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Securities - Personal Property Security Act (PPSA)
MORE CASES
Part 2
. Royal Bank of Canada v. Cutler Forest Products Inc. [property secondary to security]
In Royal Bank of Canada v. Cutler Forest Products Inc. (Ont CA, 2023) the Court of Appeal considered a (remarkable) PPSA 'GSA versus chattel' lease security priority dispute, here where the owner of PPSA-unregistered (and thus unperfected) leased chattels fell in security priority after a perfected GSA by a bank - due to PPSA amendments from 2007:[1] The appellant, Paccar Leasing Company Ltd. (“Paccar”), appeals the motion judge’s order holding that the perfected security interest of Royal Bank of Canada (“RBC”) in the property of the debtor, Cutler Forest Products Inc. (“Cutler”), prevailed over Paccar’s unperfected security interest as the lessor and owner of the three commercial trucks that it had leased to Cutler, thus permitting the Fuller Landau Group Inc. (the “Receiver”) to take possession of and sell the trucks. The Receiver had sought directions from the court pursuant to the order of Dietrich J., which had appointed it as receiver for Cutler. The application for the appointment of a receiver was made pursuant to s. 243(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended (the “BIA”) and s. 101 of the Courts of Justice Act, R.S.O. 1990, c.C.43, as amended (the “CIA”).
[2] The heart of Paccar’s argument on appeal is that because it retains title over the trucks in the debtor’s possession pursuant to a “true” lease, its interest ranks in priority to the interests of either RBC or the Receiver, whose interests are derived from Cutler’s. Neither RBC nor the Receiver is entitled to more rights in the property than the lessee Cutler had. Accordingly, the Receiver should not have been permitted to take possession of and sell the trucks.
[3] The Receiver argues that, as the motion judge held, Paccar’s position is incorrect and ignores the fundamental changes that came into effect with the reforms to the Personal Property Security Act, R.S.O. 1990, c. P.10 (“PPSA”), in 2007. The Receiver submits that these changes to the PPSA displaced, in certain situations, the question of ownership and title in favour of greater emphasis on the hierarchy of priority. While Paccar clearly could have perfected its security interest under the PPSA as the lessor of property for more than one year, its failure to do so meant that it does not have priority over RBC’s perfected security interest over the collateral, which arises under the General Security Agreement (the “GSA”) between RBC and Cutler.
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[6] RBC has a first in time registered security interest in Cutler’s present and after acquired personal property and undertaking pursuant to the GSA, which it entered into in April 2007.
[7] On October 22, 2020, Paccar and Cutler entered into a Canadian Vehicle Lease and Service Agreement (the “VLSA”). Pursuant to the VLSA, Paccar leased the three trucks in issue to Cutler: the 2018 Peterbilt 337 for a term of 36 months, and the 2021 Kenworth T880 and 2021 Kenworth T270 each for a term of 84 months.
[8] The VLSA provided that Paccar retained ownership of the trucks and was responsible for maintaining them in good repair, including furnishing all labour and parts which were required to keep the trucks in good operating condition. The rental payments and other charges were for the carefree use of the trucks. Cutler was not entitled to purchase the trucks at the end of the lease.
[9] As the motion judge noted at the outset of his reasons, at para. 8, the parties agree on a number of issues:. Paccar’s lease is a security interest within the meaning of the PPSA (Paccar being a lessor of goods under a lease for a term of more than one year);
. the PPSA applies to “every transaction without regard to its form and without regard to the person who has title to the collateral that in substance creates a security interest”. [...]
. Paccar failed to perfect a security interest against the Debtor regarding the trucks until after the appointment of the Receiver. Regarding the Peterbilt and T880, it did not register against a named “debtor” and did not do so within the required 15 days of the Debtor’s possession. Regarding the T270, Paccar failed to register against a “Motor Vehicle”; it also failed to register within 15 days of the Debtor’s possession;
. as a result of defects in its registrations, Paccar does not have a valid purchase money security interest (PMSI) in the trucks and does not have a perfected security interest in the trucks; and
. Paccar retained title to the trucks. Further, for the purposes of this motion, Paccar’s leases on the trucks did not secure payment or the performance of an obligation. They are “true” leases. ....
