JMB Crushing Systems Inc (Re), 2020 ABQB 763

Court of Queen’s Bench of Alberta Citation: JMB Crushing Systems Inc (Re), 2020 ABQB 763 Date: 20201207 Docket: 2001 05482 Registry: Calgary In the Matter of the Companies’ Creditors Arrangement Act , R.S.C. 1985, c. C-36 , As Amended And in the Matter of the Compromise of Arrangement or Arrangement of JMB Crushing Systems Inc and 2161889 Alberta Ltd And in the Matter of the Compromise of a Plan of Arrangement of JMB Crushing Systems Inc and Mantle Materials Group Ltd. Between: Jerry Shankowski and 945411 Alberta Ltd. Applicants - and - JMB Crushing Systems Inc. and 2161889 Alberta Ltd. Respondents _______________________________________________________ Endorsement

of the Honourable Madam Justice K.M. Eidsvik _______________________________________________________ [ 1 ] Mr. Jerry Shankowski is the President and sole director of 945411 Alberta Ltd. (“945”). 945 is a gravel pit owner and subcontractor to JMB Crushing Systems Inc. (“JMB”), brought several applications in this CCAA matter. Two of these applications were heard on November 27, 2020, with the remaining applications adjourned to a later date.

The two applications at issue presently are as follows. [ 2 ] Firstly, 945 seeks to set aside the Amended and Restated Mantle Sale Approval and Vesting Order (SAVO) and the Reverse Vesting Order (RVO) that I granted on October 16, 2020 (the “Vesting Orders”).

These Orders transferred certain JMB assets to Mantle Materials Group Ltd. (“Mantle”) (the “Acquired Assets”) and certain were held back and transferred to 2161889 Alberta Ltd. (“216”) (the “Excluded” or “Remaining” Assets). [ 3 ] In short, 945 takes the position that it was not properly notified of a provision in the Supply Contract between the M.D. of Bonnyville the “MD”) and JMB (the “Supply Contract”) that 945, and other subcontractors, submit creates a trust in favour of JMB’s subcontractors, including 945.

Accordingly, the duty of utmost good faith and to make full and frank disclosure was breached in making what in effect was an ex parte application on October 16, 2020. These Orders should be set aside since as a result of the lack of disclosure, 945 did not oppose the SAVO and RVO, to its prejudice. [ 4 ] Secondly, 945 seeks an Order setting aside the assignment of the Amended Royalty Aggregates Agreement (the “Royalty Agreement”) agreed to between Mantle and 945 on October 15, 2020 for the same reason.

Its position is that it would have negotiated differently, and insisted on full payment of the cure costs had it known of the arguable trust provision and their potential entitlement to a claim now not less than $588,457.61. [ 5 ] JMB, Mantle, and the Monitor, opposed the applications (“the Respondents”). The secured creditors, ATB and Fiera supported the Respondents. The other subcontractors, RBEE Aggregate Consulting Ltd.(“RBee”), J.R.

Paine & Associates Ltd., Shamrock Valley Enterprises Ltd., and Matt Silver Trucking did not join in either of these applications and made no submissions although their counsel were all present. [ 6 ] Firstly, the Respondents submitted, in short, that the Orders were obtained with proper service and notice. In particular, the Supply Contract was properly provided to 945, and all concerned, before the Orders in question were granted.

They maintain that they had no duty to advise of a potential trust provision in the Supply Contract, and in any event, the Orders do not prejudice 945’s potential claims, so they should not be set aside. [ 7 ] Secondly, they submit that 945 has not met the test to set aside the agreed assignment of the Royalty Agreement. Background [ 8 ] The necessary factual background in order to determine these two applications can be summarized as follows: 1. The Initial Order which placed JMB and 216 into receivership pursuant to the CCAA was granted on May 1, 2020. 2.

