Executive Summary: Key Legal and Evidentiary Issues

• Characterization of the $337,390.62 escrowed sum as either property of Earth Boring’s estate or funds held on trust for Tulloch in light of competing insolvency and construction adjudication regimes.
• Effect of the Companies’ Creditors Arrangement Act (CCAA) and prior BIA NOI stay on Tulloch’s ability, as an unsecured creditor, to enforce its adjudication award against escrowed funds.
• Interpretation of the Escrow Agreement and related correspondence to determine whether the necessary “certainty of intention” existed to create an express trust over the escrow funds.
• Interaction between s. 70(1) and s. 67 of the Bankruptcy and Insolvency Act, including whether funds segregated for a disputed claim fall inside or outside the bankrupt/insolvent estate.
• Application and reconciliation of three lines of caselaw regarding money paid into court or a lawyer’s trust account, especially the distinction between mere segregation and true trust funds.
• Consequences of Tulloch’s decision not to challenge the Reverse Vesting Order (RVO) or seek clarification on the status of the escrow funds before closing, given that the escrow was treated as a Retained Asset for NewCo while Tulloch’s claim became an Excluded Liability in ResidualCo’s bankruptcy.

Background and parties

Earth Boring Co. Limited is a company that became subject to insolvency and restructuring proceedings in Ontario under the Companies’ Creditors Arrangement Act (CCAA), after first initiating a Notice of Intention (NOI) to make a proposal under the Bankruptcy and Insolvency Act (BIA). The decision also involves related entities Yarbridge Holdings Inc., Trolan Investments Ltd., and Yarfield Services Limited, but the central dispute concerns Earth Boring and one particular creditor, Tulloch Geomatics Inc.
Tulloch is a surveying firm. On October 25, 2022, Earth Boring retained Tulloch to provide surveying services for the “South Georgetown Servicing Watermain” project. A payment dispute later emerged regarding Tulloch’s invoices for this work, totaling just over $350,000, which set the stage for construction adjudication, escrow arrangements, and eventually the present priority fight in the face of Earth Boring’s insolvency.

Construction dispute and adjudication

When the parties were unable to resolve the billing dispute, Tulloch commenced an adjudication on May 31, 2024 under Part II.1 of Ontario’s Construction Act, the statutory prompt payment and adjudication regime for construction disputes.
On August 2, 2024, the adjudicator (Reynolds) issued a decision ordering Earth Boring to pay Tulloch $337,390.62. Earth Boring responded by seeking leave for judicial review of the adjudication order and by notifying Tulloch it intended to assert separate “Deficiencies” claims against Tulloch for alleged problems with the work. Thus, by late 2024, there was both an adjudication award in Tulloch’s favour and potential counterclaims anticipated by Earth Boring.

Tolling and escrow arrangements instead of immediate enforcement

Rather than allow immediate enforcement of the adjudication award or proceed directly to payment into court, the parties negotiated two key contracts: a Tolling Agreement and an Escrow Agreement.
Under the Tolling Agreement, a broad range of “Potential Claims” between Earth Boring and Tulloch—including all manner of existing and possible future claims—were tolled for one year from the effective date, unless terminated earlier on 30 days’ notice. This allowed both sides to preserve rights while they worked through the judicial review and any deficiency claims.
The Escrow Agreement, dated November 29, 2024, addressed how the adjudication amount would be held and when it would be released. Earth Boring’s then-counsel, the law firm Torkin Manes, agreed to act as Escrow Agent and to hold the $337,390.62 (the “Escrow Funds”) in a dedicated escrow account after an initial deposit into the firm’s mixed-use trust account. The Escrow Agreement provided that the Escrow Agent could release the Escrow Funds only in two situations:

1. If there was an agreement in writing between Earth Boring and Tulloch authorizing release; or
2. If there was an issued and entered order from the Divisional Court on Earth Boring’s judicial review application, together with a resolution of any further appeals.
   The agreement itself did not use the language of “trust” or expressly declare the funds to be held in trust, although Tulloch later argued that the structure and use of a trust account indicated an intention to create a trust. The court ultimately regarded the temporary use of a mixed-use trust account as ordinary law-firm practice and not decisive proof of intention to establish a trust.

