Van T Holdings Inc. v. KCS Equipment Ltd., 2013 ABQB 154

Court of Queen ’ s Bench of Alberta Citation: Van T Holdings Inc. v. KCS Equipment Ltd., 2013 ABQB 154 Date: 20130313 Docket: 1103 01321 Registry: Edmonton Between: Van T Holdings Inc., Van T Holdings Inc.

Carrying on Business as Van T Holdings and Thomas Van Tetering Carrying on Business as Van T Holdings Plaintiff - and - KCS Equipment Ltd., 1186044 Alberta Ltd., Contrac Equipment Ltd., AFD Petroleum Ltd., Bonus Rentals Inc., Paradox Access Solutions Inc., Liquid Capital Exchange Corp. and Minister of National Revenue (Canada) Defendants _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice Peter B. Michalyshyn _______________________________________________________ I.

Introduction [ 1 ] This is an appeal from a Master and the outcome of an intriguing priorities contest between lien holders, the Crown, and a Factor.

[2] The facts are laid out in the thorough briefs of the parties and the decision appealed from. That decision is reported at VanT Holdings Inc. v. KCS Equipment Ltd., 2012 ABQB 335. [3] General contractor Van T Holdings and Thomas Van Tetering (“Van T.”) provided work in relation to certain project landsin west Edmonton. Van T. hired KCS Equipment Ltd., which in turn hired numerous other sub-trades/suppliers. KCS became insolventand was unable to pay the companies with which it contracted.

As a result, just under $2.8 million in builders lien claims were filedagainst the project lands. [4] On February 15, 2011 Master Wacowich cleared the liens from title after ordering the sum of $673,335.88 paid into courtpending resolution of the claims of numerous claims. That sum is the difference between the total of all invoices issued to Van T. byKCS, net of all payments made by Van T. to KCS or to third parties on KCS’ behalf. The payment in was made pursuant to s. 48 of theBuilders Lien Act RSA 2000 c.

B-7 (“BLA”). [5] The funds in court closely match the lien fund, but the payment in concluded nothing with regard to the appropriate fundfor distribution to the lien holders.

The payment in was expressly “subject to both the claims of the Respondents and of the Applicants,without prejudice to the Applicant’s right to contest the Liens and the validity of the alleged debt.” [6] There are the following competing claims to the $673,335.88. [7] The lien holders acknowledge most of the priority claimed by the Minister of National Revenue (“the Crown”), but say theyhave priority over the Factor, Liquid Capital Exchange Corp.

The lien holders also oppose Van T.’s claims. [8] Liquid Capital claims $276,367.56 of the sum in court on account of a factoring agreement with KCS. [9] The Crown claims $326,188.74 of the sum in court on account of KCS’ failure to remit source deductions and GST. Whileacknowledging Liquid Capital’s priority to $276,367.56 the Crown says it has priority thereafter over the lien holders for its full claims. [10] Van T. claims $48,714.74 of the sum in court on the basis of an alleged error in invoices and lien fund calculation. [11] The Master dealt with the parties’ claims as follows. A.

The Crown’s interest [12] The Crown conceded and the Master agreed that Liquid Capital had a superior claim to the $276,367.56: First VancouverFinance v. Canada (M.N.R.) 2002 SCC 49 and Canada Trustco Mortgage Corp. v. Port O’Call Hotel Inc. (SCC),[1996] 1 SCR 963. [13] Regarding the Crown’s interest vis-a-vis the lien holders, the Crown served four enhanced requirements to pay on January 4,2011 and February 8, 2011.

In doing so the Crown attached funds owed by Van T. to KCS, including KCS’ liability for sourcedeductions and GST. [14] The lien holders did not seriously contest the Crown’s priority over them, except with regard to a residual sum remainingfrom that part of a $345,459.45 net invoice (#511) factored to Liquid Capital but not collected by Liquid Capital nor paid to KCS.

