Lisec America, Inc. v. Barber Suffolk Ltd., 2012 ONCA 37

CITATION: Lisec America, Inc. v. Barber Suffolk Ltd., 2012 ONCA 37

DATE: 20120120

DOCKET: C53360

COURT OF APPEAL FOR ONTARIO

Blair and LaForme JJ.A. and Benotto J. (ad hoc)

BETWEEN:

Lisec America, Inc.

Applicant (Appellant)

and

Barber Suffolk Ltd. and Roynat Capital Inc.

Respondents (Respondent in Appeal)

Brett Harrison and Jeffrey Levine, for the appellant

Craig J. Hill, for the respondent Roynat Capital Inc. No one appearing for the respondent Barber Suffolk Limited

Heard: October 14, 2011

On appeal from the order of Justice Frank Marrocco of the Superior Court of Justice, dated February 9, 2011.

R.A. Blair J.A.:

OVERVIEW

[1] The issue on this appeal is whether Lisec America Inc. or Roynat Capital Inc. holds a prior perfected and first ranking security interest in a large $1.4 million piece of equipment known as a waterjet glass cutting machine (the “Waterjet”).

[2] Both parties argue that a proper and commercially reasonable interpretation of the governing legislation – the Personal Property Security Act, R.S.O. 1990, c. P.10 (the “PPSA”) – supports their position. In a nutshell, here is how the dispute arose.

[3] Lisec sold the Waterjet to Barber Suffolk Ltd. and, in accordance with the agreement, later delivered it to the Collingwood facility of a related company, Barber Glass Industries Inc. Prior to delivery, Lisec perfected its security interest in the machine by registering a financing statement against Barber Suffolk. At the same time, Lisec had also sold two other pieces of equipment to Barber Glass – a Cutting Line and a Vertical IG Line. They were delivered to Barber Glass in Collingwood at the same time, and Lisec registered a financing statement against Barber Glass in order to perfect its security interest in that equipment as well.

[4] What Lisec did not know was that Barber Suffolk had sold its interest in the Waterjet to Barber Glass on the day of the original sale.

[5] Barber Glass was in need of additional financing at the time when the equipment was delivered. It arranged that financing through Roynat Capital. Aware of Lisec’s PPSA registration against Barber Glass, Roynat requested Lisec either to confirm the details of its security interest or, if paid in full, to register a discharge of it. Lisec discharged the registration, still unaware of the transfer from Barber Suffolk to Barber Glass. It did so on the understanding that it would receive payment for the Cutting Line and the Vertical IG Line out of the proceeds of the new financing. Roynat then advanced close to $9.5 million to Barber Glass and registered a PPSA financing statement against Barber Glass to perfect its own security interest in the Waterjet.

[6] Barber Glass was subsequently placed into receivership. Lisec and Roynat each claim to be entitled to a prior security interest in the Waterjet on the basis of the priority of perfection by registration regime set out in the PPSA. Lisec says that its properly perfected interest in the Waterjet through the Barber Suffolk registration remained perfected, in spite of the unknown transfer of the machine to Barber Glass, because of the saving provisions of ss. 39 and 48(2) of the Act. Roynat appears to agree that would be the case but for the intervention of the registration of Lisec’s discharge of its security interest against Barber Glass. Roynat submits, however, that the discharge caused Lisec’s security interest in the Waterjet to become unperfected and therefore to be superceded by the Roynat registration on the basis of the priority of registration regime set out in s. 30(1), rule 1.

[7] Lisec applied to the Superior Court of Justice to settle the issue. Marrocco J. ruled in favour of Roynat. Lisec appeals from that order. For the reasons that follow, I would allow the appeal.

THE FACTS DEVELOPED

[8] The Barber Glass group of companies is in the business of supplying glass products to the transportation industry, heavy equipment manufacturers, the architectural market and the furniture market – and has done so for over 100 years. Barber Glass and Barber Suffolk are related companies in that group, although Barber Suffolk is not in a similar business. Barber Glass operates three facilities, one in Collingwood (for processing oversized glass orders) and two in Guelph (a manufacturing facility and a retail facility).

