GE Canada Equipment Financing G.P. v. ING Insurance Company of Canada, 2009 ONCA 171

GE Canada Equipment Financing G.P. v. ING Insurance Company of Canada [Indexed as: GE Canada Equipment Financing G.P. v. ING Insurance Co. of Canada]

94 O.R. (3d) 321

Court of Appeal for Ontario,

Cronk, Juriansz and MacFarland JJ.A.

February 25, 2009

Personal property security -- Priorities -- Secured creditor who held perfected security interests in two trucks under Personal Property Security Act having priority over insurer who was entitled to salvage rights in trucks under statutory condition 6(7) -- Section 4(1)(c) of PPSA relieving insurer of obligation to protect its interests under policies by providing notice of those interests in PPSA registry but not addressing priorities and not operating to oust priority conferred on secured creditor by s. 9(1) of PPSA -- Statutory condition 6(7) not operating to vest title to salvage in insurer free and clear of pre-existing perfected security interest in trucks -- Personal Property Security Act, R.S.O. 1990, c. P.10, ss. 4(1) (c), 9(1) -- Statutory Conditions -- Automobile Insurance, O. Reg. 777/93, s. 6(7).

GE financed the acquisition of two trucks by B Ltd., which was in the vehicle leasing and rental business. GE took all necessary steps under the Personal Property Security Act to perfect its purchase money security interests ("PMSIs") in the trucks and their proceeds. B Ltd. subsequently leased the trucks to two separate third parties, and each lessee obtained automobile insurance on its vehicle under a policy of insurance issued by ING. The trucks were stolen. B Ltd. submitted proof of loss forms to ING in which it falsely represented that no one other than the insured had any interest in the trucks and that there was no lien, chattel mortgage or conditional sales agreement thereon. ING accepted the loss claims and paid the cash value of the trucks to B Ltd. and the lessees. As a result, it became entitled to salvage rights in the trucks under statutory condition 6(7) in Statutory Conditions -- Automobile Insurance passed under the Insurance Act, R.S.O. 1990, c. I.8. In consideration for the receipt of the insurance proceeds, B Ltd. purported to transfer title to the trucks to ING (the "Transfer"). Both trucks were recovered and ING took possession of them. After B Ltd. defaulted on its payment obligations under the conditional sales agreements, GE attempted to exercise its remedies on default and learned for the first time of the theft of the trucks. GE commenced an application for a declaration that its PMSIs had priority over ING's salvage rights. The application was dismissed. The application judge found that the combined effect of s. 4(1)(c) of the PPSA and statutory condition 6(7) was to deprive GE of the priority protection otherwise afforded to its PMSIs under the PPSA. GE appealed.

Held, the appeal should be allowed.

The effect of s. 4(1)(c) of the PPSA was to relieve ING of the obligation to protect its interests under the insurance policies by providing notice of those interests in the PPSA registry. It did no more than that. Nothing in the language of s. 4(1)(c) suggests that it is intended to resolve priority disputes between creditors. It is not concerned with priorities at all. Section 4(1)(c) did not operate to oust the priority otherwise conferred on GE's PMSIs by s. 9(1) of the PPSA. Statutory condition 6(7) represents a statutory codification of the common-law right of subrogation. Under the principle of subrogation, the insurer succeeds only to the exact right otherwise enjoyed by its insured. Section 6(7) does not increase the [page322] rights of an insurer against third parties beyond those enjoyed by its insured or create new rights in the insurer not previously possessed by its insured. In this case, B Ltd.'s interests in the trucks were subject to GE's perfected PMSIs. As against GE, ING was in no better position in respect of its salvage rights than was B Ltd.

ING did not take title to the trucks under the Transfer free from GE's PMSIs under s. 28(1) of the PPSA. The Transfer did not constitute a "sale" for the purpose of s. 28(1), and it was not carried out by B Ltd. "in the ordinary course of business", as required under s. 28(1).

It was unreasonable that a creditor in GE's position should lose its priority in secured collateral because it failed to foresee that its debtor would actively mislead its involved insurers. As between GE and ING, the consequences of B Ltd.'s misrepresentations should be borne by ING.

APPEAL from the order of Lederman J., [2008] O.J. No. 385 (S.C.J.) dismissing an application for a declaration in respect of priorities.

