Unisource Canada, Inc. v. Laurentian Bank of Canada et al. [Indexed as: Unisource Canada Inc. v. Laurentian Bank of Canada]

47 O.R. (3d) 616

[2000] O.J. No. 687

No. C31857

Court of Appeal for Ontario

Labrosse, Weiler and Charron JJ.A.

March 8, 2000

Personal property security -- Security interests -- Purchase- money security interest ("PMSI") -- Priorities -- Debtor leasing printing press from bank with option to purchase -- Bank registering security interest -- Debtor then granting general security agreement over its assets to creditor -- Debtor refinancing and new lender providing funds to discharge bank's security interest -- Debtor acquiring legal title to printing press -- Debtor granting security interest to new lender -- New lender's security interest PMSI having priority over creditor's general security agreement -- Personal Property Security Act, R.S.O. 1990, c. P.10, ss. 1, 33(2).

PG acquired a printing press and sold it to the Royal Bank, which leased it back for a period of five years with an option to buy. The Bank perfected a security interest in August 1995. In 1996, PG gave UC Inc. a general security agreement that was perfected in February 1996. Subsequently, the Laurentian Bank agreed to refinance the printing press, and it paid the amount outstanding to the Royal Bank and registered its own general security agreement. The Royal Bank's security interest was discharged in April 1997 and legal title to the press passed to PG. In May 1997, PG went bankrupt. The Laurentian Bank claimed that its security interest was a purchase-money security interest ("PMSI"), which is defined in s. 1 of the Personal Property Security Act ("PPSA") as "a security interest taken by a person who gives value for the purposes of enabling the debtor to acquire rights in or to collateral to the extent that the value is applied to acquire the rights". Further, pursuant to s. 33(2) of the PPSA, it claimed that its PMSI had priority over the general security agreement of UC Inc.

On a motion for summary judgment, Sharpe J. held that the Laurentian Bank did not have a PMSI because the refinancing did not alter or improve the position of the debtor, which did not acquire something it did not previously have. The Laurentian Bank appealed.

Held, the appeal should be allowed.

The Laurentian Bank's financing enabled PG to acquire further rights in the printing press and this satisfied the criteria for a PMSI. Before this financing, PG had only a contingent equitable interest in the printing press, the contingency being the election to exercise the option to purchase, and after the financing PG might acquire certain title to the press. This interpretation was consonant with sound commercial policy. By recognizing a difference between a lease/option arrangement and the acquisition of title, it will be easier for a debtor to enter into new financing arrangements to acquire further rights in collateral without the co-operation of the original lender being required. The debtor and its business will benefit. The interpretation also accords with the original expectations of the parties in this case that the security interest granted to UC Inc. would rank second in priority. It would be unfair for UC Inc. to have added to the pool of its security the printing press purchased with funds f rom Laurentian Bank. Accordingly, the appeal should be allowed.

1151162 Ontario Ltd. (Re) (1997), 13 P.P.S.A.C. (2d) 16 (Ont. Gen. Div.); Greyvest Leasing Inc. v. Canadian Imperial Bank of Commerce (1991), 1 P.P.S.A.C. (2d) 264 (Gen. Div.) [revd (1993), 5 P.P.S.A.C. (2d) 187 (Ont. C.A.)]; Royal Bank v. Tisdale Credit Union (1992), 1992 CanLII 8170 (SK QB), 104 Sask. R. 128, [1993] 1 W.W.R. 439, 4 P.P.S.A.C. (2d) 44 (Q.B.); Speedtrack Ltd. (Re) (1980), 11 B.L.R. 220, 33 C.B.R. (N.S.) 209, 1 P.P.S.A.C. 109 (Ont. S.C.)

APPEAL from a judgment of Sharpe J. (1999), 14 P.P.S.A.C. (2d) 206 (Gen. Div.) with respect to the priority of security interests under the Personal Property Security Act, R.S.O. 1990, c. P.10.

Cases referred to Statutes referred to Personal Property Security Act, R.S.O. 1990, c. P.10, ss. 1 "purchase-money security interest", 33(2)

Jonathan H. Wigley, for appellant. Richard H. McLaren and Christopher G. McLaren, for respondent.

