Toronto Dominion Bank v, 2021 ABQB 205

Court of Queen’s Bench of Alberta Citation: Toronto Dominion Bank v 1287839 Alberta Ltd, 2021 ABQB 205 Date: 20210317 Docket: 1803 05959 Registry: Edmonton Between: Toronto Dominion Bank Plaintiff - and - 1287839 Alberta Ltd, Pricope Matwychuk Holdings Ltd., Fehr Quality Contracting Inc., 101279740 Saskatchewan Ltd. Alexandru Pricope and Christina Matwychuk Defendants _______________________________________________________ Endorsement of the Honourable Mr. Justice M. J. Lema _______________________________________________________ A. Introduction [ 1 ] Holders of a writ of enforcement seek a ruling that proceeds of land bound by the writ were held in trust for it and thus did

not tumble into the bankruptcy estate of the former owner of the lands. A competing creditor argues that the proceeds were not so held and that the writ-holders so tumbled. [ 2 ] I find that the proceeds were not held in trust for the writ-holders, instead remaining an asset of the now-bankrupt owner. B.

Background [ 3 ] The writ-holders were the first-position registrant against title to certain lands later sold in receivership proceedings against the owner. [ 4 ] A court order approving the sale contained the following provisions governing determination of priority to the sale proceeds (first, corralling of all claims against the land and, second, defining the nature and purpose of the proceeds fund ): [ corralling of claims ]: … all of [the former owner’s] right, title and interest in and to the [lands] shall vest absolutely in the name of the Purchasers, free and clear of and from any and all caveats, security interests, hypothecs, pledges, mortgages, lines, trusts or deemed trusts, reservations of ownership, royalties, options, right of pre-emption, privileges, interests, assignments, actions, judgments, executions, levies, taxes, writ of enforcement, charges, or other claims, whether contractual, statutory, financial, monetary or otherwise, whether or not they have attached or been perfected, registered or filed and whether secured, unsecured or otherwise (collectively, the “Claims”), including , without limiting the generality of the foregoing: (

a) any encumbrances or charges created by the Receivership Order; (

b) any charges, security interests or claims evidenced by registrations pursuant to the Personal Property Security Act (Alberta) or any other personal property registry systems; (

c) any liens or claims under the Builders’ Lien Act (Alberta); and (

d) those Claims registered on title to [the lands] (all of which are collectively referred to as the “Encumbrances ”, which term shall not include the permitted encumbrances, caveats, interests, easements and restrictive covenants listed in [a schedule] (collectively, “Permitted Encumbrances”)). and for greater certainty, this Court orders that all Claims including Encumbrances other than Permitted Encumbrances, affecting or relating to [the lands] are hereby expunged, discharged and terminated as against [the lands]. [s 5 of the order] [ nature and purpose of proceeds fund ]: For the purposes of determining the nature and priority of Claims, net proceeds from the sale of [the lands] (to be held in an interest-bearing account by the Receiver) shall stand in the place and stead of [the lands] from and after delivery of the Receiver’s Closing Certificate, and all Claims including Encumbrances (but excluding Permitted Encumbrances) shall not attach to, encumber or otherwise form a charge, security interest, lien, or other Claim against [the lands] and may be asserted against the net sale proceeds from the sale of [the lands] with the same priority they had with respect to [the lands] immediately prior to the sale , as if [the lands] had not been sold and remained in the possession or control of the person having that possession or control immediately prior to the sale.

Unless otherwise otherwise ordered (whether before or after the date of this Order [January 17, 2020]), the Receiver shall not make any distribution to creditors of net proceeds from sale of [the lands] without further order of this Court , provided however the Receiver may apply any part of such net proceeds to repay any amounts the Receiver has borrowed for which it has issued a Receiver’s Certificate pursuant to the Receivership Order. [para 15] [emphasis added] [ 5 ] In other words, all claims against the lands were shifted, in a priority-neutral way, from the land to the proceeds . [ 6 ] Critically, that order did not move beyond identifying the potential claims and shifting the focus from the land to its proceeds .

