Giffen (Re), 1998 CanLII 844 (SCC), [1998] 1 SCR 91

Giffen (Re), [1998] 1 S.C.R. 91

IN THE MATTER OF the Bankruptcy of Carol Anne Giffen

R. West & Associates Inc. and the Attorney General of British Columbia Appellants

v.

Telecom Leasing Canada (TLC) Limited Respondent

and

The Attorney General of Canada, the Attorney General for Ontario and the Attorney General for Alberta Interveners

Indexed as: Giffen (Re)

File No.: 25193.

1997: October 8; 1998: February 12.

Present: L’Heureux‑Dubé, Sopinka,¹ Gonthier, Cory, McLachlin, Iacobucci and Major JJ.

on appeal from the court of appeal for british columbia

Bankruptcy and insolvency ‑‑ Personal property security ‑‑ Company employee leasing vehicle ‑‑ Lessor failing to register financing statements under B.C. Personal Property Security Act and thus perfect its security interest ‑‑ Employee making assignment in bankruptcy ‑‑ Property of bankrupt vesting in trustee under Bankruptcy and Insolvency Act ‑‑ Unperfected security interest in collateral not effective against trustee under Personal Property Security Act ‑‑ Whether trustee entitled to proceeds of sale of vehicle ‑‑ Personal Property Security Act, S.B.C. 1989, c. 36, s. 20(b)(i) ‑‑ Bankruptcy and Insolvency Act, R.S.C., 1985, c. B‑3, ss. 67(1), 71(2).

The respondent lessor leased a car to a company which in turn leased it to G, one of its employees. The lease between G and her employer was for more than one year and gave G the option of purchasing the vehicle from the lessor. Although the lessor was not a party to the lease agreement, it played an important role in the arrangement. The lessor received a deposit from G, it fixed the lease rates, and it was entitled to receive payments directly from G if her employer stopped paying her. The lessor and G were also named as the owners of the vehicle in the registration and insurance documents; the lessor was described as the “lessor” and G was described as the “lessee”. G made an assignment in bankruptcy. Neither the lessor nor the employer had registered financing statements under the British Columbia Personal Property Security Act (“PPSA”) in respect of their leases, with the result that the lessor’s security interest in the car was not perfected. The lessor seized the vehicle and sold it with the appellant trustee’s consent. The trustee subsequently brought a motion for an order that it was entitled to the proceeds of sale, relying on s. 20(b)(i) of the PPSA, which provides that a security interest in collateral is not effective against a trustee in bankruptcy if the security interest is unperfected at the date of the bankruptcy. The lessor opposed the claim on the grounds that the bankrupt never owned the car and that the trustee could not have a better claim to the car than the bankrupt had. The trial judge held that the lessor’s unperfected security interest was of no effect as against the trustee. The Court of Appeal reversed the decision and held that the proceeds properly belonged to the lessor.

Held: The appeal should be allowed.

The definition of “security interest” in the PPSA explicitly includes leases for a term of more than one year. The lessor’s interest in the car is the reservation of title in the car; this interest, created by the lease agreement, falls within the ambit of the PPSA. Since the lessor did not have possession of the car and did not register its security interest, it held an unperfected security interest in the car prior to the bankruptcy. The bankrupt’s right to use and possession of the car constitutes “property” for the purposes of the Bankruptcy and Insolvency Act (“BIA”), which passed to the trustee by virtue of s. 71(2). Section 12(2) of the PPSA also recognizes that a lessee obtains a proprietary interest in leased goods. Here, the trustee’s possessory interest in the car comes into competition with the unperfected security interest of the lessor. On a plain reading of s. 20(b)(i) of the PPSA, the lessor’s interest in the car is ineffective against the trustee. While the effect of s. 20(b)(i), on the present facts, is that the trustee ends up with full rights to the car when the bankrupt had only a right of use and possession, s. 20(b)(i) modifies the principle that a trustee is limited to the rights in the property enjoyed by the bankrupt. The issue is not ownership of the vehicle, but rather priority to it. Although federal bankruptcy legislation provides that a trustee shall step into the shoes of the bankrupt and as a general rule acquires no higher right in the property of the bankrupt than that which the bankrupt enjoyed, it is a policy choice of the legislature that an unsecured creditor’s position, as represented by the trustee, is more meritorious than the unperfected security interest of a secured creditor.

The trustee can sell the car and confer good title. The lessor could have made a claim against the car under s. 81 of the BIA. This claim would have been defeated by the trustee in reliance on s. 20(b)(i) of the PPSA. Both the defeat of a claim and the failure to make a claim under s. 81 result in the effective abandonment or relinquishment of any claim to the car.

Section 20(b)(i) of the PPSA does not offend the priorities set out in the BIA, but rather is only one element of the provincial legislation which serves to define the rights of the parties involved in a bankruptcy. More particularly, s. 20(b)(i) serves, on the present facts, to define the rights of the lessor and indicates that for the purpose of the bankruptcy, the lessor does not have the status of a secured creditor. Even though bankruptcy is clearly a federal matter, and even though it has been established that the federal Parliament alone can determine distribution priorities, the BIA is dependent on provincial property and civil rights legislation in order to inform the terms of the BIA and the rights of the parties involved in the bankruptcy.

Since s. 20(b)(i) of the PPSA provides that the lessor’s unperfected security interest is ineffective against the interest acquired by the trustee, the trustee need not make an election under s. 30(1)(k) of the BIA in order to realize its interest in the car.

G did not hold the car on resulting trust for the lessor, since the contract of lease does not contemplate the creation of a trust.