B. The Factor ’ s interest [ 15 ] The Master next addressed the contest between the Factor Liquid Capital and the lien holders. That contest was resolved in the Factor ’ s favour. [ 16 ] The Master acknowledged that in theory, if the funds paid into court were the “ Lien Fund ” and, without more, stood in place of the land, the in rem rights of the lien holder claimants would trump the in personam rights of Liquid Capital. That finding however would defeat the very priorities contest envisaged in the order paying money in.

As such, the Master went to deal with that priorities contest as between Liquid Capital and the lien holders. He distinguished Genstar Limited v. D. Lindon Construction Limited

(1982) A.R. 395 (Master) as being a case dealing with an assignment of book debts and not an absolute assignment as under the factoring agreement. The Master stated, at paragraphs 41-42: 41 Even though a factoring of accounts receivable in some sense an assignment, the assignment is absolute and it is best described as a sale. It is a sale by a company of an account receivable at a discounted value to the factoring company for immediate consideration. (Port O'Call, above). The rights of a Factor to a factored invoice is absolute, whether or not the factor retains recourse against the seller.

As such, it is outside s. 11 of the Builders Lien Act as it is not caught by the term "assignment", as a General Assignment of Book Debts has been held to be. 42 In the result, the liens do not take priority over the factored invoice. The fact that an owner might be obliged to retain the face value of invoice #511 (for example) as part of the lien fund is neither conclusive nor determinative of priority.

Moreover, the policy of the Act is to some extent preserved by analogy to the position of the Crown with respect to a factored invoice, which attaches to the proceeds of sale of the invoice, rather than the face value of the invoice itself. To find otherwise, would indirectly give the Lien holders priority over the Crown. [ 17 ] The Master thus concluded that Liquid Capital had priority over the lien holders to the extent of its $276,367.56 claim. C.

Rights to the balance of invoice #511 [ 18 ] The Master ’ s decision also allowed the lien holders to contest the “ unclaimed residue ” of invoice #511 being $89,197.99. An order given in a follow-up July 23, 2012 hearing before the Master comes to the same conclusion. The Crown appeals these decisions, asserting it has a priority over the lien holders. D. Van T. ’ s claim [ 19 ] The Master awarded nothing to Van T.

Subsequently counsel for Van T. sought clarification whether Van T. was barred from asserting a claim to a portion of the funds in court on the basis of an alleged error in two the invoices in evidence. The Master responded in a letter to all counsel dated June 28, 2012, concluding Van T. could not assert any claim to the balance of funds in court. Van T. appeals this finding. II. Analysis A. Standard of review [ 20 ] No one disagreed that Bahcheli v. Yorkton Securities 2012 ABCA 166 establishes a standard of review of correctness.

B. Liquid Capital and the lien holders [ 21 ] As noted, Liquid Capital is in the business of factoring. Factoring is described by Cory J. in Port O ’ Call , at paragraphs 30 - 32: For the resolution of these appeals, it is essential that there be a clear recognition of the fundamental difference between an absolute and a conditional assignment of book debts. In an absolute assignment, all interests are transferred and no property remains in the hands of the assignor. It is, simply, a sale of the book debts of the company.

This is the basis of the business of factoring. (paragraph 30) ... [Factoring] is in effect a sale by a company of its accounts receivable [invoices] at a discounted value to the factoring company for immediate consideration. (paragraph 31) ... [A factoring arrangement] ... requires an absolute transfer of the proprietary interest of the assignor in the book debts ” . (at paragraph 32) [ 22 ] The practice of factoring was again analysed by the Supreme Court of Canada in First Vancouver , wherein the court concluded the Crown ’ s deemed trust provisions in relation to income tax were a floating charge over all of the tax debtor ’ s property.

However, the charge did not attach to those assets sold by a tax debtor to a third party purchaser, such as through a factoring arrangement.

The court held that any accounts factored prior to the enhanced requirement to pay notices were not subject to the Crown ’ s deemed trust, as those accounts had been sold to a third party purchaser. [ 23 ] Although priorities were not specifically addressed in First Vancouver , the Court at paragraph 39 suggested that the issue of priorities did not even arise, as the factor was a third party purchaser of book debts rather than a secured creditor. [ 24 ] Liquid Capital and KCS entered into the factoring agreement on September 15, 2010.

