COURT OF APPEAL FOR ONTARIO
WEILER, MOLDAVER and MACFARLAND JJ.A.
IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
AND IN THE MATTER OF A PROPOSED PLAN OF COMPROMISE OR ARRANGEMENT WITH RESPECT TO STELCO INC. AND THE OTHER APPLICANTS LISTED ON SCHEDULE “A”
APPLICATION UNDER THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
Robin B. Cumine, Q.C. and Gustavo F. Camelino for the appellant, CAFO Inc.
Geoff R. Hall and Tom D. McKinlay for the respondent, Stelco Inc.
Heard: March 24, 2005
On appeal from the order of Justice James M. Farley of the Superior Court of Justice dated April 15, 2004.
WEILER J.A.:
1This appeal raises two issues. First, when an insured has fully paid for a policy of insurance and assigns its right to receive a refund of any unearned premiums, is this a security interest that is transferred? Second, is it necessary to file notice of the security interest under the Personal Property Security Act, R.S.O. 1990, c. P.10 (“PPSA”) or is the security interest exempt from registration by virtue of a combination of s. 4(1)(c) of the PPSA and s. 138 of the Insurance Act, R.S.O. 1990, c. I.8, or at common law?
Facts
2CAFO Inc. (“CAFO”) finances insurance premiums for businesses under a standard form Premium Instalment Contract (a “PIC”). A purchaser will give an insurance company a down payment on the premiums due to the insurer. Under the PIC, the purchaser agrees to pay the rest of the premiums to CAFO over time and CAFO pays the insurer that remaining sum up front in exchange for an assignment of the right to receive payment of any amounts due from the insurer, such as unearned premiums. This assignment functions as security for the total amount that CAFO pays to the insurer.
3Stelco Inc. (“Stelco”) and CAFO signed two PICs. The first concerned insurance for which the total premiums including taxes was $8.8 million. Stelco made all payments under this PIC. Stelco and CAFO also signed a PIC on June 11, 2003, under which funds were advanced for an insurance policy with Royal Sun Alliance Insurance. The premiums and taxes totalled $1.8 million; the down payment was $0.36 million and the balance plus service charge totalled $1.5 million. Stelco defaulted on this PIC in March 2004.
4Before the default, on January 29, 2004, Farley J. made an order under the Companies’ Creditors Arrangement Act (“CCAA”) staying all actions by Stelco’s creditors. Notice of the PIC was not registered under the PPSA because it was believed, based on the practice in the industry, that under s. 138 of the Insurance Act and s. 4(1)(c) of the PPSA, notice was not required to perfect the security. CAFO brought a motion asking Farley J. to permit it to enforce its security under the PIC. However, Farley J. refused, holding that the effect of s. 138 and s. 4(1)(c) did not create a perfected security interest in unearned insurance premiums unless notice of the PIC was filed under the PPSA. In holding that s. 4(1)(c) does not apply to exempt premium financing contracts, the motion judge essentially affirmed the opinion he had previously expressed in obiter in Re Ivaco Inc. (2004), 2003 ONSC 64275, 1 C.B.R. (5th) 204 (Ont. S.C.J.). Farley J. also suggested that a security interest might not arise under the PIC until the underlying insurance policy is cancelled, calling the timing of the security into question.
5Before this appeal was heard, the insurance policy underlying the PIC expired such that CAFO could no longer claim any unearned premiums and such that Stelco no longer had an interest in the litigation. Therefore, this court made a representation order requiring CAFO to pay the costs of the appeal on a substantial indemnity basis and appointing counsel to oppose CAFO’s arguments.
Analysis
6Section 4(1) of the PPSA provides:
This Act does not apply,
(c) to a transfer of an interest or claim in or under any policy of insurance or contract of annuity.
7CAFO submits that the insured’s right to obtain a refund of any unearned premiums coupled with the transfer of the insured’s right to cancel the insurance policy operate so as to “transfer” an “interest” “in or under” any policy. As a result, the exemption created by s. 4(1) applies and exempts CAFO from the need to register its interest under the PPSA.
8Farley J. rejected this submission. His most important reason for holding that CAFO’s security interest does not fall within the exemption is that the right to a potential refund of unearned premium arises under the premium instalment financing agreement. He concluded at para. 17 of his judgment:
It would seem to me that one would need stronger and more specific language to reasonably conclude that the context of s. 4(1)(c) of the PPSA was intended to encompass the return of unearned premiums since what one is looking at is the enforcement of rights under a financing agreement – and in theory, such a financing agreement could be used for any other item of commerce.