[10] Paccar makes three interrelated arguments. First, it argues that neither the common law, nor any provision of federal or provincial law, can give RBC or the Receiver greater property rights to the collateral than Cutler possessed. It argues that neither the Receiver nor RBC can be entitled to the trucks because this was a “true lease” and, while the debtor Cutler had the right to possess and use the trucks in exchange for rent, Paccar retained title.
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D. ANALYSIS
(1) The Effect of the 2007 Revisions to the PPSA
[15] The motion judge began his analysis by discussing the 2007 changes to the PPSA which, he noted, have “fundamentally changed the law around the preservation and priority of a lessor’s interest”. In the course of a few concise paragraphs, he summarized the pre-existing law, the object of the PPSA, and the purpose of the 2007 amendments as follows:[13] As the Court of Appeal for Saskatchewan wrote in International Harvester Credit Corp. of Canada v. Bell’s Dairy Ltd. (Trustee of), (1986), 1986 CanLII 158 (SK CA), 30 D.L.R. (4th) 387 (Sask. C.A.), the law has long been concerned with security transactions under which title to goods rests with one person (the true owner), while their possession is enjoyed by another (the ostensible owner). The potential for mischief in such arrangements is obvious, a fact which prompted early legislation dealing with the two most frequently encountered instances: chattel mortgages and conditional sales. This early legislation, however, did not apply to a true lease of goods (as distinct from a security transaction in the form of a lease). This form of dealing – the true lease – in which title and possession are separated, was left to the common law. As a general rule, the common law did not allow the lessor’s title to leased goods to be defeated through some dealing by the lessee. All this changed, however, when the PPSA (in Ontario, in 2007) brought about far-reaching statutory changes to the common law.
[14] The object of the PPSA is to modernize and consolidate the law of personal property as security for debts, so as to provide an orderly, predictable system for taking and enforcing security interests. The scope of the statute includes all transactions, regardless of their form and irrespective of the intention of the parties, that either create or are deemed to create a security interest in personal property and fixtures. In Ontario, since 2007, the law treats true leases of goods as though the parties had intended the property to serve as security for the amounts owing by lessee. This is a singularly important departure from the law as it existed before this Act came into being.
[15] The legislature has, by enacting the PPSA, set aside traditional concepts of title and ownership to a certain extent. Property rights subject to provincial legislation are what the legislature determines them to be. This is precisely what was done in the PPSA, which implemented a new conceptual approach to the definition and assertion of rights in and to personal property. Priority and realization under the PPSA revolve around the central statutory concept of a “security interest”. The rights of parties to a transaction that creates a security interest are explicitly not dependent on either the form of the transaction or upon traditional questions of title. They are defined by the PPSA itself: see also Giffen (Re), 1998 CanLII 844 (SCC), [1998] 1 S.C.R. 91, at para. 26. [Emphasis added.] [16] The motion judge went on to explain that a “debtor” under the PPSA includes a “‘lessee of goods under a lease for a term of more than one year’ (s. 1(1))”; that the PPSA applies to a “‘lease of goods under a lease for a term of more than one year even though the lease may not secure payment or performance of an obligation’ (s. 2(c))”; and that the PPSA “‘provides that a PMSI has priority over any other security interest in the collateral if the PMSI was perfected within 15 days of the debtor taking possession’ (s. 33(2))”.
[17] The implication of this, which is not seriously in dispute, is that the PPSA, as of 2007, provided Paccar with the means of preserving the priority of its interest in the trucks over the interest of RBC under the GSA. That means, however, that Paccar’s interest does not turn on common law notions of title or ownership but on compliance with the provisions of the PPSA governing perfection of security interests. It is common ground that, for reasons that are irrelevant to this appeal, Paccar failed to perfect its interest.