Jeff Buck, the President and Chief Executive Officer of the applicant JMB, swore an Affidavit dated April 16, 2020 in support of the Initial Order. He disclosed at paragraph 33, that JMB had a number of material contracts including a “Supply Agreement with the Municipal District of Bonnyville No. 87 for the production, hauling and stockpiling of crushed aggregate materials for use in road construction .” (the Supply Contract), (my italics). 3. An Amended and Restated CCAA Initial Order was granted on May 11, 2020 after there had been service on all parties, including 945. 4.

The MD of Bonnyville owed approximately $3.5 million to JMB. 945 and Matt’s Silver Trucking, a subcontractor, had filed liens against land owned by the MD wherein a stockpile of aggregate had been placed by JMB. Further, RBee and Shamrock Valley Enterprises Ltd., had sent notices to the MD advising that JMB was in default of their respective accounts. JMB advised the MD that J.R. Paine & Associates had also not been paid for its gravel testing. 5.

The MD receivable payment was necessary to allow JMB to continue operations but the MD would not pay it until the liens were discharged and a process for addressing such claims was established. 6. Accordingly, on May 20, 2020 a Lien Claims Process Order (the “Lien Order”) was put into place to allow the MD to remit the funds to the Monitor in trust and deal with the lien claims. 7. Several lien notices, including 945’s, were submitted to the Monitor pursuant to the Lien Order.

Counsel for one of the claimants (RBEE) sought and received a copy of the Supply Contract in July. 945’s counsel did not ask for the Supply Contract in filling out its lien notice, nor was he provided with it. 8. The lien claim for 945 included invoices for March and April 2020. The total owing for aggregates removed by JMB and dedicated to the project of the MD was $424,674.05, including GST.

9. 945’s lien was denied on July 27, 2020 on the basis that the material supplied by 945 was not supplied on or in respect of an improvement and it was not registered against the Lands or any lands owned by the MD. Counsel for 945 and RBEE disputed the Monitor’s Lien Determination. The Lien Dispute applications were scheduled to be heard October 22, 2020. 10. The Monitor paid out some liens, continued to hold the portion that has been disputed by JMB and RBEE ($1.85M – the “Holdback Fund”) and paid out the difference to JMB. 11. Mantle had been successful in the JMB SISP process.

As part of the potential sale of JMB assets to Mantle, counsel for Mantle approached 945’s counsel to discuss obtaining 945’s support for the potential sale, and to ensure that the 945 Royalty Agreement would be included in the sale. An agreement was reached on October 15, 2020 allowing the Royalty Agreement to be assigned to Mantle. Part of the agreement was that JMB would help to clear the liens that had been filed on the 945 land and an application was filed in that regard. 12.

Various Orders were applied for on October 16, 2020 including the impugned SAVO and RVO to be put in place, a Plan Sanction Order and an Assignment Order. All application materials for these applications were served on the service list by October 1, 2020. 13. 945 was first provided with a copy of the Supply Contract on October 9, 2020 by its attachment as exhibit “C” to the unfiled Affidavit of Jason Panter sworn October 9, 2020. This affidavit was provided to support an application to remove liens that had been filed against 945’s land also scheduled for October 16, 2020. 14.

The significance of paragraph 26 of the Supply Contract was first discovered by 945’s counsel on October 17, 2020 when he was preparing for questioning on Mr. Panter’s affidavit and the affidavit of Mr. Blake Elyea in preparation for the October 22, 2020 application. 15. Paragraph 26 of the Supply Contract provides; 26.

From the amounts paid to JMB by the MD, JMB is deemed to hold that part of them in trust which are required or needed to pay for any salaries, wages, compensation, overtime pay, statutory holiday pay, vacation pay, entitlements, employee and employer Canada pension plan contributions, employee and employer employment insurance contributions, Worker’s Compensation premiums and assessments, income taxes, withholdings, GST and all costs directly or indirectly related to the Product and Services. JMB shall pay the foregoing from such trust funds . (bolding mine) 16.