Insolvency proceedings and the reverse vesting transaction

On April 15, 2025, Earth Boring commenced NOI proceedings under the BIA. Two days later, on April 17, 2025, the proceeding was converted into a CCAA restructuring file in the Ontario Superior Court’s Commercial List. Both the NOI and CCAA proceedings imposed a broad stay of proceedings, halting claims and enforcement attempts against Earth Boring.
Coincidentally, April 17, 2025 was also the day the Divisional Court released an endorsement dismissing Earth Boring’s application for leave to seek judicial review of the adjudication decision. The Divisional Court’s formal order, reflecting that dismissal, was issued on April 25, 2025. Significantly, Earth Boring had no advance notice of when the Divisional Court decision would be released. The amount in issue—$337,390.62—was relatively small when compared to Earth Boring’s overall indebtedness, and thus did not materially affect the broader restructuring calculus.
As part of the CCAA restructuring, the shares of Earth Boring and associated companies were sold under a Subscription Agreement. The court approved this transaction by way of a Reverse Vesting Order (RVO) on September 15, 2025. Under the RVO and Subscription Agreement:

• Tulloch’s claims against Earth Boring were categorized as “Excluded Liabilities,” transferred to a separate entity, ResidualCo, which was later adjudged bankrupt.
• The Escrow Funds, by contrast, were categorized as a “Retained Asset” and remained with Earth Boring in its post-transaction “NewCo” form.
  Earth Boring stressed that Tulloch was aware of the insolvency proceedings, was communicating with the Monitor’s counsel and insolvency counsel about the Escrow Funds, and did not oppose the RVO motion or seek clarification about the status of the escrow before the transaction closed. Post-closing, the approved CCAA distributions were made: the remaining estate assets were insufficient to fully repay secured creditors, leaving nothing for unsecured creditors such as Tulloch.

Core legal issues: property of the estate vs trust and priority

The motion before Justice W.D. Black concerned who was entitled to the $337,390.62 held in escrow. Earth Boring framed the issues as:

• Whether Tulloch’s claim to the escrow was subject to the CCAA stay;
• Whether the Escrow Funds were properly characterized as a Retained Asset payable to NewCo under the Subscription Agreement and RVO; and
• If not payable to NewCo, whether the Escrow Funds should instead be treated as an Excluded Asset to be remitted to ResidualCo’s trustee in bankruptcy.
  Tulloch streamlined the question, contending the key issue was whether the Escrow Funds were Earth Boring’s property at the time it filed its NOI. Tulloch argued that if Earth Boring did not own the funds “in the absolute sense” when the NOI was filed—either because the funds were impressed with a trust or because Earth Boring held only a contingent interest—then the escrow should be released to Tulloch in accordance with the triggering terms of the Escrow Agreement.
  Earth Boring countered that merely segregating funds on account of a possible creditor claim does not give that creditor a higher priority in insolvency. In its view, unless the creditor has fully completed enforcement of its judgment before creditor protection is obtained, enforcement must cease and the segregated funds remain part of the debtor’s estate. At the time of the April 15, 2025 NOI filing, Tulloch’s adjudication award had not yet been definitively upheld and enforced; Tulloch was still an unsecured judgment creditor whose ability to realize on the adjudication award was interrupted by the insolvency stay.

Three lines of caselaw on funds in court or trust accounts

Justice Black, following the analysis of Justice Topolniski in Transtrue Vehicle Safety Inc. v. Werenka, identified three lines of caselaw dealing with contests between a trustee in bankruptcy and a litigation claimant over money held in a lawyer’s trust account or paid into court.
First, Earth Boring relied on the line of authority grounded in s. 70(1) of the BIA, which provides that an assignment or bankruptcy order takes precedence over all judicial attachments and executions “except those that have been completely executed by payment to the creditor or the creditor’s representative,” and except secured creditors. This includes the Supreme Court’s decision in Canadian Credit Men’s Trust v. Beaver Trucking Ltd., where priority was denied to an execution creditor because payment into court, without full payment over, did not complete enforcement before bankruptcy. Similar principles were applied in Tradmor Investments Ltd. v. Valdi Food and Toronto-Dominion Bank v. Phillips, as well as more recent Ontario authority holding that garnishments or executions not completed by payment prior to bankruptcy do not outrank the trustee, even if distribution was imminent.
Second, there is a line of cases (which neither party relied on here) that deals with other specific factual patterns and was considered less directly relevant.
Third, Tulloch relied on a trust-based line of cases where funds placed in a lawyer’s trust account, pending resolution of a dispute, were found to be trust property and not part of the bankrupt’s estate. In Acepharm Inc. (Re), the Court of Appeal held that rent payments placed by Acepharm into a lawyer’s interest-bearing trust account pending litigation were “in every sense, trust funds,” and thus not property divisible among creditors; the debtor had only a contingent beneficial interest. Similarly, in Greenstreet Management Inc. (Re), Justice Morawetz held that a deposit paid into a solicitor’s trust account, then paid into court pending litigation about a failed real estate deal, was held in trust. The bankrupt’s estate encompassed only a contingent interest, not outright ownership.

