Simon's Megalomaniacal Legal Resources

Securities - PPSA (2)

. Royal Bank of Canada v. Cutler Forest Products Inc.

In Royal Bank of Canada v. Cutler Forest Products Inc. (Ont CA, 2023) the Court of Appeal considers s.57.1 of the PPSA ['Default - Rights and Remedies: - Application'], here when deciding the PPSA's application to 'true' leases as opposed to 'security' leases:

(3) Section 57.1 of the PPSA and the argument that it exempts true leases from the operation of the priority system in the PPSA

[34] Paccar’s third ground of appeal is that the motion judge erred in rejecting its submission that s. 57.1 exempts “true leases” from the operation of the priority system in the PPSA. Section 57.1 provides that:

Unless otherwise provided in this Part, this Part applies to a security interest only if it secures payment or performance of an obligation.

[35] There is no dispute that the leases in question were true leases. As before the motion judge, Paccar argues that true leases are excluded from the operation of Part V because they do not secure payment of an obligation. It does not follow from this, however, that Part V, which is entitled “Default – Rights and Remedies”, impacts RBC’s priority or the Receiver’s authority to sell the trucks and distribute the proceeds accordingly. In my view, the motion judge correctly found that Part V does not so apply. He applied the modern principle of statutory interpretation and found that Part V establishes “a scheme of ‘self-help’ rights and remedies which operate without the need for court intervention.” Accordingly, pursuant to s. 57.1, these self-help rights do not apply to a true lease. In addition, the motion judge found that interpreting s. 57.1 to give Paccar priority over a perfected security interest would entirely defeat the purpose of including leases longer than a year into the PPSA registration and perfection scheme.

[36] On appeal, Paccar correctly argues that true leases are excluded from Part V of the PPSA but misconstrues the impact of this exclusion. As McLaren notes in Secured Transactions, at § 3:19:

Under the previous Act, the analysis for whether a lease could comply with the Act’s registration requirements was done by diligent secured parties at the point when the lease arose in order to protect the lessor’s interests through registration and general compliance with the Act. While it seems that the deemed inclusion of leases for more than one year does away with the analysis required under the previous Act, the revised Act merely shifts the analysis to the point when the lessor seeks to depend on the rights and remedies granted by Part V of the Act for the purposes of realization. Lease transactions that do not secure payment or performance are deemed to be within the scope of the Act for conflicts, perfect, and priority portions of the Act only. They are not within the types of interest regulated by statutory control over the realization process.

[37] Paccar asserts that the motion judge incorrectly found that RBC was entitled to enforce its security interests despite the explicit legislative exclusion of true leases from Part V of the PPSA. At the heart of the motion judge’s reasons with respect to these submissions, however, were the reforms that were made to the PPSA which came into effect in 2007. Following this reform, a lease of more than one year creates a security interest, “whether or not the interest secures payment or performance of an obligation”: PPSA, s. 1. For that reason, it is important to briefly re-emphasize the background to this significant legislative change.

[38] As noted above, the 2007 amendments displaced common law title and ownership in favour of the priority system under the PPSA. These amendments, which brought Ontario into lock-step with other Canadian provinces, were intended to address the excessive litigation over whether a lease fell under the PPSA: Anthony Duggan, “Quinquageneries” (2022) 46:1 Dal LJ 379 at 384-85, n. 14, citing Canadian Bar Association – Ontario, Submission to the Minister of Consumer and Commercial Relations concerning the Personal Property Security Act (October 1998), at p. 8. Following these amendments, the determination of whether a lease is a true or security lease is only required where there is a default under the lease: Burke, at p. 300. As emphasized throughout Giffen (Re) by Iacobucci J., the traditional concepts of title and ownership are no longer determinative in the context of the present appeal, as the modern PPSA makes the dispute “one of priority to the [collateral] and not ownership in it”: at para. 28.

[39] Paccar submits that provincial property legislation informs the rights of secured creditors under federal bankruptcy legislation and that, since true leases are excluded from Part V, a secured creditor cannot enforce its security interest under the Bankruptcy and Insolvency Act or the Courts of Justice Act.