Thereafter a number of invoices were factored without incident. [ 25 ] On December 3, 2010 KCS factored invoice #511 by paying a discounted cash sum in exchange for the face value of the KCS invoice. That face value was $345,459.45. In keeping with previous transactions, not factored was a 10% hold back of $36,556.55 which was deducted before the balance of invoice #511 was calculated. In other words, $345,459.45 was the net value of invoice #511 after the 10% hold back. [ 26 ] Of the $345,459.45, Liquid Capital paid KCS $264,621.94, or 76.4% of the face value of the invoice.

To that extent, KCS ’ interest in the invoice was replaced by cash in its hands. Liquid Capital was to earn a factoring fee of 3.4% of the invoice, amounting to $11,745.62. To that extent, KCS ’ interest in the invoice was replaced by Liquid Capital ’ s fee. Finally, Liquid Capital was obliged to maintain a 20% reserve of the face value of the invoice, payable to KCS under the factoring agreement once Liquid Capital received payment from Van T Holdings.

To that extent, KCS ’ interest in the invoice was replaced by Liquid Capital ’ s obligation to pay further cash under the factoring agreement in due course. [ 27 ] As was argued before the Master, the factoring arrangement was analogous to First Vancouver , wherein “ ...an account receivable went out, cash came in, the estate [was] neither depleted nor enhanced. ” As was also argued before the Master, by way of the factoring agreement KCS lost all rights under the invoice #511; the invoice formed no part of the lien fund because it ceased to be an amount due and owing to KCS that had not been paid, but rather had already been disposed of in favour of cash. [ 28 ] Owing to the liens filed starting December 10, 2010, Liquid Capital received no payment from Van T. on factored invoice #511.

Nor did Liquid Capital recover its $11,745.62 fee. Finally, Liquid Capital received no part of the 20% hold back which was to be

paid to KCS in accordance with the factoring agreement. [ 29 ] In invoice #511, Liquid Capital bought an account receivable which is a form of debt, and a chose in action, giving Liquid Capital a right to sue Van T. if necessary for payment. It was not seriously contested that the assignment in the factoring agreement met the formal requirements of s. 20 of the Judicature Act , RSA 2000, c.

J-2, which amongst other things require the assignment be absolute and unconditional. [ 30 ] Black ’ s Law Dictionary 9 th Ed., defines “ assignment ” as “ the transfer of rights or property ” , and further defines an “ absolute assignment ” as “ an assignment that leaves the assignor no interest in the assigned property or right ” . Given these

definitions, and the Supreme Court ’ s conclusion that a factoring agreement is an absolute assignment, the effect at law of the factoring agreement before the Master and this court, is as follows: once KCS, the assignor, sold and assigned the accounts receivable to Liquid Capital, the assignee, KCS no longer had any interest in the factored accounts.

That interest was left solely with Liquid Capital. [ 31 ] There was argument before the Master as to the in personam nature of Liquid Capital ’ s chose in action, and the in rem nature of the lien holders ’ interests against the estate or interest of the owner in the property on which work or services were performed, or to which materials were supplied: BLA , s 6. [ 32 ] A right in rem is described by Professor Ziff in Principles of Property Law as “ a right against the world at large ” (at page 75).

Rights in rem are therefore distinct from rights in personam , as they are exercisable against more than one person, and attach to the land for which the work or services were provided. As a general proposition of law, rights in rem trump rights in personam . [ 33 ] The lien claimants argue that under this general proposition of law and under the priority provisions of the BLA , their liens take priority over Liquid Capital ’ s factored invoice. The priority provisions created by the BLA will be addressed first, with a discussion of the effect of the general principles of property law to follow.

Priority Provisions of the Builders ’ Lien Act [ 34 ] The BLA specifically addresses the issue of priorities in

section 11 as follows: 11(1) A lien has priority over all judgments, executions, assignments, attachments, garnishments and receiving orders recovered, issued or made after the lien arises.