[9] On July 16, 2007, Lisec sold the Waterjet to Barber Suffolk. The equipment purchase agreement provided for a Purchase Money Security Interest (a “PMSI”) in favour of Lisec. At the same time, Lisec also sold additional equipment to Barber Glass – the Cutting Line and the Vertical IG Line – destined for the Barber Glass facility in Collingwood.

[10] Unbeknownst to Lisec, Barber Suffolk in turn sold the Waterjet to Barber Glass on July 16, 2007.

[11] A year later, all three pieces of equipment were delivered and, in accordance with the equipment purchase agreement, Lisec delivered the Waterjet to Barber Glass’ Collingwood facility as well. On June 19, 2008 – before delivering the equipment – Lisec registered a financing statement against Barber Suffolk to perfect its PMSI in the Waterjet. It also registered a financing statement against Barber Glass to perfect its PMSI in the two pieces of equipment sold to Barber Glass. Neither registration, on its face, indicated any particular collateral description.

[12] Lisec did not know when the equipment was delivered that Barber Suffolk had earlier transferred its interest in the Waterjet to Barber Glass.

[13] Barber Glass was looking for additional financing at about the same time. It approached Lisec asking Lisec to release its security interest in the Barber Glass equipment so that Barber Glass could obtain additional financing. The new financing was to result in Lisec invoices respecting the Cutting Line and the Vertical IG Line being paid.

[14] Enter Roynat Capital, which was to provide the refinancing. Having learned of the June 19, 2008 Lisec registration against Barber Glass, Roynat’s solicitors contacted Lisec by a letter dated June 23, 2008 asking for confirmation of the details of its security interest and requesting that, “if in fact the registration has been paid in full,” Lisec discharge its registration. Lisec did not respond to the letter, but on July 9, 2008, it registered a financing change statement discharging its registration against Barber Glass.

[15] On the basis of that discharge, Roynat proceeded to advance $9.5 million to Barber Glass pursuant to a Debenture dated July 7, 2008. The Debenture specifically granted Roynat a security interest in the Waterjet. Roynat in turn perfected that security interest by registering a financing statement sometime thereafter. Some of Barber Glass’ indebtedness to Lisec was repaid out of the funds advanced.

[16] Barber Glass’ financial difficulties began to mount, however, and on November 10, 2010 it was placed in receivership. Lisec shortly learned for the first time that Barber Suffolk had earlier sold the Waterjet to Barber Glass and that the Waterjet was considered in the receivership as an asset of Barber Glass. On November 17, 2010, Lisec claimed a PMSI in the Waterjet and on November 29, 2010, it registered a financing statement showing Barber Glass as the new debtor in respect of its security interest in that machine.

[17] As part of the Barber Glass receivership proceedings the receiver is seeking to sell Barber Glass’ assets. Lisec objected to the inclusion of the Waterjet in the asset sale, and applied to the Superior Court of Justice for a determination of its right and entitlement in the machine. As noted above, the application judge dismissed its application.

THE REASONS OF THE APPLICATION JUDGE

[18] The application judge accepted Lisec’s argument that its PMSI over the Waterjet had not become unperfected as a result of the transfer of the machine from Barber Suffolk to Barber Glass. Lisec did not know about the transfer until the receivership occurred and properly registered a financing change statement within 30 days of learning about it, and its perfected security was therefore preserved by the operation of s. 48(2) of the PPSA.

[19] That was not the end of the matter for the application judge, however. He reasoned that because Lisec had registered a financing statement against Barber Glass, because the wording of that financing statement was sufficiently broad to capture the Waterjet as well as the two other pieces of equipment sold to Barber Glass, and because Lisec had discharged the Barber Glass registration without qualification, the effect of that discharge was to unperfect Lisec’s PMSI in the Waterjet. Lisec’s subsequent attempt to continue to perfect that interest by its November 29, 2010 registration was to no avail because Roynat had perfected its security interest in the machine after the discharge and before the subsequent Lisec registration.

