2811472 Canada Inc. c.o.b. Acorn Partners v. Royal Bank of Canada et al.

[Indexed as: 2811472 Canada Inc. v. Royal Bank of Canada]

85 O.R. (3d) 490

Court of Appeal for Ontario,

Goudge, Gillese and Lang JJ.A.

March 8, 2007

Headnote

Personal property security -- Security interests -- Factoring agreement -- Application judge not erring in finding that factoring agreements did not constitute purchase money security interest -- Personal Property Security Act, R.S.O. 1990, c. P.10.

The Bank had loaned money to M Ltd. and held as security a properly perfected General Security Agreement ("GSA"). Shortly before M Ltd.'s bankruptcy, and after the Bank had made demands on its loans, M Ltd. entered into several factoring agreements with A under which it purported to assign various accounts receivable to A. Neither A nor M Ltd. ever sought or obtained an agreement from the Bank to subordinate its security interest to that of A. The Bank brought an application for a declaration that it had priority over A under its GSA. The application was granted. The application judge held that the factoring agreements did not create a purchase money security interest ("PMSI"). While it might be said that the funds which M Ltd. obtained from A were intended to be used for the purchase of materials, the true intent of the factoring arrangement was to enable [page491] M Ltd. to perform its contract. Accordingly, the transaction did not fall within the definition of a PMSI. In any event, pursuant to the Assignment of Account entered into between M Ltd. and A, M Ltd. warranted and guaranteed that "the Account has not been pledged, assigned or otherwise encumbered, nor its face value diminished by the Assignor", despite the fact that the Bank held a perfected GSA over all M Ltd.'s accounts and book debts. A could have discovered the Bank's properly registered financing statement upon conducting a Personal Property Security Act ("PPSA") search. Having failed to do so, A entered into the factoring agreement at its own risk. As M Ltd. did not have the right to assign its accounts, the transaction could not be effective, and any priority A might have had was defeated due to the invalid transaction. A appealed.

Held, the appeal should be dismissed.

The application judge did not err in finding that A did not have a PMSI. The application judge in essence took the view that A could not show the extent to which the value it gave to acquire its security interest went into the creation of the collateral over which it acquired that security interest. Moreover, the assignment agreements all supported the application judge's view.

APPEAL from the judgment of Forget J. (2006), 2006 23253 (ON SC), 81 O.R. (3d) 721, [2006] O.J. No. 2790 (S.C.J.), allowing the Bank's application for a declaration of priority.

Statutes referred to Personal Property Security Act, R.S.O. 1990, c. P.10

Counsel

Sean Cumming, for appellant 2811472 Canada Inc. c.o.b. as Acorn Partners. J. Ross Macfarlane, for respondent Royal Bank of Canada.

Endorsement

[1] Endorsement by THE COURT: -- The appellant argues that the application judge erred in finding that it did not hold a PMSI interest under the Personal Property Security Act, R.S.O. 1990, c. P.10 ("PPSA"). We disagree. In our view, the application judge in essence took the view that the appellant could show no more than that it was advancing general working capital to Molnar against its security. It could not show the extent to which the value it gave to acquire its security interest went into the creation of the collateral over which it acquired that security interest. Moreover, the assignment agreements all support the application judge's view.

[2] The appellant also argues that the application judge erred in ordering it to pay back to the respondent the sums it had already received pursuant to its security. Again, we disagree. In collecting these sums not only was it benefiting from Molnar acting outside its normal course of business, but it was also realizing on its security which ranked behind that of the respondent. This the PPSA does not permit.

[3] The appeal must be dismissed. [page492]

[4] Costs to the respondent fixed at $10,000 inclusive of disbursements and GST.

Appeal dismissed.