The judgment of the court was delivered by

[1] WEILER J.A.: -- Laurentian Bank of Canada ("Laurentian") and Unisource Canada Inc. ("Unisource") disagree as to which of them has priority to realize on a security interest under the Personal Property Security Act, R.S.O. 1990, c. P.10 (the "Act"). The issue in this appeal is whether the motions judge erred in holding that the general security agreement held by Unisource had priority. Laurentian appeals on the basis that it had a purchase-money security interest ("PMSI") and that the motions judge erred in holding that it did not. The reasons of the motions judge are reported at (1999), 14 P.P.S.A.C. (2d) 206 (Gen. Div.).

[2] Section 1 of the Act defines a "purchase-money security interest" in part as "a security interest taken by a person who gives value for the purpose of enabling the debtor to acquire rights in or to collateral to the extent that the value is applied to acquire the rights" (emphasis added).

[3] Pursuant to s. 33(2) of the Act, "a purchase-money security interest in collateral or its proceeds has priority over any other security interest in the same collateral given by the same debtor" provided that certain conditions are met. There is no dispute that, if the security interest held by Laurentian meets the definition of being a PMSI, the conditions of s. 33(2) were fulfilled and Laurentian's security interest has priority over that of Unisource.

[4] The background facts to the appeal are not in dispute. Printer's Group acquired a Mitsubishi printing press, sold it to the Royal Bank, and then entered into a lease of the printing press from the Royal Bank for a period of five years with an option to buy the press at the end of the term. [^1] The Royal Bank registered and perfected a security interest in the printing press on August 30, 1995. Printer's Group also owed money to Unisource for the supply of paper. Printer's Group gave Unisource a general security agreement over its assets that was perfected by registration on February 7, 1996. The Royal Bank's security interest, registered first in time, was first in priority while that of Unisource was second.

[5] Laurentian subsequently agreed with Printer's Group to refinance the printing press. If, as part of the refinancing, Laurentian had taken an assignment of the Royal Bank's first security interest, there would be no dispute that Laurentian's interest would have priority over that of Unisource. Instead, Laurentian paid to the Royal Bank the amount outstanding on the printing press and registered a general security agreement. After receiving the money from Laurentian, the Royal Bank's security interest was discharged on April 15, 1997 and legal title of the press passed to Printer's Group. Printer's Group went bankrupt in May 1997. Laurentian claimed a priority interest in the printing press on the basis that it held a PMSI.

[6] Unisource brought a motion for a summary judgment that its security interest had priority over Laurentian's. The position of Unisource was that the security interest of Laurentian was not a PMSI because, in paying the Royal Bank, Laurentian did not enable "the debtor to acquire rights in or to collateral" (emphasis added).

[7] The motions judge held:

The Laurentian refinancing did not alter or improve the debtor's [Printer's Group] position with respect to the press in any material way. The debtor did not add to its pool of assets or otherwise enhance its financial position by acquiring something it did not have previously. The effect of the Laurentian refinancing was merely to substitute one financing technique or vehicle for another. As a result of the refinancing, it is true that the debtor did, for a brief time, acquire legal title to the press, but it quickly reconveyed that title to Laurentian under the terms of its general security agreement which provided that the debtor:

. . . grants, sells, assigns, conveys, transfers, mortgages, pledges and charges as in by way of fixed and specific mortgage and charge to and in favour of the bank and grants to the bank a security interest in all personal property of every nature and kind whatsoever and wheresoever situate.

The debtor's right to retain possession and use of the press was still contingent upon it making the payments required under its loan, now to Laurentian, for an amount that included the price of the press. In my view, neither the acquisition of legal title, nor the change in the arrangements for the financing of the press, satisfy the statutory definition for a PMSI. Laurentian's financing merely altered the manner in which the debtor financed the acquisition or retention of the press and did not result in any new assets being added to the debtor's pool of assets. It follows that the purpose of the PMSI exception has not been met.

[8] The appellant asks that the judgment be set aside and replaced with a judgment declaring that Laurentian has a PMSI in the printing press.

[9] For the reasons that follow I would respectfully disagree with the conclusion of the motions judge that the acquisition of legal title by Printer's Group did not satisfy the statutory definition of a PMSI. Laurentian's financing did not merely alter the manner in which the debtor financed the press. It enabled Printer's Group to acquire further rights in the press that it previously did not have. In so doing, Laurentian met the statutory definition for a PMSI.