Cases Cited

Distinguished: Fleeming v. Howden (1868), L.R. 1 Sc. & Div. 372; Flintoft v. Royal Bank of Canada, 1964 CanLII 89 (SCC), [1964] S.C.R. 631; approved: International Harvester Credit Corp. of Canada Ltd. v. Bell’s Dairy Ltd. (Trustee of) (1986), 1986 CanLII 158 (SK CA), 61 C.B.R. (N.S.) 193; Donaghy v. CNS Vehicle Leasing, 1992 CanLII 6150 (AB KB), [1992] 6 W.W.R. 70; David Morris Fine Cars Ltd. v. North Sky Trading Inc. (Trustee of), 1996 ABCA 134, [1996] 7 W.W.R. 332; referred to: Paccar Financial Services Ltd. v. Sinco Trucking Ltd. (Trustee of), 1989 CanLII 287 (SK CA), [1989] 3 W.W.R. 481; Re Perepeluk; Canadian Imperial Bank of Commerce v. Touche Ross Ltd., 1986 CanLII 2907 (SK CA), [1986] 2 W.W.R. 631; Robinson v. Countrywide Factors Ltd., 1977 CanLII 175 (SCC), [1978] 1 S.C.R. 753; Husky Oil Operations Ltd. v. Minister of National Revenue, 1995 CanLII 69 (SCC), [1995] 3 S.C.R. 453; Re Nishi Industries, 1978 CanLII 1974 (BC CA), [1978] 6 W.W.R. 736; Re Cadieux and Jas. A. Ogilvy’s Ltd. (1952), 33 C.B.R. 15; Deputy Minister of Revenue v. Rainville, 1979 CanLII 2 (SCC), [1980] 1 S.C.R. 35; Deloitte Haskins and Sells Ltd. v. Workers’ Compensation Board, 1985 CanLII 82 (SCC), [1985] 1 S.C.R. 785; Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail), 1988 CanLII 105 (SCC), [1988] 1 S.C.R. 1061; British Columbia v. Henfrey Samson Belair Ltd., 1989 CanLII 43 (SCC), [1989] 2 S.C.R. 24.

Statutes and Regulations Cited

Bankruptcy and Insolvency Act, R.S.C., 1985, c. B‑3 [am. 1992, c. 27, s. 2], ss. 2 “property”, 30(1)(k), 67(1) [idem, s. 33], 71, 72, 81, 136(1).

Personal Property Security Act, S.B.C. 1989, c. 36, ss. 1 “security interest”, 2(1), 3 [rep. & sub. 1993, c. 28, s. 16], 12(1)(b), (2), 20(b)(i), 21 [rep. & sub. 1990, c. 11, s. 5], 24, 25.

Authors Cited

Buckwold, Tamara M., and Ronald C. C. Cuming. “The Personal Property Security Act and the Bankruptcy and Insolvency Act: Two Solitudes or Complementary Systems?” (1997), 12 Banking & Finance L. Rev. 467.

Cuming, Ronald C. C. “Canadian Bankruptcy Law: A Secured Creditor’s Heaven” (1994), 24 Can. Bus. L.J. 17.

Waters, D. W. M. Law of Trusts in Canada, 2nd ed. Toronto: Carswell, 1984.

Ziegel, Jacob S. “Personal Property Security and Bankruptcy: There Is No War! ‑‑ A Reply to Roman and Sweatman” (1993), 72 Can. Bar Rev. 44.

APPEAL from a judgment of the British Columbia Court of Appeal (1996), 1996 CanLII 1429 (BC CA), 16 B.C.L.R. (3d) 29, 131 D.L.R. (4th) 453, [1996] 5 W.W.R. 111, 69 B.C.A.C. 161, 113 W.A.C. 161, 37 C.B.R. (3d) 297, [1996] B.C.J. No. 37 (QL), reversing a decision of the British Columbia Supreme Court (1994), 90 B.C.L.R. (2d) 326, [1994] 6 W.W.R. 439, 29 C.B.R. (3d) 309, [1994] B.C.J. No. 857 (QL), allowing the appellant trustee’s action. Appeal allowed.

Geoffrey H. Dabbs, for the appellant R. West & Associates Inc.

R. Richard M. Butler, for the appellant the Attorney General of British Columbia.

John Douglas Shields and Alastair Wade, for the respondent.

Edward R. Sojonky, Q.C., and Jan Brongers, for the intervener the Attorney General of Canada.

Richard J. K. Stewart, for the intervener the Attorney General for Ontario.

Written submissions only by James A. Baird, for the intervener the Attorney General for Alberta.

The judgment of the Court was delivered by

1Iacobucci J. -- The principal question raised by this appeal is whether s. 20(b)(i) of the Personal Property Security Act, S.B.C. 1989, c. 36 (“PPSA”), can render a lessor’s unperfected security interest in personal property ineffective against the rights acquired in the property by the trustee in bankruptcy, which finds its authority under the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B‑3 (“BIA”). I conclude that s. 20(b)(i) operates, on the present facts, to defeat the unperfected security interest of the respondent Telecom Leasing Canada (TLC) Limited (the “lessor”), in favour of the interest acquired by the appellant R. West & Associates Inc. (the “trustee”).

2Constitutional questions were raised in this appeal; however, in my view of the case, it is not necessary to address these issues. A reading of the provisions of the BIA and the PPSA in question reveals that no conflict arises in the operation of the legislation.

1. Facts

3On October 27, 1992, the lessor leased a 1993 Saturn car to the B.C. Telephone Company, which in turn leased the car to one of its employees, Carol Anne Giffen (the “bankrupt”). The bankrupt and her employer were parties to the agreement of lease entitled “Employee Agreement Personal Vehicle Lease Program/Flex Lease Program”. The term of the lease was for more than one year. The lease gave the bankrupt the option of purchasing the vehicle from the lessor.

4Although the lessor was not a party to the agreement, it played an important role in the arrangement contemplated by the agreement. More specifically, the lessor received a deposit from the bankrupt, it fixed the lease rates, and it was entitled to receive payments directly from the lessee/bankrupt if her employer stopped paying her. Further, the lessor and the bankrupt were named as the owners of the vehicle in the registration and insurance documents relating to the vehicle; the lessor was described as the “lessor” and the bankrupt was described as the “lessee”.

5The bankrupt made an assignment in bankruptcy on October 12, 1993. Neither the lessor nor the B.C. Telephone Company had registered financing statements under the PPSA in respect of their leases. The failure to register meant that the lessor’s security interest in the car was not perfected, as defined in the PPSA, at the time of the assignment in bankruptcy.

6The appellant was appointed as the trustee in bankruptcy. The lessor seized the vehicle and sold it with the trustee’s consent; proceeds of $10,154.54 were held in trust by the lessor’s counsel. The trustee subsequently brought a motion for an order that it was entitled to the proceeds of sale relying on s. 20(b)(i) of the PPSA. The lessor opposed the claim on the grounds that the bankrupt never owned the car and that the trustee could not have a better claim to the car than the bankrupt had.

7Hood J. of the Supreme Court of British Columbia held that, by virtue of s. 20(b)(i) of the PPSA, the unperfected security interest of the lessor was of no effect as against the trustee. Hood J. ordered that the proceeds from the sale of the vehicle be paid over to the trustee. The lessor appealed to the Court of Appeal for British Columbia; the Attorney General of British Columbia was granted leave to intervene as a party respondent in the appeal. The Court of Appeal allowed the appeal and held that the proceeds properly belonged to the lessor.