[18] In my view, there can be no doubt that the motion judge’s analysis of the purpose of the PPSA and its revisions is correct. First, it is worth noting that Ontario and Manitoba were the last two common law provinces to include leases of more than one year in their secured interest and priority legislation: Richard H. McLaren, Secured Transactions in Personal Property in Canada, 3rd ed (Toronto: Thomson Reuters Canada, 2023), at § 3:19 (McLaren, Secured Transactions). Although this Court has not expressly ruled on the point, there is ample support for the view that the purpose of the 2007 amendments was to bring Ontario in line with the other provinces, and, as the motion judge explained, to modernize and simplify the regime of secured interests and priorities: Michael E. Burke, “Ontario Personal Property Security Act Reform: Significant Policy Changes” (2009) 48:2 Can Bus LJ 289 at 298; Ronald C. C. Cuming, Catherine Walsh & Roderick Wood, “Secured Transactions Law in Canada – Significant Achievements, Unfinished Business and Ongoing Challenges” (2011) 50 Can Bus LJ 156 at 174. Richard McLaren, in the 2022-2023 Annotated Ontario Personal Property Act, at p. 61-62, outlined the differences in Ontario law before and after the 2007 amendments to the PPSA:The scope of the PPSA has been expanded to include certain types of true leases, following the enactment of Ministry of Government Services Consumer Protection and Service Modernization Act, 2006, S.O. 2006, c. 34 (“Bill 152”). Previously, the Ontario PPSA differed from other provinces in that a true lease for a term of more than one year was not covered by the Act. Therefore, only leases that secured payment for an obligation fell within the ambit of the Ontario PPSA. This led to a significant amount of litigation in order to determine whether a particular lease is or is not covered by the Act. Section 2(c) now specifically includes a lease of goods for a term of more than one year, regardless of whether the lease secures payment for an obligation.
By including leases of goods for a term of more than one year under the scope of the Act, a greater degree of certainty has been achieved. The previous focus on factors such as the identity of the lessor, the value of purchase options or the intentions of parties to determine whether a transaction requires registration of a financing statement, or other acts to perfect the lessor’s interests, has been rendered obsolete. The Act is now in lock-step with other provincial PPSAs in this regard and promotes uniformity across jurisdictions.
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In our view, it is now time to clarify the law and to move toward uniformity with Personal Property Security Acts in other provinces. To this end, we recommend that Ontario follow the western model, and adopt the definition of "lease for a term of more than one year," with all necessary related changes. While the OPPSA should thus apply to all leases, the default provisions set out in Part V of the OPPSA should only apply to those leases which in substance create a security interest. In other words, where there is a "true" lease, the rights and remedies of the parties after default should continue to lie outside the OPPSA. [19] Second, and relatedly, there are a number of decisions rendered under other provincial regimes which clearly make the point that the regimes which exist in those provinces have, in prescribed circumstances, prioritized registered security interests over common law notions of title.
[20] The leading case on the subject is Giffen (Re), 1998 CanLII 844 (SCC), [1998] 1 S.C.R. 91, penned by Iacobucci J. on appeal from the British Columbia Court of Appeal. In that case, a lessor leased a car to a company, which in turn leased it to an employee for more than one year: at para. 3. The employee subsequently made an assignment in bankruptcy: at para. 5. According to the British Columbia Personal Property Security Act, S.B.C. 1989, c. 36 (“BC PPSA”), in force at the time, the lessor had a security interest because the lease was for more than one year, but as the lessor had not registered its financing statements as required by the BC PPSA, the security interest remained unperfected: at para. 32. The lessor seized the car and sold it with the appellant trustee’s consent, and the trustee sought an order, pursuant to the BC PPSA, that it was entitled to the proceeds of sale because a security interest in collateral is not effective against a trustee in bankruptcy if the security interest is unperfected at the date of the bankruptcy: at para. 6.
[21] As in the present appeal, the lessor opposed the claim on the grounds that “the bankrupt never owned the car and that the trustee could not have a better claim to the car than the bankrupt had”: Giffen (Re), at para. 6. While the trial judge held that the unperfected security interest was of no effect as against the trustee, the British Columbia Court of Appeal reversed the decision and held that the proceeds properly belonged to the lessor.
