DATE: 20060515

DOCKET: C43997

COURT OF APPEAL FOR ONTARIO

DOHERTY, GOUDGE and ROULEAU JJ.A.

B E T W E E N :

994814 ONTARIO INC.

Aubrey E. Kauffman and Katherine McEachern for the appellant

Appellant/Applicant

• and -

RSL CANADA INC.

S. Harvey Starkman Q.C. and Kevin W. Fisher for the respondent

Respondent

• and -

EN-PLAS INC.

George Benchetrit for RSM Ritcher Inc.

Respondent to the Appeal

Heard: April 12, 2006

On appeal from the judgment of Justice Donald R. Cameron of the Superior Court of Justice dated August 2, 2005, reported at (2005) 2005 ONSC 27144, 14 CBR (5th) 134.

ROULEAU J.A.:

Overview

[1] This appeal involves a contest over three pieces of equipment that were located on the premises of RSL Canada Inc. (RSL), a company in receivership. The contest is between En-Plas Inc., the supplier of the equipment, and 994814 Ontario Inc. (the appellant), a company holding a general security agreement (GSA) over all of the assets and undertakings of RSL, including after acquired equipment. The GSA was perfected under the Personal Property Security Act, R.S.O. 1990, c. P.10 (PPSA).

[2] The appellant submits that the motion judge erred in his analysis and application of the PPSA. It also argues that there are palpable and overriding errors in the motion judge’s findings of fact. Although I agree with the appellant that certain portions of the motion judge’s analysis and application of the PPSA are problematic, I find no basis to interfere with his findings of fact. Based on those findings, I conclude that the appeal should be dismissed.

Facts

[3] En-Plas is the Canadian representative for Nissei, a manufacturer of injection molding machines used in the production of plastic products throughout Canada. These machines are very large and can weigh several tons. They are manufactured in Japan. En-Plas imports these machines, providing technical services and advice for their installation and startup at the customers’ production facility. In many instances, the machine is shipped directly from the manufacturer in Japan to the customers’ premises, and any additional work to be done to make the machine operational is done on site.

[4] En-Plas proposed to sell, as a package deal, three molding machines to RSL. The appellant is the parent and secured creditor of RSL.

[5] On July 28, 2004, En-Plas sent a quote to RSL. The terms of the quote included:

(a) that En-Plas retain title in the equipment until payment in full was received; and

(b) that startup was to be performed by En-Plas.

[6] The quote also set out, in bold print with double underlining, the words “Electrical Safety Approved”.

[7] Two of the machines had never previously been sold in Canada. En-Plas had been advised by the Ontario Electrical Safety Authority on April 29, 2004, that modification to the design of these two machines (the NEX machines) was required before they could be approved for operation under the Ontario Electric Safety Code. At the time, En-Plas thought that a solution could quickly be found and the requisite modifications carried out. En-Plas did not, therefore, tell RSL about this issue at that time.

[8] On July 29 2004, RSL issued a purchase order for the three machines at a cost of $373,000 US with ten percent down and net 180 days. The purchase order also set out “[a]ll other terms and conditions per En-Plas Quote # ‘Q0019814’”. The ten percent down payment was paid in early August 2004.

[9] The machine that En-Plas had in stock was shipped from En-Plas on August 4, 2004 and made operational thereafter. The other two machines were, as frequently occurs, shipped from Japan directly to RSL’s premises on December 15, 2004. They required modifications and these would be made on site. Both the shipping orders and purchase order included the title retention language as noted above.

[10] At the time the motion was heard, one or two of the machines had still not met the electrical safety authority standards. Accordingly, En-Plas could not provide the necessary safety certification for the sale and operation of these machines in Ontario. En-Plas did not consider that delivery to RSL of the machines could occur until this condition was met. As a result, RSL had not been invoiced and no debt had yet been recorded in the books.

[11] On February 8, 2005, on application by the appellant as secured creditor of RSL, RSM Richter Inc. (Richter) was appointed interim receiver of RSL pursuant to an order of Farley J. The registered GSA provided the appellant with security over inventory and equipment.

[12] As full payment had not been made, En-Plas initially took the position that it was the owner of the three machines. En-Plas requested that the balance owing be paid, or that arrangements be made for the return of the machines. The solicitors for the appellant responded that the secured creditor had taken possession of all of the assets and that En-Plas was simply an unsecured creditor of RSL. Later En-Plas advised Richter that it held title to the machines for reasons related to safety, and that, in fact, two of the machines had not yet received Electrical Safety Authority approval and were not operational. By this time Richter had obtained an order from Ground J. approving the sale of the machines to Depco International Inc., a company associated with RSL. In light of the position being taken by En-Plas, Richter obtained an undertaking from Depco that it would not resell the machines and would return them to Richter if a court determined that En-Plas had priority with respect to them. On July 7, 2005, En-Plas moved to vary Ground J.’s order, set aside the sale of the machines and declare that the machines were the property of En-Plas or, in the alternative, conduct a trial of an issue.