2. Relevant Statutory Provisions

8Personal Property Security Act, S.B.C. 1989, c. 36

2. (1) Subject to section 4, this Act applies

(a) to every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral, and

(b) without limiting the generality of paragraph (a), to a chattel mortgage, a conditional sale, a floating charge, a pledge, a trust indenture, a trust receipt, an assignment, a consignment, a lease, a trust, and a transfer of chattel paper where they secure payment or performance of an obligation.

3. Subject to sections 4 and 55, this Act applies to

(a) a transfer of an account or chattel paper,

(b) a commercial consignment, and

(c) a lease for a term of more than one year

that do not secure payment or performance of an obligation.

20. A security interest

(b) in collateral is not effective against

(i) a trustee in bankruptcy if the security interest is unperfected at the date of the bankruptcy, . . .

21. Where the interest of a lessor under a lease for a term of more than one year or of a consignor under a commercial consignment is not effective against a judgment creditor under section 20 (a) or a trustee or liquidator under section 20 (b), the lessor or consignor is deemed, as against the lessee or consignee, as the case may be, to have suffered, immediately before the seizure of the leased or consigned goods or the date of the bankruptcy or winding‑up order, damages in an amount equal to

(a) the value of the leased or consigned goods at the date of the seizure, bankruptcy or winding‑up order, and

(b) the amount of loss other than that referred to in paragraph (a) that results from the termination of the lease or consignment.

Bankruptcy and Insolvency Act, R.S.C., 1985, c. B‑3

30. (1) The trustee may, with the permission of the inspectors, do all or any of the following things:

(k) elect to retain for the whole [or] part of its unexpired term, or to assign, surrender or disclaim any lease of, or other temporary interest in, any property of the bankrupt;...

67. (1) The property of a bankrupt divisible among his creditors shall not comprise

(a) property held by the bankrupt in trust for any other person,

(b) any property that as against the bankrupt is exempt from execution or seizure under the laws of the province within which the property is situated and within which the bankrupt resides,

but it shall comprise

(c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge, and

(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.

71. (1) A bankruptcy shall be deemed to have relation back to, and to commence at the time of the filing of, the petition on which a receiving order is made or of the filing of an assignment with the official receiver.

(2) On a receiving order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with his property, which shall, subject to this Act and to the rights of secured creditors, forthwith pass to and vest in the trustee named in the receiving order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any conveyance, assignment or transfer.

72. (1) The provisions of this Act shall not be deemed to abrogate or supersede the substantive provisions of any other law or statute relating to property and civil rights that are not in conflict with this Act, and the trustee is entitled to avail himself of all rights and remedies provided by that law or statute as supplementary to and in addition to the rights and remedies provided by this Act.

(2) No receiving order, assignment or other document made or executed under the authority of this Act shall, except as otherwise provided in this Act, be within the operation of any legislative enactment in force at any time in any province relating to deeds, mortgages, judgments, bills of sale, chattel mortgages, property or registration of documents affecting title to or liens or charges on real or personal property.

81. (1) Where a person claims any property, or interest therein, in the possession of a bankrupt at the time of the bankruptcy, he shall file with the trustee a proof of claim verified by affidavit giving the grounds on which the claim is based and sufficient particulars to enable the property to be identified.

(2) The trustee with whom a proof of claim is filed under subsection (1) shall within fifteen days thereafter or within fifteen days after the first meeting of creditors, whichever is the later, either admit the claim and deliver possession of the property to the claimant or give notice in writing to the claimant that the claim is disputed with his reasons therefor, and, unless the claimant appeals therefrom to the court within fifteen days after the mailing of the notice of dispute, he shall be deemed to have abandoned or relinquished all his right to or interest in the property to the trustee who thereupon may sell or dispose of the property free of any lien, right, title or interest of the claimant.

(3) The onus of establishing a claim to or in property under this section is on the claimant.

(4) The trustee may give notice in writing to any person to prove his claim to or in property under this section, and, unless that person files with the trustee a proof of claim in the prescribed form within fifteen days after the mailing of the notice, the trustee may thereupon with the leave of the court sell or dispose of the property free of any lien, right, title or interest of that person.

(5) No proceedings shall be instituted to establish a claim to, or to recover any right or interest in, any property in the possession of a bankrupt at the time of the bankruptcy, except as provided in this section.

(6) Nothing in this section shall be construed as extending the rights of any person other than the trustee.

136. (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows. . . .

3. Judicial History

A. British Columbia Supreme Court (1994), 1994 CanLII 16640 (BC SC), 90 B.C.L.R. (2d) 326

9Hood J. held that the trustee was entitled to the proceeds from the car. He began his analysis by examining the relationship between the parties and found that the respondent was the lessor and the bankrupt was the lessee of the car, even though the respondent was not party to the lease agreement. He also found that the lease agreement, which was for a period of more than one year, was a “security interest” for the purposes of the PPSA.

10Hood J. analysed the holding of the Saskatchewan Court of Appeal in International Harvester Credit Corp. of Canada Ltd. v. Bell’s Dairy Ltd. (Trustee of) (1986), 1986 CanLII 158 (SK CA), 61 C.B.R. (N.S.) 193. The Saskatchewan Court of Appeal found that a trustee in bankruptcy may acquire a higher interest in property than that enjoyed by the bankrupt through the operation of the PPSA. The court also concluded, in accordance with the Saskatchewan PPSA, that a lessor’s security interest is subordinate to the interest of a trustee in bankruptcy where the lessor failed to perfect its interest. Hood J. added that the trustee’s claim in the present case was even stronger than that of the trustee in International Harvester since s. 20(b)(i) of the PPSA provides that an unperfected security interest will be “not effective against” a trustee in bankruptcy whereas the Saskatchewan equivalent provides that an unperfected security interest will be “subordinate to” the interest of a trustee in bankruptcy.

11Hood J. held that the PPSA applied on the facts and in so doing he rejected the lessor’s argument that this was a matter of exclusive federal jurisdiction governed by the BIA. He noted that the constitutionality of the PPSA was not in issue before him, and that in Paccar Financial Services Ltd. v. Sinco Trucking Ltd. (Trustee of), 1989 CanLII 287 (SK CA), [1989] 3 W.W.R. 481 (Sask. C.A.), the Saskatchewan equivalent to s. 20(b)(i) was held to be constitutionally valid.