[22] In allowing the appeal and reinstating the trial judge’s decision, the Supreme Court held that because the lessor’s security interest in the car was unperfected at the time of bankruptcy, it could not be effective against the trustee.[1] Writing for the Court, Iacobucci J. stated at para. 44:Admittedly, the effect of [the section], on the present facts, is that the trustee ends up with full rights to the car when the bankrupt had only a right of use and possession. [23] He concluded, at para. 56:I agree with the decisions of the courts that have held that the principle that a trustee in bankruptcy cannot obtain greater rights to the property than the bankrupt had has been modified through the policy choices of the legislatures represented in s. 20(b)(i) of the [BC] PPSA, and its equivalents in other provinces. [24] Summarizing, with approval, the Court of Appeal for Saskatchewan’s findings in International Harvester Credit Corp. of Canada Ltd. v. Bell's Dairy Ltd. (Trustee of), 1986 CanLII 158 (SK CA), 30 D.L.R. (4th) 387, 50 Sask. L. R. 177, Iacobucci J. noted that the Saskatchewan PPSA had displaced the common law rule in favour of the true owner, at para. 52:Provincial legislatures, faced with a policy choice involving the competing interests of the true owner and those of third parties dealing with the ostensible owner, have decided that the true owner must forfeit title, when faced with a competing interest, if she failed to register her interest as required. The court also noted that true leases were not regulated by the personal property regimes until recently. Thus, “as a general rule the common law did not allow the lessor’s title to leased goods to be defeated through some dealing of the lessee. However, the Personal Property Security Act has effected far-reaching changes to the law” [Citations omitted]. [25] Paccar argues that Giffen (Re) is distinguishable because the trustee’s entitlement to the collateral in that case was based on protection from enforcement of an unsecured creditor’s rights, rather than a proprietary right greater than the possessory rights held by the lessee. Accordingly, in Paccar’s submission, Giffen (Re) does not apply to the determination of priority as between a true owner and a perfected security interest. In my view, this reading is too narrow. In Giffen (Re), the Supreme Court found that the trustee could obtain greater rights than the bankrupt had, but it also found that the BC PPSA “set aside the traditional concepts of title and ownership to a certain extent” such that the lessor’s unperfected interest was not necessarily first in priority: at paras. 26 and 32. The latter holding is applicable to the present appeal.
[26] At the time that Giffen (Re) was decided in 1998, Ontario had not yet reformed its PPSA to harmonize with legislation in other provinces. A key feature of the now-consistent policy choices made by provincial legislatures across Canada is that a creditor with an unperfected security interest is vulnerable to the claims of other creditors, whether through a trustee in bankruptcy (as in Giffen (Re)) or by direct subordination to third parties with a perfected security interest. In this case, the holder of a perfected security interest (RBC, through the GSA) prevails over the unperfected security interest of the lessor owner of the collateral trucks.
[27] While the application of this principle in the context of true leases may appear counterintuitive because of our prevalent common law notions of ownership and title, the answer here is that the legislation provides the mechanism for the lessor to protect its interest by adhering to the statutory requirements for registration and perfection. Had Paccar so complied in this case, it would have had a perfected PMSI that ranked above RBC’s previously registered GSA: see PPSA, ss. 20(3), 33(2). It did not do so.
[28] Paccar’s overarching argument that neither RBC nor the Receiver can claim a greater interest in the collateral than that possessed by the debtor is based upon a faulty premise. As Iacobucci J. held in Giffen (Re), “the dispute is one of priority… and not ownership in it”: at para. 28. The legislature made a policy choice to displace the common law principle that the lessee cannot transfer better title than she possesses: Giffen (Re), at para. 54, citing International Harvester. And, in recognition of the lessor’s rights, the PPSA addressed any potential unfairness issues by providing that leases of more than one year, whether true leases or not, are security interests and will be protected as PMSIs provided that they are perfected as required by the PPSA pursuant to ss. 20(3), 33(2). . Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd.
In Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd. (Ont CA, 2021) the Court of Appeal considered an interesting (and uncommon) PPSA case of attaching corporate shares as security against a loan. In this extract the court covers the issue generally:(1) The Governing Principles
[27] Contemporary personal property security legislation was intended to simplify and rationalize the law of secured transactions. Under s. 2(a), the PPSA applies to “every transaction without regard to its form and without regard to the person who has title to the collateral that in substance creates a security interest.” The PPSA adopts a “functional approach to determining what security interests are covered by its provisions”: Bank of Montreal v. Innovation Credit Union, 2010 SCC 47, [2010] 3 S.C.R. 3, at para. 18. Almost anything that serves functionally as a security interest is a security interest for the purposes of the Act: I Trade Finance Inc. v. Bank of Montreal, 2011 SCC 26, [2011] 2 S.C.R. 306, at para. 26. Subsection 2(a)(i) of the PPSA specifically includes a pledge among the forms of transaction that give rise to a security interest.
