Royal
Bank of Canada v. Radius Credit
Union Ltd., 2010
SCC 48, [2010] 3 S.C.R. 38
Royal Bank of
Canada Appellant
v.
Radius Credit
Union Limited Respondent
Indexed as: Royal
Bank of Canada v. Radius
Credit Union Ltd.
2010 SCC 48
File No.: 33152.
2010: April 19; 2010: November 5.
Present:
McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron,
Rothstein and Cromwell JJ.
on appeal from the court of appeal for saskatchewan
Commercial law — Priorities — Unregistered provincial
security interest taken in subsequently acquired property — Bank Act security
subsequently taken in same property without notice of existing security —
Collateral acquired by debtor after execution of both security agreements —
Property seized by Bank on default — Whether priority should be given to
provincial security interest or Bank Act security interest — Bank Act, S.C. 1991, c. 46, ss. 427(2) , 428 , 435(2) — Personal Property Security
Act, 1993, S.S. 1993, c. P-6.2, ss. 20(3),
66.
At
issue is a priority dispute between a prior unregistered security interest
taken under Saskatchewan’s Personal Property Security Act, 1993 (“PPSA”)
and a subsequent security interest taken and registered under the Bank Act .
The dispute is in respect of property acquired by the debtor after the
execution of both security agreements.
The debtor
borrowed money from Radius Credit Union and, on January 24, 1992, executed
a General Security Agreement (“GSA”) giving it a security interest in all of
his current and after-acquired property. The Credit Union did not register a
financing statement in the Personal Property Registry or otherwise perfect its
security interest until September 24, 1998. After executing the GSA with
the Credit Union, the debtor turned to the Royal Bank for additional
financing. The Bank registered its Notice of Intention to take Bank Act
security on January 22, 1996, and first took Bank Act security on
June 10, 1997. Its Bank Act security interest also covered both
present and after-acquired property. When the debtor defaulted, the Bank
seized and sold some of the collateral covered by both its Bank Act
interest and the Credit Union’s security interest.
The Credit Union
brought an application before the Court of Queen’s Bench pursuant to s. 66
of the PPSA for a declaration that it had a priority claim over the
proceeds of the disposition of that property. Applying the same reasoning as
in the companion case Bank of Montreal v. Innovation Credit Union, the
applications judge found the Bank’s interest had priority because the Credit
Union had not perfected its security interest through registration under the PPSA
before the Bank took and registered its Bank Act security; he did not
address the issue arising from the fact that the competing interests in this
case arose in respect of after-acquired property. The Saskatchewan Court of
Appeal reversed the applications judge’s decision finding that the analysis must
proceed along different lines than pursued in Bank of Montreal. Because
both security interests attached simultaneously at the time the debtor
purchased the collateral in question, the Bank Act does not provide a
rule to address this priority dispute. Applying common law principles of
property law, the Court of Appeal concluded that the priority rule to apply is “first
in time is first in right” and that, notwithstanding the Credit Union’s failure
to perfect its security interest under the PPSA, this rule should apply
according to the date of execution of the respective security agreements.
Held: The appeal should be dismissed.
There
is no basis upon which the Court could create a first-to-register priority rule
as proposed by the Bank without doing violence to the terms of the Bank Act
in its current manifestation. Such a rule would have to be enacted by
Parliament, if it saw fit to do so. On this point, the Court agrees with the
analysis of the Court of Appeal.
The Court of
Appeal was also correct in concluding that the dispute must be resolved in
favour of the Credit Union. However, the priority dispute in this appeal falls
to be determined on the same basis as the companion case. The fact that the
collateral in question consists of after-acquired property does not change the
framework of analysis. As the Bank Act contains no express priority
provision applicable to this particular dispute, it is necessary to first look
at the nature of the security interest conveyed to the Bank under the Bank
Act and, in order to resolve the priority dispute, compare it to the prior
competing PPSA interest to consider whether the Credit Union acquired
any interest under its prior security agreement that would derogate from the
debtor’s title.
Under
s. 427(2) of the Bank Act , the Bank acquired an inchoate
proprietary interest in the assigned after-acquired property of the debtor from
the time of execution and delivery of its security agreement on June 10,
1997. While the statutory interest created under the Bank Act is
necessarily inchoate until the debtor acquires rights in the property, the time
of attachment does not change the nature of the interest conveyed and,
consequently, is not significant here. As the combined effect of
ss. 427(2) and 435(2) of the Bank Act is that the Bank can acquire
no greater interest in the collateral than the debtor has at the relevant time,
the question which arises is whether the nature of the interest already
conveyed to the Credit Union under the PPSA derogated from the debtor’s
title.
The provinces cannot legislate in
order to oust the bank’s rights; however, they can alter the law as it relates
to property and civil rights. Saskatchewan did so when it enacted the PPSA.
