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Who gets the first piece? Enforcement Priority Cases in 2020

Liens are very powerful tools used to secure payment on services rendered to a party and lien priority rules regulate the order in which creditors get paid for their services or interests. The general rule for liens priority is that secured creditors have priority on their payment over unsecured creditors. Although the idea behind liens priority seems pretty straightforward, in the sense that the party who comes first gets their claim attended to first (the "first to file rule"), the situation can get really complex when determining who has priority amongst secured creditors.


In this blog post, we will consider recent cases in 2020 that give an insight into the current state of the law in regard to priority cases in the environmental, mining, residential and construction world.


Toronto-Dominion Bank v Canada, 2020 FCA 80

In 2010, Toronto-Dominion Bank (“TD”) granted a customer, the Borrower, a loan and a line of credit, both of which were secured against a property owned by the Borrower (the "Property"). TD was not aware that in 2007 and 2008, the Borrower had collected Goods and Services Tax (“GST”) in the amount of $67,854 and failed to remit this amount to the Receiver General of Canada. In 2011, the Borrower sold the Property and used the proceeds from that sale to repay TD in full, for the loan and line of credit.


Subsequently, the Canada Revenue Agency (“CRA”) demanded the proceeds of the sale of the Property to clear off the GST debt by way of a deemed trust claim under Section 222 of the Excise Tax Act (“ETA”). CRA’s position was that the proceeds from the sale should have been paid to the Receiver General first before being paid to any other creditor. The Federal Court of Appeal upheld the ruling of the Federal Court that the unremitted GST sum was subject to the deemed trust provisions of Section 222 of the ETA. It was also held that CRA had a super-priority lien on the proceeds of the sale because its deemed trust was created before TD’s security interest. Borden Ladner Gervais LLP expresses the effect of this decision succinctly by saying that:

“The FCA’s decision confirms that amounts paid to a secured creditor from a debtor with an outstanding Goods and Services Tax/Harmonized Sales Tax (GST/HST) liability are deemed to be held in trust for the CRA.”


This decision has had wide ranging effects in the lending industry. Many lenders have implemented additional safeguards in their lending documents to cover off any outstanding liabilities that could fall under the deemed trust rules in favour of the government, including additional representations and warranties to be provided by the borrower that there is no outstanding debt owing to any party that could create a super priority, and often a covenant and obligation to provide additional reporting materials to the lender so that they can confirm that all HST/GST and other government remittances have been made as necessary. Additionally many title insurance companies have created an add-on to their title insurance policy to partially protect a lender against future super priority claims, as an example this link provides a description of the coverage provided by one of the major title insurers in Canada. The law firm of Devry Smith makes several good points about the unpleasant effect that this decision has had for lenders in their article here and also describes the use of title insurance to try to mitigate some of these issues.


British Columbia (Attorney General) v Quinsam Coal Corporation, 2020 BCSC 640

Quinsam owned and operated the Quinsam Coal Mine (Mine) on Vancouver Island. The Mine stopped operating in June 2019 and Quinsam made an assignment into bankruptcy under

the Bankruptcy and Insolvency Act (“BIA”). However, Quinsam’s Trustee abandoned the Mine without fulfilling the closure, reclamation, and remediation obligations under the British Columbia Mines Act. British Columbia then appointed its own receiver and took steps to mitigate the damage at the mine, with the process of reclaiming the mine to cost millions of dollars more than the amount held in security. However, Quinsam had earlier executed a promissory note in favour of ENCECo, Inc. (ENCECo), granting ENCECo a security interest in its coal inventories and the proceeds of their sale. The coal inventories were eventually sold and both the British Columbia Government and ENCECo claimed the proceeds of the sale. The Government’s position was that the proceeds must be used to fulfill Quinsam’s environmental obligations while ENCECo argued that it was entitled to the proceeds as Quinsam’s secured creditor. The British Columbia Superior Court agreed with ENCECo and held that the proceeds were not part of Quinsam’s estate and so could not create a super-priority in favour of the Government's claim.


Yukon (Government of) v Yukon Zinc Corporation, 2020 YKSC 15

Yukon Zinc owned and operated a mine located in Yukon Territory, the Wolverine Mine. After commencing mining operations, Yukon Zinc had financial problems and subsequently placed the mine in a care and maintenance program. The company then restructured its debt obligations under the Companies’ Creditors Arrangement Act (“CCAA”). The Yukon Government, under its Quartz Mining Act, performed environmental remediation at the mine which was furnished by Yokun Zinc to the tune of $10.5 million. The Yukon Government continued performing remediation work at the mine and by the end of 2020, had expended $5.58 million out of the $10.5 million Reclamation Security available to it. In late 2020, both the Yukon Government and a secured creditor, Welichem Research General Partnership, laid claim to various relief following Yukon Zinc’s bankruptcy. The Government claimed $35.5 million for the anticipated future cost of remediating the Mine and argued that it had a priority lien under the BIA. The Court of Appeal held that the Crown could not claim super priority for anticipated future costs but only for costs that had actually been sustained. It was also held that the charge created under s. 14.06(7) of the BIA only applies to real property and does not include interests in real property such as mineral claims.


Urbancorp Cumberland 2 GP Inc. (Re), 2020 ONCA 197

Cumberland Group was a residential condominium developer and had contracted the appellant contractors for work. During the course of the work, the appellants were owed $3,864,428.72 by Cumberland Group who then applied for and were granted insolvency protection under the BIA. Subsequently, Cumberland Group’s assets were sold under the CCAA. After federal charges had been satisfied, the appellants claimed a trust over the proceeds for their unpaid invoices under s.9(1) of the Construction Lien Act (the “CLA”). The Court of Appeal held that the s. 9(1) CLA trust claim was proper in this case, to create a trust in favour of unpaid contractors over the sale proceeds. The Court further held that s.9(1) would only be inoperative to the extent that it relates to federal charges which would be given priority under the CCAA.


In conclusion, these decisions are very important as they highlight the current protection given to creditors in these industries and provide insight, in particular, as it relates to super priorities granted to various government entities. These decisions can also help clarify the steps that a lender or other parties can take in order to improve risk management and further secure any current or future claims.


If you have any questions about liens and the role of priorities in those liens from either the borrower or lender perspective and would like to better understand how they may affect your business, kindly book a free consultation with Northview Law available on this link or contact us at 416-639-7639. We look forward to hearing from you soon.