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Securities - General. Royal Bank of Canada v. Cutler Forest Products Inc. [property secondary]
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). . Grewal v. 102095 P.E.I. Inc.
In Grewal v. 102095 P.E.I. Inc. (Ont CA, 2022) the Court of Appeal considered basics of security law:[7] In this case, once the individual appellant paid the amount that was due on the principal debt, that is the promissory note, the respondent no longer had any right to claim on the security, i.e., the collateral mortgage. The security was spent as a result of the honouring of the main obligation. The respondent simply cannot advance or maintain a claim under the security when the principal debt has been paid. Nor can the respondent enforce a judgment on that security when the judgment on the principal debt has been paid. To allow otherwise would be inconsistent with the fundamental purpose of the security, as is indicated by the use of the term “collateral” mortgage.
[8] This principle is a basic one in commercial law. It was recited by this court in Mortgage Insurance Co. of Canada v. Grant Estate, 2009 ONCA 655, 99 O.R. (3d) 535, at para. 39, with a simple quote from M.H. Ogilvie, Canadian Banking Law, 2nd ed. (Scarborough: Carswell, 1998):Since a collateral security is one taken to secure the performance of an obligation, then upon the performance of the obligation the security should be surrendered or discharged.
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