While the PPSA does not contain any provisions which identify the nature
of a PPSA security interest in proprietary terms, the effect of the
legislation is to create a statutory interest in after-acquired property which
is analogous to an inchoate proprietary interest. Much as
under the Bank Act , the statutory interest created under the PPSA
is necessarily inchoate until the debtor acquires rights in the property.
However, the time of attachment does not change the nature of the interest
conveyed. At the time of execution of its security agreement on
January 24, 1992, the Credit Union acquired an interest in the assigned
after-acquired property, which effectively derogated from the title the debtor
had available to assign to the Bank. Consequently, the Bank took its security
interest subject to the PPSA security interest held by the Credit Union.
Cases Cited
Applied: Bank
of Montreal v. Innovation Credit Union, 2010 SCC 47, [2010] 3 S.C.R. 3,
aff’g (sub nom. Innovation Credit Union v. Bank of Montreal) 2009 SKCA
35, 324 Sask. R. 160, rev’g 2007 SKQB 471, 306 Sask. R. 227; Royal Bank of
Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; referred to: Rogerson
Lumber Co. v. Four Seasons Chalet Ltd. (1980), 113 D.L.R. (3d) 671; Bank
of Montreal v. Hall, [1990] 1 S.C.R. 121; Abraham v. Canadian Admiral
Corp. (Receiver of) (1998), 158 D.L.R. (4th) 65; Holroyd v. Marshall
(1862), 10 H.L. Cas. 191; Tailby v. Official Receiver (1888), 13 App.
Cas. 523; In re Lind, [1915] 2 Ch. D. 345; Banque nationale
du Canada v. William Neilson Ltd., [1991] R.J.Q. 712.
Statutes and Regulations Cited
Bank Act, S.C. 1890, c. 31,
s. 73.
Bank Act, S.C. 1944, c. 30,
ss. 86(2), 88(2).
Bank Act, S.C. 1991, c. 46,
ss. 427 , 428 , 435 .
Bank Act Amendment Act, 1900, S.C. 1900,
c. 26, s. 17.
Personal Property Security Act, S.A.
1988, c. P-4.05.
Personal Property Security Act, 1993,
S.S. 1993, c. P-6.2, ss. 4(k), 10, 12, 13, 35(1)(c), 66.
Authors Cited
Cuming,
Ronald C. C. “Fitting a Square (Federal) Peg in a Round (Provincial)
Hole: Rationalizing Section 427 Bank Act With Provincial Property
Security Law” (2010), 73 Sask. L. Rev. 1.
Cuming,
Ronald C. C., and Roderick J. Wood. “Compatibility of Federal
and Provincial Personal Property Security Law” (1986), 65 Can. Bar Rev.
267.
Cuming,
Ronald C. C., Catherine Walsh and Roderick J. Wood. Personal
Property Security Law. Toronto: Irwin Law, 2005.
Fisher
and Lightwood’s Law of Mortgage, 11th ed., Wayne
Clark, ed. London: Butterworths, 2002.
Goode
on Legal Problems of Credit and Security, 4th ed.,
Louise Gullifer, ed. London: Sweet & Maxwell, 2008.
Moull,
William D. “Security Under Sections 177 and 178 of the Bank Act ”
(1986), 65 Can. Bar Rev. 242.
APPEAL
from a judgment of the Saskatchewan
Court of Appeal (Sherstobitoff, Jackson and Smith JJ.A.), 2009 SKCA 36,
324 Sask. R. 191, 451 W.A.C. 191, 306 D.L.R. (4th) 444, [2009] 8 W.W.R. 60, 51
C.B.R. (5th) 197, 14 P.P.S.A.C. (3d) 124, [2009] S.J. No. 148 (QL), 2009
CarswellSask 157, reversing a decision of Zarzeczny J., 2007 SKQB 472, 39
C.B.R. (5th) 273, 12 P.P.S.A.C. (3d) 276, [2007] S.J. No. 680 (QL), 2007
CarswellSask 749. Appeal dismissed.
Michael W. Milani, Q.C., and Erin M. S.
Kleisinger, for the appellant.
Donald H. Layh, Q.C., and Shawn M. Patenaude, for the
respondent.
The
judgment of the Court was delivered by
Charron
J. —
1. Overview
[1]
This case, like its companion case Bank of
Montreal v. Innovation Credit Union, 2010 SCC 47, [2010] 3 S.C.R. 3, concerns
competing security interests taken pursuant to the provisions of the Bank
Act, S.C. 1991, c. 46 , and Saskatchewan’s The Personal Property Security
Act, 1993, S.S. 1993, c. P-6.2 (“PPSA”). As in the companion case,
the priority dispute in this case is between a prior unregistered security
interest taken under the PPSA and a subsequent security interest taken
and registered under the Bank Act . However, in the present case the
dispute is in respect of property acquired by the debtor after the
execution of both security agreements.
