In Firepower Debt GP Inc. v. TheRedPin, Inc., 2019 ONCA 903 (“Firepower”), the Ontario Court of Appeal recently affirmed a decision of Justice Penny that commissions held by an insolvent real estate brokerage but owed to real estate salespersons were not held in trust and were thus subject to the security of the brokerage’s lenders. The decision sheds light on the facts that may drive such a determination in future cases and should be borne in mind by lenders and other creditors to businesses which receive commissions and are required to remit a portion of those commissions to salespersons.

Background: Relationship Between TRP Realty and the Agents

TheRedPin.Com Realty Inc. (“TRP Realty”) operated a real estate brokerage business and engaged real estate salespersons (the “Agents”) that performed the listing and selling activities that generated trades in real estate and TRP Realty’s entitlement to commissions. Pursuant to its contract with each of the Agents, TRP Realty was required to pay a specified portion of the commissions it earned and received to the Agents. TRP Realty maintained three bank accounts:

  1. a real estate trust account which is where TRP Realty deposited buyer deposits, as required under the Real Estate and Business Brokers Act, 2002, S.O. 2002, c. 30 Sch. C;
  2. a commission account which is where all commissions earned by TRP Realty on transactions were ultimately deposited and from which commissions belonging to third parties such as the Agents were paid; and
  3. an operating account into which TRP Realty transferred the commissions it earned on transactions from the commission account (after paying the Agents) and from which it paid its operating expenses such as payroll and overhead.

In June 2018, a receiver was appointed over TRP Realty. At the time of its appointment, there was $6.6 million in commissions to be received by TRP Realty at various times through 2023, $3.7 million of which would be owing to the Agents. The receiver brought a motion for advice and directions regarding whether these funds were held in trust for the benefit of the Agents, or whether they were part of the assets of TRP Realty and subject to the security of its lenders.

Motions Decision: Commissions Not Held in Trust

It is settled law in Ontario that there is no statutory requirement to hold the Agents’ commissions in trust, and no trust automatically imposed by equity, so unless the Agents could establish that the commissions were held in trust by TRP Realty, the Agents would rank as unsecured creditors in the estate of TRP. (Ontario (Ministry of Consumer and Commercial Relations-Business Practices Division) v. Safeguard Real Estate Ltd., 1994 CanLII 7502 at paras. 13-14 (ON SC)).

The determination of whether there is a trust depends on the application of the “three certainties”: certain of subject matter, certainty of object and certainty of intention. The parties agreed that certainty of subject matter (the commissions) and object (TRP and the Agents) was not at issue. The sole issue was whether TRP Realty intended to establish a trust over the commissions on behalf of the Agents.

Justice Penny articulated the legal test regarding certainty of intention as follows:

Certainty of intent requires that it be clear that the donor or settlor intended to create a trust; i.e., that the settlor intended for the property in question to be held for the benefit of another. No formal document evidencing the creation of a trust is required. Nor is it necessary that the settler use any specific language - even the use of the word “trust” is not necessarily dispositive one way or the other. The question is one of substance - did the settlor evidence an intention that the property be held by one person for another person’s benefit? This intention may be express or implied and may be determined from words or acts.

Where a trust is to be implied, however, effect must be given to inferences as to the intention of the parties which a reasonable person would draw from the words or conduct of the parties and not to any subjective or other intention which was not made manifest at the time. Certainty of intention cannot solely derive from a “moral obligation as to what is to be done with the property”… (paras. 15-16)

Justice Penny held that TRP Realty did not intend to establish a trust over the commissions, primarily on the basis of the following facts:

  1. There was no provision in the contract between TRP Realty and the Agents that commissions were to be held in trust by TRP Realty for the benefit of the Agents, nor was there any language that could reasonably be construed as having this meaning or intent. The contract contained an entire agreement clause.
  2. The audited financial statements of TRP Realty categorized amounts on deposit in the commission account as “cash and cash equivalents”. Amounts held in trust in the real estate trust account were categorized as “restricted cash”. Similarly, the consolidated statements of income categorized all commissions earned by TRP Realty (including the amounts owed to the Agents) as “revenue” and the amounts owing to the Agents as “cost of revenue.”

While there were certain account statements provided by the bank to TRP Realty, and certain trade record sheets provided by TRP Realty to the Agents, that indicated that the funds were subject to a “commission trust”, the ambiguous inferences to be drawn from these documents were outweighed by the above facts.

Justice Penny distinguished the decision of Mr. Justice Cameron in Eu v. Rosedale Realty Corp. (Trustee of) (1997), 1997 CarswellOnt 2519 (Gen. Div.) [Commercial List] where the relevant contract required the brokerage to hold all commissions it received in a “commission trust account”. There was no similar intention expressed in the relevant contract in this case.

Appeal Decision: Affirming Justice Penny

The Ontario Court of Appeal dismissed the appeal brought by the Agents, holding that Justice Penny correctly stated the legal principles regarding certainty of intention in the excerpt above and did not commit any palpable or overriding error in his application of the above facts to reach the conclusion that the commissions were not held in trust. Accordingly, the entire $6.6 million in commissions to be received by TRP Realty were subject to the security of TRP Realty’s lenders.

Takeaways: Make Inquiries as to Whether Commissions Held in Trust

Lenders and other creditors of a business which receives commissions and is required to remit a portion of those commissions to salespersons should be aware of the facts that may impact whether their security will attach to that portion. In light of Firepower and the case law discussed therein, the following facts may be relevant to this determination, among others:

  1. Do the contracts between the business and the salespersons indicate whether or not the portion of the commissions payable to the salespersons are held in trust by the business?
  2. Do the sales agreements in which the commissions are earned indicate whether or not the business will hold a portion of those commissions in trust for the salesperson? Is the salesperson a party to or otherwise aware of the terms of that agreement?
  3. Are the commissions deposited by the business into a trust account or a regular operating account?
  4. How are the commissions categorized on the financial statements of the business?
  5. If the business receives funds that are to be held in trust, how are those treated? Are they deposited into a different account and categorized differently on the financial statements of the business?
  6. Are there any communications by the business to the salespersons indicating that the commissions payable to the salespersons are held in trust?
  7. Are there any communications by the salespersons to the business taking the position that the commissions are held in trust, which were not refuted by the business?