12The learned trial judge rejected the lessor’s argument that the trustee had disclaimed the property by failing to elect to retain the lease under s. 30(1)(k) of the BIA. He found that this argument ignored the statutory rights granted to the trustee under s. 20(b)(i) of the PPSA. Hood J. also dismissed the lessor’s argument that a resulting trust existed between the bankrupt and the lessor, and therefore the vehicle did not form part of the bankrupt’s estate, as provided by s. 67(1)(a) of the BIA. In Hood J.’s view, the equitable principle of resulting trust could not usurp the clear provisions of the PPSA and the rights it conferred upon the trustee. The lessor had also argued that the trustee was estopped from claiming that the vehicle was part of the bankrupt’s estate, given that the bankrupt signed a statement of affairs which referred to the vehicle as “fully encumbered”. Hood J. stated that the bankrupt’s conduct or view of her interest was not determinative of the question of law at issue.

13Hood J. concluded that the trustee was entitled to the net sale proceeds from the vehicle, together with an accounting.

B. British Columbia Court of Appeal (1996), 1996 CanLII 1429 (BC CA), 16 B.C.L.R. (3d) 29

14Finch J.A., Macfarlane and Wood JJ.A. concurring, overturned Hood J. and held that the lessor was entitled to the proceeds of the car.

15Finch J.A. disagreed with the reasoning and the result in International Harvester, which had been followed by the trial judge. In his view, both International Harvester and Hood J.’s decision in the case on appeal failed to account for the role of the BIA in the circumstances of a bankruptcy. Section 67 of the BIA provides that the trustee in bankruptcy shall receive only the “property of the bankrupt” thus there was no legitimate basis for granting to a trustee in bankruptcy a greater claim to the property than that which the bankrupt enjoyed. Finch J.A. held (at p. 40) that to allow the trustee a greater claim to the property than the bankrupt had would “overlook fundamental concepts of bankruptcy law” as expressed in Fleeming v. Howden (1868), L.R. 1 Sc. & Div. 372 (H.L.), and Flintoft v. Royal Bank of Canada, 1964 CanLII 89 (SCC), [1964] S.C.R. 631.

16Finch J.A. rejected the Saskatchewan Court of Appeal’s characterization of the trustee as “a representative of the creditors of the bankrupt”, and he found that the Saskatchewan Court erred in relying on Re Perepeluk; Canadian Imperial Bank of Commerce v. Touche Ross Ltd., 1986 CanLII 2907 (SK CA), [1986] 2 W.W.R. 631 (Sask. C.A.), as authority for that proposition. He did not find that Perepeluk “[laid] down any broad statement of principle to the effect that the trustee’s obligation is to the creditors as opposed to the bankrupt” (p. 42). Further, Finch J.A. noted that the Saskatchewan Court of Appeal failed to consider that a trustee is an officer of the court, appointed to stand in the bankrupt’s shoes and to represent the bankrupt’s interests, even where those interests are adverse to the interests of the creditors. With these principles in mind, Finch J.A. underlined that the trustee could only succeed to the rights of the bankrupt.

17Finch J.A. distinguished Robinson v. Countrywide Factors Ltd., 1977 CanLII 175 (SCC), [1978] 1 S.C.R. 753, which the appellant Attorney General cited in support of the argument that assets other than those of the bankrupt may be distributed upon bankruptcy. Finch J.A. held that recovering for a bankrupt’s estate property which the bankrupt had unlawfully concealed is not comparable to the present circumstances where provincial legislation operates to add to the bankrupt’s estate property which never belonged to the bankrupt.

18Finch J.A. also considered Husky Oil Operations Ltd. v. Minister of National Revenue, 1995 CanLII 69 (SCC), [1995] 3 S.C.R. 453, where this Court held that valid provincial workers’ compensation legislation was inoperative where it conflicted with federal priorities as established by the BIA. The lessor argued that Husky Oil stood for the proposition that provincial legislation can neither remove nor add something to a bankrupt’s estate owing to the primacy of the priority scheme of the BIA. Finch J.A. reviewed Gonthier J.’s comments in Husky Oil regarding the analysis which must be undertaken to determine whether two laws are in operational conflict. He then found that s. 20(b)(i) and the BIA do conflict since s. 20(b)(i) purports to define the property of the bankrupt in a way which is inconsistent with the definition provided in the BIA. He further found that s. 20(b)(i) is inconsistent with the BIA since it permits property which does not belong to the bankrupt to be distributed among the bankrupt’s creditors.

19Finch J.A. stated that the real question at issue is who holds title to the car. That is, did the bankrupt or the trustee in bankruptcy obtain title to the vehicle by reason of the lessor’s failure to register its security interest? The bankrupt acquired only a right to use the car and a contingent future right of purchase. The learned judge concluded that s. 20(b)(i) cannot possibly have the effect of transferring title from the lessor, the true owner, to the trustee in bankruptcy because this would give the trustee greater proprietary rights in the car than the bankrupt enjoyed.

20Finch J.A. rejected the argument that Re Nishi Industries, 1978 CanLII 1974 (BC CA), [1978] 6 W.W.R. 736 (B.C.C.A.), in which the British Columbia Conditional Sales Act, 1961, S.B.C. 1961, c. 9, was held to be constitutionally valid and was found to give a trustee in bankruptcy priority over a secured creditor, supported the trustee’s position. He distinguished that case on the basis that, under a conditional sale or chattel mortgage, the mortgagee or the purchaser acquires a property interest, whereas in the present case the lessee does not acquire a property interest in the collateral. Rather, the bankrupt held only the right to possess the car while payments were being made.

21Finch J.A. also dismissed the lessor’s argument based on s. 30(1)(k) of the BIA, under which a trustee may elect to retain a lease. Finch J.A. found that s. 30(1)(k) applied only to leases of property belonging to the bankrupt and had no application where the bankrupt has leased the property of another.

22Finding it unnecessary to address the other issues raised by the lessor or to deal with the constitutional questions raised by the Attorney General, Finch J.A. allowed the appeal and directed that the proceeds be paid to the lessor.

4. Issues

23There is one principal issue in the present appeal: can s. 20(b)(i) of the PPSA extinguish the lessor’s right to the car in favour of the trustee’s interest, or is the operation of s. 20(b)(i) limited by certain provisions of the BIA?

24In my view, this issue can be resolved through a normal reading of the relevant provisions of both the PPSA and the BIA, buttressed by the policy considerations supporting these provisions.

