the funds held by Mr. Thind for the payment of the off-site levies, and the funds held by Mr. Thind for the benefit of 126.

CareVest also argues that the requirement for the certainty of subject- matter is absent in this instance, as the final amount of the off-site levies was not determined until January 12, 2009. Since the

requirements of a trust relationship are not present, the relationship is actually one of debtor-creditor, to which the PPSA applies. [8] In the alternative, CareVest submits that if a Quistclose trust has been created, then it should nonetheless receive the SubjectFunds. The primary purpose of the trust, which was to pay the off-site levies immediately, failed when the County did not cash theoriginal trust cheques. The original mandate of the trust, which was to help 126 complete the development, would have been frustratedwhen 126 defaulted under the loan.

If a Quistclose trust existed, CareVest would be entitled to a return of the Subject Funds as thebeneficial owner of those funds. Law [9] In Barclays Bank Ltd. v. Quistclose Investments Ltd., [1970] A.C. 567; [1968] 3 All E.R. 651; [1958] 3 W.L.R. 1097(H.L.) Rolls Razor Ltd. borrowed money from Quistclose Investments for the specific purpose of paying a declared dividend. However,before the dividend was paid, Rolls Razor entered voluntary liquidation. Barclay’s Bank applied the money earmarked for the dividendaccount against Rolls Razor’s outstanding loan.

Quistclose sued for a return of its funds on the basis that they had been impressed with atrust. [10] The Lord Wilberforce stated, at page 579: Two questions arise, both of which must be answered favourably to the respondents if they are to recover the money from the bank. Thefirst is whether as between the respondents and Rolls Razor Limited, the terms upon which the loan was made were such as to impressupon the sum of ​209,719 8s. 6d. a trust in their favour in the event of the dividend not being paid.

The second is whether, in that event,the bank had such notice of the trust or of the circumstances giving rise to it as to make the trust binding upon them. [11] The House of Lords found that both of these conditions had been met. The “mutual intention” of the parties was that themoney should be used exclusively for the payment of the dividend. Barclay’s Bank also had sufficient notice, by way of a letter fromRolls Razor to the bank. Therefore, the arrangement gave rise to a “primary trust”, the terms of which required the money to be paid outas a dividend.

Where the primary trust failed, as in this instance, the “secondary purpose” of the trust operated to return the dividendmonies to the lender, Quistclose. If the dividend monies had been distributed, thereby fulfilling the primary purpose of the trust, thenQuistclose would only have had a remedy against Rolls Razor through a debt action. This case is the origin of the term Quistclose trust, although the principles underlying the trust can be traced back to much older cases:Tooley v. Milne (1819) 2 B. & A. 683, Edwards v. Glynn (1859) 2 E. & E. 29. [12] In Ling v.

Chinavision Canada Corp. (1992), (ON SC), 10 O.R. (3d) 79 (Ont. Gen. Div.) the plaintiff(“Ling”) advanced $500,000.00 loan to the defendant corporation (“Chinavision”). The loan agreement contained a term that, in theevent of a default, Ling could convert his debt to shares of Chinavision. The loan was guaranteed by Mr. Francis Cheung (“Cheung”),who was also a co-defendant in this matter. Both Cheung and Chinavision became insolvent, and Chinavision defaulted on the loan.

Lingattempted to convert his debt into shares of Chinavision. [13] A third party, North America Television Production Corporation (“North America T.V.”), advanced funds to Chinavision andCheung for the purpose of paying off the loan. Ling refused to accept the loan repayment because he was concerned that the fundswould be “attacked by creditors of Mr. Cheung.” Chinavision then applied for

summary judgment, seeking a declaration that Ling wasobliged to accept the repayment. The Court found that the “principle contained in the Quistclose trust case has been recognizedconsistently in this jurisdiction.” He concluded that the funds tendered by North America T.V. were “for the sole purpose of paying theindebtedness of [Cheung]” and therefore did not become part of the estate of either of the defendants. Ling must accept the repayment. [14] In Del Grande v. McCleery (1998), 40 B.L.R. (2d) 202; 24 E.T.R. (2d) 30 (Ont. Ct. J. (Gen.

Div.)), aff’d (2000) (ON CA), 127 O.A.C. 394 (C.A.) after reviewing Barclays Bank Ltd. v. Quistclose Investments Ltd., the Court restated thecriteria for finding a Quistclose trust at p. 206: 1. Whether the terms of the loan were such as to impress upon the loan sum a trust in favour of the lender if the specific purpose ofthe loan was not achieved or fulfilled;

2. Whether the party receiving the loan proceeds had notice of the trust or of the circumstances giving rise to the trust so as to bind such a party. [ 15 ] In Twinsectra Ltd. v. Yardley , [2002] UKHL 12 ; [2002] 2 A.C. 164 ; [2002] 2 W.L.R. 802 a purchaser (“Yardley”) sought financing to purchase property. He obtained financing from Twinsectra Ltd. (“Twinsectra”), on the condition that the loan money will be “utilized solely for the acquisition of property”. The money was released to the client account of Yardley’s solicitor (“Sims”).