[40] Again, the appellant’s argument fails to recognize the wording and purpose of the amendments and s. 20(1)(a)(i).

[41] First, as noted above, the PPSA clearly lays out a procedure for lessors to protect their interests. Had Paccar perfected its security interest, it would, by virtue of ss. 33(2) and 20(3) of the PPSA had a PMSI in the trucks that would have ranked ahead in priority of RBC. Paccar did not do so. The PPSA explicitly provides for this scenario, too. Pursuant to s. 20(1)(a)(i), an unperfected security interest is subordinate to a perfected security interest in the same collateral.

[42] Second, Paccar’s argument would render the amendment meaningless and undermine the goal of simplifying and modernizing the law. If the s. 57.1 exclusion allowed for determination of priority but precluded enforcement, there would be no meaningful clarification or reduction in litigation as intended by the legislature. As the Court of Appeal for Saskatchewan found in International Harvester, at pp. 10-12, after the amendment of that province’s personal property security legislation:

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 legislation dealing with the two most frequently encountered instances: chattel mortgages and conditional sales. In enacting both The Bills of Sale Act and The Conditional Sales Act, the legislature was faced with a policy choice involving the competing interests, on the one hand, of the true owner, and on the other, of persons dealing in good faith with the ostensible owner. In both cases the legislature decided that the true owner should forfeit his title, if, having failed to register his contract in the public registry provided for that purpose, a third party for value, having no knowledge of that contract, acquired an interest in the goods through the ostensible owner.

Neither Act applied, however, 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. And 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.

The object of this Act is to modernize and consolidate the law of personal property as security for debts. 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. For the first time both consignments of goods and true leases of goods are treated by the law as though the parties had intended the property to serve as security for the amounts owing by the consignee or lessee as the case may be. This is a singularly important departure from the law as it existed before this Act came into being.

. Royal Bank of Canada v. Cutler Forest Products Inc.

In Royal Bank of Canada v. Cutler Forest Products Inc. (Ont CA, 2023) the Court of Appeal considered s.20 PPSA ['Unperfected security interests']:

(2) Section 20 of the PPSA

[29] The relevant parts of s. 20 of the PPSA provide as follows:

(1) Except as provided in subsection (3), until perfected, a security interest,

(a) in collateral is subordinate to the interest of,

(i) a person who has a perfected security interest in the same collateral or who has a lien given under any other Act or by a rule of law or who has a priority under any other Act, or [...]

(b) in collateral is not effective against a person who represents the creditors of the debtor, including an assignee for the benefit of creditors and a trustee in bankruptcy;

[30] Paccar relies on s. 20(1)(b) to argue that the Receiver in this case falls outside the protection of “a person who represents the creditors of the debtor” and thus is subordinate to its unperfected security interest as the owner and lessor. Paccar also argues that s. 20 cannot confer property rights greater than those held by the lessee on either the Receiver or on any perfected security holder. On this basis, Paccar asserts that the motion judge erred in finding that RBC’s interest in the collateral prevailed over Paccar’s.

[31] I disagree. First, by focusing on s. 20(1)(b), Paccar ignores the clear meaning of s.20(1)(a)(i) as set out above: an unperfected interest in collateral is subordinate to a perfected interest in the same collateral. This plainly means that, as the holder of an unperfected security interest, Paccar’s security interest is subordinate to that of RBC, which holds a GSA.

[32] Second, Paccar appears to misconstrue the Receiver’s role in these proceedings. It is not disputed that the Receiver in this case is not caught by s. 20(1)(b). Unlike a trustee in bankruptcy, as was the case in Giffen (Re), or an assignee for the benefit of creditors, the Receiver is not “a person who represents the creditors of the debtor”. The Receiver, while appointed at the instance of RBC pursuant to s. 243 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, and s. 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43, stands in the shoes of the debtor and not the creditors. While attempting to satisfy Cutler’s debts, the Receiver quite properly applied to the court for directions as to the question of the trucks.

[33] In short, read in its entirety, there is no basis to support Paccar’s submission on the effect of s. 20.