Horizon Earthworks Ltd. (Re), 2011 ABQB 799

Court of Queen ’ s Bench of Alberta Citation: Horizon Earthworks Ltd. (Re), 2011 ABQB 799 Date: 20111220 Docket: BK03 115363 Registry: Edmonton In the Matter of the Bankruptcy of Horizon Earthworks Ltd. (“Horizon”); and In the Matter of requests for advice and direction in respect to the Harper Creek Funds. _________________ Memorandum of Decision on applications seeking advice and direction in respect to the payment of the Harper Creek Funds of the Honourable Mr. Justice D.R.G. Thomas __________________________ Table of Contents A.

Background Facts.................................................................................................. Page: 2 B. Applications Made................................................................................................. Page: 5 C. Issues Arising......................................................................................................... Page: 5 D. Analysis................................................................................................................... Page: 6

E.

Summary................................................................................................................. Page: 8 F. Costs....................................................................................................................... Page: 8 A.

Background Facts [ 1 ] The background to this dispute is set out in the Trustee’s First Report (the “Trustee’s First Report”) filed with the Court by Deloitte & Touche Inc. (The “Trustee”) on November 9, 2011. [ 2 ] The basic facts outlined in the Trustee’s First Report were elaborated on in more detail in the Trustee’s Brief which has also been filed with the Court. All parties who were present at the time of oral submissions on November 29, 2011 acknowledged that the facts summarised in the Trustee’s Brief state fairly the context of this dispute.

For ease of reference and with some minor revisions and additions that portion of the Trustee’s Brief is set out as a basis for this decision. [ 3 ] Horizon was a company that specialized in road construction, rough grading and base work throughout northern and central Alberta. [ 4 ] On November 13, 2009 Deloitte & Touche Inc. was appointed Interim Receiver and Monitor of the property of Horizon. [ 5 ] On November 20, 2009 the rule of the Interim Receiver was expanded Deloitte & Touche Inc. was appointed as the Receiver of Horizon’s property (the “Receiver”) [ 6 ] On April 13, 2010 Horizon was assigned into bankruptcy and Deloitte & Touche Inc. was appointed as the Trustee. [ 7 ] At the time that Horizon was placed into receivership, Horizon had several uncompleted contracts in different locations in Alberta. [ 8 ] One of these uncompleted contracts was with the Municipal District of Greenview No. 16 (“Greeniew”) under which Horizon agreed in September 2008 to perform road grading and other work on the Harper Creek Road (Range Road 264) (the “Harper Creek Contract”).

The total tender price of Horizon’s bid was for $1,523,324.00, plus G.S.T.; however, Greenview has since indicated that the estimated total amount to be paid under the Harper Creek Contract is $1,497,824.43, plus G.S.T. [ 9 ] On October 20, 2008, Horizon posted a Performance Bond (the “Performance Bond”) and a Labour and Material Payment Bond (“Labour and Material Bond”), each in the amount of $761,662.22 (the Performance Bond and the Labour and Material Bond are collectively referred to as the “Bonds”).

Horizon is the principal, Greenview is the obligee, and Western Surety Company (“Western Surety”) is the surety under the Bonds. [ 10 ] Prior to the posting of the Bonds, on or about April 28, 2008 Horizon and Western Surety had executed an agreement` in consideration for Western Surety providing bonding to Horizon (the “Indemnity Agreement”). The Indemnity Agreement contains, among others, the following terms: Indemnification of the Surety (clause #17), Assignment of the Principal’s rights (clause #20) , and Trust funds (clause #22) .

A full copy of the Indemnity Agreement containing these terms is included in the Trustee’s Brief under Tab 1.

[ 11 ] On or about November 17, 2009 Western Surety sent Greenview a letter indicating that through the Indemnity Agreement Horizon had assigned to Western Surety all funds due to it under the Harper Creek Contract. The Receiver disputed Greenview’s ability to make any payments to Western Surety and Greenview continues to hold those funds. [ 12 ] On or about December 17, 2009, Greenview declared Horizon to be in default of the Harper Creek Contract for: (

a) discontinuing the provision of the services; (

b) failing to provide the services with sufficient workers or material to promptly complete the contract; and (

