The recent decision from Alberta inVan T Holdings Inc. v. KCS Equipment Ltd.1 should be of interest to a certain class of lenders known as Factors or a certain kind of loan called Factoring2 and to lawyers who act on behalf of Factors and lien claimants as it considers the competing claims that can arise between creditors where contractors or subcontractors involved in the construction project become insolvent. The decision in Van T Holdings centers on a dispute over court‐held funds between a Factor, Liquid Capital Exchange Corp. and lienholders. The dispute related to excavation and grading work performed in West Edmonton, Alberta, and arose after Van T Holdings Inc., the general contractor, was ordered to pay $673,335.88 into court to have all liens discharged from title after its subcontractor, KCS Equipment Ltd., became insolvent.3
The Court concluded that the Crown’s Enhanced Requirement to Pay pursuant to section 224(1.2) of the Income Tax Act4 and section 317(3) of the Excise Tax Act5 afforded it superior priority over the lienholders.6 However, the Alberta court held, on the facts of the case, that the Factor enjoyed priority superior to that enjoyed by the Crown. Relying on the Supreme Court’s decisions in First Vancouver7 and Port O’Call8, Master Schlosser found that the subcontractor’s obligation to deduct and remit employee’s source deductions and GST gave rise to a deemed trust in favour of the Crown over assets of the tax debtor/subcontractor, KCS, held at the time or acquired after the time the trust arose (the moment it failed to remit its source deductions by the specified due date).9 However, because the factoring agreement was perfected before the Crown’s Enhanced Requirement to Pay, the Factor had a superior claim to proceeds of the factored invoice, regardless of whether or not the funds were in possession of the Crown.10 In short, the court held that “a factored invoice would not be caught by an Enhanced RTP.”11
Section 11(1) of the Alberta’s Builders’ Lien Act12 (the “Alberta Act”), reads as follows: “A lien has priority over all judgments, executions, assignments, attachment, garnishment or receiving orders recovered, issued or made after the lien arises.”13 Because Master Schlosser viewed a factored account as an absolute assignment more akin to a sale transaction than an ‘assignment’ for the purposes of the Alberta Act, he determined that the rights of the Factor were absolute as against the lienholder.14
Analysis with respect to Van T Holding’s applicability in Ontario
In Van T Holdings, Master Schlosser read “assignment” in section 11(1) of the Alberta Act as not including an “absolute assignment”. Master Schlosser further determined that because the Factored invoices were “absolute assignments”, as per a 1996 decision15 of the Supreme Court, section 11(1) did not apply to grant lienholders superior priority over the Factor.
The Alberta court’s ruling is problematic, in that there is nothing in the Alberta Act or cited jurisprudence suggesting that an “absolute assignment” is, necessarily, not included in the class of “assignments” referred to in section 11(1). Furthermore, the definition set out in Black’s Law Dictionary of assignment (“the transfer of rights or property”) and absolute assignment (“an assignment that leaves the assignor no interest in the property or right”) leave open the possibility that “absolute assignment” is a species of “assignment”. As a result, Master Schlosser determines, somewhat arbitrarily, that a Factor takes priority over a lienholder for the purpose of the Alberta Act.
Like the Alberta Act, Ontario’s lienholder priority provision is largely ambiguous with respect to the meaning of “assignment”. Section 77 of the Construction Lien Act16 (the “Ontario Act”) reads as follows:
The liens arising from an improvement have priority over all judgments, executions, assignments, attachments, garnishments and receiving orders except those executed or recovered upon before the time when the first lien arose in respect of the improvement.
If Van T Holdings were tried in Ontario, a court would likely decide in favour of lienholders over Factors.
Although the decision in Van T Holdings may be viewed as a victory for factoring companies in Alberta, the decision does not affect the position of factoring companies in Ontario since contractors and subcontractors enjoy additional protection by way of statutory trusts created pursuant to Part II of the Ontario Act.
Specifically, under section 8 of the Ontario Act, a trust fund for the benefit of contractors and subcontractors who supply materials or services to a project arises as soon as amounts become payable to them under a contract with respect to an improvement, that is, when work commences. Under the Ontario Act, money held in trust includes not only those amounts received, but also those amounts owed to the contractor, whether or not due or payable. Therefore, accounts receivable, in that they represent money owed by the owner to the contractor with respect to an improvement, are captured by a construction trust in Ontario. Under section 8(2) of the Ontario Act, the contractor or subcontractor, as trustee, is unable to appropriate or convert these owed amounts for its own use or for any use inconsistent with the trust. Therefore, a factoring agreement entered into after the trust arises and without the consent of those contractors and subcontractors with a beneficial interest in the monies is inconsistent with the Ontario Act. In Ontario if, as Master Schlosser held in Alberta, “a factored account is a sale, not a loan”17 it is a sale of property subject to a statutory trust for the benefit of the contractors.
Any subsequent assignment of an account receivable in Ontario is therefore subject to the pre‐existing trust in favour of the contractor or subcontractor who supplied services or materials for the improvement of the property.
The decision in Van T Holdings shows just how difficult it can be to rely on construction lien jurisprudence from “foreign” jurisdictions. Commentators warn that case law in this area of law can be misleading given discrepancies in the language of provincial construction lien statutes.18 Bristow, Glaholt, Reynolds & Wise lament the varied legal landscape in Canada with respect to construction liens:
A lack of national uniformity in statutory construction trusts in the provinces means that suppliers of labour and materials across provincial borders find themselves with differing degrees of protection and different methods of enforcement of their claims in different jurisdictions.19
Although steps have recently been made toward harmonization, most notably a set of amendments that came into effect in Nova Scotia in 200520 that brought that province’s construction lien legislation closer to Ontario’s, discrepancies between the Acts will continue to render jurisprudence from other provinces outside Ontario of reduced value and application for cases involving construction projects in Ontario.