Cases referred to David Polowin Real Estate Ltd. v. Dominion of Canada General Insurance Co. (2005), 76 O.R. (3d) 161, [2005] O.J. No. 2436, 255 D.L.R. (4th) 633, 199 O.A.C. 266, 23 C.C.L.I. (4th) 191, 15 C.P.C. (6th) 1, [2005] I.L.R. I-4422, 19 M.V.R. (5th) 205, 140 A.C.W.S. (3d) 166 (C.A.) [leave to appeal to S.C.C. refused [2005] S.C.C.A. No. 388]; Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411, [1997] S.C.J. No. 25, 143 D.L.R. (4th) 385, 208 N.R. 161, [1997] 2 W.W.R. 457, J.E. 97-523, 46 Alta. L.R. (3d) 87, 193 A.R. 321, 44 C.B.R. (3d) 1, 8 C.P.C. (4th) 68, 97 D.T.C. 5089, 12 P.P.S.A.C. (2d) 68, 69 A.C.W.S. (3d) 295, consd Chrysler Credit Canada, a division of Daimler Chrysler Financial Services (debis) Canada Inc. v. Fehr (2001), 55 O.R. (3d) 630, [2001] O.J. No. 3401, [2001] O.T.C. 634, 33 C.C.L.I. (3d) 147, 16 M.V.R. (4th) 74, 107 A.C.W.S. (3d) 896 (S.C.J.), distd Other cases referred to Bank of Nova Scotia v. Groupe Procycle Inc., [1999] O.J. No. 24, 92 O.T.C. 356, 7 C.B.R. (4th) 66, 14 P.P.S.A.C. (2d) 237, 84 A.C.W.S. (3d) 1200 (Gen. Div.); Bell ExpressVu Ltd. Partnership v. Rex, [2002] 2 S.C.R. 559, [2002] S.C.J. No. 43, 2002 SCC 42, 212 D.L.R. (4th) 1, 287 N.R. 248, [2002] 5 W.W.R. 1, J.E. 2002-775, 166 B.C.A.C. 1, 100 B.C.L.R. (3d) 1, 18 C.P.R. (4th) 289, 93 C.R.R. (2d) 189, REJB 2002-30904, 113 A.C.W.S. (3d) 52; DaimlerChrysler Financial Services (Debis) Canada Inc. v. Mega Pets Ltd., [2002] B.C.J. No. 808, 2002 BCCA 242, 212 D.L.R. (4th) 41, [2002] 5 W.W.R. 587, 166 B.C.A.C. 298, 1 B.C.L.R. (4th) 237, 22 B.L.R. (3d) 14, 33 C.B.R. (4th) 44, 2003 D.T.C. 5612, 113 A.C.W.S. (3d) 179; Fairline Boats Ltd. v. Leger, [1980] O.J. No. 216, 1 P.P.S.A.C. 218 (H.C.J.); First Vancouver Finance v. M.N.R., [2002] 2 S.C.R. 720, [2002] S.C.J. No. 25, 2002 SCC 49, 212 D.L.R. (4th) 615, 288 N.R. 347, [2003] 1 W.W.R. 1, J.E. 2002-960, 219 Sask. R. 185, 45 C.B.R. (4th) 213, [2002] 3 C.T.C. 285, 2002 D.T.C. 6998, [2002] G.S.T.C. 23, 113 A.C.W.S. (3d) 1098; Giffen (Re), [1998] 1 S.C.R. 91, [1998] S.C.J. No. 11, 155 D.L.R. (4th) 332, 222 N.R. 29, [1998] 7 W.W.R. 1, J.E. 98-372, 101 B.C.A.C. 161, 45 B.C.L.R. (3d) 1, 1 C.B.R. (4th) 115, 13 P.P.S.A.C. (2d) 255, 77 A.C.W.S. (3d) 433; Paskow v. Calvert Fire Insurance Co., 579 F.2d 949 (5th Cir. 1979); PPG Industries v. Hartford Fire Ins. Co., 531 F.2d 58 (2nd Cir. 1976); Recktor (Re), [1983] O.J. No. 957, 47 C.B.R. (N.S.) 267, 3 P.P.S.A.C. 32 (H.C.J.); Rizzo & Rizzo Shoes Ltd. (Re) (1998), 36 O.R. (3d) 418, [1998] 1 S.C.R. 27, [1998] S.C.J. No. 2, 154 D.L.R. (4th) 193, 221 N.R. 241, J.E. 98-201, 106 O.A.C. 1, 50 C.B.R. (3d) 163, 33 C.C.E.L. (2d) 173, 98 CLLC Â210-006; Royal Bank of Canada (Administrative agent for certain lenders) v. 1231640 Ontario Inc. (Trustee of), [2007] O.J. No. 4561, 2007 ONCA 810, 37 C.B.R. (5th) 185, 163 A.C.W.S. (3d) 474, 289 D.L.R. (4th) (C.A.) [Leave to appeal to S.C.C. granted [2008] S.C.C.A. No. 34]; [page323] Stelco Inc. (Re), [2005] O.J. No. 1575, 253 D.L.R. (4th) 524, 197 O.A.C. 1, 9 C.B.R. (5th) 307, 21 C.C.L.I. (4th) 1, [2005] I.L.R. I-4430, 7 P.P.S.A.C. (3d) 281, 138 A.C.W.S. (3d) 949 (C.A.) Statutes referred to Insurance Act, R.S.O. 1990, c. I.8, ss. 234(1), 258(3) Personal Property Security Act, R.S.O. 1990, c. P.10, ss. 2 [as am.], (a) [as am.], 4(1) [as am.], (c) [as am.], 9(1), 25(1) [as am.], 28, (1), (5) Uniform Commercial Code-Secured Transactions, 9-104(g) [rep., now 9-109(d)(8)], 9-109(d)(8) Rules and regulations referred to Statutory Conditions -- Automobile Insurance, O. Reg. 777/93, s. 6(7) Authorities referred to Boivin, Denis, Insurance Law (Toronto: Irwin Law, 2004) Catzman, F.M., Q.C., Personal Property Security Law in Ontario (Toronto: Carswell, 1976) Driedger, E.A., Construction of Statutes, 2nd ed. (Toronto: Butterworths, 1983) Fridman, G.H.L., Q.C., Sale of Goods in Canada, 5th ed. (Toronto: Carswell, 2004) McLaren, Richard H., Secured Transactions in Personal Property in Canada, 2nd ed., looseleaf (Toronto: Carswell, 2003) Sullivan, Ruth, Sullivan and Driedger on the Construction of Statutes, 4th ed. (Markham, Ont.: LexisNexis Butterworths, 2002) Ziegel, Jacob S., and David L. Denomme, The Ontario Personal Property Act: Commentary and Analysis, 2nd ed. (Markham, Ont.: LexisNexis Butterworths, 2000)

Harvey G. Chaiton and Doug Bourassa, for appellant. Adam J. Stephens and Nafisah Chowdhury, for respondent.

The judgment of the court was delivered by

[1] CRONK J.A.: -- This appeal involves a priority dispute between a secured creditor who holds perfected security interests under the Personal Property Security Act, R.S.O. 1990, c. P.10 (the "PPSA") in two highway tractor trucks and an automobile insurer who is entitled to salvage rights in the same vehicles under statutory condition 6(7) in Statutory Conditions -- Automobile Insurance, O. Reg. 777/93 passed under the Insurance Act, R.S.O. 1990, c. I.8, as amended (the "Insurance Act"). At issue is the interplay between s. 4(1) (c) of the PPSA, which excludes "a transfer of an interest or claim in or under any policy of insurance" from the application of the PPSA, and statutory condition 6(7) of the Insurance Act, which affords an insurer the [page324] right to salvage in an insured vehicle in certain circumstances. We are also required to determine whether ss. 28(1) or 25(1) of the PPSA operate in this case to determine the priority contest between the parties.

I. Facts

(1) The parties and the events

[2] The appellant, GE Canada Equipment Financing G.P. ("GE"), an asset-backed lender, leases or conditionally sells various types of collateral, including highway tractor trucks. The respondent, ING Insurance Company of Canada ("ING"), offers a range of insurance products and services to the public, including automobile insurance. At the relevant time, Brampton Leasing and Rentals Limited ("Brampton") was in the vehicle leasing and rental business, operating as a Hertz car and truck rental agency.

[3] GE financed the purchase of numerous vehicles for use by Brampton in its leasing and rental business. In particular, on September 18, 2002 and November 18, 2004, GE entered into two conditional sale agreements (the "CSAs") with Brampton, whereby GE financed Brampton's acquisition of two highway tractor trucks manufactured in 2003 and 2005 (referred to in these reasons as the "2003 Truck", the "2005 Truck" or, collectively, the "Trucks").

[4] Under the terms of the CSAs, (i) GE was named as the "assignee" and Brampton was named as the "purchaser" of the Trucks; (ii) GE remained the owner of and held title to the Trucks until they were paid for in full; (iii) Brampton was required to place and maintain comprehensive first party all risks insurance on the Trucks for their full replacement value, to name GE as a beneficiary in the insurance policies so obtained and to ensure that the policies contained a waiver of subrogation clause in favour of GE; and (iv) while not in default under the CSAs, Brampton was entitled to the quiet use and enjoyment of the Trucks.

[5] By the end of November 2004, GE had taken all necessary steps under the PPSA to perfect its purchase money security interests ("PMSIs") in the Trucks and their proceeds. [^1]

[6] In accordance with its obligations under the CSAs, Brampton obtained comprehensive general liability insurance policies on [page325] the Trucks from Zurich Insurance Company, naming GE as loss payee thereunder. In addition, in February and May 2005, when Brampton leased the Trucks to two separate third parties, each lessee obtained automobile insurance on its leased vehicle under a policy of insurance issued by ING (the "ING policies"). The third parties were named as the insureds and lessees, and Brampton was named as the lessor and loss payee under the ING policies. No mention was made of GE in the ING policies.

[7] After the ING policies were issued, both Trucks were stolen. As a result, in September 2005 and May 2006, the third- party lessees completed loss claims and Brampton submitted proof of loss forms to ING in respect of the stolen Trucks. In the latter documents, Brampton falsely represented in relation to the Trucks: "[N]o person, firm, or corporation, other than the Insured, has had any interest therein, and there is no lien, chattel mortgage, or conditional sales agreement thereon."