[28] The steps required to create a security interest in collateral, on the one hand, must not be confused with the steps required to make a security agreement enforceable against third parties, on the other hand. Under s. 9(1) of the PPSA, a consensual security agreement is “effective according to its terms between the parties to it.” By contrast, under s. 11, “[a] security interest is not enforceable against a third party unless it has attached”. Attachment can be achieved in different ways, under s. 11(2) of the PPSA, depending on the nature of the collateral. The question of attachment is not strictly at issue in this case since there is no third-party claim on the pledged collateral. I use the language of attachment to reflect the fact that Canada Grace’s security interest did attach to the pledged shares.
[29] If Canada Grace became a “secured party having control of investment property” for the purposes of s. 17.1 of the PPSA, then Canada Grace could in theory “sell, transfer, use or otherwise deal with the collateral”, subject only to the terms of the security agreement. Each of the terms “investment property” and “control” requires analysis.
(a) “Investment property”
[30] The term “investment property” is defined in s. 1 of the PPSA as “a security, whether certificated or uncertificated, security entitlement, securities account, futures contract or futures account”. The word “security” is in turn defined by reference to the Securities Transfer Act, 2006, S.O. 2006, c. 8 (“STA”). Under ss. 1 and 10 of the STA, the term security includes a share or equity interest issued by a corporation. In this case, the pledged shares fit the STA definition of “security” and, by extension, “investment property”.
(b) “Control”
[31] The concept of “control” was introduced into Ontario law through the STA in 2006, accompanied by simultaneous amendments to the PPSA.
[32] The 2006 amendments to the PPSA responded to a concern that the PPSA was ill-equipped to deal with declining physical share ownership and the growth of the “indirect holding system” in capital markets. In the indirect holding system, shareholders own shares and other securities through securities intermediaries, clearing services, banks, or other financial institutions. The development of the indirect holding system permitted greater efficiency in securities trading but left the law of secured transactions to rely on increasingly unwieldy analogies to physical share ownership in order to accommodate use of securities accounts and book entries as collateral: see Richard McLaren, Secured Transactions in Personal Property in Canada, loose-leaf, 3rd ed. (Toronto: Carswell, 2016), at para. 1.04; Robert Scavone, “Stronger than Fictions: Canada Rethinks the Law of Securities Transfers in the Indirect Holding System” (2007) 45 Can. Bus. L.J. 67, at p. 77.
[33] Professor McLaren concisely sets out the concept of control, at para. 14.03:Control is the functional equivalent of the prior law’s notion of physical possession of a certificated security, but has been expanded to conform to current market practices with regard to investment property. Under the STA, control is not limited to physical possession, however includes it within the concept. See also Eric Spink, “Securities Transfer Act – Fitting New Concepts in Canadian Law” (2007), 45 Can. Bus. L.J. 167, at p. 184. Control exists when the secured party is in a position to liquidate the property without any further involvement from the owner of the property: Scavone, at pp. 23-30; Spink, at p. 185.
[34] The STA defines “control” by reference to the different means of acquiring it, depending on the nature of the collateral. Sections 23-26 of the STA describe how a purchaser can acquire control of certificated securities (s. 23), uncertificated securities (s. 24), or “security entitlements”, which is the broader category encompassing, most notably, securities accounts (s. 25). The PPSA incorporates each manner of obtaining control in s. 1(2), which refers to a “secured party” rather than a “purchaser”. In each case, “control” essentially mimics a pledge arrangement.
[35] If the parties employ certificated securities, s. 23 of the STA states that control may be established by simple possession of the certificates. This arrangement resembles a traditional pledge whereby one party places the physical share certificates in the other’s possession.
[36] In the case of uncertificated securities such as the pledged shares in Atlas Springbank, s. 24 of the STA establishes that the secured party will have control of an uncertificated security if (a) the uncertificated security is delivered to the secured party (i.e. registered in the secured party’s name on the books of the issuer); or (b) the issuer has agreed that the issuer will comply with instructions that are originated by the secured party without the further consent of the registered owner. This latter arrangement is referred to as a “control agreement”.