It did not earmark the proceeds for any particular claimant , whether directly or indirectly (e.g. declaring that there was only one claimant). [ 7 ] The order simply set the stage for Act II , in which all claimants would either agree on the distribution of the proceeds (presumably yielding a consent order) or a court would rule on priorities after hearing a contested application.

Either way, a further court order was expressly contemplated, which would actually allocate the proceeds to the entitled party or parties. [ 8 ] The former owner of the lands later became bankrupt , before the proceeds had been paid out to any party. [ 9 ] That is the backdrop against which I summarize the competing arguments. C. Positions [ 10 ] The writ-holders say: • “At the time of sale …, [their writ] was the first registered financial encumbrance ….

The only other financial encumbrance registered on title was an Agreement Charging Land in favour of TD, registered [after] the [writ]. … TD is not asserting a priority [over the writ-holder]”; • “ .. BDC has security against assets of [the owner/debtor] that contains a land charge . The [writ-holders] do not contest the validity of [that] charge or that [it] would encompass [the lands]. Rather, [they say] that, as a matter of law and in determination of priority to the … proceeds …, [they] are entitled to the … proceeds in priority to BDC’s unregistered land charge ;

• the Land Titles Act (ss 14(3) and s 56) determines priority here, with priority turning on relative (date-determined) serial numbersi.e. registration beats non-registration, earlier registration beats later; • “Immediately prior to the sale, the [writ-holders] had priority to the net sale proceeds by virtue of the writ being the firstregistered charge …. BDC’s land charge was unregistered at the time of the sale … By virtue of the [above] Order and the Land TitlesAct, the Writ has priority over BDC’s unregistered interest. …”; •

section 70 of the Bankruptcy and Insolvency Act, which give priority to a bankruptcy order or assignment over “… garnishments,… executions or other process against the property of a bankrupt” (except where an unsecured creditor has received the fruits ofexecution), does not apply here. The reason is that the lands were sold before the owner-debtor became bankrupt, and, by the date ofbankruptcy, the proceeds had already been earmarked for the writ-holder.

In other words, the proceeds had effectively been carvedout of the owner’s assets and so did not form part of the bankruptcy estate; and • the writ-holders do not argue that they actually received the proceeds. Instead, they assert an equivalent position: that the proceedswere being held in trust for them. Here they point to para 67(1)(

a) BIA, which says that “property of the bankrupt divisible amongcreditors shall not comprise property held by the bankrupt in trust for any other person.” Effectively, the writ-holders say that,with the proceeds being reserved for “Claims”, and with their writ constituting the first-ranking Claim, the proceeds should betreated as being held in trust for them i.e. as not tumbling into the bankruptcy with the owner’s other assets.

In other words, whilethey did not actually receive the proceeds (and thus qualify for shelter under s. 70’s “fruits received” exception), they had effectivelycorralled the proceeds and become their beneficial owner. Actual receipt was not required because they were already over the goalline with effective ownership of the proceeds. [11] BDC says: •

section 70 BIA governs; • the writ-holders are an unsecured claimant falling into s. 70; • since the writ-holders did not actually receive the proceeds, they do not qualify for the “fruits received” exception in s. 70; • the proceeds were not being held in trust for the writ-holders; and • accordingly, on bankruptcy, the writ-holders lost whatever Land Titles Act priority they had to the proceeds, ending up in theunsecured-creditors corral, where their only recourse is to file a proof of claim and wait for a dividend (if any) from the bankruptcytrustee. D.