ANALYSIS

[20] For purposes of the analysis, a brief resumé of the chronological timeline may be helpful:

July 16, 2007: Lisec sells the Waterjet to Barber Suffolk and two other pieces of equipment to Barber Glass

July 16, 2007: Barber Suffolk transfers its interest in the Waterjet to Barber Glass

June 19, 2008: Lisec perfects its security interests by registering PPSA financing statements against both Barber Suffolk and Barber Glass (thinking it is doing so against Barber Suffolk in relation to the Waterjet and against Barber Glass in relation to the other two pieces of equipment)

June 28, 2008: All three pieces of equipment are delivered to the Barber Glass facility in Collingwood

July 9, 2008: Lisec discharges its registration against Barber Glass, at Barber Glass’ and Roynat’s request

After July 9, 2008: Roynat registers a PPSA financing statement against Barber Glass, perfecting its security interest against the Waterjet, and thereafter advances its financing

November 10, 2010: Barber Glass is placed in receivership

November 17, 2010: Lisec claims a PMSI in the Waterjet

November 29, 2010: Lisec registers a financing change statement after learning that the Waterjet had been sold by Barber Suffolk to Barber Glass

Did the Unknown Transfer Affect Lisec’s Registration Against Barber Suffolk?

[21] The application judge correctly determined that the unknown transfer from Barber Suffolk to Barber Glass did not unperfect Lisec’s PMSI in the Waterjet because Lisec properly registered a financing change statement against Barber Glass within 30 days of learning of the transfer. This conclusion follows from the operation of subsection 48(2) of the PPSA, which states:

Where a security interest is perfected by registration and the debtor, without the prior consent of the secured party, transfers the debtor’s interest in all or part of the collateral, the security interest in the collateral transferred becomes unperfected thirty days after the later of,

(a) the transfer, if the secured party had prior knowledge of the transfer and if the secured party had, at the time of the transfer, the information required to register a financing change statement; and

(b) the day the secured party learns the information required to register a financing change statement,

unless the secured party registers a financing change statement or takes possession of the collateral within such thirty days.

[22] The purpose of this provision is to protect creditors who have taken all proper steps to perfect their security under the PPSA from losing their priority because of an unknown transfer of the protected asset to another debtor. Since the PPSA regime protects priority by means of registration against the name of the debtor, the Act provides a secured party in such circumstances with a grace period after becoming aware of the transfer to preserve its priority by registering a financing change statement against the new debtor as well. Accordingly, since Lisec registered its financing change statement within 30 days of learning the information required to do so, the effect of s. 48(2) is that Lisec’s security interest in the Waterjet – as protected by the Barber Suffolk registration – remained perfected and entitled to priority over any registrations made against Barber Glass, and covering the same collateral, during the period between the transfer and the registration of Lisec’s subsequent financing change statement.

[23] Were that the only issue, therefore, Lisec would clearly have priority over Roynat in the dispute over security in the Waterjet. But that is not the only issue. Lisec’s discharge of its registration against Barber Glass – a registration that was never intended to apply to the Waterjet – muddies the waters.

[24] I turn to that issue now.

Discharge of the Barber Glass Registration

[25] The application judge concluded that the effect of Lisec’s discharge of its registration against Barber Glass on July 9, 2008, was to unperfect its PMSI in the Waterjet. Since Roynat had perfected a security interest in the assets of Barber Glass – including the Waterjet – before Lisec registered its subsequent financing change statement, it followed that the Roynat registration took priority.

[26] The rationale for this conclusion was that Lisec’s registration against Barber Glass, even though not intended to protect its interest in the Waterjet, was nonetheless broad enough to do so. It covered all of Barber Glass’ goods, inventory, equipment and accounts. The application judge reasoned that “creditors should understand that the registration of a discharge of a generally-worded financing statement unperfects all security interests in the collateral described in the financing statement,” and that any security interest they hold in the assets of the debtor in question will become subordinated.

[27] The difficulty with this reasoning is that creditors in the position of Lisec have no reason to believe that the contested collateral in a situation like this – the Waterjet, here – is amongst the assets over which the creditor has agreed to release its interest. That said, the other interest at play – the second creditor in the position of Roynat – advanced its funds and perfected its security interest in the second debtor’s collateral without knowing that the first creditor claimed a security interest in the collateral; indeed, in this case, Roynat had every reason to believe that Lisec did not, since Lisec has expressly discharged its registration against the collateral at Roynat’s request before it advanced its funds.