[8] In consideration for the receipt of the ING insurance proceeds, Brampton also purported to transfer title to the Trucks to ING in circumstances of a vehicle total loss claim (the "Transfer"). The proof of loss forms stated:

Payment of this claim to [the insured and Brampton] is hereby authorized and in consideration of such payment the Insurer is discharged forever from all further claim by reason of the said loss or damage. All rights to recovery from any other person are hereby transferred to the Insurer which is authorized to bring action in the Insured's name to enforce such rights. All right, title and interest in the vehicle or any part or equipment thereof is hereby transferred to the Insurer only in the event that this claim is based upon the whole value of the vehicle because it has been lost, destroyed or damaged beyond economical repair and the Insured agrees immediately to notify the Insurer in the event of its recovery. (Emphasis added)

The record does not reveal how the Transfer contemplated by this provision was actually made.

[9] ING accepted the loss claims and discharged its indemnity obligations under the ING policies by paying the cash value of the stolen Trucks jointly to Brampton and the third-party lessees, less applicable deductibles. As a result, as I discuss later in these reasons, ING became entitled to salvage rights in the Trucks under statutory condition 6(7) of the Insurance Act.

[10] ING did not conduct PPSA searches prior to issuing the ING policies, paying the ING insurance proceeds or accepting title to the Trucks from Brampton.

[11] Both Trucks were later recovered and ING took possession of them. ING then sold the 2005 Truck to an unrelated party. As a result of this litigation, ING has retained possession of the 2003 Truck and the proceeds from the sale of the 2005 Truck. [page326]

[12] Brampton did not notify GE of the theft of the Trucks. On the contrary, it continued to make payments to GE under the CSAs for some months after the Trucks were stolen. Similarly, GE received no notice of the terms of the ING policies, the claims made thereunder by Brampton and the third-party lessees, the payment to them of the ING insurance proceeds, or the Transfer. None of the ING insurance proceeds was remitted to GE.

[13] Brampton defaulted in its payment obligations under the CSAs in December 2006 and filed an assignment in bankruptcy on March 1, 2007. GE learned of the theft of the Trucks when it attempted to exercise its remedies on default under the CSAs. On March 14, 2007, GE obtained used vehicle information packages for the Trucks from the Ministry of Transportation, which indicated that ING was the registered owner of the 2003 Truck and that it had owned, and subsequently sold, the 2005 Truck. The packages also identified GE as a "secured party" and a registered lienholder in relation to both Trucks.

[14] There is no suggestion that the third-party lessees or ING knew of GE's PMSIs in the Trucks prior to the end of March 2007, when GE wrote to ING and informed it of GE's perfected PMSIs in the Trucks. Brampton, of course, knew of GE's PMSIs throughout.

(2) Relevant statutory provisions

[15] The following statutory provisions are central to the issues on appeal:

A. The [PPSA](https://www.canlii.org/en/on/laws/stat/rso-1990-c-p10/latest/rso-1990-c-p10.html)

4(1) Except as otherwise provided under this Act, this Act does not apply, . . . . . (c) to a transfer of an interest or claim in or under any policy of insurance ... . . . . .

9(1) Except as otherwise provided by this or any other Act, a security agreement is effective according to its terms between the parties to it and against third parties. . . . . .

25(1) Where collateral gives rise to proceeds, the security interest therein, (a) continues as to the collateral, unless the secured party expressly or impliedly authorized the dealing with the collateral free of the security interest; and (b) extends to the proceeds. [page327] . . . . .

28(1) A buyer of goods from a seller who sells the goods in the ordinary course of business takes them free from any security interest therein given by the seller even though it is perfected and the buyer knows of it, unless the buyer also knew that the sale constituted a breach of the security agreement.

B. Statutory condition 6(7) of the [Insurance Act](https://www.canlii.org/en/on/laws/stat/rso-1990-c-i8/latest/rso-1990-c-i8.html)

There shall be no abandonment of the automobile to the insurer without the insurer's consent. If the insurer exercises the option to replace the automobile or pays the actual cash value of the automobile, the salvage, if any, shall vest in the insurer.

(3) The litigation

[16] Despite demand therefor, ING refused to surrender possession of the 2003 Truck or to pay the proceeds from the sale of the 2005 Truck to GE. As a result, GE commenced proceedings against ING, applying for declarations that (i) its PMSIs in the Trucks had priority over ING's rights to salvage in the same vehicles; and (ii) it was entitled to the return of the Trucks or, in the case of the 2005 Truck, to the proceeds of sale thereof, from ING.

[17] ING resisted GE's application on two grounds. It maintained that its salvage rights flowed from the ING policies, which incorporated statutory condition 6(7) of the Insurance Act, and that the PPSA did not apply to its interests in the Trucks by virtue of s. 4(1)(c) of the PPSA and statutory condition 6(7) of the Insurance Act. ING also argued that as the Transfer was a "[sale] in the ordinary course of business", the PPSA did not apply by operation of s. 28(1) of the PPSA. On both grounds, ING asserted that it took title to the Trucks free from GE's pre-existing perfected PMSIs in the Trucks.

[18] By order dated February 4, 2008, the application judge dismissed GE's application and, on consent, awarded costs to ING in the total amount of $15,000, plus interest. The core of his reasoning was as follows [at paras. 22-23]:

As a matter of priority, the PPSA, in effect, has stated that GE is not to have priority over transfers of interest to ING by reason of the operation of Statutory Condition 6(7) which is incorporated into insurance policies.

Conclusion

I find that GE's interest in the vehicles vis a vis ING is not protected by the PPSA for the reason that [the] PPSA does not apply to a transfer of an interest under a policy of insurance [s. 4(1)(c) of the PPSA]. There was such a transfer of an interest by virtue of Statutory Condition 6(7).

[19] Given this conclusion, the application judge regarded it as unnecessary to address ING's s. 28(1) PPSA argument. In contrast [page328] to its position on this appeal, ING did not rely on s. 25(1) of the PPSA in the proceeding before the application judge.

II. Issues

[20] I would frame the issues on appeal this way: do ING's salvage rights in the Trucks have priority over GE's pre- existing perfected PMSIs in the Trucks and their proceeds by operation of (i) s. 4(1)(c) of the PPSA and statutory condition 6(7) of the Insurance Act; (ii) s. 28(1) of the PPSA; or (iii) s. 25(1) of the PPSA?

III. Analysis

[21] GE advances two main arguments in support of its claim that its PMSIs have priority over ING's salvage rights. It submits that the application judge erred by concluding that the combined operation of s. 4(1)(c) of the PPSA and statutory condition 6(7) of the Insurance Act resulted in title to the Trucks vesting in ING free from GE's perfected PMSIs in the Trucks and their proceeds. GE also asserts that neither s. 28(1) nor s. 25(1) of the PPSA are engaged in this case since, in the case of s. 28(1), the Transfer was not a "[sale] in the ordinary course of business" and, in the case of s. 25(1), GE did not expressly or impliedly authorize the Transfer. I will address these arguments in turn.