Analysis [12] The writ-holders’ claim turns on whether the proceeds were being held in trust for them. If so, they shelter under para.67(1)(a), which would recognize their beneficial ownership of the property and carve it out of the owner’s (now bankrupt’

s) property.(Since the writ-holders did not actually receive the proceeds, they do not qualify for the “fruits received” exception in s 70 or its otherexception i.e. deferral to the rights of secured creditors.) [13] Topolniski J. distilled the key considerations in determining priority to proceeds derived from a now-bankrupt’s property: 1. To trump a trustee’s priority to funds paid into court under a garnishee or as a condition of opening up a default judgment, thejudgment creditor must have completed execution (T.L. Cleary Drilling Co. (Trustee of) v. Beaver Trucking Ltd., (SCC), [1959] S.C.R. 311, 38 C.B.R. 1; Tradmor Investments Ltd. v. Valdi Foods

(1987) Inc. (1993), (ON SC), 33C.B.R. (3d) 244 (Ont. Ct. Gen. Div.), aff’d (1997), (ON CA), 43 C.B.R. (3d) 135 (OCA)) 2. An order permitting payment out of monies paid into court on obtaining a further order is insufficient to trump the trustee’s priority tothe funds (T.L. Cleary Drilling Co.). 3. A judgment creditor is not elevated to the status of secured creditor by virtue of a payment into court, whether that payment is toadvance an appeal or as security for costs (T.L. Cleary Drilling Co.; Tradmor Investments Ltd.; and Laker (Trustee of) v.Colby (1987), 66 C.B.R. (N.S.) 71 (Que. Sup. Ct.)). 4.

A judgment creditor may trump a trustee’s priority to funds paid into court if the funds are sufficiently ‘earmarked’ and the creditorhas ‘done all that it could’ to access the funds (Careen Estate v. Quinlan Brothers Ltd. (2004), 2004 NLSCTD 132 , 2 C.B.R. (5th) 102 (Nfld. S.C.)). 5. A secured creditor trumps a trustee’s priority to funds paid into court if the monies are the subject of valid security (BIA, s. 70;(T.L. Cleary Drilling Co.; McCurdy Supply Company Limited v. Doyle (1957), (MB QB), 64 Man. R. 289 (Q.B.),aff’d without reasons (1957), (MB CA), 64 Man.

R. 365n (C.A.)). [from para 11 of Stone Sapphire Ltd v TransglobalCommunications Group Inc, 2008 ABQB 575 affd 2009 ABCA 125] [emphasis added]. [14] Topolniski J. continued her distilling work in Transtrue Vehicle Safety v Werenka, 2015 ABQB 197, where she examinedcompeting clusters of “monies held” cases and synthesized as follows:

Section 70 provides that an unsecured judgment creditor is only entitled to the judgment amount if the judgment has been fullyexecuted by the time of the bankruptcy. An assignment into bankruptcy takes precedence over any unexecuted judgment ororder.

Section 67 provides that the Bankrupt’s estate does not include any property the bankrupt holds in trust for another. The intent of this provision is relatively apparent when the bankrupt is a traditional trustee holding, for example a real estate vendor holding a deposit from a purchaser or a broker holding stocks for her client. It becomes less clear when the property is paid into court or a lawyer’s trust fund pending the resolution of a dispute or litigation.

Read contextually and harmoniously, s 67 and s 70 must be interpreted to work together rationally to achieve these legislative objectives: 1. to ensure the equitable distribution of a bankrupt debtor’s assets among the estate's creditors; 2. to ensure that the only property that is distributed is the bankrupt’s ; 3. to maximize to the extent that is fair and equitable the value of the estate for distribution; and 4. to provide for the financial rehabilitation of insolvent persons. When Posted Money is held by a lawyer, it is clearly a trust fund in the lawyer’s hands: Re Acepharm at para 12.

The question is: Does the simple fact of deposit with a lawyer automatically mean that there is a “trust” for the purposes of s 67 of the BIA ? According to Re Acepharm and Re Greenstreet , Posted Money deposited with the Clerk of the Court is treated differently, depending on its initial characterization. If it was simply deposited with the Clerk of the Court pursuant to a Court Order, the Clerk is a “mere repository”, not a trustee. However, if it was initially deposited with a lawyer as true trust money, that characteristic continues if it is later transferred to the Clerk of the Court.

