U. Toronto Law Working Paper Series No

Transcription

1 U. Toronto Law Working Paper Series No SECURITY INTERESTS IN TRANSFERRED COLLATERAL: A NOTE ON LISEC AMERICA INC. V. BARBER SUFFOLK LIMITED Anthony Duggan January 6, 2014

2 SECURITY INTERESTS IN TRANSFERRED COLLATERAL: A NOTE ON LISEC AMERICA INC. V. BARBER SUFFOLK LIMITED 1. Introduction A primary objective of the provincial personal property security statutes is to facilitate the publication of security interests for the protection of outside parties. To this end, the legislation provides for the registration of security interests and for register searches by interested outsiders. There are two main types of search facility: against the debtor s name; and, if the collateral is serial-numbered goods, such as a motor vehicle, against the collateral serial number. 1 To facilitate debtor s name searches, the legislation requires the secured party to correctly state the debtor s name in its financing statement, while to facilitate serial-number searches, the legislation requires or encourages the secured party to include the collateral serial number in its registration. A debtor s name search will typically reveal all registrations filed against the name the searcher provides. On the other hand, as Example 1 illustrates, it will not reveal a registration that is filed against the name of the debtor s predecessor in title. Example 1. A holds a security interest in B s collateral perfected by registration. B transfers the collateral to C outside the ordinary course of business and without A s knowledge or consent. C subsequently proposes to give D a security interest in the same collateral or, alternatively, to re-sell the collateral to D. D should conduct a register search before transacting with C so as to avoid a potential priority dispute with A. However, a debtor s name search is unlikely to reveal A s registration. This is because, unless D is aware that C has acquired the collateral from B, it will most likely search against C s name whereas the registration is filed against A s name. There are two measures in the legislation aimed at ameliorating the A-B-C-D problem. The first is the serial-number search facility. Returning to the above example, if the collateral is serialnumbered goods, such as a motor vehicle, and D conducts a serial number search, there is a 1 In Ontario, the serial number search facility is limited to motor vehicles whereas, in the other provinces, it extends to other types of serial-numbered collateral, such as boats and trailers, as well. 1

3 good chance that the search will reveal A s registration. However the serial number search facility is available only for certain types of collateral and outside these cases a debtor s name search is D s only option. The second measure aimed at the A-B-C-D problem is a provision requiring A to amend its registration by substituting C for B in the debtor s name field within a stated number of days after A learns the relevant facts. In Ontario, the provisions are to be found in OPPSA, section 48(1) and (2), which read as follows: 2 (1) Where a security interest is perfected by registration and the debtor, with the prior consent of the secured party, transfers the debtor s interest in all or part of the collateral, the security interest in the collateral transferred becomes unperfected fifteen days after the transfer is made unless the secured party registers a financing change statement within such fifteen days. (2) Where a security interest is perfected by registration and the debtor, without the prior consent of the secured party, transfers the debtor s interest in all or part of the collateral, the security interest in the collateral transferred becomes unperfected thirty days after the later of, (a) the transfer, if the secured party had prior knowledge of the transfer and if the secured party had, at the time of the transfer, the information required to register a financing change statement; and (b) the day the secured party learns the information required to register a financing change statement, unless the secured party registers a financing change statement or takes possession of the collateral within such thirty days. There are functionally equivalent provisions in the other provincial PPSAs, but they are differently worded. 3 Lisec America Inc. v. Barber Suffolk Ltd 4 involved the application of OPPSA, section 48(2) in somewhat unusual circumstances. The case is interesting because the court reached a conclusion which is at odds with the plain meaning of the statutory text and which raises some difficult policy questions. In addition, and as a separate matter, the judgment has implications for a 2 Personal Property Security Act RSO 1990, c.p-3 ( OPPSA ). 3 See, e.g., Personal Property Security Act, 1993, SS 1993, c.p-6.2, s.51 ( Saskatchewan PPSA ). 4 Lisec America Inc. v. Barber Suffolk Limited 2012 ONCA 37 (R.A. Blair J.A., La Forme. and Benotto JJ A concurring). 2