[28] Herein lies the dilemma. Whatever the result, an innocent provider of credit will suffer a loss. The application judge was dealing with a case of first impression. I have been able to find no other case where the effect of an intervening discharge by the first creditor against the assets of the second debtor in circumstances such as this has arisen.

[29] Respectfully, however, I disagree with the conclusion of the application judge. I say this for two reasons.

Lisec’s Security Interest in the Waterjet Did Not Attach Through Barber Glass

[30] First, I am not persuaded – as the application judge and the parties appear to have accepted – that the Lisec registration against Barber Glass operated to perfect a Lisec security interest in the Waterjet enforceable against Barber Glass. Lisec did not have a security interest in the Waterjet that could have been perfected in that fashion because Barber Glass never granted it one.

[31] Registrations under the PPSA do not operate in the air. They operate to protect a security interest in collateral that has “attached.”[^1] Section 11 of the PPSA provides that a security interest is not enforceable against a third party unless it has attached. Section 19 requires that, to be perfected, a security interest must (a) have attached, and (b) been perfected in accordance with the Act. A security interest cannot attach, however, unless (amongst other things) the debtor has signed a security agreement containing a description of the collateral in which the security interest has been given: see s. 11(2).

[32] Here, Barber Suffolk and Barber Glass did not grant Lisec a general security agreement or other instrument that would have provided security over all of their assets. They executed equipment purchase agreements granting security interests in specific pieces of equipment – in the case of Barber Suffolk, the Waterjet; in the case of Barber Glass, the Cutting Line and the Vertical IG Line. At no time did Barber Glass sign a security agreement granting Lisec a security interest in the Waterjet. As Professor Ziegel and David Denomme note, “[w]here collateral is transferred by a debtor to another person the new debtor has not created a security interest in [the first secured creditor’s] favour; he merely holds an interest in collateral subject to the prior security interest”: Jacob S. Ziegel & David L. Denomme, The Ontario Personal Property Security Act Commentary and Analysis, 2d ed. (Toronto: Butterworths, 2000) at pp. 253-54.

[33] As Mr. Quast observed in his December 20, 2010 affidavit filed on behalf of Lisec, “[the Barber Glass registration] was entirely unrelated to Lisec’s PMSI in the Barber Suffolk Equipment”, i.e., the Waterjet. Accordingly, although Lisec’s security interest in the Waterjet both attached and was perfected by registration against Barber Suffolk, Lisec never had a security interest in the Waterjet that attached through Barber Glass and therefore that could be perfected through a registration against Barber Glass.

[34] On this analysis, Lisec’s registration against Barber Glass could not have perfected a security interest in the Waterjet. Given the wording of the security agreements in question, the fact that Barber Glass ultimately became the owner of the machine does not alter this result. It follows, then, that if Lisec’s registration against Barber Glass did not cover the Waterjet, neither it nor its discharge could have had an impact on the operation of ss. 39 and 48(2) in preserving the priority of Lisec’s security interest in the Waterjet. The state of affairs is not different than if there had been no Barber Glass registration in the first place.

The Lisec Registration and Discharge Against Barber Glass Are Irrelevant In Any Event

[35] There is a second reason why Lisec’s priority must prevail.

[36] The application judge’s conclusion that the intervening Barber Glass discharge operated to unperfect Lisec’s security interest in the Waterject for purposes of Roynat’s priority is premised on the view that Lisec’s Barber Suffolk registration somehow became subsumed in its Barber Glass registration and therefore that Lisec’s discharge of the Barber Glass registration operated to discharge the Barber Suffolk registration. In my view, that is not the case.

[37] Lisec’s Barber Suffolk registration is a stand-alone registration. It is not dependent upon nor was it replaced by the Barber Glass registration – assuming for the purposes of this discussion that the latter also sheltered Lisec’s security interest in the Waterjet, upon the transfer from Barber Suffolk to Barber Glass.

