Alberta Court of Appeal discusses use of single purpose corporations by real estate developers feature image

Alberta Court of Appeal discusses use of single purpose corporations by real estate developers

By Dana Hagg (Associate)

Real estate developers often limit their liability by creating a new corporation for the sole purpose of purchasing and developing property, then dissolve the corporation upon completion. This is referred to as a “single purpose” corporation. The Alberta Court of Appeal recently discussed this practice in Condominium Corporation No 0828219 v Carrington Holdings Ltd, 2023 ABCA 222, aff’g 2022 ABQB 510.

The case relates to construction deficiencies at the Avenue at Hermitage condominium in Edmonton. The contract named “Carrington Hermitage Ltd.” as the developer, which was a wholly owned subsidiary of Carrington Holdings Ltd. created for the sole purpose of the condominium project.

The condominium corporation sued Carrington Hermitage. Midway through the litigation, Carrington Hermitage was dissolved and stopped defending the lawsuit. This is where things went wrong: the condominium corporation proceeded to obtain a $112,000 judgment against Carrington Hermitage, but it had no remaining assets. As the saying goes, one cannot get blood from a stone.

The condominium corporation commenced a second lawsuit against Carrington Holdings, based on the assumption that Carrington Holdings, as sole shareholder, received the assets of Carrington Hermitage upon dissolution.

At common law, shareholders are not liable for the corporation’s debts because corporations have a “separate legal personality” distinct from their shareholders, officers, and directors. The Alberta Legislature recognized the risk of shareholders stripping a corporation of its assets and dissolving it, leaving its debtors unsatisfied. Hence, Legislature enacted a narrow exception to the “separate legal personality” rule: section 227(4) of the Business Corporations Act (Alberta), RSA 2000, c B-9 permits a judgment against a dissolved corporation to be enforced against a shareholder who received assets during the corporate dissolution. However, the shareholder’s pre-existing assets are protected.

Carrington Holdings readily admitted that it was liable to the extent of the assets it received when Carrington Hermitage dissolved, by virtue of the existing judgment and section 227(4). However, there was no evidence that Carrington Holdings actually received anything from Carrington Hermitage upon dissolution. If Carrington Holdings received less than $112,000 upon dissolution, the condominium corporation will not be able to collect its full $112,000 judgment unless it obtains a second judgment against Carrington Holdings directly.

This brings us to the key legal issue. Naturally, litigants expect that once an issue has been litigated, the issue need not – and cannot – be litigated a second time. Mischief would arise if a court were to give judgment on an issue that had already been decided in a prior judgment. It would undermine the finality of judicial orders. Scarce judicial resources would be wasted. Inconsistent judgments could undermine the integrity of the justice system. Hence, the related legal doctrines of merger, res judicata, and abuse of process prevent parties from litigating issues that have already been decided by the court.

This is where the condominium corporation’s error becomes apparent. The condominium corporation argued it would be an abuse of process for Carrington Holdings to defend the second lawsuit, given that its wholly-owned subsidiary was already adjudged liable to the same plaintiffs for the same construction defects.

The Court disagreed. Carrington Holdings was a separate legal personality from Carrington Hermitage, and the risk of inconsistent judgments alone was insufficient to justify preventing Carrington Holdings from defending itself a second time.

Perhaps it seems unfair that real estate developers are allowed profit from a business model that leverages single purpose corporations to avoid liability to innocent third parties. However, there is nothing inherently wrong this practice. The Court of Appeal majority wrote at paragraphs 12-13 that the robust protection afforded by corporations is “not a loophole or a technicality,” but rather, it is “an essential part of corporate law for over a century, and vital to the economy.” This protection does not apply to cases of fraud, or where the corporation is merely a “sham,” but courts must not allow “moral indignation to triumph over legal principle.” As highlighted by the Supreme Court of Canada in Southcott Estates Inc v Toronto Catholic School Board, 2012 SCC 51 at paras 1 and 29-30, although “real estate developers frequently create single-purpose corporations for the sole purpose of purchasing and developing properties for profit,” they should not derive an “unfair advantage” through doing so. Therefore, “those who choose the benefits of incorporation must bear the corresponding burden,” which include statutory filing and record-keeping obligations and a duty to mitigate losses.

The Condominium Property Act, RSA 2000, c C-22 offers protection from unscrupulous developers who misuse corporate entities. For example, the Condominium Property Amendment Act, 1996, SA 1996, c 12 was enacted to protect purchasers of condominium units “off plan,” that is, before the construction is substantially completed. Subsequently, the Condominium Property Amendment Act, 2000, SA 2000, c 11 expanded the definition of “developer” to include anyone who “receives money paid by or on behalf of a purchaser.” The Alberta Court of Appeal held in Condominium Corp No 0321365 v 970365 Alberta Ltd, 2012 ABCA 26 at paragraphs 9-11 that these amendments “recognized that consumers needed to be protected from hit and run developers, who promise much but deliver little, whether because of ineptitude, negligence, greed, or worse yet, fraud.” Legislature expanded the definition of “developer” in order to “minimize the risk of purchase monies flowing out to third parties despite the statutory prohibitions.”

Contrary to the argument of its legal counsel, the condominium corporation’s unenviable situation has nothing to do with the interpretation or operation of the CPA. Rather, the condominium corporation’s predicament can only be blamed on its hastening to judgment against a dissolved subsidiary corporation without first adding the parent corporation as a defendant. Despite losing this appeal, the condominium corporation may still avail itself of its rights and remedies under the CPA and at common law – but it must prove its case against the proper corporation first.

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