[2]
The applications judge viewed this case as
raising the same issue as that raised in Bank of Montreal. In that case,
he concluded that the priority rule specified by s. 428 of the Bank Act ,
which gives a Bank Act security interest priority over subsequently
acquired rights in respect of the property, also gives the bank priority over
subsequently acquired priority rights (sub nom. Innovation Credit
Union v. Bank of Montreal, 2007 SKQB 471, 306 Sask. R. 227 ). In a brief
judgment, the applications judge held that the Royal Bank’s interest under the Bank
Act takes priority over Radius Credit Union’s unperfected interest under
the PPSA (2007 SKQB 472, 39 C.B.R. (5th) 273).
[3]
The Court of Appeal for Saskatchewan allowed the
appeal, finding that the analysis must proceed along different lines than
pursued in Bank of Montreal. Since the dispute was over after-acquired
property, it was necessary to first determine at what time each creditor
acquired its respective interest. After determining that both security
interests attached simultaneously at the time the debtor purchased the
collateral in question, the Court of Appeal held that the Bank Act does
not provide a rule to address this priority dispute. Applying common law
principles of property law, the Court of Appeal concluded that the priority
rule to apply is “first in time is first in right” and that, notwithstanding
the Credit Union’s failure to perfect its security interest under the PPSA,
this rule should apply according to the date of execution of the respective
security agreements (2009 SKCA 36, 324 Sask. R. 191).
[4]
The Royal Bank now appeals with leave to this
Court, arguing that the conclusion reached by the Court of Appeal is neither
commercially reasonable nor required by law. The Royal Bank essentially joins
forces with the appellant in Bank of Montreal in advocating the adoption
of a first-to-register priority rule.
[5]
I would dismiss the appeal. For the reasons
stated in Bank of Montreal, I see no basis upon which the Court could
create a first-to-register priority rule as proposed without doing violence to
the terms of the Bank Act in its current manifestation. On this point,
I agree with the Court of Appeal. Such a rule would have to be enacted by
Parliament, if it saw fit to do so.
[6]
I also agree with the Court of Appeal that the
dispute must be resolved in favour of the Credit Union. However, I reach this
conclusion for different reasons. In my view, the priority dispute in this
appeal falls to be determined on the same basis as the companion case. As I
will explain, the fact that the collateral in question consists of
after-acquired property does not change the nature of the competing interests
at stake in this appeal. In each case, the competing Credit Union acquired a
statutory and therefore legally cognizable interest in the assigned property at
the time of execution of its security agreement. By the combined
effect of ss. 427(2) and 435(2) of the Bank Act , the Bank subsequently
acquired no greater interest than the debtor himself had at the time of
execution and delivery of its security interest. Consequently, the
Bank took its security interest subject to the PPSA security interest
held by the Credit Union.
2. The
Facts and Proceedings Below
[7]
Wayne Hingtgen, a Saskatchewan farmer, borrowed
money from Radius Credit Union Limited (“Credit Union”). In order to secure
the debt, Hingtgen executed a General Security Agreement (“GSA”) on January 24,
1992, giving the Credit Union a security interest in all of Hingtgen’s current
and after-acquired property. The Credit Union did not register a financing
statement in the Personal Property Registry or otherwise perfect its security
interest, until September 24, 1998.
[8]
After the GSA with the Credit Union was
executed, Hingtgen turned to the Royal Bank (“Bank”) for additional financing.
The Bank first registered its Notice of Intention to take Bank Act
security on January 22, 1996, and it first took Bank Act security on
June 10, 1997. As with the Credit Union’s PPSA security interest, the
Bank’s Bank Act interest covered both present and after-acquired
property.
[9]
Ultimately, Hingtgen defaulted on his loans and
the Bank seized and sold some of the collateral that was covered by both its Bank
Act interest as well as the Credit Union’s security interest. This sale
yielded $65,125 in proceeds. Importantly, the collateral that was seized and
sold was property that Hingtgen did not acquire until after both the Credit
Union and the Bank had taken security interests. The Credit Union brought an
application before the Saskatchewan Court of Queen’s Bench pursuant to s. 66 of
the PPSA seeking a declaration that it had a priority claim over the
proceeds of the disposition of that property.
[10]
Zarzeczny J., the applications judge, viewed
this case as being “on all fours” with the legal issue in Bank of Montreal (para.
7). In that case, he held that s. 428 of the Bank Act , which gives
a Bank Act security interest priority over subsequently acquired rights
in respect of the property, also gives the bank priority over subsequently
acquired priority rights. He thus held in a brief judgment that, as in Bank
of Montreal, the Bank’s interest had priority because the Credit Union had
not perfected its security interest through registration under the PPSA
before the Bank took and registered its Bank Act security. The
applications judge did not address the issue arising from the fact that the
competing interests in this case arose in respect of after-acquired property.
