On September 18, 2020, the Ontario Court of Appeal released its decision in Dal Bianco v. Deem Management Services Limited, 2020 ONCA 585. In brief, the lower court held that construction lien claimants had priority over a mortgagee in the sale proceeds of an insolvent debtor’s property under section 78 of the Construction Act (the “Act”). The mortgagee appealed. On appeal, the parties moved for directions from the Court of Appeal on which appellate court had jurisdiction. Jurisdictional issues were present in this appeal because of the overlap between the priority dispute under the Act and a receivership process under the Bankruptcy and Insolvency Act (“BIA”). Both statutes set out different appeal routes.
The court ruled that because the impugned order was made in part reliance on the BIA, federal paramountcy rules in favour of federal legislation. As a result, under the BIA, the Court of Appeal had appellate jurisdiction.
In addition to confirming appellate routes, this decision further reinforces the protection of lien claimants as the overall purpose of Ontario’s construction law regime. Also, this decision showcases the courts’ propensity to underpin the protection of lien claimants as a guiding principle when disposing of construction-related matters. In other words, unless an exception dictates otherwise, a court will defer to favouring lien claimants.
Background and Facts
Deem Management Services Limited (“Deem”) was the registered owner of a parcel of land in Waterloo, Ontario (the “Real Property”). Mr. Dal Bianco, the owner and sole director of Deem, incorporated Uptown Inc. to plan and develop the vacant portion of the Real Property into a senior’s residence (the “Project”).
Shortly into construction, the Project became insolvent and the trades were notified by Mr. Dal Bianco to cease construction activities. The trades liened. In addition to construction liens, various mortgages were registered against title to the Real Property, three of which were registered by Mr. Dal Bianco personally.
Pursuant to section 293(1) of the BIA, the Ontario Superior Court appointed a Receiver over the property in connection with the Project (the “Property”). The Receiver liquidated the Property and from the proceeds of sale, payments were made to the first and second ranking mortgages. However, $5M remained in trust and was to be disbursed to the remaining secured parties. A dispute arose as to whether the lien claimants or Mr. Dal Bianco, as third ranking mortgagee, held priority to the remaining funds.
Priority Motion in the Ontario Superior Court of Justice
The motion judge relied on section 78 of the Act to grant priority in favour of the construction lien claimants.
In granting the motion, C. Gilmore J. noted that the intention of the Act, and thus the intention of section 78, is to protect lien claimants by granting them priority status over mortgages that are registered on title after construction liens have been registered. However, the Act carves out certain exceptions that, if proven, would shift the Act’s priority regime in favour of mortgagees. Therefore, the issue on this motion, as is the issue in most priority disputes, is whether the facts demonstrate that a section 78 exception exists.
C. Gilmore J. relied on the principle set out in the Ontario Court of Appeal’s decision in Boehmers v. 794561 Ontario Inc.[1] to confirm that the onus to persuade the court that a section 78 exception is triggered rests on the mortgagee, not the lien claimant.
To satisfy their burden of proof, Mr. Dal Bianco relied on sections 78(6) and 78(2) of the Act, respectively, to argue that:
- The third mortgage was a “subsequent mortgage” under the Act and because funds were advanced under the subsequent mortgage, Mr. Dal Bianco as the third ranking mortgagee, therefore had priority over those funds; and,
- The third mortgage was a “building mortgage” under the Act and therefore held priority over the lien claimants to the extent of any deficiency in the holdbacks.
A) The S. 78(6) Subsequent Mortgage Argument
Section 78(6) of the Act outlines an exception that covers a mortgage registered after construction has commenced on a project and thus after lien rights have arisen. For a mortgagee to gain priority over lien claimants under this exception, the Act sets out that the funds lent must satisfy the following three conditions:
- The funds must be advanced “in respect of that mortgage”;
- There must not be any preserved or perfected liens at the time of the advance; and
- At the time of the advance, the mortgagee must not have received written notice of a claim for lien.
Conditions two and three were satisfied in this case.
With respect to the first condition, Mr. Dal Bianco took the position that the entirety of funds advanced under the Project “benefitted the project” and therefore were advanced “in respect of” the third mortgage. The court disagreed. The court referred to the case of of XDG Ltd. v. 1099606 Ontario Ltd.[2] to highlight the distinction between “amounts secured” and “amounts advanced”. In XDG, the financial arrangement in question involved advances made under a credit agreement, whose amounts were later secured by registration of a mortgage. The court in XDG held that because the mortgage was registered on title to secure a prior indebtedness and was not registered to secure advances made under that mortgage, the lien claimants’ priority was not affected. The court also referred to the decision in Jade-Kennedy Development Corp. Re to confirm the absence of case law supporting the notion that section 78(6) required the proceeds of an advance to create a “benefit” to the borrower.