c) failing to promptly pay its creditors for labour, services, equipment and related items. [ 13 ] At the time Greenview declared Horizon to be in default of the Harper Creek Contract, Greenview estimated that there was $774,260.92 unpaid to Horizon under the Harper Creek Contract. [ 14 ] Greenview made a claim under the Performance Bond and Western Surety arranged for Petrowest Construction LP (“PetroWest”) to complete the outstanding work under the Harper Creek Contract, pursuant to an agreement between Greenview, Petrowest and Western Surety (the “Completion Contract”). [ 15 ] Petrowest completed the outstanding work pursuant to the Completion Contract on or about August 9, 2010. [ 16 ] Greenview had to pay Petrowest the amount of $383,010.65 to complete the work under the Completion Contract due to more favorable rates existing than at the time the Harper Creek Contract was executed. [ 17 ] As such, Greenview estimates that there is a $391,250.27 balance owing under the Harper Creek Contract after setting off amounts paid under the Completion Contract (the “Harper Creek Funds”). [ 18 ] Greenview received notices from many subcontractors and suppliers of Horizon that their respective work or materials have not been paid for by Horizon on the Harper Creek Road project (the “Unpaid Third Party Claims”).

Greenview advises that the Unpaid Third Party Claims total $922,807.12. [ 19 ] The Trustee understands that several of the employee related Unpaid Third Party Claims have been paid in full, or in part, through the Wage Earner Protection Program. Horizon’s former controller has also indicated to the Trustee that several of the claims do not properly reconcile with Horizon’s books and records, and as such, may not be due and owing by Horizon pursuant to the Harper Creek Contract.

Therefore, there is some uncertainty regarding the actual total of the Unpaid Third Party Claims. [ 20 ] Western Surety advises that some of these same suppliers or subcontractors that form part of the Unpaid Third Party Claims have also made claims against the Labour and Material Bond and commenced actions against Western Surety. Western Surety advises that the total value of such claims is $773,285.15. [ 21 ] At all times during the events described above, Horizon had two primary secured creditors, the Bank of Nova Scotia (the “Bank”) and Roynat Inc. (“Roynat”).

Both held security over all present and after acquired personal property of Horizon. [ 22 ] The Receiver determined that the security of the Bank had priority over all other contractual secured creditors insofar as inventory, receivables, book debts and other intangibles of Horizon along with the proceeds thereof, and that Roynat’s security had

priority over all other contractual secured creditors insofar as concerns all other personal property of Horizon, inclusive of proceeds thereof.

A copy of the General Security Agreement (the “GSA”) executed by Horizon in favour of the Bank and dated May 29, 2008 is found under Tab 2 of the Trustee’s Brief. [ 23 ] The secured indebtedness owed to each of the Bank and Roynat by Horizon is materially greater than the amount represented by the Harper Creek Funds. [ 24 ] Roynat, the Bank, and the Receiver entered into an assignment agreement, wherein the Receiver assigned its interest in any and all remaining assets of Horizon to the Bank and Roynat, as the case may be (the “Assignment Agreement”).

As part of the Assignment Agreement, the Receiver assigned, among other things, all of its right title and interest in the remaining book debts of Horizon to the Bank in exchange for a credit against the indebtedness owed by Horizon to the Bank (the “Book Debts Assignment”). The Assignment Agreement is found under Tab 3 of the Trustee’s Brief. [ 25 ] On June 2, 2011 this Court approved by Order the Assignment Agreement and also discharged the Receiver.

In addition, the Receiver was removed as a plaintiff or applicant, as the case may be, in any and all legal proceedings outstanding, with the Bank being substituted in its place if the subject matter of the legal proceeding concerned inventory, receivables, book debts, or other intangible assets of Horizon, or the proceeds thereof. See Appendix A of the Trustee’s First Report. [ 26 ] The Trustee has confirmed that there are no funds or other assets in the estate of Horizon in bankruptcy. [ 27 ] With this factual background the parties made a number of applications. B. Applications Made [ 28 ] The Trustee seeks:

a) advice and direction in respect to which interested party is entitled to the Harper Creek Funds potentially owing to the bankrupt Horizon by Greenview pursuant to the Harper Creek Contract;

b) an order granting the Trustee its fees and disbursements, including legal costs on a solicitor and its own client full indemnity basis, out of the funds currently held by Greenview prior to any other distribution of the funds; and