[11]
The Saskatchewan Court of Appeal reversed the
applications judge’s decision. Jackson J.A., writing for the court, viewed
this case as requiring a different analysis than that adopted in Bank of
Montreal. In Bank of Montreal, where Innovation Credit Union’s
interest attached prior to the Bank of Montreal’s interest, ss. 427(2) and
435(2) of the Bank Act , according to which the bank acquires no greater
interest than the debtor had at the time the Bank Act security was
taken, was dispositive of the priority issue (sub nom. Innovation Credit
Union v. Bank of Montreal, 2009 SKCA 35, 324 Sask. R. 160 ). Here, because
the collateral at issue consisted of after-acquired property, both the Credit
Union’s interest and the Bank’s interest attached simultaneously at the time
that Hingtgen actually purchased the property. Since the Bank Act
contained no priority rule to resolve this dispute, it was necessary to resort
to applicable common law, rules of equity, and statutory law to fill the gap.
While the time of perfection, or the lack of perfection, under the PPSA
determined which of two competing security interests takes priority under that
Act, it was of no consequence on the question of the validity or the
enforceability of the interest. Based on applicable principles of property
law, Jackson J.A. held that the appropriate rule was to accord priority to the
security interest created pursuant to the first agreement to be executed. On
that basis, she awarded priority to the Credit Union.
3. Analysis
[12]
As in Bank of Montreal, nothing turns on
the particular wording of either respective security agreement in this appeal
and it is not necessary to set out the relevant parts of the security
agreements. The priority dispute essentially raises a question of statutory
interpretation.
[13]
As explained in Bank of Montreal, the
focal point for resolving a priority dispute involving a Bank Act
security and provincial personal property security act security interests is
the Bank Act itself. Because provinces cannot enact provisions that
would affect the priority of a validly created federal security interest, the
conceptual framework for resolving disputes between PPSA security
interests and Bank Act security interests is necessarily that supplied
by the Bank Act . While the internal priority rules of the PPSA
cannot be invoked to resolve the dispute, the provisions of the PPSA
cannot be ignored as provincial property law plays a complementary role in
defining the rights granted under the Bank Act . As the Bank Act
contains relatively few provisions which explicitly address whether a Bank
Act security has priority over other interests in the same property, most
priority disputes are resolved by considering whether, on the basis of applicable
principles of property law, the proprietary rights granted to the bank under
that Act have precedence over competing interests.
[14]
In applying the framework of analysis set out
more fully in Bank of Montreal, it is necessary to first look at the
nature of the security interest conveyed to the Bank under the Bank Act
and, in order to resolve the priority dispute, compare it to the prior
competing PPSA interest to consider whether the Credit Union acquired
any interest that would derogate from the debtor’s title.
3.1 The
Security Interest Conveyed Under the Bank Act
[15]
In order to determine the nature of the security
interest conveyed under the Bank Act we must construe the relevant
provisions of the statute. It may be useful to situate the particular provisions
at issue in this appeal within the general structure of the regime governing Bank
Act security. The regime may be summarized as follows:
1. Section
427(1) authorizes banks to lend money to a variety of borrowers for a range of
purposes and to take security in specified classes of property when making such
loans.
2. Section
427(2) states that the “[d]elivery of a document giving security on property to
a bank . . . vests in the bank” certain “rights and powers” in respect of the
property described in the document. Of course, the time at which a creditor
acquires its security interest in the collateral is of critical importance in
any priority dispute. As we shall see, there is some uncertainty on the
question of when the Bank acquired its interest in this appeal. As the debtor
only acquired rights in the collateral at a time subsequent to the “delivery”
of the security document to the Bank, an issue arises as to what, if any,
proprietary interest was acquired by the Bank under s. 427(2) at the time it took
its Bank Act security interest.
3. The
nature of the “rights and powers” which vest in the bank are defined further
under s. 427(2) depending on the nature of the collateral. More specifically as
it relates to this appeal, s. 427(2) (c) grants the bank taking a Bank
Act security “the same rights and powers as if the bank had acquired a
warehouse receipt or bill of lading in which that property was described”.
In turn, s. 435(2)
specifies that the effect of acquiring a warehouse receipt or bill of lading is
to vest in the bank, “from the date of the acquisition”, all the right and
title of the owner of the property. Just as in Bank of Montreal, ss.
427(2)(c) and 435(2) are of critical importance on the issue that
occupies us in this appeal as, by their terms, the bank acquires all interest
in the collateral, but no greater, than the debtor has at the relevant time.
4. Section
427(4) states that, unless the bank registers a notice of intention with the
appropriate authority, its security interest will be void as against third
parties. This notice of intention may be registered up to three years before
the security is actually given. It is common ground that the notice of
intention was duly registered by the Bank in this case.