The Supply Contract defines “Product” and “Services”, respectively, as: 1.e. “Product” means the production by JMB of the aggregate described in this agreement which includes the crushing and cleaning of rock/gravel, and all related services whereby rock/gravel is made into usable crushed aggregate for the MD in accordance with the required specifications set out in this agreement; f. “Services” means the hauling and stockpiling of crushed aggregate by JMB as set out in this agreement and anything else which is required to be done to give effect to this agreement. 17.

The Monitor explained in its 8 th Monitor’s Report dated October 16, 2020 and brief filed the same day, that 945’s lien is invalid since “The Monitor is not aware of any construction projects taking place on, adjacent to, or in connection with, the MD Lands. The MD Contract is not based on any individual project, completion milestones, or specific Work.” He further explained that the purpose of the MD Contract was for the temporary stockpiling of product for the MD’s future and general use. As such, the lien claim does not constitute an “improvement” under the Builder’s Lien Act RSA 2000 c.

B-7 (“ BLA ”) which could give rise to corresponding lien rights as a product was neither affixed to the MD lands nor intended to be or become part of the MD Lands and there was no specific project for which the product was supplied. Further, to the extent that it is argued that the improvement is against the MD of Bonnyville’s roads, which are also public highways, such lien claims are invalid as a result of s. 7 of the BLA which states: “No lien exists with respect to a public highway or for any work or improvement caused to be done on it by a Municipal Corporation.”. 18.

On October 16, 2020 the SAVO, RVO, an Assignment Order, a Plan Sanction Order, the Stay Extension order, and a Lien Discharge on the 945 land Order were granted. 19. On October 17, 2020 counsel for 945 advised that he wished to cross-examine on the Panter affidavit, which examination was scheduled for October 20, 2020 20.

On the morning of October 20, 2020, counsel for 945 advised that he would be seeking an adjournment of his client’s application as he wished to amend it to seek additional relief including a declaration that paragraph 26 of the Supply Contract created a trust for 945 and other subcontractors, amongst other relief. 21. 945 learned in late October, by a call from JMB’s counsel, that there was an error in the April invoice since the wrong price was ascribed to certain aggregate. 945 also learned that the gravel was used for “asphalt” which required prior consent by 945 – which had not been obtained – and a higher price.

Mr. Shankowski, the principal of 945, swore that he would not have granted consent. 22. Also, in light of the potential trust claim, 945 advised that it had an outstanding invoice from December 2019 from JMB that should be included in the trust claim. The total claim of 945 is now $588,457.61. 23. Finally, Mr. Shankowski stated that he would not have agreed to the Royalty Agreement assignment to Mantle had he known of his ability to claim through the trust provision and he would have insisted on all the cure costs to be paid.

He also would not have entered into the agreement because of trust issues with JMB/now Mantle which were amplified by the asphalt invoice issue. He had already refused to put in a renewal agreement clause because of these trust issues.

1. Should the Vesting Orders be set aside? Parties’ positions [ 9 ] 945 submitted that the trust provision in the Supply Contract should have been brought to 945 and the other subcontractors’ attention. To the extent that it was not, the May Lien Process Order and the Vesting Orders were obtained in effect on an ex parte basis. It submitted that the Court should exercise its discretion and set aside the Vesting Orders on this ground alone.

Had 945 been aware of the trust provisions, it would not have consented to the Vesting Orders being granted. [ 10 ] Alternatively, the Court should set aside the RVO in particular, since its effect was to leave the beneficiaries of the trust with only whatever remedies they may have against 216 after allowing for the payment of the Holdback Funds, accordingly, 945 has been prejudiced by the lack of disclosure. [ 11 ] The Respondents submitted that the Orders were not granted on an ex parte basis but in fact fair notice was given for all the Orders in question.

Notice that there was a Supply Contract was given in April and a copy of the Contract was supplied on October 9, 2020, 7 days before the application for the Vesting Orders.