(2) Notwithstanding subsection (1), a payment made pursuant to an assignment, attachment, garnishment or receiving order that is paid, before the lien is registered, to a person for whose benefit the assignment, attachment, garnishment or receiving order is made or issued, takes priority over the lien. [ 35 ] The first issue raised by the priorities provisions of the BLA , is whether or not a factoring agreement constitutes an “ assignment ” within the meaning of s. 11 .

As has previously been reviewed, a factoring agreement is an absolute assignment of the proprietary interests of the assignor in the accounts receivable. This leaves the assignor with no interest in the assigned property or right. [ 36 ] As the assignor is left with absolutely no interest in the assigned property, the term “ assignment ” under the BLA could not have been meant to and does not include an absolute assignment such as a factoring agreement. The assignor no longer has any interest in the factored accounts receivable which have been absolutely assigned.

A lien can only attach to the estate or interest of the owner in the property. It therefore cannot attach to accounts receivable which have been absolutely assigned. [ 37 ] Put another way, and as argued by Liquid Capital, with which I agree:

Section 11(1) of the BLA does not state that a creditor of a lien claimant cannot sell its property for bona fide immediate consideration. [38] I am unable to accept the lien holders’ submission that ‘an assignment is an assignment is an assignment’. Granted, s. 11(1)BLA does not distinguish between conditional and absolute assignments. The cases however do distinguish between them. And the casesthemselves cannot be distinguished on the basis they are being applied to the builders’ lien context, so far as the parties know, for thefirst time.

Given the cases, it is reasonable and logical to conclude that the absolute assignment in the factoring agreement before theMaster is not an assignment for purposes of s. 11(1) of the BLA. Application of the principles of property law [39] I am unable to agree with the lien holders that this case involves a contest between rights in personam vs. in rem. By creatingrights in rem, a builders’ lien attaches to the “estate or interest of the owner in the property” on which work was performed: Bristow et al, Construction, Builders’ and Mechanics Liens in Canada, 7th ed, (Toronto: Carswell, 2005) ch 1.2 at 1-18.

From this it follows that first,the right attaches only to the estate or interests of the owner in the property, and second, it attaches only to the property on which workwas performed. As such, accounts receivable which have been absolutely assigned are no longer an interest belonging to the “owner”. [40] As the rights of the respective claimants are in respect of different interests, land versus assigned accounts receivable, there isno conflict between them. [41] Finally, it is no answer that Master Wacowich’s s. 48 BLA order created an in rem lien fund.

That submission on behalf of thelien holders is untenable given the specific provision in the same order that any such characterization is without prejudice to the parties’contest over priorities. I agree with the submission of the lien holders that Master Wacowich’s order created no new rights. Nor can it beread however to extinguish rights, which as noted above would be the effect of characterizing the order as having created an in rem lienfund, without more.

Policy arguments [42] The lien holders point to the ‘purpose’ of the BLA as inconsistent with the result reached by the Master, and on this appeal. [43] With regard to general principles both as to purpose and

interpretation, in Canbar West Projects (c.o.b. Can-West ProjectsLtd.) v. Sure Shot Sandblasting & Painting Ltd. 2011 ABCA 107, leave to appeal to SCC refused [2011] S.C.C.A. No. 235, the courtstated, at paragraph 14: The general interpretive directives set out in Rizzo and Bell are subject to modification when builders' lien statutes are being interpreted.Specifically, courts are required to adopt a strict

interpretation in determining whether a lien claimant is entitled to a lien, and a liberalapproach with respect to those to whom the statute applies: Ace Lumber Ltd. v. Clarkson Co., (SCC), [1963] S.C.R. 110at 114, 36 D.L.R. (2d) 554; Hett v. Samoth Realty Projects Ltd. (1977), (AB CA), 4 A.R. 175 at para. 13, 76 D.L.R.(3d) 362 (C.A.). Builders' liens are business oriented statutes with practical, as opposed to formalistic, goals; their overall intent is toensure that "the land that receives the benefit shall bear the burden": Scratch v. Anderson (1909), (AB CA), [1917] 1W.W.R. 1340 at 1342, 33 D.L.R. 620 (Alta.