5. Section
427(3) provides the bank with an efficient mechanism of accessing its
collateral by allowing the bank to seize property in the event of the debtor’s
non-payment of a loan to the bank, which is what the Bank did here.
6. The Bank Act contains few provisions that
explicitly address the question of priority over competing interests in the
same property. Of potential relevance to this appeal is s. 428 which gives
priority to the bank “over all rights subsequently acquired in, on or in
respect of that property”.
[16]
I now turn to ss. 427(2) and 435(2). The
relevant wording of the provisions is as follows:
427. . . .
(2) Delivery of a document giving security on property
to a bank under the authority of this section vests in the bank in respect
of the property therein described
(a) of which the person
giving security is the owner at the time of the delivery of the document, or
(b) of which that person
becomes the owner at any time thereafter before the release of the security by
the bank, whether or not the property is in existence at the time of the
delivery,
the following
rights and powers, namely,
(c) . . . the same rights
and powers as if the bank had acquired a warehouse receipt or bill of lading in
which that property was described . . . .
435. (1) A bank may acquire and hold any
warehouse receipt or bill of lading as security for the payment of any debt
incurred in its favour, or as security for any liability incurred by it for any
person, in the course of its banking business.
(2) Any
warehouse receipt or bill of lading acquired by a bank under subsection (1)
vests in the bank, from the date of the acquisition thereof,
(a) all the right and
title to the warehouse receipt or bill of lading and to the goods, wares
and merchandise covered thereby of the previous holder or owner
thereof; and
(b) all
the right and title to the goods, wares and merchandise mentioned therein of
the person from whom the goods, wares and merchandise were received or acquired
by the bank, if the warehouse receipt or bill of lading is made directly in
favour of the bank, instead of to the previous holder or owner of the goods,
wares and merchandise.
[17]
In this case, Mr. Hingtgen did not hold any
right in the collateral in question at the time the security document was
delivered to the Bank. It is only subsequently, at the time he purchased each
item of property, that he acquired any rights in the assigned property.
Therefore, it is correct to say that the Bank’s proprietary interest in
after-acquired property can only “attach” to the property when the debtor acquires
it. Before that time, there is evidently no collateral upon which it could
attach. This conclusion finds support in the majority of the Canadian
jurisprudence and virtually all academic commentary: see e.g. Rogerson
Lumber Co. v. Four Seasons Chalet Ltd. (1980), 113 D.L.R. (3d) 671 (Ont.
C.A.), per Arnup J.A.; Bank of Montreal v. Hall, [1990] 1 S.C.R.
121, at p. 134, citing W. D. Moull, “Security Under Sections 177 and 178 of the
Bank Act ” (1986), 65 Can. Bar Rev. 242, at p. 251; Abraham v. Canadian
Admiral Corp. (Receiver of) (1998), 158 D.L.R. (4th) 65 (Ont. C.A.), at
paras. 19-20; R. C. C. Cuming and R. J. Wood, “Compatibility of Federal and
Provincial Personal Property Security Law” (1986), 65 Can. Bar Rev. 267,
at p. 276.
[18]
The proprietary interest which attaches to the
after-acquired collateral at the time of its purchase by Hingtgen, however,
does not constitute the full extent of the interest granted to the Bank under
the Bank Act . As the underlined words of the above-noted provisions
make plain, the rights and powers conveyed under the security agreement vest
in the Bank on delivery of the security document (s. 427(2) ), from
the date of the acquisition thereof (s. 435(2) ). As discussed in the
companion Bank of Montreal appeal, the nature of the interest acquired
by the bank was explained in Bank of Montreal v. Hall, in these terms:
The nature of the
rights and powers vested in the bank by the delivery of the document
giving the security interest has been the object of some debate. . . . I find
the most precise description of this interest to be that given by Professor
Moull in his article “Security Under Sections 177 and 178 of the Bank Act ”
(1986), 65 Can. Bar Rev. 242, at p. 251. Professor Moull, correctly in
my view, stresses that the effect of the interest is to vest title to the
property in question in the bank when the security interest is taken out.
[Emphasis added; pp. 133-34.]
As Professor Moull
explained at p. 251:
The
result, then, is that a bank taking security under section 178 effectively
acquires legal title to the borrower’s interest in the present and
after-acquired property assigned to it by the borrower. The bank’s interest
attaches to the assigned property when the security is given or the property is
acquired by the borrower and remains attached until released by the bank,
despite changes in the attributes or composition of the assigned property. The
borrower retains an equitable right of redemption, of course, but the bank
effectively acquires legal title to whatever rights the borrower holds in the
assigned property from time to time.