The authorities ruling that ownership of Posted Money must be determined by resolution of the litigation on the basis of it being s 67(a) “trust” for whoever the ultimate victor might be run afoul of s 70. If the litigation is pursued to judgment and the Posted Money paid without fully executing on the judgment, that creditor is bootstrapped to a better position than a pre-bankruptcy judgment creditor holding an unexecuted judgment. The effect operates to the detriment of the other creditors and violates the BIA ’s foundational principles of creditor equality and rateable distribution of a bankrupt’s property.

I therefore conclude that if bankruptcy intervenes before the matter is adjudicated and the judgement is executed, s 70 applies and the trustee in bankruptcy should prevail. Perhaps facially harsh to the solvent litigant, the result is consistent with the principles of statutory

interpretation and the context of ss 67 and 70. In this scenario, the answer is not dependent upon where the Posted Money is held . As noted in Re Acepharm , if held by a lawyer, such funds are, in every sense, trust funds in her hands. However, this does not equate to the funds automatically qualifying as “trust” property for the purpose of s 67(a) . The lawyer is a repository like the Clerk of the Court. The difference is that unlike the Clerk of the Court, the lawyer has professional and fiduciary obligations to her client.

Accordingly, it makes no difference whether the fund is on deposit with a lawyer or the Clerk of the Court . [paras 64-71] [emphasis added] [ 15 ] I would add (or elaborate on) the following: where a follow-up order to determine priority is contemplated, the funds in question are necessarily not held in trust for any given creditor , at least until that determination is made .

By default, until (at minimum) that happens, the proceeds remain the property of the former owner (now bankrupt) . [ 16 ] This was the finding of the Supreme Court of Canada in Century Services Inc v Canada (Attorney General) , 2010 SCC 60 (paras 82-87 ), where monies representing a GST amount claimed by CRA had been ordered held by a CCAA monitor: The last issue in this case is whether Brenner C.J.S.C. created an express trust in favour of the Crown when he ordered on April 29, 2008, that proceeds from the sale of LeRoy Trucking’s assets equal to the amount of unremitted GST be held back in the Monitor’s trust account until the results of the reorganization were known.

Tysoe J.A. in the Court of Appeal concluded as an alternative ground for allowing the Crown’s appeal that it was the beneficiary of an express trust. I disagree. Creation of an express trust requires the presence of three certainties: intention, subject matter, and object. Express or “true trusts” arise from the acts and intentions of the settlor and are distinguishable from other trusts arising by operation of law (see D. W. M. Waters, M. R. Gillen and L. D. Smith, eds., Waters’ Law of Trusts in Canada (3rd ed. 2005), at pp. 28-29, especially fn. 42).

Here, there is no certainty of the object (i.e. the beneficiary) inferrable from the court’s order of April 29, 2008 sufficient to support an express trust . At the time of the order, there was a dispute between Century Services and the Crown over part of the proceeds from the sale of the debtor’s assets. The court’s solution was to accept LeRoy Trucking’s proposal to segregate those monies until that dispute could be resolved. Thus, there was no certainty that the Crown would actually be the beneficiary, or object, of the trust .

The fact that the location chosen to segregate those monies was the Monitor’s trust account has no independent effect such that it would overcome the lack of a clear beneficiary . In any event, under the

interpretation of CCAA s. 18.3(1) established above, no such priority dispute would even arise because the Crown’s deemed trust priority over GST claims would be lost under the CCAA and the Crown would rank as an unsecured creditor for this amount. However, Brenner C.J.S.C. may well have been proceeding on the basis that, in accordance with Ottawa Senators , the Crown’s GST claim would remain effective if reorganization was successful, which would not be the case if transition to the liquidation process of the BIA was allowed.