The Supply Contract was available on request at any time and another subcontractor’s counsel had a copy of it since July. [ 12 ] The Respondents continued that they had no duty to point out parts of the Supply Contract including paragraph 26, and it does not create a trust as proposed by 945, or the other subcontractors. [ 13 ] Finally, and in any event, the Respondents argue that the RVO does not prejudice 945 since its remedies as against 216 are the same as they would have been against JMB since the “Remaining Assets” now held by 216 include the Holdback Funds and other JMB cash assets.

Accordingly, the Vesting Orders should stand. Analysis [ 14 ] The issue of whether paragraph 26 of the Supply Contract creates a trust in favour of the subcontractors, including 945, for their outstanding claims has been adjourned to another day.

It is not necessary for me to decide this discrete issue in order to deal with these applications. [ 15 ] Can it be said that the Vesting Orders were obtained on an ex parte basis since the purported trust provision was not brought to 945’s attention before the Vesting Orders application was heard on October 16, 2020? [ 16 ] Firstly, it is clear that notice was given to all affected parties to the Vesting Orders application a week before the hearing, and counsel for 945 attended on October 16, 2020. Accordingly, it is not appropriate to suggest that this was an ex parte application.

As discussed in Kim v Choi 2020 ABQB 57 wherein Wavel Ventures Corp v Constanini 1996 ABCA 415 was referenced and applied, if an application is made on notice, it not an ex parte application. The real issue here is whether there was sufficient disclosure for the application. [ 17 ] In that regard, 945 relies on the Supreme Court of Canada decision Valard Construction Ltd. v Bird Construction Co . 2018 SCC 8 . In that case, Valard Construction, a subcontractor, was not advised that a bond was in place between the general contractor (Bird Construction) and a contractor who had contracted with Valard.

By the time Valard determined that there was a bond in place that would have covered its claim, the limitation period to make a claim, had passed. [ 18 ] With respect to the duty to inform of the trust’s existence, the Court said at para 19: In general, wherever “it could be said to be to the unreasonable disadvantage of the beneficiary not to be informed ” of the trust’s existence, the trustee’s fiduciary duty includes an obligation to disclose the existence of the trust .

Whether a particular disadvantage is unreasonable must be considered in light of the nature and terms of the trust and the social or business environment in which it operates, and in light of the beneficiary’s entitlements thereunder. For example, where the enforcement of the trust requires that the beneficiary receive notice of the trust’s existence, and the beneficiary would not otherwise have such knowledge, a duty to disclose will arise.

On the other hand, “where the interest of the beneficiary is remote in the sense that vesting is most unlikely, or the opportunity for the power or discretion to be exercised is equally unlikely” it would be rare to find that the beneficiary could be said to suffer unreasonable disadvantage if uninformed of the trust’s existence. [ 19 ] In Valard , the majority of the Supreme Court found that it was unusual to have a bond in the private oil and gas construction situation in question and that Valard was seriously prejudiced by the failure of the trustee (Bird) to advise of the bond. “Questions of industry understanding, practice, and expectations are, however, matters of fact ” the Court continued at para 23 (italics in the original).

On the facts of that case, the Court held that the bond should have been brought to the subcontractor’s attention. Posting it in the trailer on the construction site would have been sufficient. [ 20 ] The Court emphasised that the question is not what ideally could have been done, but what a reasonable trustee, in the particular circumstances of the case, would have done. [ 21 ] Here, the fact that there was a Supply Contract in place would not be surprising. It was disclosed in the first Affidavit filed by JMB in April 2020.

In the preparation of the lien claim, the Monitor requested in the Lien Notice that “all applicable contracts” and “sub-contracts”, amongst other details be provided with the Notice. It was expected that the Supply Contract would have been reviewed at that point and indeed it was provided to the other subcontractor’s counsel likely for that very purpose. S. 33 of the BLA allows a subcontractor to request a copy of the general contract even if it is not a party (although I note that in Valard , they did not think that this

section was enough to absolve the fiduciary’s positive duty that they found existed in that case). [ 22 ] Here, the Supply Contract was provided to counsel for 945 days before the hearing for the Vesting Orders and his own application to have the liens on his client’s title removed on October 16. Once counsel took the opportunity to review the Contract (in preparation for a cross-examination and the October 22 lien application), he noticed the paragraph in question. The Supply Contract is relatively short (11 pages), and paragraph 26 finds itself in the “Invoicing and Set-Off”