[19]
At first glance, it may appear inconsistent to
say, on the one hand, that the bank’s proprietary interest in after-acquired
property does not attach until the property is actually acquired by the debtor
and, on the other, that the bank’s interest in the assigned property vests at
the time of execution of the security agreement. However, this peculiarity was
not totally foreign to the law at the time the Bank Act was enacted. A
similar concept was recognized by courts of equity. As I will explain, the Bank
Act effectively creates an inchoate proprietary interest in the
after-acquired property from the time of delivery of the security agreement, a
notion that had been recognized in equity.
[20]
At common law, it was not possible for an
individual to grant an interest in property that he or she did not at that time
own. However, it has long been held that equity will recognize and enforce
interests which are granted in after-acquired property: see Holroyd v.
Marshall (1862), 10 H.L. Cas. 191; Tailby v. Official Receiver
(1888), 13 App. Cas. 523 (H.L.). The grantee’s equitable interest in the
property does not arise at the time the contract is executed. Rather, once the
grantor acquires the property, the grantee immediately acquires an equitable
interest in that property: see Holroyd; Fisher and Lightwood’s Law
of Mortgage (11th ed. 2002), W. Clark, ed., at p. 133. As between
competing equitable interests in after-acquired property, priority has
generally been given to the first agreement to be executed: see In re Lind,
[1915] 2 Ch. D. 345 (C.A.); R. C. C. Cuming, C. Walsh and R. J. Wood, Personal
Property Security Law (2005), at p. 312. As explained by Professor Goode,
equity in effect recognizes a type of inchoate proprietary interest in
after-acquired property from the moment the agreement is executed:
For example, a
debtor executes a charge in favour of X over future property on April 1 and
acquires a new asset on August 1. The charge attaches on August 1. There
appears to be no problem. But suppose that on May 1 the debtor had executed a
second charge, in favour of Y, over the same classes of future assets. Who
wins, X or Y? The answer is simple enough: X wins, as he is the first in
time. The problem is to know how this result is arrived at, because, of
course, the security interest does not attach until the debtor has acquired the
asset, so that the competing interests of X and Y attach simultaneously. How,
then, does X get priority?
Here we have a striking example of the intellectual subtlety of the
law. In a number of cases the courts have ruled that whilst, in a sense, an
agreement for security over after-acquired property cannot attach to that
property prior to acquisition, yet the agreement constitutes a present
security. In other words, it creates an inchoate security interest which is
waiting for the asset to be acquired so that it can fasten on to the asset but
which, upon acquisition of the asset, takes effect as from the date of the
security agreement. Acquisition of the asset produces the situation in which
the security is deemed to have continuously attached to the asset from the time
of execution of the security agreement.
(Goode on Legal Problems of
Credit and Security (4th ed. 2008), Louise Gullifer, ed., at p. 74)
[21]
Thus, in creating an interest which comes into
existence immediately upon the delivery of a security document, but only
attaches to the collateral at the time the debtor actually has an interest in
the property, the Bank Act simply gives statutory recognition to this
notion of “inchoate interest from the date of execution” that had long been recognized
by courts of equity. In my view, this interpretation is the only one that gives
effect to all the words contained in ss. 427(2) and 435(2) .
[22]
This interpretation, while not explained in
these terms, was effectively adopted by the Quebec Court of Appeal in Banque
nationale du Canada v. William Neilson Ltd., [1991] R.J.Q. 712.
Rousseau-Houle J.A., writing for the majority (the dissenting opinion not on
this point), described the nature of the bank’s interest under equivalent
provisions of the Bank Act in these terms:
[translation] The bank’s rights
depend on when the security was given. . . .
The
Bank may exercise its right under this section only if the person who gave the
security has become the owner. This is the effect of section 178 [now s.
427].
. . .
These provisions necessarily lead to the conclusion that the Bank’s
rights in the property it was given in security were acquired as of the date of
the agreement, provided that the transferor was then or subsequently became the
owner of the property in question. In this case, the Bank is deemed to have
held its rights since the date of the agreement, regardless of the fact that
the transferor acquired the property at different times. However, the
Bank’s rights may be asserted as against third parties only if a notice of
intention was registered not more than three years immediately before the
security was given . . . . [Emphasis added; pp. 721-22.]
[23]
This interpretation also finds support in this
Court’s decision in Royal Bank of Canada v. Sparrow Electric Corp.,
[1997] 1 S.C.R. 411. As explained in the companion appeal, it became necessary
for the Court in that case to determine the nature of the Royal Bank’s security
interest under the Bank Act and the nature of its security interest
under the Alberta Personal Property Security Act, S.A. 1988, c. P‑4.05.
Each security agreement covered both the present and after-acquired property of
the debtor. The Court concluded that the security interest conveyed to the Bank
under each statute was in the nature of a fixed charge over both the
present and future assets of the debtor, which interest took effect from
the time the security agreement was entered into. Gonthier J., dissenting
but not on this point, acknowledged that the concept of a fixed charge over
property that did not yet exist was a novel one, explaining as follows:
It would seem appropriate at this point, before leaving the present
discussion, to comment briefly upon this novel and perhaps abstract notion of
possessing a fixed charge over all of the present and future inventory of a
debtor. To begin with, I note that traditional definitions of the fixed charge,
as for example the one I previously quoted above from Illingworth [v.
