Court File and Parties

COURT FILE NO.: 33-2126339 DATE: 2017/04/19

ONTARIO SUPERIOR COURT OF JUSTICE IN BANKRUPTCY and INSOLVENCY IN THE MATTER OF THE BANKRUPTCY OF DAVID JOSEPH HUGHES OF THE CITY OF KINGSTON IN THE PROVINCE OF ONTARIO

BEFORE: Justice Stanley Kershman

HEARD AT OTTAWA: March 22, 2017

RE: BDO CANADA LIMITED in its capacity as TRUSTEE OF THE BANKRUPT DAVID JOSEPH HUGHES’ ESTATE, Moving Party/Debtor AND SNAP AUTO FINANCE CORP., Responding Party/Creditor

COUNSEL: Alden Christian, counsel for the Moving Party Edward M. Hyer, counsel for the Responding Party

Reasons for Decision

Introduction

[1] This is an appeal under s. 192(4) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”), from a decision of Master Nathalie Champagne, Registrar in Bankruptcy (the “Registrar”), dated November 1, 2016 and reported at 2016 ONSC 6832.

[2] The Trustee in Bankruptcy, BDO Canada Limited (the “Trustee”), disallowed a secured claim by the creditor, Snap Auto Finance Corp. (“Snap”) against David Joseph Hughes, who made an assignment in bankruptcy on May 24, 2016.

[3] On appeal, the Registrar reversed the Trustee’s decision and allowed Snap’s claim.

[4] For the following reasons, the Court allows the Trustee’s appeal and restore the its decision to disallow Snap’s secured claim.

Background

[5] In July 2014, Mr. Hughes purchased a 2014 Dodge Ram 1500 (the “Vehicle”) in Alberta and Snap provided the financing. On July 17, 2014, Snap perfected its purchase-money security interest in the Vehicle by registering under Alberta’s Personal Property Security Act, R.S.A. 2000, c. P-7 (“Alberta’s PPSA”). The Vehicle was registered with the Government of Alberta on July 15, 2014 to Mr. Hughes as the owner.

[6] In November 2015, Mr. Hughes moved to Kingston, Ontario, and brought the Vehicle with him. Mr. Hughes continued to work in Alberta and travel to and from Ontario without the Vehicle. When he was in Alberta, he had access to a work vehicle to get around. He returned home to Ontario following his work shifts in Alberta.

[7] On May 24, 2016, Mr. Hughes made an assignment in bankruptcy. That same day, the Trustee served Snap with a Notice of Bankruptcy and a Statement of Affairs, which showed Mr. Hughes’ address to be in Kingston, Ontario. In the Statement of Affairs, the Vehicle is listed, but its location is not indicated.

[8] On May 27, 2016, Snap filed a proof of claim and, on June 17, 2016 — some 20 days after being served with Mr. Hughes’ Notice of Bankruptcy — Snap registered the Vehicle under Ontario’s Personal Property Security Act, R.S.O. 1990, c. P.10 (“Ontario’s PPSA”).

[9] The Trustee disallowed the secured claim on the ground that Snap had not registered its security within 15 days of the Vehicle being “brought in” to Ontario, as required by s. 5(2) of Ontario’s PPSA:

5 (2) A security interest in goods perfected under the law of the jurisdiction in which the goods are situated at the time the security interest attaches but before the goods are brought into Ontario continues perfected in Ontario if a financing statement is registered in Ontario before the goods are brought in or if it is perfected in Ontario,

(a) within sixty days after the goods are brought in;

(b) within fifteen days after the day the secured party receives notice that the goods have been brought in; or

(c) before the date that perfection ceases under the law of the jurisdiction in which the goods were situated at the time the security interest attached,

whichever is earliest, but the security interest is subordinate to the interest of a buyer or lessee of those goods who acquires the goods from the debtor as consumer goods in good faith and without knowledge of the security interest and before the security interest is perfected in Ontario.

[10] On appeal under s. 135(4) of the BIA, the Registrar reversed the Trustee’s disallowance and concluded that the Vehicle had not been “brought in” to Ontario. The Registrar held, at para. 20, that the conclusion of whether a vehicle has been “brought in” should be determined by both the residence of the owner of a vehicle and the physical presence of the vehicle in the non-PPSA jurisdiction: neither one, on its own, is determinative.