[22] To begin, I note that the issues on appeal relate to the interpretation of the relevant PPSA provisions and statutory condition 6(7) of the Insurance Act. The process of statutory interpretation is governed by the modern rule of statutory construction, first described in E.A. Driedger, Construction of Statutes, 2nd ed. (Toronto: Butterworths, 1983), at p. 87:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

See, also, Ruth Sullivan, Sullivan and Driedger on the Construction of Statutes, 4th ed. (Markham, Ont.: LexisNexis Butterworths, 2002), at pp. 1-3; Bell ExpressVu Ltd. Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559, [2002] S.C.J. No. 43, at para. 26; and Rizzo & Rizzo Shoes Ltd. (Re) (1998), 36 O.R. (3d) 418, [1998] 1 S.C.R. 27, [1998] S.C.J. No. 2, at para. 21.

(1) Section 4(1)(c) of the PPSA and statutory condition 6(7) of the [Insurance Act](https://www.canlii.org/en/on/laws/stat/rso-1990-c-i8/latest/rso-1990-c-i8.html)

[23] The application judge concluded that the combined effect of s. 4(1)(c) of the PPSA and statutory condition 6(7) of the Insurance Act [page329] was to deprive GE of the priority protection otherwise afforded to its PMSIs under the PPSA. With respect, I disagree.

(i) PPSA regime

[24] The PPSA is provincial chattel security legislation designed to protect the rights of creditors and debtors by regularizing secured transactions in personal property. To achieve this objective, the PPSA establishes a province-wide, notice-based registration system. Under this system, the first creditor to register notice of a security interest in a debtor's personal property generally has a first priority secured interest in that property that is effective against third parties, including other secured creditors: see Royal Bank of Canada (Administrative agent for certain lenders) v. 1231640 Ontario Inc. (Trustee of), 2007 ONCA 810, (C.A.), at para. 4, per Weiler J.A. (in dissent, but not on this point), leave to appeal to S.C.C. granted [2008] S.C.C.A. No. 34. The purpose of such legislation was described by Gonthier J. (dissenting on other grounds) in Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411, [1997] S.C.J. No. 25, at para. 21:

[P]rovincial legislatures have moved to protect secured creditors generally through the enactment of personal property security legislation . . . These statutory regimes have been implemented to increase certainty and predictability in secured transactions through the creation of a coherent system of priorities . . . The benefits of such certainty in commercial transactions, on basic economic principles, are intended to accrue to the health of the economy in general.

[25] Section 2 of the PPSA delineates the scope of the statute:

2. Subject to subsection 4(1), this Act applies to, (a) 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 including, without limiting the foregoing, (i) a . . . conditional sale . . . and (ii) an assignment, lease or consignment that secures payment or performance of an obligation;

Thus, under s. 2(a) and subject to s. 4(1), the PPSA applied to GE's security interests in the Trucks, as created under the CSAs.

[26] The central priorities rule under the PPSA is set out in s. 9(1): "Except as otherwise provided by this or any other Act, a security agreement is effective according to its terms between the parties to it and against third parties" (emphasis added).

[27] In this case, GE's PMSIs in the Trucks were perfected by registration under the PPSA before the issuance of the ING policies and the Transfer. As a result, under the s. 9(1) priorities rule, GE's PMSIs have priority over the interests of all third parties [page330] with a subsequently acquired interest in the secured collateral. The issue, therefore, is whether s. 4(1)(c) of the PPSA and statutory condition 6(7) of the Insurance Act, alone or in combination, constitute an exception to the s. 9(1) PPSA priorities rule, such that ING's salvage rights in the Trucks overtake the priority of GE's PMSIs in the same collateral.

(ii) [Section 4(1)](https://www.canlii.org/en/on/laws/stat/rso-1990-c-p10/latest/rso-1990-c-p10.html)(c) PPSA exclusion

[28] Section 4(1)(c) of the PPSA excludes transfers of "an interest or claim in or under any policy of insurance" from the application of the PPSA. Jacob S. Ziegel and David L. Denomme, in The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed. (Markham, Ont.: LexisNexis Butterworths, 2000), at p. 82, citing F.M. Catzman, Q.C., Personal Property Security Law in Ontario (Toronto: Carswell, 1976), at p. 35, explain the rationale for the s. 4(1)(c) exclusion in this fashion:

The drafters of the original Ontario Act rationalized the exclusion of security interests in insurance policies on the ground that the insurer maintains records of title and claims to policies and contracts issued by it and that there was no need for a separate registry.

See, also, Rektor (Re), [1983] O.J. No. 957, 47 C.B.R. (N.S.) 267 (H.C.J.), at para. 11.

[29] Thus, the purpose of s. 4(1)(c) is to avoid the unnecessary duplication of notice systems concerning transfers that create interests or claims in or under insurance policies. This is achieved by excluding such interests or claims from the PPSA notice and registration scheme. Simply put, notice under the PPSA is not required to perfect a security interest falling within the ambit of s. 4(1)(c).

[30] In Stelco Inc. (Re), [2005] O.J. No. 1575 (Ont. C.A.), this court was concerned with whether an assignment of unearned premium under an insurance premium financing contract came within the s. 4(1)(c) exclusion. Justice Weiler, writing for the court, examined the scope of s. 4(1)(c) and noted that its purpose is to exempt certain items of commerce from the notice and registration requirements of the PPSA. She commented, at paras. 10, 15, 21-22 and 24:

[Section] 4(1)(c) deals specifically with transfers of interests or claims in insurance policies. It does not deal with "other items of commerce" and these are not exempted [from the application of the PPSA]. . . . . .

The wording of the exclusion in s. 4(1)(c) is clear and should be read as including the assignment of unearned premium under a policy of insurance. [page331] . . . . .

In Ontario, interpreting s. 4(1) as exempting [the premium financier] from registering its right to receive any unearned insurance premium leads one to s. 138 of the Insurance Act [which provides for notice of an insured's assignment of the right to refund of premium under a contract of insurance].

This is not to say that s. 138 gives [the premium financier] the right to priority over other secured lenders. To determine priorities, resort to the common law or to the provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 would be necessary and that issue awaits another day. . . . . .

[The premium financier] has an interest in the unearned premiums that were transferred to it by virtue of the [contracts in issue] and . . . that security interest was exempt from registration by virtue of a combination of s. 4(1)(c) of the PPSA and s. 138 of the Insurance Act. (Emphasis added)

[31] The effect of s. 4(1)(c) in this case, therefore, was to relieve ING of the obligation to protect its interests under the ING policies by providing notice of those interests in the PPSA registry. But s. 4(1)(c) did no more. It did not relieve ING of the requirement to be mindful of the PPSA-protected interests of secured creditors. Nothing in the language of s. 4(1)(c) suggests that it is intended to resolve priority disputes between creditors, including priority competitions between a creditor with a perfected security interest under the PPSA (like GE) and a creditor whose interest in collateral is exempt from the notice and registration requirements of the PPSA (like ING).

[32] Indeed, a consideration of the language of s. 4(1)(c) in the context of its purpose indicates that s. 4(1)(c) is not concerned with priorities at all. The words of Professors Ziegel and Denomme at p. 116 of their above-cited text, although addressing another exclusion from the PPSA under s. 4(1)(a), apply with equal force to s. 4(1)(c):

[Section] 4(1)(a) means not only that the Act has nothing to say about the creation and perfection of non-consensual security interests but also that it does not regulate priorities between PPSA security interests and non-PPSA interests. (Emphasis added)

[33] Accordingly, since s. 4(1)(c) of the PPSA does not address priorities, it does not operate to oust the priority otherwise conferred on GE's PMSIs by s. 9(1) of the PPSA.