[13] The motion judge found that the conditions of sale had not been satisfied and, as a result, the sale had not been completed. The machines therefore remained the property of En-Plas and title had not passed. No debt had been created and, because RSL was not a debtor, a security interest could not attach to the machines. Thus, the PPSA regime was not yet engaged.

Position of the Parties

[14] The appellant argues that the motion judge erred in his interpretation of the PPSA. The fact that En-Plas had stipulated that it retained title until all payments were received is of no relevance. 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”.[^1] Subsection 2(a)(i) of the Act specifically provides that, it applies to conditional sale agreements.

[15] The appellant submits that the equipment was purchased by RSL from En-Plas pursuant to a conditional sale agreement. Once RSL entered into that agreement, the appellant acquired a security interest in that piece of equipment which attached pursuant to s. 11 of the PPSA. The GSA entered into between RSL and the appellant had been registered and the security interest in that machine therefore had been perfected as required by the PPSA.

[16] To obtain protection under the PPSA En-Plas would have had to perfect its security interest in the machine through registration. It never did and, as a result, the appellant argues that it should be found to have priority.

[17] En-Plas argues that the sale was never completed and no debt was ever created. RSL therefore never got possession, and the appellant could not obtain a security interest. In addition, title never passed to RSL so as to bring the PPSA into play.

Analysis

[18] The appellant referred the court to various passages contained in the motion judge’s reasons that suggest that he misconstrued or misapplied the PPSA. Although there may be merit in that argument I need not address it. The question is not whether the trial judge’s interpretation of the PPSA was correct but rather whether, based on the findings of fact, the motion judge was correct in concluding that the PPSA regime had not yet been engaged. In my view he was.

[19] As is apparent from the reasons of Brook J.A. in Guaranty Trust Co. of Canada v. Canadian Imperial Bank of Commerce (1993), 6 P.P.S.A.C. (2d) 51 (Ont. C.A.) aff’g (1989), 2 P.P.S.A.C. (2d) 88 (Ontario H.C.), a court must initially determine if and when an agreement of purchase and sale was reached. This is because a security interest in equipment cannot attach until a transaction occurs which gives the debtor rights in the equipment.

[20] On this issue, the motion judge made important findings. After considering all of the documentation exchanged between the parties and the affidavits and cross-examinations filed, the motion judge found:

[28] En-Plas does not show RSL as an account receivable but it does show a liability to RSL in relation to the deposit paid as En-Plas would be required to return the deposit if it was unable to complete delivery and installation.

[38] … The agreement was for a total package price for the delivery and installation of three Machines. Delivery and installation of the Machines was not complete on the date of the Receivership, February 8, 2005. The NEX 6000 was not operational and the NEX 2000 had not received the necessary electrical and safety certification for safe and legal operation.

[39] RSL and En-Plas had not recorded the transaction in their accounting records so as to create a debtor-creditor relation. The obligation was still pending to RSL and RSL was still in a position to reject the goods. En-Plas was not in a position to demand payment.[^2]

[21] The appellant argues that there is no basis for the motion judge’s findings set out above and that they constitute palpable and overriding error. In particular, the appellant points out that, because En-Plas did not advise RSL of the electrical safety issue regarding the machines, En-Plas could not rely on this as delaying the completion of the delivery and installation. I disagree. The motion judge’s reasons show that he was well aware of the fact that En-Plas had not advised RSL of the electrical safety issues. The findings I have quoted are fully supported by the record, including the language of the documentation, the nature of the property in issue, En-Plas’ obligation to obtain electrical certification and make the machines operational, as well as the fact that the books and records of RSL and En-Plas are consistent with the machines being entirely the property of En-Plas at the relevant time.

[22] Although the motion judge did not put it this way, I take his findings quoted above, when read in the context of the balance of his reasons, to mean that on the particular facts of this case, RSL had not yet acquired an interest in the machines. The documentation exchanged between the parties did not give RSL rights in the equipment to which the appellant’s GSA could attach. RSL acquired nothing until the machines were “Electrical Safety Approved” and En-Plas had made them operational. Since this never occurred, RSL never became a debtor and never acquired any rights in the three machines, a prerequisite for the creation of a security interest.

Conclusion

[23] For these reasons, I would dismiss the appeal and award costs to the respondent fixed at $18,000 inclusive of GST and disbursements.

“Paul S. Rouleau J.A.”

“I agree D.H. Doherty J.A.”

“I agree S.T. Goudge J.A.”

RELEASED: May 15, 2006

[^1]: PPSA s. 2(a).

[^2]: Reasons of motion judge reported as 994814 Ontario Inc. v. RSL Canada Inc. (2005), 2005 ONSC 27144, 14 C.B.R. (5th) 134 at p. 140.