5. Analysis

A. The Locus of Title Is Not Determinative

25At the outset, it is important to note that the Court of Appeal’s holding in the present appeal rests on the principle that the “property of the bankrupt” shall vest in the trustee (s. 71(2) BIA) and that only the property of the bankrupt shall be distributed among the bankrupt’s creditors (s. 67(1) BIA). In the opinion of the Court of Appeal, the bankrupt, as lessee, did not have a proprietary interest in the car, and since the trustee obtains its entitlements to the contents of the bankrupt’s estate through the bankrupt, the trustee cannot assert a proprietary interest in the car. In my view, the Court of Appeal, with respect, erred fundamentally in focussing on the locus of title and in holding that the lessor’s common law ownership interest prevailed despite the clear meaning of s. 20(b)(i).

26The Court of Appeal did not recognize that the provincial legislature, in enacting the PPSA, has set aside the traditional concepts of title and ownership to a certain extent. T. M. Buckwold and R. C. C. Cuming, in their article “The Personal Property Security Act and the Bankruptcy and Insolvency Act: Two Solitudes or Complementary Systems?” (1997), 12 Banking & Finance L. Rev. 467, at pp. 469‑70, underline the fact that provincial legislatures, in enacting personal property security regimes, have redefined traditional concepts of rights in property:

Simply put, the property rights of persons subject to provincial legislation are what the legislature determines them to be. While a statutory definition of rights may incorporate common law concepts in whole or in part, it is open to the legislature to redefine or revise those concepts as may be required to meet the objectives of its legislation. This was done in the provincial PPSAs, which implement a new conceptual approach to the definition and assertion of rights in and to personal property falling within their scope. The priority and realization provisions of the Acts revolve around the central statutory concept of “security interest”. The rights of parties to a transaction that creates a security interest are explicitly not dependent upon either the form of the transaction or upon traditional questions of title. Rather, they are defined by the Act itself. [Emphasis added.]

27In International Harvester, supra, the Saskatchewan Court of Appeal recognized that the regime put in place to regulate competing interests in personal property does not turn on title to the collateral (at p. 204):

There is nothing in the language of the section [s. 20 of the Saskatchewan PPSA which is the equivalent of s. 20 of the British Columbia PPSA], or its relationship with other sections, or indeed in the overall scheme of the Act to suggest, for example, that an unperfected security interest, because it is rooted in and attached to the title of particular goods in the possession of a debtor, should be treated as superior to the more generally derived and broadly attached interest which an execution creditor comes to have in a debtor’s goods. Indeed, the very opposite is suggested not only by the language of the section, but by the overall thrust of the Act.

28The Court of Appeal in the present appeal did not look past the traditional concepts of title and ownership. But this dispute cannot be resolved through the determination of who has title to the car because the dispute is one of priority to the car and not ownership in it. It is in this context that the PPSA must be given its intended effect and it is to this question that I now wish to turn.

B. Definition of “Security Interest”

29The PPSA applies to “every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral” (s. 2(1)(a)).

30Section 1 of the PPSA defines “security interest”, in part, as “an interest in goods, chattel paper, a security, a document of title, an instrument, money or an intangible that secures payment or performance of an obligation”. This definition is elaborated upon by paragraph 1(a)(iii) of the PPSA, which provides that “security interest” means the interest of “a lessor under a lease for a term of more than one year, whether or not the interest secures payment or performance of an obligation” (emphasis added). Further, s. 3 of the PPSA deems certain agreements, which do not secure payment or performance of an obligation, to be security agreements for the purposes of the PPSA. Section 3 includes leases “for a term of more than one year that do not secure payment or performance of an obligation”.

31The elements of the definition of “security interest” explicitly include within the definition of “security interest” leases for a term of more than one year. The lessor’s interest in the car is the reservation of title in the car; this interest, created by the lease agreement, falls within the ambit of the PPSA.

C. The Nature of the Lessor’s Interest in the Car

32A security interest is valid and enforceable when it attaches to personal property. Section 12(1)(b) of the PPSA provides that a security interest “attaches” when the debtor acquires “rights in the collateral”. Section 12(2) states explicitly that “a debtor has rights in goods leased to the debtor . . . when he obtains possession of them in accordance with the lease”. Thus, upon delivery of the car to the bankrupt, the lessor had a valid security interest in the car that could be asserted against the lessee and against a third party claiming a right in the car. However, the lessor’s security interest remained vulnerable to the claims of third parties who obtain an interest in the car through the lessee including, trustees in bankruptcy. In order to protect its security interest from such claims, the lessor must therefore perfect its interest through registration of its interest (s. 25), or repossession of the collateral (s. 24). The lessor did not have possession of the car, and it did not register its security interest. Thus, prior to the bankruptcy, the lessor held an unperfected security interest in the car. This brings us to the BIA.

D. The Bankrupt’s Interest in the Car Vests in the Trustee

33Section 71(2) of the BIA provides that, upon an assignment into bankruptcy, the bankrupt’s “property . . . shall, subject to this Act and to the rights of secured creditors, forthwith pass to and vest in the trustee”. Section 2 of the BIA defines “property” very broadly to include “every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property”.

34In my opinion, the bankrupt’s right to use and possession of the car constitutes “property” for the purposes of the BIA and the trustee, by virtue of s. 71(2) of the BIA, succeeds to this proprietary right. I find support for this conclusion in Paccar Financial Services, supra, where the Saskatchewan Court of Appeal held that “property” as it is used in the BIA is “broad enough to include a leasehold interest” (at p. 494, citing Re Cadieux and Jas. A. Ogilvy’s Ltd. (1952), 33 C.B.R. 15 (Que. Sup. Ct.), at p. 16).

35The trustee assumes the bankrupt’s possessory interest in the car through the operation of s. 71(2); it is upon this basis that the trustee can assert a claim to the car.

36I note that s. 12(2) of the PPSA also recognizes that a lessee obtains a proprietary interest in leased goods. Section 12(2) states explicitly that “a debtor has rights in goods leased to the debtor . . . when he obtains possession of them in accordance with the lease” (emphasis added). Thus, s. 12 operates to “deem or recognize that a lessee has a proprietary interest” (Buckwold and Cuming, supra, at p. 471). The Saskatchewan Court of Appeal considered a provision similar to s. 12 of the British Columbia PPSA in International Harvester and held that (at p. 206):

. . . a trustee in bankruptcy, upon whom there devolves a chattel in the possession of the bankrupt under a commercial lease for a term exceeding a year, succeeds to the contractual or “possessory” interest of the bankrupt in that chattel, as well as the bankrupt’s statutory or “proprietary” interest therein as conferred upon the debtor by s. 12 of the Act. [Emphasis added.]

37From the perspective of both the PPSA and the BIA the bankrupt, as lessee, can be described as having a proprietary interest in the car.