[34] This conclusion is bolstered by the nature of the transaction at issue. GE submits that s. 4(1)(c) does not apply to resolve the priority contest between the parties because the Transfer did not "in substance create a security interest" in or under an [page332] insurance policy or amounts payable under an insurance policy. Thus, it is contended that the Transfer did not fall within the ambit of s. 4(1)(c). I agree.

[35] Section 4(1)(c) of the PPSA is modelled after Article 9 of the Uniform Commercial Code (the "UCC"), which establishes exceptions from similar personal property registration schemes in the United States. UCC 9-109(d)(8) provides:

9-109(d) This article does not apply to:

(8) a transfer of an interest in or an assignment of a claim under a policy of insurance . . .

[36] Prior to July 1, 2001, the wording of UCC 9-104(g) -- the predecessor provision to current UCC 9-109(d)(8) -- was identical to that of s. 4(1)(c) of the PPSA. The ambit of UCC 9-104(g) was interpreted by American courts as limited to direct interests created in an insurance policy by making the policy itself the collateral securing the transaction in question. Thus, for example, in Paskow v. Calvert Fire Insurance Co., 579 F.2d 949 (5th Cir. 1979), at p. 953, the court explained that UCC 9-104(g) was "directed not at the insurance of collateral but the creation of a security interest in an insurance policy" (emphasis added). See, also, PPG Industries v. Hartford Fire Ins. Co., 531 F.2d 58 (2nd Cir. 1976), at p. 60.

[37] The Transfer in this case was not a secured transaction -- it did not create an interest that secured payment or performance of an obligation. Nor did it create a security interest "in or under an insurance policy", including in respect of amounts payable under an insurance policy, so as to trigger the application of s. 4(1)(c) of the PPSA. Rather, it involved the purported transfer of ownership in the Trucks to ING in exchange for full indemnification under the ING policies on the basis of a total loss claim.

[38] I note that GE makes no claim to the ING policies or their proceeds. Its claims are to the collateral secured by the CSAs -- the Trucks -- and, in the case of the 2005 Truck, to the proceeds of sale realized by ING, in respect of which GE holds PPSA-protected security interests. GE's claims, therefore, are unaffected by s. 4(1)(c). Its claims are based on "PPSA security interests" in the Trucks and, in respect of the 2005 Truck, in its proceeds. In contrast, ING's interests in or under the ING policies and its salvage rights in the Trucks are "non-PPSA interests".

[39] In all these circumstances, I agree with GE's submission that s. 4(1)(c) does not operate in this case to determine the priorities between GE's PPSA security interests in the Trucks and their proceeds and ING's non-PPSA salvage rights in the Trucks. Section 4(1)(c) simply has no bearing on that key issue. [page333]

[40] However, that does not end the matter. In the application judge's view, it was the combined operation of s. 4(1)(c) and statutory condition 6(7) that determined this priority contest. Recall that he held that GE's interest in the vehicles "is not protected by the PPSA for the reason that [the] PPSA does not apply to a transfer of an interest under a policy of insurance" and "There was such a transfer of an interest by virtue of Statutory Condition 6(7)." I turn now to consideration of statutory condition 6(7).

(iii) Statutory condition 6(7)

[41] Under s. 234(1) of the Insurance Act, statutory condition 6(7) forms part of the standard form automobile insurance policy in use in Ontario. [^2] Statutory condition 6(7) is concerned with automobile total loss cases. In such cases, an insurer is entitled to the salvage, if any, in the lost automobile where it elects to replace or pay the actual cash value of the automobile. In David Polowin Real Estate Ltd. v. Dominion of Canada General Insurance Co. (2005), 76 O.R. (3d) 161, [2005] O.J. No. 2436 (C.A.), at para. 54, leave to appeal to S.C.C. refused [2005] S.C.C.A. No. 388, this court explained that statutory condition 6(7) affords an insurer three options where an insured vehicle is a total loss:

First, the insurer can replace the insured's car and take title to the salvage. It is entitled to the salvage because otherwise, its insured will be over-indemnified. Second, it can pay the actual cash value of the car and take title to the salvage. Again, the insurer claims entitlement to the salvage to prevent over-indemnification. Third, it can elect to leave the salvage with the insured, in which case the insured's loss would not be the actual cash value of the car but its diminution in value.

[42] In this case, the Trucks were lost through theft. On proof of loss, ING exercised the second option described in Polowin -- it paid Brampton and the third-party lessees the actual cash value of the Trucks, less applicable deductibles, in exchange for the Transfer. Having satisfied its indemnity obligations under the ING policies in full, ING became entitled under statutory condition 6(7) to title to any salvage in the Trucks. But this does not mean that statutory condition 6(7) operates to vest title to the salvage in ING, free and clear of pre-existing perfected security interests in the Trucks. I say this for several reasons. [page334]

[43] First, the concepts of priority and salvage are not the same. Statutory condition 6(7) does not refer to priorities, the interests of secured creditors, or the PPSA. It refers to the right to salvage in respect of a total loss insured vehicle. A plain reading of statutory condition 6(7) offers no support for ING's contention that it is intended, alone or in combination with s. 4(1)(c) of the PPSA, to extinguish a creditor's pre-existing perfected security interest in a vehicle that becomes the subject of a total loss claim. For example, statutory condition 6(7) does not contain the words "notwithstanding any security interest in the vehicle". It is, of course, open to the legislature to create a right that extinguishes or subordinates the pre-existing perfected security interests of third parties. But if this were the intent of statutory condition 6(7), it could easily have been accomplished by the use of explicit priorities language.

[44] This conclusion is fortified by the decision of the Supreme Court of Canada in Sparrow. In that case, Iacobucci J., writing for a majority of the court, confirmed at paras. 106 and 112, that clear and unambiguous language is required to extinguish the rights of a secured creditor in respect of collateral:

Parliament has shown that it knows how to assert priority over rival security interests . . . All that is needed to overtake a fixed and specific charge is clear language to that effect.

Finally, I wish to emphasize that it is open to Parliament to step in and assign absolute priority to the deemed trust. A clear illustration of how this might be done is afforded by s. 224(1.2) [of the Income Tax Act], which vests certain moneys in the Crown "notwithstanding any security interest in those moneys" and provides that they "shall be paid to the Receiver General in priority to any such security interest". All that is needed to effect the desired result is clear language of that kind. (Citations omitted)

See, also, First Vancouver Finance v. M.N.R., 2002 SCC 49, [2002] 2 S.C.R. 720, [2002] S.C.J. No. 25, at paras. 26-28; DaimlerChrysler Financial Services (Debis) Canada Inc. v. Mega Pets Ltd., [2002] B.C.J. No. 808, 2002 BCCA 242, at para. 38.

[45] In contrast to the explicit Crown priority provision referenced in Sparrow, statutory condition 6(7) is devoid of any express or implied indicators of a legislative intent to affect the perfected security interest of a secured creditor in an insured vehicle that is lost to an insured. In my view, to read such an intent into statutory condition 6(7) in the absence of clear and unequivocal language evidencing such a legislative objective would constitute an unwarranted extension of the scope of an insurer's salvage rights.

