By Shaneka Shaw Taylor & Eugenia Bashura
In Firepower Debt GP v. TheRedPin, the Ontario Court of Appeal grappled with the question of what happens to a real estate agent’s uncollected commissions when their real estate brokerage becomes insolvent.
The brokerage, TheRedPin.Com Realty, had a roster of real estate agents actively engaged in trades, which entitled the brokerage to commissions. Red Pin had commission-split agreements with their agents. Before all of the commissions were collected, Red Pin became insolvent and a receiver was appointed.
The receiver went to court to seek guidance on whether the agents’ commissions, when collected, had to be held in trust for the benefit of the agents or the brokerage. Guidance was needed as secured creditors can collect from an insolvent business before unsecured creditors. If the secured creditors deplete all of the assets of the business, there will be nothing left for unsecured creditors to collect. If the commissions were held in trust for the benefit of the agents, the commissions would be excluded from Red Pin’s available assets and secured creditors would not be able to access those funds before the agents. If on the other hand, the commissions were not held in trust, then the agents’ claims to their share of commissions would be as unsecured creditors, ranking them behind secured creditors.
The motions judge found that a trust had not been created for the benefit of the agents, as there was no evidence of Red Pin and the agents’ mutual intention to create such a trust. The agents appealed.
The Ontario Court of Appeal agreed with the motions judge. The Court of Appeal found as follows:
(a) Agreements between Red Pin and the agents.
The independent contractor agreements between Red Pin and each of its agents neither explicitly created a trust, nor required that one be created in relation to the treatment of commissions. This failure to express that intention indicated that the parties did not intend to create a trust.
(b) Red Pin’s financial statements.
Red Pin’s financial statements supported an inference that there was no intention to create a trust. Red Pin’s financial statements reflected certain amounts as held in trust in the “Restricted cash” category. That category, however, did not include the agents’ commissions. Instead, the agents’ commissions were shown as assets of Red Pin in the “cash and cash equivalents” category. The financial statements were approved as accurate and not misleading by the auditors and by Red Pin’s Board of Directors.
(c) History of a separate commission account at Red Pin’s banks.
Red Pin had three bank accounts – a trust account where buyers’ deposits were kept, a commission account where all commissions were deposited and an operating account in which Red Pin transferred its portion of the commission split. The commission account was not opened as a trust account at Red Pin’s bank but rather as a standard operating account. This supported the conclusion that there was no intention to create a trust.
(d) Trade records sheets.
The reference to the “contract” in the trade records sheets was to the independent contractor agreements between Red Pin and its agents and that these agreements, as discussed above, contained no mention of a trust. Therefore, the fact that the trade records sheets showed that the agents’ commissions were split with Red Pin and stated that it constituted a commission “trust” agreement “as set out in the contract”, this was not determinative of the parties’ mutual intention to create a trust.
(e) Evidence of Red Pin’s founder.
Finally,the evidence of Red Pin’s founder, Tarik Gidamy, who testified that the commissions were held in trust for the agents, was after-the-fact evidence inconsistent with his behaviour at the relevant time (i.e. his representation to Red Pin’s auditors and Board of Directors of the financial statements where the agents’ commissions were shown as assets).
Based on the above, the Court of Appeal dismissed the agents’ request that they receive priority over secured creditors, in respect of the uncollected commissions.
What does this mean for agents and brokerages?
If it is the expectation of real estate agents and their brokerages that commissions, when collected, will be held in trust for the benefit of the real estate agents, this intention should be clearly articulated in the agreement between the agent and the brokerage. At a minimum, that mutual intention should be recorded in the agreements that the real estate agents have with their brokerage. If necessary, have a lawyer prepare or review any independent contractor agreement to ensure that the parties’ reasonable expectations are clearly communicated.
As the business progresses, ensure that the parties’ behaviours are consistent with what would be expected for a trust relationship including respecting the fiduciary obligations owed by a trustee to the beneficiaries of the trust.
Eugenia Bashura joined Boghosian + Allen LLP in 2019 to complete her articles. She is a graduate of the University of Windsor.