Priority Between Secured Creditors and Customers Who Pre-Paid for Services Not Delivered

Are prepaying customers treated simply as unsecured creditors, or might they have a trust claim to recover the payment if the service is not delivered?

By: Dennis Fitzpatrick and Kaja Marinic

In New Solutions Financial Corp. v. 952339 Ontario Ltd., the Ontario Superior Court of Justice decides that secured creditors have priority over students who paid in advance for services which were never provided.

The school accepted prepayment of tuition fees, but then became insolvent, thus failing to provide services. The Admission Agreement between students’ parents and the school explicitly stated that parents must pay the full amount of tuition fees regardless of whether the services were actually provided. As a result, the Court found that an express trust had not been created or intended and that this point was not arguable.

Even if a claim for an express trust was arguable, the Court found that such a claim could not succeed where the advance payments were co-mingled in a bank account with other funds, which were used for operation of the school.

The Court also found that the parents had no viable claim for unjust enrichment. Such a claim would require proof that:

  • the secured creditor received a benefit;
  • the parents suffered a corresponding deprivation; and
  • there was no juristic reason for the enrichment.

The contract between the school and the parents making the amounts payable constituted a juristic reason for the enrichment at the time payments were made.

The Court thus found that the parents had no claim to an express, constructive, nor resulting trust. There was no viable claim for unjust enrichment. The doctrines of equitable subordination of creditors, marshalling, and set-off were not applicable to this case. The Court concluded that, on a thorough review of all possible remedies, the parents had no claim in priority to the secured creditor.

This case may have been decided differently if the Admission Agreement had not stated that tuition was payable regardless of whether the services were rendered. Secured creditors of such service-providers may want to ensure that the contract for services contains a clause that payment is due regardless of whether future services are delivered.

Contact:

Dennis Fitzpatrick a partner at Burns Fitzpatrick LLP
Dennis Fitzpatrick
Partner
604.602.5001
dfitzpatrick@burnsfitz.com

 

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