E. The Priority Contest and the Operation of Section 20(b)(i)

(i) Purpose of Section 20(b)(i)

38The Saskatchewan Court of Appeal explained the theory behind s. 20 of the Saskatchewan PPSA in International Harvester (at pp. 204‑5). A person with an interest rooted in title to property in the possession of another, once perfected, can, in the event of default by the debtor, look to the property ahead of all others to satisfy his claim. However, if that interest is not perfected, it is vulnerable, even though it is rooted in title to the goods (at p. 205):

A third party may derive an interest in the same goods by virtue of some dealing with the person in possession of them, and . . . he may become entitled to priority. That is, he may become entitled, ahead of the person holding the unperfected security interest, to look to the goods to satisfy his claim.

Public disclosure of the security interest is required to prevent innocent third parties from granting credit to the debtor or otherwise acquiring an interest in the collateral. However, public disclosure of the security interest does not seem to be required to protect a trustee who is not in the position of an innocent third party; rather, the trustee succeeds to the interests of the bankrupt. In one authority’s opinion, trustees are given the capacity to defeat unperfected security interests because of the “representative capacity of the trustee and the effect of bankruptcy on the enforcement rights of unsecured creditors” (R. C. C. Cuming, “Canadian Bankruptcy Law: A Secured Creditor’s Heaven” (1994), 24 Can. Bus. L.J. 17, at pp. 27-28).

39Prior to a bankruptcy, unsecured creditors can make claims against the debtor through provincial judgment enforcement measures. Successful claims will rank prior to unperfected security interests pursuant to s. 20. Once a bankruptcy occurs, however, all claims are frozen and the unsecured creditors must look to the trustee in bankruptcy to assert their claims. Cuming describes the purpose of s. 20(b)(i) (at p. 29):

In effect, the judgment enforcement rights of unsecured creditors are merged in the bankruptcy proceedings and the trustee is now the representative of creditors who can no longer bring their claims to a “perfected” status under provincial law. As the repository of enforcement rights, the trustee has status under s. 20(b)(i) of the bcppsa to attack the unperfected security interest.

40The purpose behind granting a trustee in bankruptcy the power to defeat unperfected security interests was recognized by the Saskatchewan Court of Appeal in International Harvester (at p. 206):

Indeed, the fact that a trustee in bankruptcy is a representative of creditors serves to shed light on more than one aspect of the issue. It explains ‑‑ or at least assists in the explanation of ‑‑ why a trustee in bankruptcy is included in s. 20, as well as why a trustee is not necessarily confined to the interest of the bankrupt.

41The Saskatchewan Court of Appeal again acknowledged the representative role of the trustee in bankruptcy in Paccar Financial Services, which also involved a priority contest between a trustee and the unperfected security interest of a lessor. The court stated that the trustee, after bankruptcy, acts as the representative of the unsecured creditors of the bankrupt and asserts “the claim of the unsecured creditors to the goods and possessions of the bankrupt pursuant to the priorities established for competing perfected and unperfected security interests. It is simply a contest as between an unsecured creditor and the holder of an unperfected security interest” (p. 490).

42The Court of Appeal erred, in my view, in not recognizing that the purpose of s. 20(b)(i) is, at least in part, to permit the unsecured creditors to maintain, through the person of the trustee, the same status vis‑à‑vis secured creditors who have not perfected their security interests which they enjoyed prior to the bankruptcy of the debtor.

(ii) The Present Appeal and Section 20(b)(i)

43In the present appeal, the trustee’s possessory interest in the car, acquired through the bankrupt under the authority of the BIA, comes into competition with the unperfected security interest of the lessor. Section 20(b)(i) of the PPSA states explicitly that a security interest in collateral “is not effective against a trustee in bankruptcy if the security interest is unperfected at the date of the bankruptcy”. On a plain reading of s. 20(b)(i), the lessor’s interest in the car is ineffective against the trustee.

44Section 20(b)(i) does not grant title or any other proprietary interest to the trustee, but it prevents the lessor from exercising rights against the trustee. Admittedly, the effect of s. 20(b)(i), on the present facts, is that the trustee ends up with full rights to the car when the bankrupt had only a right of use and possession. The Court of Appeal refused to accept this result because, in its view, it violated fundamental concepts of bankruptcy law. In this respect, the Court of Appeal cites Fleeming, supra, and Flintoft, supra, in support of the proposition that a trustee in bankruptcy cannot receive a greater interest in the property than the bankrupt had at the time of the bankruptcy.

45With respect, I disagree with the Court of Appeal for two reasons: first, Fleeming and Flintoft can be distinguished; and second, s. 20(b)(i) modifies the principle that a trustee is limited to the rights in the property enjoyed by the bankrupt.

46Both Fleeming and Flintoft involved circumstances where the contested property was held on trust by the bankrupt and therefore did not form part of the bankrupt’s estate. Consider the following statement of Lord Chelmsford from Fleeming (at pp. 380-81):

The general principle of every Bankrupt Act is, that the person in whom the estate vests for distribution under the bankruptcy takes the property of the bankrupt exactly as he himself held it. Lord Elphinstone at the time of his death was a mere trustee under a condition to denude in favour of Lady Hawarden, consequently the estate could only vest in the trustee under the sequestration subject to this condition. . . .

It appears to me, therefore, that the lands in question were not part of the heritable estate of the bankrupt which, within the meaning of the Bankrupt Act, would vest in the trustee for the benefit of the creditors.

47Lords Cranworth, Westbury and Colonsay all agreed that Lord Elphinstone was vested with the disputed property as a mere trustee and for that reason the property could not vest in the trustee in bankruptcy appointed for Lord Elphinstone’s estate (at pp. 378‑80, 383‑84, and 385, respectively).

48In Flintoft, a dispute arose between a bank and a trustee in bankruptcy over the ownership of uncollected debts owing to the debtor at bankruptcy. The debts arose from the sale by the debtor of goods covered by valid Bank Act security. An express trust protected the bank’s interest in the debtor’s book debts; the debtor also assigned its interest in the debts to the bank. The basis of the trustee’s challenge was that the assignment of book debts held by the bank was void for lack of timely registration. The court held that the trust sustained the bank’s interest in the book debts; trust property is excluded from the property of the bankrupt. Consequently, the bank’s failure to register the assignment did not result in the book debts falling into the hands of the trustee in bankruptcy.