[38] There is nothing in the PPSA that precludes a secured creditor from having a perfected security interest in collateral in more than one way or through registration against more than one entity. In short, even if the Barber Glass registration did encompass Lisec’s security interest in the Waterjet (which, for the reasons articulated above, I do not think it did), the discharge of the Barber Glass registration did not take with it the discharge of the Barber Suffolk registration; nor does the preservation of the Barber Suffolk priority through the operation of ss. 39 and 48(2) constitute an effective revival of the Barber Glass registration.

[39] The Barber Suffolk registration remained in place and remained perfected at all material times as a result of the operation of s. 48(2) of the PPSA. The Lisec/Barber Glass registration and discharge are red herrings in the analysis, in my view, and the Lisec/Barber Suffolk registration therefore takes priority over the Roynat registration. In this way the priority provisions of rule 1 of s. 30(1) of the PPSA continue to be respected: priority of registration does prevail. It is simply Lisec’s priority of registration that prevails, not Roynat’s. By operation of s. 48(2), the Barber Suffolk registration is deemed to be a prior registration against the Barber Glass equipment.

[40] On this interpretation, there is no need to engage in the debate about whether the common law doctrine of nemo dat quod non habet continues to play a parallel role in the determination of priority disputes involving security interests, or whether it has been ousted by the terms of the PPSA, as counsel have invited us to do. Suffice it to say, as the Supreme Court of Canada has recently noted, in Bank of Montreal v. Innovation Credit Union, 2010 SCC 47, [2010] 3 S.C.R. 3, at para 41, “the PPSA resolves priority disputes through a detailed set of priority rules rather than on the basis of title or the form of a transaction.”

[41] To the extent that nemo dat principles would otherwise have been applicable in these circumstances, it seems to me that they have been incorporated into – and are given effect through – the upshot of ss. 9, 39 and 48(2) of the Act, taken together: (i) a security agreement is effective according to its terms against third parties (s. 9); (ii) the rights of a debtor in collateral may be transferred, but no transfer prejudices the rights of the secured party under the security agreement or otherwise (s. 39); and (iii) a registered priority does not become unperfected by an unknown transfer to a third party if the secured party registers a financing change statement within 30 days of learning of the information required to do so (s. 48(2)). Nothing further is required for these purposes.

[42] Nor does anything in this approach conflict with the well-accepted purpose of the PPSA which, as Gonthier J. noted in Royal Bank v. Sparrow Electric Corp., 1997 CanLII 377 (SCC), [1997] 1 S.C.R. 411, at p. 436, is “to increase certainty and predictability in secured transactions through the creation of a coherent system of priorities.”

[43] It is true that lenders in the position of Roynat are vulnerable in situations such as this case presents. But the legislature has given a clear indication through the operation of s. 48(2) of the PPSA that lenders in the position of Lisec are to prevail. There is no lack of certainty or predictability when the provisions of the Act as a whole are properly applied.

[44] I note, in concluding, that on this interpretation, Roynat is in no worse position than it would have been in had there never been an intervening Lisec/Barber Glass registration. Having conducted a search that would have revealed no prior registration, Roynat would have made its advance. Section 48(2) would have operated to preserve Lisec’s priority through the Barber Suffolk registration, however, once Lisec registered its financing change statement within the allotted 30-day period after acquiring knowledge of the transfer of interest, as it did.

DISPOSITION

[45] For the foregoing reasons, I would allow the appeal, set aside the order below, and declare that Lisec’s security interest in the Waterjet ranks first in priority to Roynat’s security interest in the Waterjet.

[46] Lisec is entitled to its costs of the appeal, fixed in the amount of $15,000 all inclusive, as agreed between counsel.

“R.A. Blair J.A.”

“I agree H.S. LaForme J.A.”

“I agree M.L. Benotto J. (ad hoc)”

RELEASED: January 20, 2012

[^1]: The notion of attachment recognizes that a security interest is proprietary in nature and must therefore fasten to specific collateral: see Ronald C.C. Cuming, Catherine Walsh & Roderick J. Wood, Personal Property Security Law (Toronto: Irwin Law, 2005), at p. 164; Roy Goode, Legal Problems of Credit and Security, 3d ed. (London: Sweet & Maxwell Ltd., 2003) at p. 59; Richard H. McLaren, The 2012 Annotated Ontario Personal Property Act (Toronto: Thomson Canada Ltd., 2011) at pp. 143-44.