Houldsworth, [1904] A.C. 355], emphasize the ability to “settle and fasten”
upon ascertainable and defined property as being an integral attribute to this
particular form of charge. This type of attachment to tangible and
ascertainable property, of course, is impossible to achieve in the case of an
assignment of inventory, where that collateral is changing constantly. In
short, the traditional concept of the fixed charge seems to be at odds with
the notion of having a proprietary right over collateral such as after-acquired
inventory which, by definition, is not yet in existence at the time the
security agreement is executed.
In my
view, however, a fixed charge over all present and future inventory represents
a proprietary interest over a dynamic collective of present and future
assets. To this extent, as stated above, this form of security interest
challenges our traditional conception of a fixed charge; to the same extent, in
my opinion, our conception of this form of charge must change to meet the
modern realities of commercial law, and in particular the legislative
provisions which have been brought to bear in this appeal. [First emphasis
added; second emphasis in original; paras. 62-63.]
[24]
In a recent article, Professor Cuming suggests,
on a review of the historical wording of the precursor sections to s. 427(2),
that there was no legislative intention to confer to the bank any proprietary
interest in after-acquired collateral at the date of execution of the security
agreement. Rather, the bank would acquire a proprietary interest only when the
debtor himself acquires such interest in the collateral, in other words, at the
time of attachment (R. C. C. Cuming, “Fitting a Square (Federal) Peg in a Round
(Provincial) Hole: Rationalizing Section 427 Bank Act With Provincial
Property Security Law” (2010), 73 Sask. L. Rev. 1, at pp. 16-19). I do
not share Professor Cuming’s concern on this point. In my view, the history of
the provision does not detract from the conclusion that an inchoate proprietary
interest in after-acquired collateral vests in the bank from the moment of
delivery of the security document. I will briefly review this history.
[25]
In 1900, an amendment was made to s. 74(2) of The
Bank Act to allow substituted collateral to be “covered by such security as
if originally covered thereby”: The Bank Act Amendment Act, 1900, S.C.
1900, c. 26, s. 17. Thus, under the 1900 version of the Act, substituted
collateral was treated as if an inchoate proprietary interest had been granted
on the date the security agreement was executed. While the language of s.
74(2) was not literally replicated in the 1944 version of the Bank Act,
s. 88(2) (the precursor to s. 427(2) ) was to the same effect. It introduced
the notion that the delivery of the document “vests and shall vest in
the bank . . . the same rights and powers in respect of such property as if the
bank had acquired a warehouse receipt or bill of lading” describing the
property: The Bank Act, S.C. 1944, c. 30, s. 88(2). Explicitly, s.
88(2) applied to after-acquired property, or as the words of the statute then
stated, property “of which such person [giving the security] becomes the owner
at any time thereafter before the release of the security by the bank, whether
or not such property is in existence at the time”. This provision,
together with s. 86(2) of the same Act, a provision that existed in a similar
form since at least 1890 (The Bank Act, S.C. 1890, c. 31, s. 73),
explained that the effect of a bank’s acquiring a warehouse receipt or bill of
lading was that “all the right and title” to the goods covered by the security “shall
vest in the bank, from the date of the acquisition thereof”. In my
view, these historical provisions have precisely the same effect as the current
ss. 427(2) and 435(2), respectively.
[26]
Consequently, one can only read in ss. 427(2)
and 435(2) the intention to statutorily vest in the bank a proprietary, albeit
inchoate, interest in the after-acquired property enforceable against third
parties from the time of execution of the security agreement, provided proper
notice of intention was registered as required by the statute.
[27]
I therefore conclude that from the time the Bank
first took Bank Act security on June 10, 1997, it acquired an inchoate
proprietary interest in the assigned after-acquired property in the nature of a
fixed charge, which interest subsequently attached to the various items of
collateral at the time they were each purchased by Hingtgen.
[28]
I now turn to the Credit Union’s competing PPSA
interest.
3.2 The
Credit Union’s Security Interest Under the PPSA
[29]
It is not disputed that, at the time Hingtgen
gave the Bank its security agreement in 1997, the Credit Union had a valid
security agreement executed on January 24, 1992, in respect of the same
collateral. It is common ground that, pursuant to ss. 12 and 13 of the PPSA,
the security interest created under the PPSA agreement attached to the
after-acquired collateral at the time Hingtgen purchased the property. Because
attachment had not yet occurred at the time Mr. Hingtgen gave the Bank its Bank
Act security interest, the critical question becomes whether the Credit
Union acquired any interest in the assigned property at that time which would
derogate from Mr. Hingtgen’s title. If so, by the combined effect of ss.