9CAFO submits that the insurance premium financing agreement is not like other items of commerce. In most financings, security is taken in a property, most often a property that already exists. Here, CAFO’s advance of funds creates the property: a fully paid‑up insurance policy. Yet CAFO takes no interest in the underlying property. Nor does CAFO take any security against other assets owned by the insured. CAFO’s only security is in the remaining unearned premiums on the policy. Items of commerce such as tangible wasting assets can be sold so that their value is “frozen” or preserved for all secured creditors. The insurance policy continues to run so that the value of the unearned premiums continues to decline and cannot be frozen by a quick sale.
10In any event, s. 4(1)(c) deals specifically with transfers of interests or claims in insurance policies. It does not deal with “other items of commerce” and these are not exempted.
11Insofar as the language of s. 4(1) is concerned, I am of the opinion that the wording does encompass the return of unearned premiums. The word “transfer” in s. 4(1)(c) includes an assignment. Black’s Law Dictionary defines the word transfer as embracing:
[E]very method – direct or indirect, absolute or commercial, voluntary or involuntary – of disposing of or parting with…an interest in property, including retention of title as a security interest and foreclosure of the debtor’s equity of redemption.
The four methods of transfer are by [e]ndorsement, by delivery, by assignment, and by operation of law.
12The next question is whether assignments of unearned premiums create an “interest” in property. In the concluding line of para. 13, Farley J. observed, “one may reasonably question the proposition that ‘the unearned premiums come into existence when the policy is funded, not when the policies are cancelled’.”
13It would be more accurate to say that a right to any unearned premiums is created when the policy is funded but the realization of that interest is contingent on the happening of a future event, namely, the non-payment of premiums and the cancellation of the policy. Nevertheless, the right is an “interest.” For example, Black’s Law Dictionary defines an interest as an aggregate of rights and further states that an interest “refers to any one right, privilege, power or immunity.” Were it otherwise, even if CAFO was subject to the PPSA, CAFO would have nothing to register until a default occurred and by then it would likely be too late for CAFO to become a secured creditor.
14With respect to whether the transfer of an interest is “in or under” the policy of insurance as opposed to the premium financing contract, Black’s Law Dictionary indicates that the preposition “in” does not only mean “contained in”. “In” also means “under or based upon the law of”. The premium financing company’s right to a refund is under the insurance contract in the sense that the premium financing agreement identifies the insurance contract giving rise to the buyer’s right to a refund: See Jacob Ziegel, in Unearned Insurance Premiums as Security Interests under The Canadian Personal Property Security Acts (2004) 1 C.B.R. (5th) 173 at 179.
15The wording of the exclusion in s. 4(1)(c) is clear and should be read as including the assignment of unearned premium under a policy of insurance.
16My conclusion is also consistent with American jurisprudence. Farley J. considered six American cases that were cited to him: Re Redfeather Fast Freight, Inc., 1 B. R. 446 (Bankr. NE 1979); Re Maplewood Poultry Co., 2 B. R. 550 (Bankr. ME 1980); Re Auto-Train Corp., 9 B. R. 159 (Bankr. DC 1981); Re Air Vermont, 40 B. R. 335 (Bankr. VT 1984); Re RBS Industries, Inc., 67 B. R. 946 (Bankr. CT 1986); and Re U.S. Repeating Arms Co., 67 B. R. 990 (Bankr. CT 1986). He distinguished or rejected each of them, either because the particular state in question had specific PIC financing legislation or because the case contained little or no analysis and simply followed other cases. He also noted that the wording in Article 9-104 of the Uniform Commercial Code (U.C.C.) is slightly different than s. 4(1)(c) of the PPSA.
17I agree with the application judge that Canadian courts should not simply follow American courts when interpreting similar legislative provisions. That said, I do not agree with him that the difference in wording between s. 4(1)(c) and the corresponding language in the American U.C.C.’s article 9-104(g) is significant. Article 9-104(g) provides:
9-104 This Article does not apply
(g) to a transfer of an interest in a claim in or under any policy of insurance, except as provided with respect to proceeds (Section 9-306) and priorities in proceeds (Section 9-312).