C.A.); aff'd (SCC), 44 S.C.R. 86, 1910 CarswellAlta 98; Schubert v. A-S4Steel Ltd., 2010 ABCA 62, 474 A.R. 340 at para. 26. [44] Here, there is no issue that the statute of course applies to the lien holders, and also to Liquid Capital via s. 12 of the BLA.Equally obvious is that the issue, to be decided on a strict construction of the statute, is whether the lien claimants are entitled to lien. [45] With these statements of purpose and principles of

interpretation in mind, I am unable to agree with the lien holders’submission that without more the legislature by enacting the BLA “chose to protect the innocent lien holder before the innocentfinancier”. I am further unable to agree with the lien holders’ further submission “that the public interest, and the Legislature’s intent, isto prevent this scenario [i.e., Liquid Capital’s priority via factoring], not to allow an assignment to defeat the Lien holders and allow the

intermediary to misappropriate funds rightfully owed to the Lien holders for their hard work. ” Such broad statements of legislative purpose are not supported by authority or reason. [ 46 ] Finally, I unable to agree with the lien holders ’ characterization that the Master ’ s decision allows the factoring assignment to destroy the lien fund, without which the lien claimants would continue to enjoy the security of the invoice payable by Van T. This characterization ignores the effect of the factoring agreement, which was to pay KCS on the bulk of the invoice, before the first lien was registered.

The lien holders could have no complaint had Van T. paid that same sum to KCS directly, before the first lien was registered. The factoring agreement had the same effect. What ’ s more, it maintained the obligatory 10% hold-back on invoice #511, plus the additional 20% hold-back under the factoring agreement.

But for the intervening rights of the Crown, that 20% hold-back would actually have benefited the lien holders, over the scenario whereby Van T. could have paid the entire net value of invoice #511 to KCS before lien registration. [ 47 ] At the end of the day, the outcome opposed by the lien holders is not contrary to the purpose or proper

interpretation of the legislation. As concluded by the Master, and likewise earlier in these reasons, the appropriate

interpretation of s. 11(1) of the BLA, excludes the absolute assignment in the factoring agreement from the lien holders ’ claims. C.

The Crown [ 48 ] The Crown supports the bulk of the Master ’ s findings, the exception being his decision giving the lien holders priority over the balance of invoice #511 not factored by Liquid Capital. [ 49 ] Of that un-factored balance, there appears to be little contest that the 10% hold back that was never factored should go to the Crown for the same reason the Crown has priority over the lien holders. [ 50 ] On the other hand, the lien holders argue that the 20% hold back of invoice #511 was factored to Liquid Capital and as such they say the Crown has no claim to it any more than it can claim priority to the $264,621.94 factored and actually paid by Liquid Capital to KCS, plus Liquid Capital ’ s fee.

The lien holders say that but for the liens, the 20% would go to Liquid Capital. Of course the lien holders say the liens then take priority to the 20%, just as they take priority to the $264,621.94 plus fee. [ 51 ] I have already dealt with the priority contest between the lien holders and Liquid Capital. [ 52 ] I accept the Crown ’ s position with regard to the 20% in held back funds. The appeal from the Master is allowed on that issue.

That is hardly to fault the Master, as it appears the Crown ’ s full argument on this issue was not made before him. [ 53 ] I recognize that the 20% held back funds were at least in part payable to Liquid Capital as part of the factoring arrangement.

However, that arrangement provided that once received from Van T., the 20% would be paid to KCS subject to “ any further discounts to which [Liquid Capital is] entitled under this Agreement and any other amounts owing to [Liquid Capital] by [KCS] in connection with such Receivables or in connection with any other Receivable ” . [ 54 ] The Crown argues that this provision in the factoring agreement is a “ security agreement ” as understood in the Income Tax Act and Excise Tax Act and is thus subject to the Crown ’ s claims. Liquid Capital did not disagree. It limited its claim to the $264,621.94.