section which would be of obvious import when seeking collection of accounts. For whatever reason, this review however happened on the 17 th – after the Vesting Orders were approved. [ 23 ] Accordingly, unlike the circumstances in Valard , where the bond was not disclosed at all, here the Supply Contract’s existence was disclosed in April and provided in October, a week before the hearing – only paragraph 26 that 945 submits creates a trust was not pointed out.

It was not unreasonable for JMB to expect that 945 would have reviewed the contents of this Contract both in preparation for the lien claim preparation in July and the application on October 16.

There is no evidence one way or another that a trust clause is unusual in a government supply contract dealing with road construction which would raise the potential duty to include the necessity to point out this clause higher than normal (such as in the facts of Valard ). [ 24 ] Further, the Supreme Court has put some emphasis on whether the beneficiary might be “unreasonably disadvantaged” by a failure to be specifically informed of the alleged trust provision and this determination goes to the question of whether a duty to specify the potential of a trust clause will be imposed.

Here, I find that 945 was not “unreasonably disadvantaged”. [ 25 ] The RVO terms are important in this regard. Para 4(

c) makes it clear that the JMB Creditors (including the secured creditors and unpaid subcontractors) will continue to have all of the rights, remedies and recourses as against 216 (which kept JMBs Remaining Assets) as they had against JMB. According to the Monitor, the RVO was put in place as the only realistic way of preserving the tax attributes of JMB which was critical to the business being acquired by Mantle. The carve out however was made to ensure that the pro rata entitlement of creditors of JMB as against the Remaining JMB Assets were not altered by the RVO.

During argument, both counsel for JMB and the Monitor advised that this would mean access to the Holdback Funds and the Estate Funds would be available, and held in trust by 216, for disputed claims as against JMB. [ 26 ] Indeed, this is why the lien claims applications against the MD property were scheduled for after the Vesting Order applications – there would be no prejudice to the claimants by the acceptance of the proposed Vesting Orders being granted.

It is notable that no other subcontractor claimant has asked to set aside these Orders. [ 27 ] In conclusion on this point, I do not accept that in these circumstances, that JMB has met the onus to show that JMB, even as a potential fiduciary as a trustee of the proposed trust under paragraph 26 of the Supply Contract, had a positive duty to point the paragraph out and/or that there was a potential trust claim argument that could be made. [ 28 ] The Vesting Order applications were not done on an ex parte basis, or with insufficient full and frank disclosure, but with proper notice. 945 was not “unreasonably disadvantaged” in the commercial circumstances present.

The Vesting Orders have not prejudiced 945’s potential trust claim in that 945 continues to have rights to claim any trust provision it may have against JMB as against 216 and the funds have been set aside in trust to allow for these claims. I note that 945 has also made a tracing application. [ 29 ] Accordingly, I dismiss the application to set aside the Vesting Orders. 2. Should the Amended Royalty Aggregates Agreement be set aside? [ 30 ] As part of the sale to Mantle, certain agreements were sought to be assigned. Mantle approached Mr.

Shankowski and they negotiated the terms for the assignment of the Aggregates Royalty Agreement that 945 had with JMB. The deal was concluded by email dated October 15, 2020. In that deal, Mantle agreed to pay 945 $50,000 towards the monetary arrears of JMB without prejudice to any claim or entitlement of 945 to continue to claim against JMB, or as against 216 as a result of all liabilities of JMB being vested in 216 in the proposed Vesting Orders.

Further, and importantly, Mantle agreed to continue to be responsible for all conservation and reclamation responsibilities on the 945 lands. [ 31 ] 945 argued that it would not have agreed to the assignment of the Royalty Agreement to Mantle without full payment of the cure costs if 945 had been made aware of the existence of the trust established by paragraph 26.