Yardley assured Sims that the money would be used to fund the acquisition of property, and was therefore disbursed to another of Yardley’s solicitors (“Leach”). Leach was unaware of the previous undertaking, and the money was subsequently used for purposes other than the acquisition of property. Yardley went bankrupt, and Twinsectra commenced proceedings against all parties involved in the transaction. [ 16 ] The House of Lords found that the parties had created a Quistclose trust. Lord Millet discussed the nature of the Quistclose trust.

He considered where the beneficial interest of the trust was located and rejected Lord Wilberforce’s characterization of there being two trusts, a primary trust and a secondary trust. Instead, Lord Millet determined that there are four theoretical possibilities for the location of the beneficial interest in a Quistclose trust: (

i) the lender, (ii) the borrower, (iii) the contemplated beneficiary, (iv) in suspense. After examining all the possibilities, Lord Millet concluded that the beneficial interest remains with the lender.

When a Quistclose trust is established, the lender “does not part with the entire beneficial interest in the money, and in so far as he does not it is held on a resulting trust for the lender from the outset.” [ 17 ] Re Cliffs Over Maple Bay Investments Ltd. , 2010 BCSC 389 , a real estate company, The Cliffs Over Maple Bay Investments Ltd. (The “Cliffs”), commenced proceedings under the Companies’ Creditors Arrangement Act in May, 2008. Pursuant to those proceedings, the Court issued a debtor in possession order (the “DIP Order”), which authorized The Cliffs to borrow funds from Century Services Inc.

The DIP Order provided that the terms and conditions of the loan were to be subject to a commitment letter dated June 13, 2008. The DIP Order also imposed certain conditions on the use of the DIP funds. The Cliffs borrowed $500,000.00 from Century, which was deposited into the trust account of The Cliff’s solicitors, Lawson Lundell LLP. The Cliffs made expenditures pursuant to the terms of the DIP Order. However, pursuant to an appeal to the British Columbia Court of Appeal, the DIP Order was set aside on August 15, 2008 ( Cliffs Over Maple Bay Investments Ltd. v. Fisgard Capital Corp. , 2008 BCCA 327 ).

At that point, $162,276.33 of the loan (“the Funds”) remained in the trust account. The setting aside of the DIP Order left no way for expenditures to be made from the Funds. [ 18 ] This case concerned entitlement to the Funds.

Three parties claimed exclusive entitlement: Century argued that it retained both legal and equitable ownership of the Funds pursuant to a Quistclose trust; Fisgard Capital Corp. and Liberty Excell Holdings Ltd. (“Fisgard”), the secured creditors to The Cliffs, claimed that they had priority and ownership of the Funds; and Lawson Lundell claimed that it had a solictor’s lien over the Funds.

The Court ultimately concluded that Century was entitled to the Funds, as they had been impressed with a Quistclose trust. [ 19 ] At para. 78, the Court stated that: Where funds have been released by a lender to a borrower’s solicitor with trust conditions governing their use, they do not become the property of the borrower until the trust conditions are satisfied.

If the trust conditions are not satisfied, unspent funds must be returned to the lender. [ 20 ] Since the trust condition “has not and now never will be satisfied”, the Court concluded at para. 89 that The Cliffs never had possession or control over the Funds. This finding defeated both the claims of Fisgard and Lawson Lundell. Analysis A.) Were the terms of the loan capable of impressing the funds with a Quistclose trust? [ 21 ] The first issue before the Court is whether a valid Quistclose trust was created.

The terms of the loan must have been capable of impressing the funds with a trust in favour of the lender. The three certainties of a trust must still be present to create a Quistclose trust and ascertainable on an objective basis. The party who seeks to apply the trust bears the onus of proving its existence on a balance of

probabilities. i.) Certainty of Intention [ 22 ] The County submits that, in this case, the terms of the advance were sufficiently clear to impress the Subject Funds with a Quistclose trust. The fax accompanying the First Advance by CareVest was on the trust condition that 126 “immediately pay the balance of the Leduc County Offiste Levy to the Leduc County in the amount of $801,350.00.” This first condition was clear the trust property was to be used for no other purpose than for payment of the offsite levy.

Subsequent advances were made on the trust condition that required 126 to provide proof that the levies had been paid in full. If a Quistclose trust was created, there must have been the mutual intention to create a trust where the beneficial interest remained with the lender, CareVest. Here, there is insufficient evidence to establish a mutual intention that the subsequent advances were to be restricted solely for the purpose of paying the Offsite Levies.