c) an order removing the Trustee from all legal proceedings relating to the Harper Creek Contract. [ 29 ] Greenview seeks advice and direction as to whether it can pay directly subcontractors and suppliers of the bankrupt Horizon out of the Harper Creek Funds and then deduct such payments from the amounts which it says would be due to Horizon under the Harper Creek Contract. [ 30 ] Western Surety makes a claim to the Harper Creek Funds on behalf of the unpaid subcontractors who have issued claims under the Labour and Material Bond by virtue of the Irrevocable Assignment and Trust Declaration or, alternatively, by virtue of the application of the doctrines of set-off and subrogation. [ 31 ] The Bank makes a cross-application for a declaration that it has a registered security interest and priority to the Harper Creek Funds and seeks a direction that these funds be paid forthwith by Greenview to the Bank.

C. Issues Arising [ 32 ] The issues arising from these applications:

a) The question stated by counsel for the Trustee at the outset of oral submissions as to whether Greenview and Western Surety can rearrange the priority of claims to the Harper Creek Funds through a private arrangement. Put another way, is the proposal for the payment of the Harper Creek Funds to unsecured creditors of Horizon which is made by Greenview and Western Surety compliant with the scheme of the Bankruptcy and Insolvency Act , R.S.C. 1985, c. B-3 (the “ BIA ”) dealing with the priority of claims in a bankruptcy, specifically ss. 136 and 141 of the BIA ?

b) Does the registered security interest of the Bank in the property of Horizon attach to the Harper Creek Funds?

c) Do the terms of the Harper Creek Contract allow Greenview the option of directly paying Horizon’s unpaid suppliers and subcontractors out of the Harper Creek Funds, and then deducting such amounts from the balance owing to Horizon in these circumstances?

d) Are the Harper Creek Funds subject to an express trust as a result of the Indemnity Agreement?

e) Does the Indemnity Agreement constitute a security arrangement that is subject to the provisions of the Personal Property Security Act , R.S.A. 2000, c. P-7, as amended (the “ PPSA ”)?

f) Is Western Surety subrogated to the rights of Greenview? D. Analysis [ 33 ] The resolution of the first issue of whether the proposal of Greenview/Western Surety is compliant with the provisions of the BIA is dispositive although I do go on to make an alternative finding in favour of the position of the Bank. [ 34 ] Counsel for the Trustee made a succinct oral submission in respect to the scheme of distribution proposed by Greenview/Western Surety. Firstly, this submission observed that the unpaid subcontractors and suppliers are unsecured creditors of the bankrupt Horizon, not of Greenview.

He observed that the circumstances here are covered by ss. 136 and 141 of the BIA which sets out the priority regime for secured, preferred and unsecured creditors of a bankrupt. If there is anything to share with the latter group then the unsecured creditors share rateably (s. 141 of the BIA ). The proposal of Greenview in respect to the group of unsecured creditors is to have them preferred over a secured creditor, in this case the Bank.

Counsel for the Trustee has characterized this proposal as a “private reorganization” of the priority regime mandated by the provisions of the BIA , particularly ss. 136 and 141 .

It was observed that no authority has been put forward to support this sort of “private reorganization” of the priority regime nor were any public policy arguments advanced as to why this sort of approach could or should be taken. [ 35 ] Counsel for the Trustee concluded his submission by stating that if parties were allowed to construct their own priority regimes outside of the regimes mandated by the BIA that would create a potential for significant mischief. [ 36 ] I agree that the Trustee’s analysis is applicable to the proposal put forward by Greenview/Western Surety.

However, I will supplement the observations made by the Trustee’s counsel by adding some public policy reasons which are to some extent self evident

when one looks at the purpose and scheme of the BIA as a whole and in respect to the priority scheme of that legislation, in particular. [ 37 ] The BIA is meant to provide a high level of certainty and predictability for all manner of creditors. Indeed, significant financing arrangements which involve the granting and registration of security by a debtor are constructed on the premise that the taking of security will reduce the risk of loss in the event a default results in an insolvency.

The statutory regime prescribed by the BIA provides predictability and certainty in this respect. [ 38 ] Further, the priority regime of the BIA enables the timely resolution of claims. Indeed, when one looks at the way the claims were dealt with by the Receiver/Trustee here it appears that Deloitte & Touche Inc. proceeded to assess the various claims and those claims moved along at a reasonable pace thereby ensuring that the claims were dealt with in accordance with the priority scheme contemplated by the BIA .