[46] Second, and importantly, statutory condition 6(7) represents a statutory codification of the common-law right of subrogation. In [page335] Polowin, Laskin J.A., writing for a unanimous court, held at para. 82, that an insurer's right to claim salvage under statutory condition 6(7) "amounts to the exercise of the right of subrogation after fully indemnifying the insured for the insured's loss". He later added, at para. 100: "Once an insured has been fully indemnified for the loss, the right to salvage is simply the exercise of the right of subrogation to prevent over-indemnification [of the insured]."

[47] Subrogation is a derivative right that rests on the principle of indemnification. It contemplates that on full indemnification of an insured by an insurer for an insured loss, the insurer becomes entitled to exercise a right belonging to the insured. In Insurance Law (Toronto: Irwin Law, 2004), Denis Boivin states, at pp. 280, 282 and 284:

Subrogation arises when the insured has an enforceable right against someone other than his or her insurer -- a right that would allow the insured to recover the losses caused by the peril, in part or in their entirety. Subrogation allows the insurer to enforce this right in the name of the insured and to withhold from the resulting award the equivalent of any indemnity paid under the insurance contract. . . . . .

The insurer must be placed in the exact same position as the insured. The insurer must have access to all the rights and remedies of the insured with respect to the insured object . . . . . . . .

Subrogation is a derivative right -- that is, it depends entirely on the rights of the insured. (Italicized emphasis in original; underlined emphasis added)

[48] In other words, under the principle of subrogation, the insurer succeeds only to the exact right otherwise enjoyed by its insured. This is not a new proposition. It has long been recognized that under the right of subrogation, the insurer must be placed in the position of its insured. For this reason, the discussion in Polowin of an insurer's exercise of the right of subrogation under statutory condition 6(7) recognizes that prior to the insurer's election to trigger statutory condition 6(7), the right to salvage in an insured vehicle is a property right of the insured. Where, however, the insurer pays the insured's total loss claim in respect of the insured vehicle, it becomes entitled to all the salvage rights that the insured possessed in respect of the insured vehicle. Statutory condition 6(7), therefore, is concerned with an insurer's right to salvage as against its insured.

[49] The application judge does not appear to have considered the implications of the principle of subrogation in the context of [page336] statutory condition 6(7). Instead, relying on Giffen (Re), [1998] 1 S.C.R. 91, [1998] S.C.J. No. 11, he concluded that the dispute between GE and ING could not be resolved on the basis of the examination of Brampton's rights in respect of the Trucks or the determination of who has title to the vehicles [at para. 21], "because the dispute is one of priority to the vehicles and not ownership in them".

[50] I agree that we are concerned here with the priorities as between GE's and ING's interests in the Trucks. I also agree that the question of title to or ownership of collateral is not determinative of priorities under the PPSA: see, for example, Giffen, at para. 26. However, the pertinent issue is the reach of ING's rights under statutory condition 6(7).

[51] Under statutory condition 6(7), where an insurer decides to replace or pay the actual cash value of a total loss vehicle, the salvage in the vehicle, if any, vests in the insurer by operation of law. Where, as here, the prerequisites to the invocation of statutory condition 6(7) are met, the issue is whether any salvage is in fact available for the benefit of the insurer. In some cases, no salvage will exist. For this reason, statutory condition 6(7) refers to salvage, "if any". Where salvage is available, the issue is whether the insurer's salvage right has priority over pre-existing perfected security interests in the vehicle in respect of which the salvage right arises.

[52] Where -- as here -- salvage is available, the principle of subrogation that underlies statutory condition 6(7) and the requirement of indemnification on which that principle rests mandate that an insurer who replaces or pays the actual cash value of an automobile in a total loss case steps into the shoes of the insured in relation to the right to salvage. The insurer is only entitled under the subrogation principle to the salvage right that was enjoyed by its insured prior to the insurer's decision to invoke statutory condition 6(7).

[53] In this case, Brampton's interests in the Trucks were subject to GE's perfected PMSIs. Statutory condition 6(7) conferred on ING only those rights to salvage possessed by Brampton prior to ING's payment of the actual cash value of the Trucks. Absent express statutory language to the contrary, statutory condition 6(7) should not be interpreted so as to confer on Brampton's insurer greater rights to salvage in the Trucks than were held by Brampton.

[54] In other words, statutory condition 6(7) does not increase the rights of an insurer against third parties beyond those enjoyed by its insured, or create new rights in the insurer not previously possessed by its insured. The "vesting" of salvage rights that [page337] occurs under statutory condition 6(7) involves the conveyance of salvage rights as between an insurer and its insured. That transfer may be subject to the interests of the insured's secured creditors.

[55] This conclusion accords with both commercial and common sense. If ING's assertion of priority is accepted, it would mean that a debtor whose vehicle was subject to the perfected security interest of a secured creditor could defeat that interest by the simple device of purchasing automobile insurance on the secured vehicle. In the subsequent event of the total loss of the vehicle, the interest of the secured creditor could be extinguished, without recourse, at the unilateral election of the debtor's insurer. This result would offend the principle of subrogation. It would permit a debtor's insurer to enjoy greater rights in the insured collateral than the debtor itself possessed. This is not a reasonable result. It is, therefore, to be avoided unless a legislative intent to effect such a result is evident. No such intent is manifest in statutory condition 6(7).

[56] The application judge relied on Chrysler Credit Canada, a division of Daimler Chrysler Financial Services (debis) Canada Inc. v. Fehr (2001), 55 O.R. (3d) 630, [2001] O.J. No. 3401 (S.C.J.) for the proposition that an insurer's entitlement to salvage under statutory condition 6(7) "was exempt from a claim under the PPSA". In so doing, he adverted to the following passage from Chrysler Credit, at para. 11:

The issue before me is not one of a transfer of an interest in a policy of automobile insurance. The issue before me does not include an insurer's right under [s. 6(7)] of the statutory conditions, which are incorporated in the policy, to acquire title to the salvage. Accordingly, the PPSA does not apply to the insurer's right to acquire the salvage of the collateral.

[57] I acknowledge that many of the facts in Chrysler Credit are analogous to those in this case. However, Chrysler Credit is distinguishable from the case at bar in several pivotal respects. Unlike this case, Chrysler Credit involved a claim by a secured creditor for entitlement to the proceeds of an insurance policy on a destroyed vehicle after the debtor's insurer had paid the debtor for the vehicle loss. That is not this case. As I have emphasized, GE makes no claim to the proceeds of the ING policies.

[58] Moreover, s. 258(3) of the Insurance Act was crucial to the decision in Chrysler Credit. That provision deals with the application of insurance money payable under an automobile insurance policy. It provides that an insured's creditor is not entitled to share in the insurance money payable under the policy unless the creditor's claim is "one for which indemnity is provided for by [the policy]". As there was no evidence that Chrysler Credit was [page338] a named insured or loss payee under the policy in question, it was precluded under s. 258(3) from claiming entitlement to the insurance proceeds and was restricted to its contractual rights against the debtor. Section 258(3) of the Insurance Act does not apply in this case, as GE seeks to obtain the secured collateral and proceeds from the sale of part of the secured collateral, rather than the proceeds of the ING policies themselves.

[59] Finally, in my view, Chrysler Credit does not hold that an insurer's right to salvage has priority over a secured party's interests in the automobile that gives rise to the salvage rights. Rather, the passage from Chrysler Credit relied on by the application judge concerns the rights of an insurer, as against its insured, to obtain salvage rights in insured collateral. In that context, Chrysler Credit holds that s. 4(1) (c) of the PPSA does not apply to an insurer's salvage rights.