B) The S. 78(2) Building Mortgage Argument
Mr. Dal Bianco further argued that the third mortgage is a “building mortgage” in accordance with section 78(2) of the Act. The court disagreed. Noting that “building mortgage” is not a defined term under the Act, the court undertook a closer inspection of the initial wording of section 78(2): “…intention to secure the financing of an improvement …”. The court characterized this language as a future intention on the part of the mortgagee to secure the financing of an improvement. Thus, for a charge to qualify as a “building mortgage” under the Act, a lender must first register a mortgage and then advance the funds under that mortgage. Mr. Dal Bianco did the reverse: he advanced funds and thereafter registered the mortgage on title – a sequence of events that proved fatal.
Mr. Dal Bianco appealed.
First Motion in the Ontario Court of Appeal
On appeal, a dispute arose over the correct appeal route. Mr. Dal Bianco filed a motion to a single judge of the Court of Appeal seeking directions on whether the Court of Appeal or the Divisional Court had appellate jurisdiction over the lower court’s order.
The BIA and the Act both set out different appeal routes: Under section 71(1) of the Act, an appeal lies to the Divisional Court; and under section 193 of the BIA, an appeal lies to the Court of Appeal.
M. Jamal J.A. held that, as a single judge, he lacked jurisdiction to decide the motion. In support of his disposition, he relied on the Ontario Court of Appeal case of Ontario (Provincial Police) v. Assessment Direct Inc.[3] where the Court of Appeal in that case held that “a single judge has no power to decide whether an appeal is within the jurisdiction of this court.” The motion was adjourned to be heard by a panel.
Second Motion in the Ontario Court of Appeal
This time around, a panel of the Ontario Court of Appeal noted that the key to identifying the correct appeal route is to focus the analysis on the order under appeal. Specifically, the court confirmed that the question to be asked when a receiver has been appointed under section 193 of the BIA is “whether the order under appeal is one granted in reliance on jurisdiction under the BIA. Where it is, the appeal provisions of that statute are applicable.”[4]
In this case, the impugned order was granted in part reliance on the BIA. The court held that styling a motion under a receivership or other bankruptcy and insolvency proceeding is not sufficient to access the appeal route under the BIA. However, the impugned order in this case was more than styled under the BIA. Rather, the substance of the order was borne out and made pursuant to the BIA’s receivership process. Thus, because the BIA is federal legislation and the Act is provincial legislation, the court deferred to the principle of federal paramountcy to settle the conflict in favour of the BIA. Accordingly, the Court of Appeal was the correct appeal route.
Key Takeaways
The case is important to construction stakeholders for several reasons. First, the higher court’s decision clarifies that the BIA’s appeal route takes precedence over that of the Act’s when the order under appeal was granted in reliance on the BIA. Given the financial threat COVID-19 poses to construction projects and the likelihood of projects becoming insolvent as a result thereof, knowing the appropriate appeal route in the event a bankruptcy and insolvency proceeding commences is useful for parties appealing orders.
Second, for construction financiers, the lower court’s decision confirms that, as a rule, when claiming priority over lien claimants, it is prudent practice for secured lenders to register the charge prior to advancing the funds. Failing to adhere to this sequence and then moving to gain priority over lien claimants is a futile strategy; not only is it in blatant contradiction of the overall purpose of the Act, but it is unsuccessful in front of an arbiter.
Ultimately, the motion court held that Mr. Dal Bianco’s third mortgage was not a “subsequent mortgage” under the Act and therefore did not trigger an exception that would disturb the Act’s priority regime. Importantly, Mr. Dal Bianco had already made the advances to finance the Project at the time when the construction liens arose, and then subsequently registered the mortgages on title. The court held that nowhere in the Act does it contain an exception that allows for lenders to lend funds for an improvement and then gain priority over lien claimants by subsequently securing their loans with registered mortgages. The court noted that allowing mortgagees to maneuver in this manner to gain priority runs counter to the Act’s overall purpose, which (again) is to protect lien claimants.
[1] 1995 CarswellOnt 244, 122 D.L.R. (4th), aff’g Jade-Kennedy Development Corp., Re, 2016 CarswellOnt 19127, 2016 ONSC 7125.
[2] 2002 CarswellOnt 4535, [2002] O.J. No. 5307.
[3] 2017 CarswellOnt 19624, 2017 ONCA 986
[4] Business Development Bank of Canada v. Astoria Organic Matters Ltd., 2019 CarswellOnt 5177, 2019 ONCA 269.