All claims identified and assessed by the Receiver/Trustee were disposed of and the Receiver was discharged by an order of this Court. To allow the proposal of Greenview/Western Surety would extend the proceedings and would defeat the intention of the BIA that all claims be assessed and brought to conclusion in a timely way. [ 39 ] The clear intent of the BIA is to provide for certainty in the resolution of claims. It exists to prevent this sort of private arrangement which would lead to the reordering of priorities by agreement between interested parties.

Also, this late claim and applications have created a cost burden for the Trustee in that the Court has sought the assistance of the Trustee in responding to these multiple requests for advice and direction and the cross-application by the Bank. [ 40 ] In

summary, the BIA provides a scheme to create certainty in respect to competing claims and to bring the administration of the affairs of a bankrupt to a timely and predictable conclusion. This sort of end-run around the legislation which is proposed here should not be and will not be allowed by this Court. [ 41 ] Turning now to the other set of issues and arguments I had said at the outset of oral submissions that I saw this dispute as having two alternative pathways to resolution.

Firstly, I noted the statutory pathway urged by counsel for the Bank which involves the analysis and application of the provisions of the PPSA to resolve these claims. The alternative approach was the application and submissions by Greenview and Western Surety which I characterized as a contractual pathway which would lead to the Harper Creek Funds being paid out directly by Greenview to some of the unpaid sub-trades and suppliers of the bankrupt Horizon. [ 42 ] I have accepted the position put forward by the counsel for the Trustee.

However, in the event I am wrong in respect to that very high level approach to the resolution of this dispute than I adopt the approach taken by the Bank in the discussion which follows. [ 43 ] As I have found above the Bank had entered into the GSA with Horizon on May 29, 2008. That GSA granted to the Bank a security interest in all of its present and after acquired property including accounts receivable.

The Bank registered its security interest arising from the GSA by way of a financing statement and that registration under the PPSA was effected on June 3, 2008 (see the PPSA search results under Tab 4 of the Trustee’s Brief). [ 44 ] In September 2008, Horizon entered into the Harper Creek Contract with Greenview. That had the effect of creating an account which was subject to the registered security interest of the Bank.

The remnant of that account is now reflected in the Harper Creek Funds. [ 45 ] I agree that all of the requirements of s. 12 of the PPSA were met by the Bank through its compliance with the registration requirements provided for in that Alberta legislation. That registered security interest attached to what would become the Harper Creek Funds as soon as the Harper Creek Contract was formed in September 2008. [ 46 ] The unsecured creditors of Horizon have not registered any security interests under the PPSA and as unsecured creditors cannot take priority to the registered security interest of the Bank.

Western Surety has not registered any of its interests under the PPSA scheme either. [ 47 ] In the result compliance by the Bank with the statutory scheme set out in the PPSA through registration of a security interest trumps the contractual claim of Greenview/Western Surety and their contractually based claim to the Harper Creek Funds is rejected.

E.

Summary [ 48 ] In

summary:

a) Greenview’s application supported by Western Surety is dismissed;

b) The Bank’s cross-application for a declaration that it has a security interest in priority to the Harper Creek Funds is allowed and those monies shall be paid forthwith by Greenview to the Bank. F. Costs [ 49 ] The Bank opposes the payment of the costs of the Trustee out of the Harper Creek Funds. In the event the parties are not able to resolve the costs issue between themselves then all outstanding cost matters shall be dealt with in writing.

I will provide further direction in respect to the resolution of costs and I await communication from counsel in that regard. [ 50 ] Once the costs issue is resolved the Trustee shall be removed from all legal proceedings relating to the Harper Creek Contract. Heard on the 29 th day of November, 2011. Dated at the City of Edmonton, Alberta this 20 th day of December, 2011. D.R.G. Thomas J.C.Q.B.A. Appearances: Ray C. Rutman Fraser Milner Casgrain LLP for the Deloitte & Touche Inc.

Trustee in the bankruptcy of the Estate of Horizon Earthworks Ltd. Darren R. Bieganek Duncan & Craig LLP for the Bank of Nova Scotia Tim Mavko Reynolds, Mirth, Richards & Farmer LLP for the Municipal District of Greenview No. 16 Eleanor A. Olszewski, Q.C. Dana Nowak MacPherson Leslie & Tyerman LLP for Western Surety