(iv) Summary

[60] I would summarize my conclusions concerning s. 4(1)(c) of the PPSA and statutory condition 6(7) of the Insurance Act as follows: (i) Section 4(1)(c) and statutory condition 6(7) do not address priorities. To determine priorities in this case, resort must be had to s. 9(1) of the PPSA. Neither s. 4(1)(c) of the PPSA nor statutory condition 6(7) of the Insurance Act, alone or in combination, constitute an exception to the s. 9(1) PPSA general priorities rule. On the facts of this case, GE's PMSIs in the Trucks are effective as against ING under s. 9(1). (ii) Under s. 4(1)(c), ING was relieved of the obligation to provide notice of its interests under the ING policies in the PPSA registry. However, while s. 4(1)(c) freed ING from the need to protect its own interests under the PPSA, it did not relieve it of the requirement to be mindful of the PPSA-protected interests of other parties in the same collateral. (iii) The reach of ING's salvage rights under statutory condition 6(7) is determined by Brampton's salvage rights as they existed before ING triggered statutory condition 6(7). Brampton's salvage rights in the Trucks did not extinguish or displace the priority of GE's PMSIs in the Trucks and their proceeds. As against GE, therefore, ING is in no better position in respect of its salvage rights than was Brampton. [page339]

(2) [Section 28(1)](https://www.canlii.org/en/on/laws/stat/rso-1990-c-p10/latest/rso-1990-c-p10.html) of the PPSA

[61] ING argues that the Transfer was a usual transaction for a leasing company, with the result that it was a "sale" in the "ordinary course of business" by Brampton, within the meaning of s. 28(1) of the PPSA. Consequently, ING asserts, it took title to the Trucks under the Transfer free from GE's PMSIs. I again set out s. 28(1) of the PPSA:

28(1) A buyer of goods from a seller who sells the goods in the ordinary course of business takes them free from any security interest therein given by the seller even though it is perfected and the buyer knows of it, unless the buyer also knew that the sale constituted a breach of the security agreement. [^3]

[62] I disagree for two reasons. First, I am not persuaded that the Transfer from Brampton to ING constituted a "sale" for the purpose of s. 28(1) of the PPSA. G.H.L. Fridman, Q.C., in his text entitled Sale of Goods in Canada, 5th ed. (Toronto: Carswell, 2004) notes, at pp. 11-12:

At common law there appear to be instances in which property in goods is compulsorily transferred by the law from one person to another. In such cases there is no purchase, the parties do not stand in the relationship of seller and buyer to each other, and there is no sale of goods. . . . In such instances, there is no bilateral transaction which can be called a contract of sale; nonetheless, the effect of what has happened is the transfer of property in goods from one person to another. (Emphasis added)

[63] These comments are apposite here. ING did not offer to buy and Brampton did not offer to sell the Trucks. No agreement of purchase and sale was entered into by the parties. Instead, ING's acquisition of title to the Trucks occurred in the context of an insurer's contractual relationship with its insured and the insured's loss payee, as a condition of Brampton's receipt of the cash value of the Trucks under the ING policies. Under statutory condition 6(7), ING became entitled to the salvage in the Trucks on its election to pay the actual cash value of the lost Trucks. Once ING so elected, its entitlement to its insured's salvage rights in the Trucks occurred by operation of law. [page340]

[64] In these circumstances, to quote Professor Fridman, there was no "purchase", the parties did not "stand in the relationship of seller and buyer to each other", there was "no sale of goods" and there was no true "contract of sale" between ING and Brampton.

[65] Second, even if the Transfer could be said to have constituted a "sale" for the purpose of s. 28(1), this record does not support the contention that the Transfer was carried out by Brampton in the "ordinary course of business", as required under s. 28(1).

[66] The test for determining whether a transaction is a sale in the ordinary course of business is uncontroversial. It is a question of fact to be objectively assessed, based on all the circumstances of the particular case: Bank of Nova Scotia v. Groupe Procycle Inc., [1999] O.J. No. 24, 92 O.T.C. 356 (Gen. Div.), at para. 21; and Fairline Boats Ltd. v. Leger, [1980] O.J. No. 216, 1 P.P.S.A.C. 218 (H.C.J.), at para. 12. Several factors compel the conclusion that the Transfer was not a transaction carried out by Brampton in the "ordinary course of business".

[67] The record shows that Brampton was in the vehicle leasing and rental business. There was no evidence before the application judge -- and none has been adduced before this court -- establishing that Brampton's business also included the sale of vehicles. The record is silent as to what Brampton did with its inventory of leased vehicles at the end of their lease terms. This gap in the evidential record distinguishes this case from those cases relied on by ING in which the nature of the debtor's business required it to revolve its inventory by selling vehicles to customers in order to retire the debtor's debts and continue its business.

[68] ING has adduced fresh evidence indicating that Brampton was a registered dealer and salesperson with the Ontario Motor Vehicle Industry Council. The fact of this registration is not dispositive of whether Brampton's ordinary business actually included the sale of vehicles. It simply means that Brampton held the necessary registration to sell vehicles if it chose to do so. There is no evidence that it so elected or that the sale of vehicles was a necessary and commonplace, or even an occasional, component of its day-to-day business.

[69] The record also establishes that: (i) Brampton did not own the Trucks; (ii) Brampton did not market the Trucks to the public or to ING. On the contrary, the Transfer involved a compulsory acquisition by ING of title to the Trucks as a condition of payment under the ING policies; (iii) ING was not a regular customer of Brampton; [page341] (iv) the amount of the insurance proceeds paid by ING was not market-driven. Rather, it represented the cash value of the Trucks, which ING elected to pay as full indemnification under the ING policies; and (v) the transfer of possession of the Trucks to ING was not a condition of payment of the ING insurance proceeds and there was no certainty that ING would ever obtain possession of the Trucks. These are not the hallmarks of a sale conducted in the ordinary course of business.

[70] Finally, Brampton obtained the ING insurance proceeds through misrepresentation. In the proof of loss forms submitted to ING, Brampton represented that no one held a security or other interest in the Trucks apart from the named insured under the ING policies. This was untrue. Thus, the Transfer in favour of ING and Brampton's receipt of the ING insurance proceeds were accomplished by dishonest means. Normal commercial dealings with inventory by a leasing company in the course of the company's ordinary and usual business do not proceed on this basis.

[71] I would reject this ground of appeal.

(3) [Section 25(1)](https://www.canlii.org/en/on/laws/stat/rso-1990-c-p10/latest/rso-1990-c-p10.html) of the [PPSA](https://www.canlii.org/en/on/laws/stat/rso-1990-c-p10/latest/rso-1990-c-p10.html)

[72] ING also argues, for the first time on appeal, that s. 25(1) of the PPSA prevents GE's PMSIs in the Trucks from attaching to the collateral in ING's hands. Again, I disagree. For convenience, I again set out s. 25(1):

25(1) Where collateral gives rise to proceeds, the security interest therein, (a) continues as to the collateral, unless the secured party expressly or impliedly authorized the dealing with the collateral free of the security interest; and (b) extends to the proceeds. (Emphasis added)

[73] In Secured Transactions in Personal Property in Canada, 2nd ed., looseleaf (Scarborough: Carswell, 2003), at para. 9.01, Richard H. McLaren makes the following observation regarding the effect of s. 25(1):

The negative implication of [s. 25(1)(a)] is that if the secured party authorized the disposition, then the acquiring party will take free of the secured party's claim to the collateral. In effect, the security agreement ceases to operate as to the collateral.

