Priority Between Builders' Liens + Trustee Fees in a Bankrupt Estate
March 2023 - 4 min read
Usually, secured claims against a bankrupt estate (such as builders' liens) are paid out before any other claims, including a bankruptcy trustee's fees. But fairness is the most important consideration when administering a bankrupt estate. It would be unfair if a secured claim ate up the entire bankrupt estate, leaving the trustee with unpaid expenses. The Court confirmed they can exercise their inherent jurisdiction to secure a trustee's fees over other secured claims, including builders' liens.
In Golfside Ventures Ltd. (Re), Golfside had a Joint Venture Agreement to develop their land with Obcorp. Golfside subsequently went bankrupt, and its only asset was the land subject to the joint venture agreement, valued at approximately $1.6 million. The bankruptcy trustee determined that the Estate would be able to cover its fees and expenses but took steps to enter agreements with other secured creditors to allow their fees and expenses to be paid before paying out their secured claims.
Unbeknownst to the trustee, Obcorp registered a builders' lien against the land valued at $5.5 million under their Joint Venture with Golfside. This was a secured claim under the Bankruptcy and Insolvency Act ("BIA"), so it would typically have to be paid before the trustee could have its fees and expenses covered by the estate. Even if Obcorp received the entire bankrupt estate, the lien would only be partially paid off, leaving the trustee with unpaid fees and expenses.
The trustee brought an application seeking to create a first charge on Golfside's assets as security to pay the trustee's reasonable fees and expenses. Obcorp opposed the application, arguing that the BIA governs this situation, and the lien took priority to the trustee's fees.
The Court considered whether to exercise its inherent jurisdiction to grant the trustee with a charge against the lands to secure its fees or to follow the BIA and allow the lien to have priority.
Inherent Jurisdiction or Stick with the Status Quo?
Under section 136(1)(b) of the BIA, a trustee's expenses and fees have priority, subject to the rights of secured creditors. According to the BIA, a secured creditor includes a person holding a lien on a debtor's property, amongst other things.
Golfside relied on Residential Warranty Company of Canada (Re), 2006 ABQB 236, to advance their claim. In that case, the Court granted a charge for the trustee on the bankrupt estate's property to secure its fees and expenses but acknowledged that allowing these charges is an exercise of the Court's inherent jurisdiction that must be used sparingly. When deciding whether to exercise this inherent jurisdiction, the Court may consider the following:
- Whether the trustee was required to address the ownership of the assets in the course of the administration of the estate.
- Whether the trustee took the initiative or positively contributed to resolving an uncertain situation.
- The work done by the trustee and the public interest in the orderly administration of bankrupt estates.
- The interests of the persons entitled to the assets in question and their actions.
- The interests of justice.
The Court noted that fairness is the primary overarching consideration when administering a bankrupt estate. If following the BIA would create an unfair result, the Court should exercise its jurisdiction to prevent the unfairness.
In this case, the trustee had been trying to secure payment for its fees. The Court found that the trustee had exercised the necessary due diligence in determining the claims against the estate. The Court noted that it would be unfair to hold that the trustee should have been aware of Obcorp's lien because Obcorp had referenced its work on the lands in a pleading in a related lawsuit.
The Court also noted there was no way for the trustee to take steps to ensure its fees would be paid before the lien would be paid. This would leave the trustee unable to cover its fees and expenses, which empowered the Court to use its inherent jurisdiction to prevent an unfair result.
Lastly, the Court held that even though it appears that the BIA exhaustively deals with the priority of claims at first glance, this situation demonstrates that it does not. The interplay between the BIA and lien legislation means that liens could unfairly disadvantage even the most prudent trustees. Thus, the Court can exercise its inherent jurisdiction to rectify the issue.
The Court granted the trustee to a charge on Golfside's assets as security for its reasonable professional fees and disbursements and that of its legal counsel, in priority to Obcorp's lien.
While secured claims will generally be given priority over a trustee's expenses and fees, this case confirms that the Court can exercise its discretion to flip the usual priority scheme. This fact-dependent analysis will depend on the unique situation in any given case.
If you have questions about the priority of lien claims in a bankruptcy, or generally, or if you are dealing with payment issues, contact Anthony Burden in Calgary, Ryan Krushelnitzky in Edmonton, or any member of Field Law's Litigation Group.
Link to decision: Golfside Ventures Ltd. (Re), 2023 ABKB 86