[10] The purpose of giving priority to a PMSI is to enable the person who has advanced funds for the acquisition of a particular asset to have the first priority over creditors who hold general security over all of the assets: see Re 1151162 Ontario Ltd. (1997), 13 P.P.S.A.C. (2d) 16 (Ont. Gen. Div.) at p. 18; Royal Bank v. Tisdale Credit Union (1992), 1992 CanLII 8170 (SK QB), 4 P.P.S.A.C. (2d) 44, [1993] 1 W.W.R. 439 (Sask. Q.B.). In this case, Laurentian advanced the funds that enabled Printer's Group to acquire title to the press. The motions judge was of the opinion that, given the existing lease/option to purchase arrangement with the Royal Bank, the acquisition of title by Printer's Group amounted to a distinction without a difference. Under the Royal Bank lease/option to purchase financing, however, the equitable interest of Printer's Group was a contingent one, the contingency being the election by the debtor to exercise the option to purchase. Printer's Group might never acquire title. [^2] Notably, the definition of a PMSI excludes "a transaction of sale by and lease back to the seller." Under the Laurentian financing, the interest of Printer's Group was not contingent. There was certainty of title.

[11] The motions judge appears to have been of the opinion that where the debtor has already taken possession of an asset a refinancing does nothing to improve the debtor's position and a PMSI cannot be created. In support of his opinion, the motions judge cited the following extract from the reasons of Gotlib J. in Greyvest Leasing Inc. v. Canadian Imperial Bank of Commerce (1991), 1 P.P.S.A.C. (2d) 264 at p. 269 (Ont. Gen. Div.):

If a creditor could obtain a PMSI merely by helping a debtor to pay for something of which the debtor had already taken possession then all lenders to debtors who had not fully paid for all property in their possession could obtain PMSI's and take priority over earlier general creditors. That cannot have been the legislator's intention.

In her reasons, however, Gotlib J. recognized that the mere possession of equipment by a debtor prior to entering into a security agreement did not exclude it from a PMSI provided that further legal rights were acquired. At p. 269 she stated:

Because a debtor has some rights in an item of collateral does not mean that it cannot obtain further rights. By giving value to the debtor after the debtor has acquired rights in the collateral the creditor has not enabled the debtor to acquire those rights but the creditor may have enabled the debtor to acquire other subsequent rights in the collateral. Only where the debtor has acquired "all possible rights" in the collateral (North Platte State Bank.. [sic] v. Production Credit Association of N. Platte, 200 N.W. 2d 1 S.Ctr. Nebraska. (1972)) does it follow that a subsequent giving of value by the creditor could not have enabled the debtor to acquire rights in the collateral.

[12] On the facts of the case before her, Gotlib J. concluded that the giving of value did not enable the debtor to acquire further rights. As I have indicated, that is not the situation here because title to the printing press was acquired.

[13] The interpretation I propose is consonant with sound commercial policy. If a difference between a lease/option arrangement and the acquisition of title is recognized, it will be easier for the debtor to enter into a new financing arrangement to acquire further rights in collateral without the co-operation of the original lender being required. The debtor and its business will benefit. The proposed interpretation also accords with the original expectations of the parties in this case that the security interest granted to Unisource would rank second in priority. It would be unfair for Unisource to have added to the pool of its security the printing press purchased with funds from Laurentian. To hold as the motions judge did results in Unisource receiving a windfall.

[14] I would therefore hold that the motions judge erred in his conclusion that there was no significant difference between the two types of transactions. By enabling Printer's Group to acquire title, the transaction with Laurentian did enable Printer's Group "to acquire rights in or to collateral".

[15] An additional issue raised by the respondent on this appeal is that the definition of a PMSI does not give Laurentian priority with respect to all of the money advanced. The respondent submitted in its factum that in the event this court finds that the motions judge erred in his interpretation of the definition of a PMSI, the court must determine how much of the money advanced was used to acquire the rights to the printing press. This issue was not raised or argued on the original motion and we did not have the figures before us to make a determination of this issue. The submission was abandoned at the hearing of this appeal. Consequently, I need not deal with it.

[16] I would accordingly allow the appeal, set aside the order of the motions judge, declare that Laurentian has a PMSI to the Mitsubishi press and that it is entitled to priority over Unisource. Costs of the appeal and of the motion below are to the appellant.

Appeal allowed.

Notes

[^1]: Note 1: A sale by and lease back arrangement is specifically excluded from the definition of PMSI in s. 1.

[^2]: Note 2: The categorization of payments made pursuant to a lease with an option to purchase depends upon the terms of the contract. The payments in repayment of the loan may be allocated on account of the purchase price of the property, as rent, or some combination of both: see Re Speedtrack Ltd. (1980), 33 C.B.R. (N.S.) 209, 1 P.P.S.A.C. 109 (Ont. S.C.).