[11] Guided by Steed (Re), 2001 ABQB 157, 294 A.R. 360, and Arseneau (Re), 2005 NSSC 26, 230 N.S.R. (2d) 33, the Registrar found, at paras. 22–23, as follows:

Mr. Hughes appears to maintain an address in Kingston but spends 20 days per month in Alberta and only 10 days per month in Ontario. His evidence of his connection to Ontario is scant. He did not obtain a permit and licence plates for the vehicle within 30 days of his arrival in Ontario as required under the Highway Traffic Act (HTA), R.S.O 1990, c H-8., nor did he obtain a driver’s license within 60 days of moving to Ontario, as required by the HTA.

There is no strong evidence that Mr. Hughes resides in Ontario permanently as was the case in Arseneau. The evidence points to a much stronger connection to Alberta. He still has an Alberta driver’s license and the vehicle was still registered in Alberta when it was sold this past summer. He bought the vehicle in Alberta, he works in Alberta and spends at least 60 per cent of his time there. On the material before me, I find that the vehicle was simply located in Ontario as a matter of convenience because Mr Hughes didn’t need the vehicle in Alberta and it was therefore not “brought in” to Ontario.

[12] The Trustee appeals the Registrar’s decision and seeks an order confirming its decision to disallow Snap’s secured claim.

[13] The Vehicle, which remained registered in Alberta, has since been sold and the proceeds of sale remain in trust.

Issues

[14] The issues on this appeal are as follows:

a. What is the appropriate standard of review? b. Did the Registrar err in its determination that the Vehicle was not “brought in” to Ontario and its conclusion to allow Snap’s claim?

Analysis

1) What is the Appropriate Standard of Review?

[15] Section 192(4) of the BIA provides that “[a] person dissatisfied with an order or decision of a registrar may appeal therefrom to a judge.”

[16] This is a true appeal and not a hearing de novo. The Court may only consider evidence before the Registrar on the motion (see Borden (Re), 2010 ONSC 3506, at para. 4).

[17] To succeed, the moving party must satisfy the Court that the Registrar has erred in principle, erred in law, or failed to take into account a proper factor or took into account an improper factor that demonstrably led to a wrong conclusion (see Borden (Re), at para. 5).

[18] If an appeal is based on an alleged error in a finding of fact, the error must be palpable and overriding (see Saban (Re), 2012 ONSC 6700, at para. 5).

2) Did the Registrar Err in Its Determination that the Vehicle Was Not “brought in” to Ontario and Its Conclusion to Allow Snap’s Claim?

[19] For the following reasons, the Court respectfully finds that the Registrar erred in its determination that the Vehicle had been “brought in” Ontario, as per s. 5(2) of Ontario’s PPSA, by failing to take into account the date of Mr. Hughes’ initial bankruptcy event, which occurred in Ontario, and the resulting assignment in bankruptcy he made in Ontario, accompanied by his sworn Statement of Affairs in Ontario. In light of all the evidence before the Court, which was before the Registrar, the Court respectfully finds that this failure demonstrably led to a wrong conclusion.

[20] Assignments into bankruptcy are governed by s. 49 of the BIA:

49 (1) An insolvent person or, if deceased, the executor or administrator of their estate or the liquidator of the succession, with the leave of the court, may make an assignment of all the insolvent person’s property for the general benefit of the insolvent person’s creditors.

(2) The assignment must be accompanied by a sworn statement in the prescribed form showing the debtor’s property that is divisible among his or her creditors, the names and addresses of all his or her creditors and the amounts of their respective claims.

(3) The assignment made under subsection (1) shall be offered to the official receiver in the locality of the debtor, and it is inoperative until filed with that official receiver, who shall refuse to file the assignment unless it is in the prescribed form or to the like effect and accompanied by the sworn statement required by subsection (2)….

[21] Thus, by s. 49(3) of the BIA, the assignment is to be offered to the official receiver in the locality of the debtor. Section 2 defines “locality of a debtor” to mean the principal place:

(a) where the debtor has carried on business during the year immediately preceding the date of the initial bankruptcy event,

(b) where the debtor has resided during the year immediately preceding the date of the initial bankruptcy event, or

(c) in cases not coming within paragraph (a) or (b), where the greater portion of the property of the debtor is situated.