Liquid Capital accepted that had it claimed the additional 20% hold back it would inevitably be turning those funds back to either the Crown or the lien holders, depending on the court ’ s decision as to the priority contest between them. [ 55 ] At the end of the day, unlike the $264,621.94 plus fee, the 20% hold back did not transfer unconditionally to Liquid Capital but remained subject to a security agreement.

The Crown argued persuasively for priority to these held-back funds, while the lien holders advanced no argument contrary to the Crown ’ s “ security agreement ” position. [ 56 ] The lien holders did advance an alternative argument based on the doctrine of marshalling. However, as argued by Liquid

Capital and the Crown, in effect marshalling has already occurred by virtue of those parties ’ agreement that Liquid Capital would claim only the $264,621.94 it had paid out, plus fee, leaving the 20% hold back to be determined. And as argued by the Crown, marshalling does not apply to the Crown in these circumstances: Nova Scotia Business Development Corp. V. Wandlyn Inn Ltd. , 1999 Carswell NS 449 . D.

Van T ’ s appeal regarding the lien fund [ 57 ] I agree with the arguments advanced by the Crown and by the lien holder ConTrac in response to Van T. ’ s objections to the Master ’ s original decision, as ‘ clarified ’ in his June 28, 2012 correspondence. [ 58 ] As a threshold point, it could be clearer to me why Van T. thinks this quantum issue was still on the table before Master Schlosser, as it appeared to have been dealt with on a final basis by Master Wacowich. No appeal was taken from his order. [ 59 ] The parties next appeared before Master Schlosser to determine priority to the fund ordered previously.

The only application before the Master is dated January 6, 2012. It was filed by the Crown, although the “ applicant ” is noted to be Van T. et al, and the Respondents noted to be KCS, Liquid Capital, the MNR, and various lien holders. The application was returnable February 29, 2012, the date of the hearing before Master Schlosser. [ 60 ] The only remedy claimed or sought in the application is “ an Order directing the Clerk of the Court to distribute the funds held by the Court among the parties to this application. ” The context of that claimed remedy is clearly the priority dispute between the parties.

The application is silent with regard to Van T. ’ s cause to revisit either the figure set by Master Wacowich, or the evidence regarding invoices. [ 61 ] Given this history, I have to ask whether Van T. ’ s cause was properly before Master Schlosser in the first place. [ 62 ] In any event, the Master entertained argument on the point, then decided the sum ordered into court was appropriate. The Master applied s. 18 and other provisions of the BLA and in my view did so correctly to conclude the funds in court were almost exactly the right amount under the BLA .

As noted by the Crown, the exact BLA calculation would actually result in a marginally higher figure. [ 63 ] Van T. argues on the appeal that the Master ’ s decision amounts to

summary judgment owing to the fact Van T. was unable to argue the alleged erroneous invoices. This argument fails however, on the basis that before both the Master and on appeal all parties opposite agreed to use Van T. ’ s own figures on the value of the disputed invoices. The Master ’ s decision regarding Van T. ’ s application is affirmed. III. Conclusion [ 64 ] The lien holders ’ appeal is dismissed with regard to the contest between them and Liquid Capital. Van T. ’ s appeal is dismissed with regard to its cause to have certain funds returned to it.

The Crown ’ s appeal is allowed with regard to its claim to the residual sum of invoice #511. [ 65 ] If they are unable to agree, the parties may of course speak to costs. Heard on the 5 th day of October, 2012.

Dated at the City of Edmonton, Alberta this 12 th day of March, 2013. Peter B. Michalyshyn J.C.Q.B.A. Appearances: Vince Y. Ng Hajduk Gibbs LLP for the Plaintiff George B ó dy Department of Justice (Canada) for the Minister of National Revenue Lyle Brookes Fraser Milner Casgrain LLP for the Defendant, Liquid Capital Exchange Corp. Greg Properzi Properzi Tims LLP for Contrac Equipment Ltd.