[37] While the STA enumerates a fixed set of methods for obtaining control based on the nature of the investment property, the notion of control must be applied functionally rather than formalistically. For instance, a control agreement governing uncertificated securities need not take a particular form so long as it grants the secured party rights to give instructions to the issuer and to deal with the securities without the further consent of the registered owner.
[38] Control, as defined in the STA, plays a number of roles in the PPSA scheme. Under s. 11(2)(d) of the PPSA, a secured party’s security interest in investment property attaches when the secured party has control of it. Similarly, a secured party may perfect a security interest in investment property by control under s. 22.1 in order to establish priority in a dispute between secured parties. For the purposes of this appeal, control is a pre-requisite to the application of certain remedies, including the remedies set out in s. 17.1 on which Canada Grace relies. . Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd.
In Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd. (Ont CA, 2021) the Court of Appeal considered an interesting (and uncommon) PPSA case of attaching corporate shares as security against a loan. In this extract the court reviews PPSA remedies under Part V of the Act:(1) The Governing Principles
(a) The rights and remedies of secured parties
[49] The rights, remedies, and duties of a secured party under the PPSA are set out in Part V of the PPSA. Section 59(1) identifies three sources or categories of remedies:Where the debtor is in default under a security agreement, the secured party has the [1] rights and remedies provided in the security agreement and [2] the rights and remedies provided in this Part [V] and, when in possession or control of the collateral, [3] the rights, remedies and duties provided in section 17 or 17.1, as the case may be. [Numbers and emphasis added.] [50] The principal remedies available under Part V include the sale of the collateral or the acceptance of the collateral in satisfaction of the debt, commonly known as foreclosure. Like the rest of the PPSA, Part V was intended to harmonize a previously unstructured area of the law in which parties were required to select an appropriate remedy from among a patchwork of common law rights: see McLaren, at para. 15.01; Ronald Cuming, Catherine Walsh & Roderick Wood, Personal Property Security Law (Toronto: Irwin Law, 2012), at p. 616.
[51] In order to ensure greater certainty and predictability in commercial matters, the remedies set out in Part V are only to a limited extent subject to modification by contract in advance. Section 59(5) provides that the remedies contained in ss. 63-66, including the rules governing sale and foreclosure remedies, cannot be waived or varied by contract to the extent that they give rights to the debtor and impose duties on the secured party. Contractual modifications are only permissible if they benefit the debtor. Ronald Cuming et al. describe Part V in the following terms, at pp. 618-619:For the most part, this scheme of enforcement remedies is mandatory and a secured party has only a limited ability to vary it by contract. The PPSA provides that to the extent that the enforcement provisions give rights to the debtor or impose obligations on the secured party, they cannot be waived or varied except as provided by the Act.
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Although the PPSA provides that a secured party also has the rights and remedies provided in the security agreement, these cannot detract from the rights conferred upon the debtor by Part V and by section 17. The PPSA permits contractual variation of the remedial scheme if the variation expands the rights available to the debtor on default. [Emphasis added.] [52] It is noteworthy that s. 59 identifies ss. 17 and 17.1 as potential sources of “rights, remedies and duties”. Section 17.1 is the relevant provision when dealing with investment property:(1) Unless otherwise agreed by the parties and despite section 17, a secured party having control under subsection 1 (2) of investment property as collateral,
(a) may hold as additional security any proceeds received from the collateral;
(b) shall either apply money or funds received from the collateral to reduce the secured obligation or remit such money or funds to the debtor; and
(c) may create a security interest in the collateral.
(2) Despite subsection (1) and section 17, a secured party having control under subsection 1 (2) of investment property as collateral may sell, transfer, use or otherwise deal with the collateral in the manner and to the extent provided in the security agreement. [Emphasis added.] [53] Section 17.1 creates an exception to the enforcement regime in Part V of the PPSA. It exempts certain forms of investment property held as collateral by removing some of the formal and procedural requirements that could impede a secured party’s ability to deal with the collateral expeditiously. Like other 2006 amendments to the PPSA and STA, the exception in s. 17.1 is aimed at improving efficiency in capital markets. It does this in two ways.