49The trustee in bankruptcy cannot succeed to property held on trust by the bankrupt. This principle appears to be the source of comments made in Fleeming and Flintoft to the effect that a trustee in bankruptcy cannot take a greater interest than the bankrupt had. In my view, the proposition stated in these cases (that a trustee in bankruptcy cannot take a greater interest in property than the bankrupt had) should be restricted to the context in which they were made, namely, where the disputed property is held on trust by the bankrupt debtor. However, the bankrupt in the case on appeal did not hold the car on trust for the lessor.

50I accept that there is a principle which provides that a trustee in bankruptcy cannot obtain a greater interest to the goods than the bankrupt (beyond the context of a trust where the goods are not property of the bankrupt). However, s. 20(b)(i) itself modifies that principle. Cases decided prior to the Court of Appeal decision in the case on appeal have consistently accepted that s. 20(b)(i), or its equivalent, can give the trustee a greater interest in the disputed property than that enjoyed by the bankrupt.

51In International Harvester, the lessor of vehicles failed to register one security interest and improperly registered another. The lessee went bankrupt. The Saskatchewan Court of Appeal had to determine the nature of the interest that the trustee had in the vehicles. The Saskatchewan PPSA had a provision very similar to s. 20(b)(i), except it provided that an unperfected security interest shall be “subordinate to” the interest of a trustee in bankruptcy (as opposed to “not effective against”). The lessor argued that this provision could not be interpreted to permit the trustee to acquire a greater interest in property than the bankrupt had.

52The court acknowledged that federal bankruptcy legislation provides that a trustee shall step into the shoes of the bankrupt and “as a general rule acquires no higher right in the property of the bankrupt than that which the bankrupt enjoyed” (p. 200). The court then considered the policy considerations supporting the PPSA regime and the potential for mischief which arises in security transactions where title to property is separated from possession of that property. Provincial legislatures, faced with a policy choice involving the competing interests of the true owner and those of third parties dealing with the ostensible owner, have decided that the true owner must forfeit title, when faced with a competing interest, if she failed to register her interest as required. The court also noted that true leases were not regulated by the personal property regimes until recently. Thus, “as a general rule the common law did not allow the lessor’s title to leased goods to be defeated through some dealing of the lessee. However, the Personal Property Security Act has effected far‑reaching changes to the law” (p. 201).

53The court stated that to find that the trustee in bankruptcy cannot have a greater claim to the goods than the bankrupt enjoyed would (at p. 205)

require resort to traditional common law concepts, to form over substance, to a technical construction of the term “interest”, and to the defeat of the policy choice made by the legislature in choosing, as it did, to include within the scope of the Act a true lease of goods. It would render the section largely, if not wholly, ineffective in this instance. . . .

54International Harvester was followed in Donaghy v. CNS Vehicle Leasing, 1992 CanLII 6150 (AB KB), [1992] 6 W.W.R. 70 (Alta. Q.B.), where a lessee leased a vehicle in Ontario and then moved to Alberta. The lessor failed to register its security interest in the vehicle in Alberta. The lessee went bankrupt and a contest developed between the trustee in bankruptcy and the lessor. The court found for the trustee. The court stated that the issue was not ownership of the vehicle, but rather priority to it. The court recognized that, for the purposes of priority, the PPSA replaces the common law principle that one cannot transfer better title than she possesses. It is a policy choice of the legislature that an unsecured creditor’s position, as represented by the trustee, is more meritorious than the unperfected security interest of a secured creditor.

55In David Morris Fine Cars Ltd. v. North Sky Trading Inc. (Trustee of), 1996 ABCA 134, [1996] 7 W.W.R. 332 (Alta. C.A.), a car dealer leased a car to a corporation; the corporation went bankrupt. The lease was not registered. The trustee in bankruptcy claimed priority to the car. The court dealt primarily with the car dealer’s argument that it was exempt from the registration requirement because the lease was out of its ordinary course of business. The court held that the car dealer was not entitled to the exemption and that the trustee’s interest in the car prevailed. The court made the following comments at para. 16:

We endorse the view of the chambers judge that the PPSA is consumer protection legislation which in many respects gives a trustee in bankruptcy greater rights than the bankrupt, and which would be undermined by the application of the common law principle that one cannot give what one does not possess.

56I agree with the decisions of the courts that have held that the principle that a trustee in bankruptcy cannot obtain greater rights to the property than the bankrupt had has been modified through the policy choices of the legislatures represented in s. 20(b)(i) of the PPSA, and its equivalents in other provinces.

F. The Trustee Can Confer Clear Title

57Title could not defeat the trustee’s claim under s. 20(b)(i) of the PPSA, but does the lessor’s retention of title and the principle of nemo dat quod non habet prevent the trustee from selling the car, conferring clear title, and distributing its proceeds under the BIA?

58Section 81 of the BIA provides a procedure through which third parties can file claims with the trustee against “property . . . in the possession of a bankrupt at the time of the bankruptcy”. Subsection 81(2) provides that where the trustee disputes a claim, and the claimant does not appeal within the prescribed time period, then the claimant is “deemed to have abandoned or relinquished all his right to or interest in the property to the trustee who thereupon may sell or dispose of the property free of any lien, right, title or interest of the claimant”. Section 81 does not specifically deal with the circumstances where a claimant’s claim is defeated, but presumably the trustee would be able to sell the good free of the claim.

59The lessor could have made a claim under s. 81 of the BIA. This claim would have been defeated by the trustee in reliance on s. 20(b)(i) of the PPSA. In my view, both the defeat of a claim and the failure to make a claim under s. 81 result in the effective abandonment or relinquishment of any claim to the car; the trustee can therefore sell the car and confer good title.

G. The Federal Priority Scheme, Which Is Subject to the Rights of Secured Creditors, Is Not Disturbed

60Section 136 of the BIA sets out a priority scheme for the division of the property of the bankrupt; the interests of the various creditors are all “[s]ubject to the rights of secured creditors”. Section 67 describes that which constitutes the property of the bankrupt.

61This Court has held on a number of occasions that provincial legislatures cannot enact legislation which operates to interfere with the priority of distribution set out in the BIA, nor can they confer secured creditor status on a class of creditors not entitled to such status under the BIA. A very recent example is Husky Oil, supra, where a majority of the Court held that s. 133 of the Workers’ Compensation Act, 1979, S.S. 1979, c. W‑17.1, was inapplicable in a bankruptcy because it operated to secure the Workers’ Compensation Board’s claim against the bankrupt’s estate in violation of the priority of the Board’s claim as set out in s. 136 of the BIA.