An amount equivalent to that claim would accordingly be set aside pending the outcome of reorganization. Thus, uncertainty surrounding the outcome of the CCAA restructuring eliminates the existence of any certainty to permanently vest in the Crown a beneficial interest in the funds .

That much is clear from the oral reasons of Brenner C.J.S.C. on April 29, 2008, when he said: “Given the fact that [ CCAA proceedings] are known to fail and filings in bankruptcy result, it seems to me that maintaining the status quo in the case at bar supports the proposal to have the monitor hold these funds in trust.” Exactly who might take the

money in the final result was therefore evidently in doubt. Brenner C.J.S.C.’s subsequent order of September 3, 2008 denying theCrown’s application to enforce the trust once it was clear that bankruptcy was inevitable, confirms the absence of a clearbeneficiary required to ground an express trust. [emphasis added] [17] In other words, where monies are parked pending a priorities determination, by definition they are not held in trust forany particular claimant. It would only follow such a determination that the successful claimant(

s) should be regarded as the effective(beneficial) owners of the funds. [18] This explains Re Careen, (2004) 2004 NLSCTD 132 , 2 CBR (5th) 102 (NLTD), on which the writ-holders rely.There, a priority determination had been made, and all that remained was for the now-earmarked-for-the-winning-claimant fund to bepaid to that party. With that earmarking (accomplished by the priority decision), the successful claimant deserved to be treated as theeffective (beneficial) owner of the funds i.e. in advance of actual receipt. While para 67(1)(

a) BIA was not mentioned there, reservationof the proceeds for the winning claimant squares with recognition of a trust in that party’s favour. [19] Not so here, where priority to the proceeds in question had not been determined before the date of bankruptcy. Instead,the proceeds remained subject to all “Claims”, with no distribution possible without further order of the Court.

Necessarily, that“further order” first required an agreement on priorities among all interested parties or the Court determining priority, neither ofwhich happened here. [20] For the same reason, I do not accept the writ-holder’s reliance on Re Anderson, 19994 ABQB 398 (para 8), where fundswere being held in trust for a creditor and the creditor had prevailed in the litigation i.e. priorities were determined, all before thedebtor became bankrupt. [21] Same for their attempt to distinguish Senger v Patterson Real Estate Inc, 2015 ABQB 511, which actually squares with thepresent case of monies not held in trust for any given creditor in advance of priorities being determined. [22] Even if the writ had staked a front-of-the-line priority for the writ-holders (i.e. under “per Land Titles Act” priority), theground fell away from that position once the owner-debtor became bankrupt.

At that point, s 70 BIA took over, subordinating allunsecured claims to the trustee unless the “execution fruits” had actually been paid to them. [23] That did not occur here, and since the writ-holders are (by definition) not secured creditors, they do not qualify for either safeharbour under s 70. (The writ-holders confirmed at the application that they are not secured creditors.) [24] In the language of Re Careen, the writ-holders had not done all that could be done to stake their claim e.g. seeking, andobtaining, the consent of all interested parties to an order recognizing their priority or, failing that, bringing an application for, and beingawarded, priority to the proceeds, all aside from having the monies actually paid out to them. [25] The only thing accomplished by the January 2020 order was to substitute the proceeds for the land.

That swap was neutralon the priorities equation: the writ-holders continued to in “first registered” (albeit still unsecured) position, but no actualdetermination of priorities had been made (hence the need for a follow-up order), and then the bankruptcy happened, engaging s 70. [26] Not to mention also engaging s 71 BIA, which provides that, on bankruptcy, the bankrupt’s property, subject only to the BIAand to the rights of secured creditors, passes to the bankruptcy trustee.

The BIA does not provide otherwise in the case of unsecuredcreditors, consigning them to proving their claims and waiting for dividends. [27] With no beneficial-interest-crystallizing priority determination, the proceeds here remained the owner’s – now bankrupt’s– property and thus fell into the bankruptcy estate. [28] Viewed differently, and recognizing that the January 2020 order was intended to be, and was, priority-neutral, imagine if theno sale of the lands had occurred and the owner had become bankrupt.

