Constructive Trust 1 vs. Secured Creditor 0

Many secured creditors see their position in absolute terms. They rely on their general security and aggressively assert their priority over unsecured creditors, such as trade creditors. However, a recent decision of the Ontario Court of Appeal(306440 Ontario Ltd. v. 782127 Ontario Ltd. (Alrange Container Services), 2014 ONCA 548) demonstrates that creative arguments by trade creditors may allow them to take priority over even secured creditors in certain circumstances, by using trust principles to remove assets from the estate.

In this case, a lender held general security over a borrower for advances made on an operating loan. The borrower carried on business storing, repairing and selling shipping containers for its customers, including a major international container lessor. Pursuant to a depot agreement (the "Depot Agreement") with this customer, the borrower stored and repaired the customer's containers. From time to time, the borrower also refurbished and sold