62Previous to Husky Oil were the so‑called “quartet” of judgments on this issue. In Deputy Minister of Revenue v. Rainville, 1979 CanLII 2 (SCC), [1980] 1 S.C.R. 35, and Deloitte Haskins and Sells Ltd. v. Workers’ Compensation Board, 1985 CanLII 82 (SCC), [1985] 1 S.C.R. 785, this Court held that a province cannot claim to be a secured creditor in a bankruptcy pursuant to provincial legislation where the Crown claim is listed as a preferred claim with a particular ranking in the BIA. In Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail), 1988 CanLII 105 (SCC), [1988] 1 S.C.R. 1061, the Court held that, where a secured creditor liquidates his security outside the bankruptcy proceedings, the property constituting the security is still property of the bankrupt and payment from the proceeds must be determined by the federal bankruptcy priorities and not in accordance with provincial law. Finally, in British Columbia v. Henfrey Samson Belair Ltd., 1989 CanLII 43 (SCC), [1989] 2 S.C.R. 24, the Court held that the province cannot deem a statutory trust to remove property from the estate of a bankrupt and thereby create its own priorities.

63The Court of Appeal applied this Court’s decision in Husky Oil to conclude that a provincial law cannot add to the estate of a bankrupt property which the bankrupt never had. In my view, the Court of Appeal erred in its characterization of s. 20(b)(i). Section 20(b)(i) of the PPSA does not offend the priorities set out in the BIA as interpreted by the quartet and Husky Oil; rather, s. 20(b)(i) is but one element of the provincial legislation which serves to define the rights of the parties involved in a bankruptcy. More particularly, s. 20(b)(i) serves, on the present facts, to define the rights of the lessor and indicates that for the purpose of the bankruptcy, the lessor does not have the status of a secured creditor.

64Even though bankruptcy is clearly a federal matter, and even though it has been established that the federal Parliament alone can determine distribution priorities, the BIA is dependent on provincial property and civil rights legislation in order to inform the terms of the BIA and the rights of the parties involved in the bankruptcy. Section 72(1) of the BIA contemplates interaction with provincial legislation.

65This Court has recognized the important role that provincial legislation plays in the event of bankruptcy in Husky Oil. Gonthier J. stated, at p. 481:

It is trite to observe that the Bankruptcy Act is contingent on the provincial law of property for its operation. The Act is superimposed on those provincial schemes when a debtor declares bankruptcy. As a result, provincial law necessarily affects the “bottom line”, but this is contemplated by the Bankruptcy Act itself.

And I stated the following for the minority in Husky Oil, at p. 531:

[P]rovincial legislation is deeply involved in determining the priority, registration, and amount of indebtedness in the bankruptcy process. In fact, the proprietary and contractual rights that are regulated by the bankruptcy process are usually created by virtue of provincial law.

66J. S. Ziegel lucidly underlined the role which provincial law plays in bankruptcy in his article “Personal Property Security and Bankruptcy: There Is No War!” (1993), 72 Can. Bar Rev. 44, at p. 50:

The answer is confirmed by the opening words of section 136(1), “Subject to the rights of secured creditors . . .”. How are those rights (and obligations) to be determined? Since the Bankruptcy [and Insolvency] Act does not spell them out the reply must surely be: by consulting the law that gave them birth, and that law, in the absence of conflicting federal prescriptions, also determines what conditions and restrictions are imposed on the recognition and enforceability of the security interest.

67Section s. 20(b)(i) does not reorder federal priorities. Compliance with the perfection requirements of the PPSA is a precondition to maintaining secured creditor status under the BIA. In the event of bankruptcy, the consequences of a failure to perfect are spelled out in s. 20(b)(i). In effect, the secured party with an unperfected security interest becomes an unsecured creditor of the bankrupt:

. . . any secured party with a security interest in personal property, who fails to meet the requirements of the Act for perfecting its security interest prior to the date a petition is filed or an assignment is made, loses the status of a secured creditor in the bankruptcy and is relegated to unsecured status.

(Cuming, supra, at pp. 25‑26).

H. Other Arguments

68The respondent raised three other arguments which I need discuss only briefly. The lessor submits that s. 30(1)(k) of the BIA requires that the trustee either elect to retain or disclaim its rights to any property leased by the bankrupt. The lessor argues that, if the trustee did have any proprietary rights to the car, these rights were disclaimed as a result of the trustee’s failure to retain the lease by making the lease payments.

69In my view, s. 30(1)(k) of the BIA has no bearing on the resolution of the present appeal. Section 20(b)(i) provides that the lessor’s unperfected security interest is ineffective against the interest acquired by the trustee; the trustee need not make an election under s. 30(1)(k) of the BIA in order to realize its interest in the car. If the lessor had a valid and enforceable security interest in the car then the trustee could choose, pursuant to s. 30(1)(k), to continue with the lease or return the car to the lessor, but none of that applies in this case.

70The respondent also submits that the bankrupt held the car on resulting trust for the lessor; consequently, by virtue of s. 67(1) of the BIA, the car is excluded from the “property of the bankrupt”. Like the trial judge, I find no merit in this argument. The contract of lease does not contemplate the creation of a trust. Further, a resulting trust arises only where

legal or equitable title to property is in one party’s name, but that party, because he is a fiduciary or gave no value for the property, is under an obligation to return it to the original title owner, or to the person who did give value for it. [Emphasis in original.]

(D. W. M. Waters, Law of Trusts in Canada (2nd ed. 1984), at p. 299.)

The transferee, who obtains the property gratuitously, holds the property on trust for the transferor, who is the rightful owner, because equity does not assume gifts (Waters, at p. 300).

71In this case, the lessor holds title to the car and is its rightful owner, having purchased it. But the lessor entered into a contract of lease wherein the lessee, for value, obtained the right to use and possession of the car. In my opinion, the facts at hand cannot give rise to a resulting trust.

72Finally, the respondent argues that the trustee is estopped from asserting a claim to the car because the lessee, whose interests the trustee succeeds, signed documents which indicated that she did not have ownership of the car. I also must reject this argument. First, the lessee’s understanding of the transaction is not at issue here. Second, ownership of the car is not at issue; rather, the contest, as discussed above, is not one of title, but priority.

6. Conclusion and Disposition

73In accordance with s. 20(b)(i), the lessor’s unperfected security interest is ineffective against the possessory interest acquired by the trustee in bankruptcy. The trustee’s interest in the car takes priority over that of the lessor; the trustee is therefore entitled to the proceeds of the car.

74For the foregoing reasons, I would therefore allow the appeal with costs throughout, set aside the judgment of the British Columbia Court of Appeal, and restore the disposition ordered by the trial judge.

Footnotes

1. 1Sopinka J. took no part in the judgment.