Trust analysis and the Escrow Agreement

The decisive question, in Justice Black’s view, was whether the escrow in this case actually reflected a true trust so as to invoke the Acepharm/Greenstreet logic under s. 67(a) of the BIA (which excludes trust property from the bankrupt’s estate). That required the classic “three certainties”: certainty of intention to create a trust, certainty of subject matter, and certainty of objects.
While the subject matter (the $337,390.62) and the potential beneficiaries (the ultimately successful party or parties to the dispute) were identifiable, the evidence of intention was lacking. The Escrow Agreement did not use trust terminology; the funds were characterized simply as escrowed pending specified triggers, and the arrangement served as a substitute for posting security into court for a stay of the adjudication order. The use of a law firm trust account in the chain of transfers, particularly a mixed-use trust account, was treated as ordinary solicitor practice and not as proof of an express trust.
Justice Black accepted Earth Boring’s evidence that it never intended to create a trust over the Escrow Funds and held that Tulloch’s argument for an implied trust failed at this preliminary “certainty of intention” hurdle. Without a trust, the Escrow Agreement functioned more like a security or holding arrangement, analogous to money paid into court without admission of liability, which remained the debtor’s property unless and until a judgment was fully executed by payment.

Reconciling sections 67 and 70 of the BIA

Tulloch attempted to extend the reasoning in Greenstreet by arguing that, trust or no trust, Earth Boring’s interest in the escrow was no more than a contingent interest dependent on the outcome of the judicial review motion. Justice Black, drawing on Werenka, rejected this broad reading.
Justice Topolniski had explained in Werenka that s. 70(1) ensures an unsecured creditor is entitled to its judgment amount only if the judgment has been fully executed before bankruptcy; an unexecuted judgment is subordinated to the trustee and the collective claims of creditors. Section 67 removes from the estate property held in trust for others, but not all funds paid into court or to lawyers automatically qualify as trust property. If money is deposited simply pursuant to a court order, the clerk or solicitor may be a mere repository, not a trustee. By contrast, where money is originally placed into a true trust account with clear trust terms, that character can follow the funds even if they are later paid into court.
Crucially, Werenka warns that treating posted funds as trust property simply because they await the outcome of litigation risks “bootstrapping” the successful litigant into a better position than other unsecured creditors whose judgments remain unexecuted. That result would undermine the BIA’s principles of creditor equality and rateable distribution. Accordingly, if bankruptcy (or insolvency protection) intervenes before final adjudication and execution, s. 70 should apply and the trustee—or, in a restructuring, the debtor-in-possession structure approved by the court—should prevail.
Justice Black adopted this reasoning and found that Earth Boring’s judicial review leave application was dismissed only after the NOI was filed; by that time, Tulloch had not completed execution of its adjudication award. Since there was no valid trust over the Escrow Funds, the funds remained property of Earth Boring’s estate, subject to the standard insolvency distribution and to the scheme embedded in the CCAA RVO.

Outcome and implications

Although Justice Black acknowledged the result may appear “facially harsh” to Tulloch, particularly because Earth Boring commenced its NOI just two days before the Divisional Court dismissed the leave application, the court emphasized the overarching policy of the bankruptcy and insolvency regime. The law protects collective creditor interests and prohibits individual unsecured creditors from obtaining a de facto priority simply because funds were set aside for a disputed claim that was never fully enforced before insolvency protection attached.
In the result, the court held that the $337,390.62 in the escrow account was not held in trust for Tulloch but formed part of the estate and was properly treated as a Retained Asset under the Subscription Agreement and RVO. The Escrow Agent was therefore directed to release the full escrow amount of $337,390.62 to Earth Boring’s restructured entity, NewCo, consistent with the CCAA scheme approved by the court. Earth Boring/NewCo is thus the successful party on this motion. The endorsement does not specify any separate award of costs or additional monetary damages, and the total amount granted in favour of the successful party is therefore limited, on the face of this decision, to the release of the $337,390.62 in escrow; any separate costs or ancillary monetary awards cannot be determined from this decision alone.