The mutual intention to create a Quistclose trust was not present for the subsequent advances so the claim that the funds were impressed with a Quistclose trust must fail for those advances. Arguably the Quistclose trust could exist for the First Advance although the subsequent co-mingling of funds arguably puts that in question. ii.) Certainty of Subject Matter [ 23 ] CareVest argues that the certainty of subject-matter is not present in the circumstances of the case because the exact amount of the off-site levies had not been finally determined until well after the advance was made.

However, whether the First Advance represented all or a portion of the off-site levies is irrelevant to whether they are considered to be held in trust. To establish the certainty of subject-matter, the trust property has to be clearly identifiable. [ 24 ] The County has not argued that the second and third advances were impressed with a Quistclose trust. Therefore, if a Quistclose trust is to be found, the subject-matter of the trust is limited to the First Advance, and $801,350.00 of the Subject Funds is all that could be considered trust property.

The remainder of the funds advanced would be the property of 126, and are subject to the claim of CareVest under its GSA. iii.) Certainty of Object s [ 25 ] The object of the trust is easily ascertainable in this case. Assuming that a trust had been created, the funds were to be forwarded to the County for payment of the off-site levies. In its reply brief, CareVest did not dispute the certainty of objects. B.) Notice requirement [ 26 ] It is the intended recipient of the funds, the County, rather than the lender, CareVest, who is seeking to apply a Quistclose trust.

The policy rationale behind the notification requirement is to provide certainty to the party receiving the funds. In other words, the notice requirement exists for the protection of the recipients of the trust funds, who are entitled to know if funds must be returned to the lender when they are not applied towards a specific purpose. The notice requirement has no application to these circumstances.

C.) If a trust has attached to the First Advance, then which party is the rightful beneficiary of the trust? [ 27 ] Prior to 2002, there had been some debate regarding the location of the beneficial interest in a Quistclose trust. In Twinsectra v. Yardley, Lord Millet directly answered this debate. He rejected the notion that there was a primary trust and a secondary trust, and concluded that the beneficial interest of a Quistclose trust remains with the lender until the primary purpose of the trust is achieved.

The lender pays the money to the borrower by way of loan, but he does not part with the entire beneficial interest in the money, and in so far as he does not it is held on a resulting trust for the lender from the outset. Contrary to the opinion of the Court of Appeal, it is the

borrower who has a very limited use of the money, being obliged to apply it for the stated purpose or return it. He has no beneficial interest in the money, which remains throughout in the lender subject only to the borrower’s power or duty to apply the money in accordance with the lender’s instructions. When the purpose fails, the money is returnable to the lender, not under some new trust in his favour which only comes into being on the failure of the purpose, but because the resulting trust in his favour is no longer subject to any power on the part of the borrower to make use of the money.

Whether the borrower is obliged to apply the money for the stated purpose or merely at liberty to do so, and whether the lender can countermand the borrower’s mandate while it is still capable of being carried out, must depend on the circumstances of the particular case. [ 28 ] As noted above the Ontario Court of Justice (affirmed by the Court of Appeal) restated the criteria for finding a Quistclose trust in part as follows: “Whether the terms of the loan were such as to impress upon the loan sum a trust in favor of the lender if the specific purpose of the loan was not achieved or fulfilled ;” (emphasis added). [ 29 ] The County argues that the cheques forwarded to them support the intention of Carevest and 126 to use the funds for payment to the County for off-site levies.

Although the cheques were allowed to staledate the purpose of the trust is still capable of being carried out, that is, it is not impossible to carry out. [ 30 ] I agree with the County, the funds when advanced did not become the property of the Developer (126) but equally they did not become the property of the County. 126 is not proceeding to complete the development and will not instruct Mr. Thind to send new cheques to the County for the levies. In my view the purpose of the loan was not achieved or fulfilled and in these circumstances can be said to be impossible to carry out.

Conclusion [ 31 ] In a Quistclose trust the beneficial interest remains with the lender until the purpose of the trust is carried out. Therefore in the circumstances, Carevest is entitled to the Subject Funds. Failing the existence of the Quistclose trust it is not disputed that Carevest would have priority to the Subject Fund pursuant to its security, particularly the GSA. In either case Mr. Thind and 126 must return the funds to Carevest. Accordingly, the Clerk shall release the funds held pursuant to the Order of Master Laycock including any interest accrued thereon to Carevest.

Carevest shall have their costs. Heard on the 29 th day of June, 2010. Dated at Edmonton, Alberta this 7th day of March, 2011. L. A. Smart M.C.C.Q.B.A. Appearances:

David Madsen Borden Ladner Gervais LLP for the Plaintiff Emmanuel Alade City Law Office - Fort Saskatchewan for the Defendant Daniel Peskett Brownlee LLP for theCounty of Leduc