The application judge observed that that the U.C.C. expressly excludes from the scope of s.9-104 an insurance claim as proceeds whereas s. 4(1)(c) does not. However, the difference in wording is not significant because the definition of “proceeds” in s. 1(1) of the PPSA accomplishes the same result: See Ziegel, supra, at p. 178 of his article on Unearned Premiums, supra.
18There are two reasons why resort should be had to American jurisprudence in this case. The PPSA in Ontario and in other Canadian common law jurisdictions is closely patterned on Art. 9 of the U.C.C. and American jurisprudence should, therefore, provide helpful guidance. Secondly, the PPSA was enacted in the various common law jurisdictions to make the law uniform and to facilitate business in more than one jurisdiction: Gimli Auto Ltd. v. BDO Dunwoody Ltd. (1998), 1998 ABCA 154, 219 A.R. 166 (C.A.) at paras. 15‑16.
19The values of certainty, uniformity, and ease of commerce are promoted if s. 4(1) of the PPSA is construed so as to exempt CAFO from having to register its interest in any unearned premiums. Such an interpretation is consistent with the purpose and objective of the personal property security regimes enacted across the country and in the United States: GMAC Commercial Credit Corp.‑Canada v. TCT Logistics Inc. (2004), 2004 ONCA 36130, 70 O.R. (3d) 321 at para. 20.
20Further not all of the cases can be distinguished on this basis. Cases from states that do not have such legislation include Re U.S. Repeating Arms, supra, Re Big Squaw Mountain Corp., 122 B. R. 831 (Bankr. ME 1990) at 9-10, Re Maplewood Poultry Co., supra, at 4 and Re Auto‑Train, supra, at 8. In those cases, the first step was to hold that the transaction was excluded from the operation of Art. 9 of the U.C.C. registration regime and then to look at the common law to determine the result.
21In Ontario, interpreting s. 4(1) as exempting CAFO from registering its right to receive any unearned insurance premium leads one to s. 138 of the Insurance Act. It states:
138.(1) Where an insured assigns the right to refund of premium that may accrue by reason of the cancellation or termination of a contract of insurance under the terms thereof and notice of the assignment is given by the assignee to the insurer, the insurer shall pay any such refund to the assignee despite any condition in the contract, whether prescribed under this Act or not, requiring the refund to be paid to the insured or to accompany any notice of cancellation or termination to the insured.
(2) Where the condition in the contract dealing with cancellation or termination by the insurer provides that the refund shall accompany the notice of cancellation or termination, the insurer shall include in the notice a statement that in lieu of payment of the refund in accordance with the condition the refund is being paid to the assignee under this section.
22This is not to say that s. 138 gives CAFO the right to priority over other secured lenders. To determine priorities, resort to the common law or to the provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B‑3, would be necessary and that issue awaits another day. I do note, however, that in Re Maplewood Poultry Co., supra, the court held that a transfer of the insurance policies in question there could not be accomplished without placing the transferee on notice of the existence of a premium finance agreement because the policies contained explicit references to the premium finance agreements. Thus the exemption from registration under Art. 9 of the U.C.C. did no harm to public policy.
23CAFO argues that no harm is done to public policy in any event because it is the proceeds of any insurance policy rather than the unearned premiums that form part of a lender’s security. Clearly, however, the lender would have an interest in knowing if the insurance policy could be cancelled and unearned premiums remitted to the financier of a PIC. The exemption from the PPSA and its policy of providing notice to lenders about the state of the assets in which they will take security should not to be taken as a licence to keep lenders in the dark about the actual state of affairs. It behooves CAFO, and those who finance premium insurance contracts, to ensure that the policies contain explicit references to the insurance premium finance agreement itself and to the right of cancellation. In any event, when a judge decides whether to exercise his or her discretion to lift the stay under the CCAA and allow a premium financing company to obtain a refund of unearned premium, one consideration would be whether the policy clearly contained an explicit reference to the premium finance agreement.
24Accordingly, I would allow the appeal and hold that CAFO has an interest in the unearned premiums that were transferred to it by virtue of the PICs and that that security interest was exempt from registration by virtue of a combination of s. 4(1)(c) of the PPSA and s. 138 of the Insurance Act.
25By previous order of this court costs of this appeal are to the respondent on a substantial indemnity basis. I would fix those costs in the amount of $26,000, inclusive of GST and disbursements.
RELEASED: April 26, 2005 (“KMW”
“Karen M. Weiler J.A.”
“I agree M. J. Moldaver J.A.”
“I agree J. MacFarland J.A.”