Money paid into court to discharge liens of subcontractors is not the property of the bankrupt contractor

Money paid into court to discharge liens stands as security in the place of the lands and those funds do not form part of the estate of a bankrupt subcontractor.
 
In D & K Horizontal Drilling (1998) Ltd. (Trustee of) v. Alliance Pipeline Ltd., 2002 SKQB 86 the bankrupt, D&K, had entered into a contract to do pipeline work for the project owner, Alliance. A number of subcontractors filed liens and Alliance paid certain money into court in order to vacate the liens. The trustee for D&K took the position that the amount paid into Court was part of the Bankrupt’s estate and that the lien claimants were merely unsecured creditors with respect to that amount. The court rejected that argument and said that since the funds in court stood in substitution for the land and that lien claimants could claim against the land without involving the bankrupt the funds in court were never the property of the bankrupt and the trustee had no right to them:
 
In my view it is not necessary to address the constitutional issue raised by the Trustee as the money paid into Court is not the property of the Bankrupt. It is uncontroverted that the funds that were paid into Court never came into the hands of the Bankrupt. The funds were paid directly into Court by Alliance by virtue of Alliance’s obligation and liability to the lien claimants under s. 56(6) of the BLA…
 
The lien claimants contributed services or materials to an improvement and therefore had both a right to sue Alliance and force the sale of the land. Once payment had been made into Court, those rights were extinguished.
The lien claimants’ rights whether against the owner, the land or the money in Court, are in my opinion, not affected by the bankruptcy of the Bankrupt, as such rights exist independent of the relationship with the Bankrupt. In other words, the money paid into Court stands in substitution for the security in the land and for the in persona rights that exist against Alliance. It is a given that the Trustee has no right to claim money belonging to third parties.
 
(D & K Horizontal Drilling (1998) Ltd. (Trustee of) v. Alliance Pipeline Ltd., 2002 SKQB 86 at para. 19, 20 and 23).
 
The Court of Appeal dismissed an appeal from the above decision and referred to the need for the bankrupt contractor to prove contractual entitlement to the funds in order to claim them as assets of the bankrupt estate: 
 
We therefore heard argument on the threshold question, whether monies paid into Court by the respondent Alliance Pipeline Ltd., under s. 56 and s. 57 of The Builders Lien Act, S.S. 1984-85-86, c. B-7.1 (BLA), were the property of the bankrupt D & K Horizontal Drilling (1998) Ltd. (D & K) and accordingly payable to its Trustee in bankruptcy, PricewaterhouseCoopers Inc. (PWC).
…Alliance Pipeline Ltd. paid the required monies into Court, following which the liens and claims of lien filed against it and the property were vacated.
Under the terms of its contract with D & K, Alliance Pipeline Ltd. exercised its right to refuse to pay the balance of the contract funds to D & K when the various liens were filed and left unpaid by D & K. Given the terms of the contract, D & K could not maintain a successful action against Alliance Pipeline Ltd. for the balance of the contract price.
 
It is a fair inference that the appellant Trustee brought proceedings under the BLA to require Alliance Pipeline Ltd. to pay money into Court as it could not compel Alliance Pipeline Ltd. to make any payments to D & K in light of article 14.1 of the contract. This article excused Alliance Pipeline Ltd. from any obligation to make payments to D & K once liens were filed against it and the property.
 
The money in Court is there because of Alliance’s obligation and liability to the lien claimants under the BLA. The lien claimants who supplied material and services to the improvements had both a right to sue Alliance Pipeline Ltd. and force the sale of this land. The money paid into Court stands in substitution for the land and for the in personam rights that exist against Alliance Pipeline Ltd. Given the provisions of the Alliance Pipeline Ltd. contract with D & K, its obligation to make further payments to D & K ceased when it failed to remedy the default: see paras. 5.4 and 5.5 of the contract.
 
For these reasons we affirm Barclay J.’s conclusion that the money in Court, to the extent of the lien claim, is not the property of the bankrupt.
 
(D & K Horizontal Drilling (1998) Ltd. (Trustee of) v. Alliance Pipeline Ltd., 2002 SKCA 145 at para. 2, 10 and 20-23, emphasis added).
 
Funds paid into court as security for liens would only become part of the estate of a bankrupt contractor the lien claims of the subcontractors were found to be invalid and it was established that the builders lien holdback was due to the general contractor (i.e. the owner did not require such funds to remedy default by the general contractor).

 

 

 

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