Even though the writ-holder had been sitting, pre-bankruptcy, in apparent first position, it would have lost that perch on bankruptcy.

The reason, again, is s. 70, which only sheltersunsecured creditors (such as the writ-holders here) from the effects of bankruptcy if they have received the fruits of their executionefforts before bankruptcy. [29] If the writ-holders would not have been immune from the effects of the owner’s bankruptcy (i.e. relegation to wait-for-dividend status) in a still-registered-against-the land circumstance, I cannot see why the priority-neutral shift to a focus on the proceedswould change things.

Either way, with priority to the proceeds not determined by the date of bankruptcy, the proceeds cannot beregarded as reserved for the writ-holders. [30] As BDC’s counsel pointed out, other potential claimants to the lands, pre-bankruptcy, included the Workers’ CompensationBoard, the Canada Revenue Agency, the TD Bank (a down-title registrant), BDC itself (via an equitable mortgage), and (in theory) theowner itself, if it had seen any glimmer of equity despite those other claims. [31] Unless and until the respective priorities of these various claims and the writ-holders’ own claim had been determined, itcannot be said that the proceeds were reserved for the exclusive benefit of the writ-holders (or any party, for that matter). [32] As for the proceeds being reserved for a “class of beneficiaries” which need not be specifically identified for a trust to exist(i.e. with sufficient “certainty of object” i.e. certainty of beneficiary), I do not see that principle applying where priority as among variouscompeting claimants has not been determined.

Counsel for the writ-holders cited the ABCA’s decision in Bruderheim CommunityChurch v Moravian Church in America (Canadian District), 2020 ABCA 393 in support of this “class” argument. I do not see that caseas helpful here, with a “priority determination” having been reached there (i.e. in favour of a certain subset of “claimants”). Thesuccessful claimants did not have to be identified by name; they could rely on the success of their “class.” [33] The key point here is that the writ-holders could not plausibly claim that, on the eve of bankruptcy, “these monies are being

M. J. Lema J.C.Q.B.A. held for us ”, as against any other claimants. Whether the claimants here were identified or not, or constituted a “class” or not via the January 2020 order, no one had reached the “winner’s circle”, such that the funds should be regarded as held for them, before bankruptcy intervened. E. Conclusion [ 34 ] The proceeds here were plainly in priorities-to-be-determined territory. By definition, they were not being held in trust for any particular creditor, let alone the writ-holders.

On bankruptcy, s 70 operated on this incomplete-execution circumstance, undercutting the not-paid-yet writ and, with s 71, pulling these monies into the bankruptcy estate and (thus) the trustee’s reach (at least as between the trustee and the writ-holders). [ 35 ] I do not find it necessary to decide whether, pre-bankruptcy, the writ-holders would have had priority over BDC’s equitable (unregistered) mortgage. [ 36 ] I do find that, with the in-bankruptcy tug-of-war between the writ-holders and BDC now decided, and with no participant in the application arguing against BDC’s priority over all other parties (i.e. beyond the writ-holders), the proceeds (net of any applicable transaction costs associated receiver’s fees) shall be paid to BDC (assuming that its claim is equal to or greater than those net proceeds). [ 37 ] I thank all counsel for their well-prepared and helpful written and oral submissions.

Heard on the 17 th day of March, 2021. Dated at the City of Edmonton, Alberta this 17 th day of March, 2021. Appearances: Zachary Soprovich Duncan Craig LLP for the Applicant writ-holders Donald Glenn Fehr and Laurie Anne Fehr Charles P. Russell, QC and Matthew Ryan (Student-at-Law) McLennan Ross LLP for the Respondent Business Development Bank of Canada Kentigern A. Rowan, Q.C. Ogilvie LLP for the Receiver MNP Ltd.