[74] ING accepts that GE's PMSIs extend to the proceeds of the Trucks. However, it submits that as the ING insurance proceeds [page342] were paid to Brampton, GE's claim for the proceeds must be advanced as a claim in Brampton's bankruptcy. ING also argues that GE's PMSIs do not "continue as to the collateral" within the meaning of s. 25(1)(a) because GE "expressly or impliedly authorized" Brampton to deal with the collateral: (i) by permitting Brampton to deal with insurance-related matters concerning the Trucks and to make insurance claims regarding stolen vehicles; and (ii) by classifying Brampton's vehicles as "inventory" in its PPSA registrations. I disagree.

[75] GE did not expressly authorize Brampton to sell or otherwise dispose of the Trucks. Nor do I think that such authorization was impliedly granted. While it is true that the terms of the CSAs authorized -- indeed required -- Brampton to place and maintain insurance on the Trucks, they also obliged Brampton to name GE as a beneficiary under the requisite insurance policies, "under a broad form of Secured Creditor Endorsement Clause". In addition, the CSAs contained an explicit title reservation clause in favour of GE. Unless and until the full amount owing to GE had been repaid, title to the Trucks remained with GE.

[76] These provisions of the CSAs, by which GE sought to protect its interests in the Trucks and to preserve its ownership of them until the amounts owing to it had been paid, belie the notion that GE authorized Brampton to dispose of the Trucks. On the contrary, until its payment obligations to GE had been satisfied, Brampton enjoyed only the right to quiet use and enjoyment of the Trucks for so long as it was not in default under the CSAs.

[77] Nor, on the facts of this case, do I accept that GE's description of the Trucks as "inventory" in its PPSA registrations constituted an implied authorization to Brampton to deal with the Trucks in any manner that Brampton saw fit. There is no evidence that GE knew that Brampton was leasing the Trucks with a view to eventually selling or otherwise disposing of them, that this was Brampton's intention, or that the sale of leased inventory formed part of Brampton's day-to-day or even occasional business activities. Indeed, this does not appear to have been suggested by Brampton even in its dealings with ING. The ING policies provided for "permission to rent or lease" the Trucks.

[78] I would not give effect to this ground of appeal.

(4) Concluding observations

[79] I end with these observations. This case involves the balancing of the competing interests in collateral of two "innocent" parties. GE took all necessary steps to perfect its PMSIs under the PPSA. It had no knowledge that the Trucks had been stolen until its own inquiries led to discovery of the thefts. Nor did it [page343] know of Brampton's misrepresentations to ING. ING had no involvement in the thefts or Brampton's misrepresentations, and it did not know of GE's security interests in the Trucks until after it had paid the proceeds under the ING policies.

[80] On the other hand, measures were available to both parties that might have avoided this dispute. GE did not require that Brampton cause its third-party lessees to name GE as an insured, a loss payee or a beneficiary under any third- party insurance policy obtained on the Trucks. Nor did GE require Brampton to provide it with copies of any third-party insurance policies. These options were available to GE. However, their success was dependent on the reliability of Brampton and its lessees.

[81] For its part, ING did not conduct any PPSA searches in this case. It defends this omission by pointing to what it describes as standard insurance industry practice: in reliance on s. 4(1)(c) of the PPSA, no PPSA searches are performed by insurers or insurance brokers prior to the issuance of automobile insurance policies. But, as I have said, the effect of s. 4(1)(c) of the PPSA is to relieve an insurer from the necessity of protecting its own interests in respect of an insurance policy by providing notice of those interests in the PPSA registry. Section 4(1)(c) does not insulate insurers from the PPSA-protected claims of third-party secured creditors.

[82] And the means of ascertaining the existence of GE's PMSIs in the Trucks were readily available to ING by the simple device of conducting a PPSA search before issuing the ING policies, before paying the ING insurance proceeds, before requesting and receiving the Transfer from Brampton and, in the case of the 2005 Truck, before disposing of the insured collateral. Notice of GE's security interests was also provided in the used vehicle information packages available from the Ministry of Transportation. ING did not avail itself of any of these opportunities to determine if its interests would be subject to the protected priority position of another claimant. Unlike the preventative options available to GE, which I have described above, the measures available to ING to protect its interests were not dependent on the reliability of its insured or a third party.

[83] I note also that the potential existence of secured creditors with claims regarding the insured collateral was within ING's contemplation. The ING policies provided for the identification of lienholders and the protection of their interests on payment of the ING insurance proceeds. This record is silent as to what steps ING took, if any, to determine if secured claims existed in respect of the Trucks prior to settling Brampton's claim for indemnification under the ING policies. [page344]

[84] In these circumstances, I view it as unreasonable that a creditor in GE's position should lose its priority in secured collateral because it failed to foresee that its debtor would actively mislead its involved insurers. To hold otherwise would impose a protectionist obligation on GE and similarly situated secured lenders that could undermine normal good faith collateral financings.

[85] I therefore conclude that, as between GE and ING, the consequences of Brampton's misrepresentations must be borne by ING. It is ING, therefore, who must look to Brampton for satisfaction. This result is consistent with the proposition, which I endorse, that an insured or its named loss payee who has derived the benefit of an insurance policy, must make good to the insurer any loss occasioned to it by the insured's or the loss payee's lack of good faith or honesty.

IV. Disposition

[86] I would allow the appeal, set aside the order of the application judge and declare that (i) GE's PMSIs in the Trucks and their proceeds have priority over ING's salvage rights in the same vehicles; and (ii) GE is entitled to possession of the 2003 Truck and to the proceeds from the sale of the 2005 Truck. I would award GE its costs of this appeal on the partial indemnity scale, fixed in the amount of $17,000, inclusive of disbursements and GST, and its costs of the proceeding before the application judge, fixed -- as agreed by the parties -- in the total amount of $15,000, inclusive of disbursements and GST.

Appeal allowed.

Notes

[^1]: In the CSA and financing change statement pertaining to the 2003 Truck, the assignee and secured creditor are identified as GE Capital Canada Equipment Financing Inc., rather than GE Canada Equipment Financing G.P. The parties did not address this descrepancy on this appeal. I therefore assume that it reflects a name change in relation to the appellant and that nothing turns on this issue.

[^2]: Section 234(1) of the Act states, in part: "The conditions prescribed by the regulations made under paragraph 15.1 of subsection 121(1) are statutory conditions and shall be deemed to be part of every contract to which they apply . . . "

[^3]: Section 28(5) of the PPSA extends the reach of s. 28 to include sales of motor vehicles out of the ordinary course of business in certain circumstances, unless the vehicle identification number ("VIN") of the motor vehicle is set out in a registered financing or financing change statement filed under the PPSA, or unless the buyer knew that the sale constituted a breach of the applicable security agreement. ING does not suggest that s. 28(5) is engaged in this case. GE properly registered its interest in each of the Trucks under the PPSA, listing the VINs of each Truck in separate registrations.