Further, the Applicants would have submitted a claim for not less than $588,457.61 had JMB accurately disclosed the existence of the trust as well thereby entitling 945 to the amounts owing to the applicants under the December 2019 statement of account as well as for the deficiencies regarding the disclosures made by JMB on October 30, 2020 with respect to the April 30, 2020 statement of account. Finally, the issues with the April account further raised trust concerns that Mr.

Shankowski already had, and he would not want to continue business with Mantle. [ 32 ] JMB, on the other hand, argued that contracts can all only be set aside in cases of duress, fraud or common mistake. In terms of the definition of fraud, it referred to the definition in Carlson v Big Bud Tractor of Canada Ltd. 1981 CarswellSask 111 (CA) at para 74 citing Fridman, The Law of Contract (1976) page 64, wherein it was described as “some unconscionable conduct which renders the bargain questionable or on equitable grounds, even though it might be perfectly valid at common law”.

Here, JMB argued, 945 had not met the onus to prove any of these criteria to have the contract set aside. Analysis [ 33 ] I have some difficulty understanding why knowing that one had a better chance of collecting the outstanding amounts owed from JMB through a potential trust vehicle would mean that you would want to negotiate for more cure costs to be paid up front. At the time this agreement was negotiated, 945’s builder’s lien had been denied by the Monitor and although it was under appeal to this Court, it was not a given that this would be successful.

Little to no evidence is before me about how the negotiations went here – but $50,000

was agreed to be paid as cure costs in face of an uphill battle on a lien claim. If one thought that they might be successful, or at least have further arguments, in favour of collecting the rest of the outstanding amounts, then why would this mean that you would only have agreed to assign if more was paid up front? [ 34 ] Setting aside contracts in a commercial setting where both parties are represented is not done lightly. The only criteria that might have applied here is the proposition that JMB acted in an “unconscionable” fashion which raises the civil “fraud” criteria to set aside a contract.

However, I not accept that JMB had a duty to point out para 26 in the Supply Contract in the circumstances of this case, so this failure would not amount to “unconscionable conduct” in my view. Further, accounting and performance issues with the past Royalty Agreement (such as the need to obtain consent) may well go to trust issues, but Mr. Shankowski admitted that he already harboured these doubts and proceeded. This is understandable since the Royalty Agreement was, and is, of mutual benefit for both Mantle and 945 to have it continue. The fact that Mr.

Shankowski now believes that he might have negotiated differently had he had further information about the value and collectability of his claim, is not sufficient to meet the strict test to set it aside. [ 35 ] In my view, 945 has not met the basic tests to have this Court intervene and set aside the assignment of the Royalty Agreement. Accordingly, the application to have the Royalty Agreement rescinded is dismissed. Heard on the 27 th day of November, 2020. Dated at the City of Calgary, Alberta this 7 th day of December, 2020. K.M. Eidsvik J.C.Q.B.A. Appearances: Richard B. Hajduk for the Applicants Mr.

Jerry Shankowski and 945411 Alberta Ltd. Tom Cumming, Caireen Hanert, Alison Gray, and Stephen Kroeger for the Respondents JMB Crushing Systems Inc and 2161889 Alberta Ltd. and Mantle Materials Group, Ltd. P antelis Kyriakakis and Nathan Stewart for the Monitor FTI Consulting Ltd. Tom Gusa for ATB Financial Kyla Mahar for Fiera Private Debt Fund VI LP et al

Tristen Cones for Canada Revenue Agency Adam Ollenburger for Kalinko Enterprises Ltd. Terence Arthur for Quest Disposal and Recycling Inc. Jerritt Pawlyk for R Bee Aggregate Consulting Ltd. and Matt Silver Trucking Christina Tchir and Kaley Shier for Shamrock Valley Enterprises Ltd. Peter Alexander for J.R Paine & Associates Ltd. Darrell Peterson for Jeff Buck Melissa Burkett for Alberta Environment and Parks Gavin Price for Gowling LLP counsel