[22] Section 2 defines “date of the initial bankruptcy event” to be the earliest of the day on which any one of a number of actions are taken. One such event is the day on which an assignment is made.

[23] The word “during” in the definition of “locality of the debtor” means “at some time within” the year preceding the date of the assignment. It does not require continuous residence or continuous carrying of business for the whole year (Thompson & Sutherland Ltd. v. Canadian Credit Men’s Trust Assn., [1926] 1 D.L.R. 330 (N.S.S.C.)).

[24] Mr. Hughes made an assignment in bankruptcy in Ontario on May 24, 2016. There was no evidence before the Registrar that he carried on business within either Alberta or Ontario. He did, however, spend time in both jurisdictions. The Registrar was thus required to consider where Mr. Hughes “resided” during the year preceding May 24, 2016.

[25] The Registrar was correct to hold that, while Mr. Hughes’ residency is not determinative of the issue, it is a relevant factor in the analysis. Nonetheless, by failing to take into account where the debtor filed his assignment and swore his Statement of Affairs — both being Ontario — the Court respectfully finds that the Registrar erred in its determination that Mr. Hughes did not reside in Ontario.

[26] Indeed, the evidence reveals Mr. Hughes’ intention to move to Ontario to live in November 2015 and to have the Vehicle remain in Ontario. Although he spent the majority of his time in Alberta — i.e. 20 days of the month — his Vehicle remained in Ontario, where it remained parked when not in use. Mr. Hughes’ evidence was that he brought his Vehicle to Ontario because he no longer needed it in Alberta. The Court also draws the inference that he purchased gas solely in Ontario for use of the Vehicle, and he kept the Vehicle continuously in Ontario.

[27] Considering the third criterion for the “locality of a debtor”, where the greater portion of Mr. Hughes’ property is situated, Mr. Hughes lives in a home in Ontario, being the address listed on his Statement of Affairs attached to his Notice of Bankruptcy.

[28] A second relevant factor, the physical presence of the Vehicle in the non-PPSA jurisdiction, was held to have been made out on the evidence.

[29] Thus, while each factor not determinative, a proper analysis would have found that they both acted in favour of Mr. Hughes’ contention that he moved to Ontario and brought his Vehicle with him. This is notwithstanding the fact that the Vehicle was still registered in Alberta.

[30] Notwithstanding, the Court respectfully finds that the Registrar made a palpable and overriding error in its finding that the Vehicle had not been “brought in” to Ontario. Evidence before the Registrar indicated that Mr. Hughes worked full-time in Alberta at a camp, where he slept. The company he worked for provided him a Vehicle to use while in Alberta. Mr. Hughes brought all of his furniture to his Kingston residence.

[31] Based on the foregoing, the Court finds that the Vehicle had in fact been “brought in” to Ontario by Mr. Hughes in November 2015.

[32] Snap registered the Vehicle under Ontario’s PPSA on June 17, 2016. Since the Court has found that the Vehicle had been brought in to Ontario in November 2015, the 60 days Snap had to prefect its security interest has lapsed. This is not withstanding that Snap may not have had actual knowledge of when the Vehicle was brought into Ontario.

[33] Moreover, the Court finds that Snap received notice that the Vehicle was brought in to Ontario on May 25, 2016 when the Trustee sent the Notice of Bankruptcy and the Stay of proceedings to Snap. Snap failed to register a financing statement in Ontario within 15 days after it received notice that the Vehicle had been brought in to Ontario. It thus failed to properly perfect its security interest and its claim against is ineffective as against Mr. Hughes.

[34] Therefore, for these reasons, the appeal is allowed. The Trustee’s decision to disallow Snap’s secured claim is restored.

[35] In the result, the Court finds that the security interest of Snap is subordinate to that of the Trustee, and that the Trustee is entitled to the Vehicle or its proceeds in priority to Snap.

Costs

[36] The parties shall have 15 days within which to resolve the issue of costs. In the event that they are unable to resolve the issue of costs, the parties will set up a time to appear before me at 9:30 a.m. to argue the issue. Each party will be allowed ten minutes to argue their position as to costs. Since counsel for Snap is from Toronto, parties may appear to argue the matter by telephone.

[37] Order accordingly.

Justice Stanley Kershman Date: April 19, 2017