427(2) and 435(2) , the Bank can only acquire its interest subject to the prior
encumbrance.
[30]
Of particular relevance on this point is the
fact that the Credit Union’s security agreement did not only constitute a valid
contract as between creditor and debtor, but also, under s. 10 of the PPSA,
was enforceable as against third parties. The relevant parts of s. 10 read as
follows:
10(1) Subject to subsection (2) and section 12.1, a security interest
is enforceable against a third party only where:
. . .
(d) the debtor has signed a
security agreement that contains:
. .
.
(iii) a
statement that a security interest is taken in all of the debtor’s present and
after-acquired personal property; . . .
[31]
The fact that s. 10 of the PPSA provides
that a security interest is enforceable against third parties upon the signing
of a security agreement (provided it contains a proper description of the
collateral) must mean that, at the moment of execution, some statutory interest
is acquired by the creditor. Otherwise, there would be nothing to enforce. As
for the nature of this interest, I return to this Court’s holding in Sparrow
Electric that all security interests under the Alberta PPSA were
akin to a fixed charge and as such, correlative to “a proprietary interest over
a dynamic collective of present and future assets” (para. 63 (emphasis in
original deleted)). As to when this interest takes effect, Gonthier J. stated
the following:
Generally
speaking, therefore, absent an express intention to the contrary, a security
interest in all present and after-acquired personal property will attach
when that agreement is executed by the parties. . . .
. . .
Applying
this principle to the case at bar, the GSA held by the respondent bank must
certainly be characterized as a fixed and specific charge. It attached at
the time the agreement was executed . . . . [Emphasis added; paras. 54-56.]
While
Gonthier J. spoke in terms of attachment here, it is clear in the
context of his analysis that he was referring to the time when the fixed charge
over all present and future assets took effect and that this occurred upon
execution of the agreement. While the statutory interest created in
after-acquired property is necessarily inchoate in nature until the debtor
acquires rights in the property, that does not change the fact that, as of
the date of execution, the creditor — in this case the Credit Union —
acquired an interest in the after-acquired property which derogated from the
debtor’s title.
[32]
The time of attachment does not change the
nature of the interest conveyed to the Credit Union and, consequently, is not
significant here. For sure, the PPSA has chosen the date of attachment,
rather than the date of execution of the agreement, as the pivotal date for
resolving a priority dispute as between some competing PPSA interests.
Notably, s. 35(1)(c) provides that
35(1) Where this Act provides no other method for determining priority
between security interests:
. . .
(c) priority
between conflicting unperfected security interests is determined by the order
of attachment of the security interests.
However,
it does not follow from this that the date of attachment has any effect on a
priority dispute between PPSA and Bank Act security interests.
Indeed, not only does s. 4(k) of the PPSA exclude from its application a
Bank Act security interest, the Province of Saskatchewan could not enact a
provision that would affect the priority of a federally created security
interest.
[33]
However, as explained in Bank of Montreal,
while the provinces cannot legislate in order to oust the bank’s rights, they
can alter the law as it relates to property and civil rights in each province.
This is what Saskatchewan did in enacting the PPSA. The Legislature
created a statutory interest in after-acquired property, an interest which is
correlative to an inchoate proprietary interest. It also provided that this
statutory interest is enforceable against third parties and that it comes into
existence on the signing of the security agreement. In creating this interest,
the Province acted within the scope of its constitutional authority. Thus, in
a priority dispute such as this one where the priority rules under the PPSA
can find no application, the date of execution of the agreement is the relevant
date, as it is at that time that the statutory interest is created. The date
of attachment is of no consequence.
[34]
I therefore conclude that, at the time of
execution of its security agreement, the Credit Union acquired a statutory
interest in the nature of a fixed charge over the debtor’s assigned after-acquired
property, which effectively derogated from the title Mr. Hingtgen had available
to assign to the Bank. This interest was in existence at the time the Bank
took its Bank Act security interest, although it attached to the
collateral in question only subsequently.
3.3 Resolving
the Priority Dispute
[35]
For the reasons explained more fully in Bank
of Montreal, by the combined effect of ss. 427(2) and 435(2), the Bank can
receive no greater interest in the property than the debtor himself has. At
the time the Bank took its Bank Act security interest, the Credit Union
already held a proprietary interest in the same collateral in the nature of a
fixed charge. The failure to register does not take anything away from the
nature and validity of the Credit Union’s prior interest.
[36]
I therefore conclude that the Bank’s security
interest is subject to the Credit Union’s rights under the PPSA.
4. Conclusion
[37]
I would dismiss the appeal with costs
throughout.
Appeal
dismissed with costs.
Solicitors for the
appellant: McDougall Gauley, Regina.
Solicitors for the
respondent: Layh & Associates, Langenburg, Saskatchewan.
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