[54] First, s. 17.1(1)(c) permits a secured party with control of investment property to create a new security interest in the collateral. This provision permits secured parties with control of investment property to “reuse” shares and other securities held in connection with structured transactions, derivatives, or brokerage accounts. For example, a secured party may re-pledge the collateral to a third party or grant a new security interest in it, subject to the security agreement: Scavone, at p. 86; see also McLaren, at para. 1.04; Jacob Ziegel, David Denomme & Anthony Duggan, Ontario Personal Property Security Act: Commentary and Analysis, 3rd ed. (Toronto: LexisNexis, 2020), at p. 184.
[55] Second, s. 17.1(2) removes restrictions on the secured party’s right to dispose of the investment property it holds as collateral, subject only to the terms of the security agreement. Borrowing again from Professor McLaren, s. 17.1(2) “dispels any ambiguities as to whether the secured party can be allowed to sell collateral and prompts the parties to use the security agreement to establish the rights of the secured party to transfer the collateral”: at para. 14.09. I agree, and I would add that s. 17.1(2) presupposes, or at least acknowledges, that parties giving security in investment property are sophisticated actors capable of drafting contracts to suit their mutual need for expeditiousness in fast-moving capital markets. It could be used, for example, to permit contracting parties to define in advance the conditions under which a securities broker would be entitled to liquidate a client’s rapidly depreciating margin account.
[56] Section 17.1(2) does not state that a secured party is permitted to accept collateral in satisfaction of the debt under the security agreement. Do the words “sell, transfer, use or otherwise deal” include a right of foreclosure? . Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd.
In Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd. (Ont CA, 2021) the Court of Appeal considers whether a contractual right of security survived over statutory rights under the PPSA:H. A note on Harry Shields
[96] As noted earlier, the appellants assert that the application judge misapplied the ruling in Harry Shields in finding that Canada Grace could rely entirely on the freestanding contractual right of foreclosure outside of the PPSA. Because I have found that the respondents’ notices were PPSA compliant, I need not address this issue but I will do so in light of the argument.
[97] In my view, the ruling in Harry Shields has been superseded by later cases interpreting the PPSA such as Bank of Montreal v. Innovation Credit Union and i Trade Finance Inc. v. Bank of Montreal, and especially by the 2006 amendments to the PPSA and STA, all of which were discussed earlier.
[98] The proper understanding and application of the ruling in Harry Shields was the focus of argument before the application judge and in the parties’ submissions on appeal. The plaintiff, Harry Shields Ltd., executed a demand debenture in favour of the Bank of Montreal. The debenture agreement gave the bank the right to appoint a receiver in the event of default. The bank also required Shields to pledge the debenture back to the bank under a separate pledge agreement. This was to ensure that the bank had possession of the debenture upon default. When Shields began to experience financial difficulties, the bank demanded payment and appointed a receiver under the debenture. Shields argued that the bank was not entitled to enforce the debenture directly because it held the debenture as a pledgee and was therefore required to resort to its remedies as a pledgee under the PPSA. Shields submitted that the bank might be required to sell the debenture, potentially to itself, before it could enforce it.
[99] Lane J. defined the issue before him as whether, “where the parties have expressly agreed that the security holder has received the debenture both as a continuing collateral security enforceable directly and as a pledge, the security holder is confined to the remedies of a pledgee.” He reasoned: “I see nothing in the PPSA that compels this conclusion,” adding, “This view leads to the commercially sensible result intended by the parties: that the bank may enforce the debenture as owner without any ritual need to sell it to itself.”
[100] Section 17.1, which was introduced after Harry Shields, simplifies the analysis. To the extent that most share pledges will give the secured party control over investment property (securities), secured parties can now rely on s. 17.1 instead of Harry Shields to “sell, transfer, use or otherwise deal with collateral”. The issue, in most cases, will be to determine whether the pledged instrument is “investment property” within the meaning of the PPSA. Whether a debenture of the kind used in Harry Shields could be considered “investment property” under the PPSA is a matter for another day. If it is not, Harry Shields may still provide some guidance. However, in most cases dealing with a pledge of shares or other securities, s. 17.1 sets out the framework.
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