4 longstanding debate in the academic literature about whether the PPSA priority rules apply where the competing security interests are given by different debtors (the so-called doubledebtor problem ). These points are developed below. 2. Case overview The dispute involved two transactions, one between Lisec and Barber Suffolk Limited (BSL) and the other between Lisec and Barber Glass Industries (BGI). BSL and BGI were related companies. The chronology was complicated, but it is helpfully summarized in the Court of Appeal s judgment. 5 On 16 July 2007, Lisec sold, but did not immediately deliver, a glass cutter to BSL on conditional sale terms. On the same date, Lisec sold, but did not immediately deliver, two other pieces of equipment, a cutting line and a vertical IG line, to BGI on conditional sale terms. Also on the same date, BSL transferred its interest in the glass cutter to BGI but without Lisec s knowledge. On 19 June 2008, Lisec registered a financing statement relating to the glasscutter and naming BSL as the debtor. On the same date, it registered a financing statement relating to the cutting line and the vertical IG line and naming BGI as the debtor. On 28 June 2008, Lisec delivered all 3 pieces of equipment to BGI, in accordance with the terms of its agreements with BSL and without knowing that BSL had transferred the glass cutter to BGI. On and around 9 July 2008, BGI negotiated for a loan with Roynat and, at Roynat s request, Lisec discharged its registration against BGI. Roynat took a security interest in the glass cutter and registered a financing statement against BGI. On 10 November, 2010, BGI defaulted against Roynat and Roynat appointed a receiver. On 29 November, 2010, Lisec found out about BSL s transfer of the glass cutter to BGI and it amended its BSL registration by substituting BGI s name for BSL s. Lisec and Roynat s receiver both claimed the glass cutter and Lisec applied to the court for an order determining the priorities. The application judge held first, that BSL s transfer of the glass cutter to BGI did not terminate Lisec s security interest. 6 Lisec had no prior knowledge of the transfer and it did not authorise the transaction. OPPSA, section 39 provides that the rights of a debtor in collateral may be transferred despite a provision in the security agreement prohibiting transfer or declaring transfer to be a default, but no transfer prejudices the rights of the secured party under the security ONCA 37 at para. [20]. 6 Lisec America Inc. v. Barber Suffolk Limited 2100 ONSC 929 (Ont. SCJ) (Marrocco J.) 3

5 agreement or otherwise. In other words, BSL s transfer of the glass cutter to BGI was effective even though it was transacted without Lisec s consent, but Lisec s security interest continued in the glass cutter. 7 Secondly, the court held that even though Lisec named BSL, not BGI in its registration, section 48(2) applied and therefore Lisec s security interest did not become unperfected as a result of the transfer. Thirdly, the court held that Lisec s security interest in the glass cutter became unperfected on 9 July 2008, when Lisec discharged its registration against BGI. Lisec appealed this ruling. The Court of Appeal agreed with the application judge on the first two points, but it overruled him on the third. It held that Lisec s BGI registration did not extend to the glass cutter because BGI never gave Lisec a security interest in the glass cutter; the transfer from BSL to BGI meant that BGI held the glass cutter subject to Lisec s security interest, but the security interest was given by BSL, not BGI; therefore, the discharge of the BGI registration had no bearing on Lisec s security interest in the glass cutter. Furthermore, even if Lisec s BGI registration did cover the glass cutter, discharge of this registration did not affect Lisec s BSL registration; in other words, Lisec s security interest in the glass cutter remained perfected by the BSL registration. These propositions seem incontrovertible, but there are other aspects of the case that merit discussion. 3. Analysis (a) The construction of section 48(2) The opening words of section 48(2) read as follows: where a security interest is perfected by registration and the debtor, without the prior consent of the secured party, transfers the debtor s interest in all or part of the collateral This wording suggests that the provision only applies where the security interest is initially perfected by registration and the debtor later transfers the 7 The court did not explain the basis for this assumption. OPPSA, s.25(1)(a) provides that where there is a dealing in collateral, the security interest continues in the collateral unless the secured party expressly or impliedly authorized the dealing. But s.20(1)(c) provides that an unperfected security interest is ineffective against a transferee of the collateral for value who takes delivery without knowledge of the security interest. The court s assumption would be correct if: (1) Lisec s security interest was perfected when BGI took delivery of the glasscutter; (2) BGI did not give value for the glass-cutter; or (3) BGI knew about Lisec s security interest. But the court made no rulings on any of these points. See further, Part 3(a), below. 4

6 collateral. But in Barber Suffolk, BSL transferred the glass cutter to BGI before Lisec registered its financing statement. This point was not addressed by either the application judge or the Court of Appeal, but both judgments imply that the order of events does not affect the application of the provision. The problem is that, if the order of events is reversed, as it was in the Barber Suffolk case, the secured party s (Lisec s) registration did not perfect its security interest and section 48(2) only applies where the security interest is perfected by registration. Registration of a financing statement will not perfect a security interest if the registration is invalid. OPPSA, section 1(1) defines debtor to mean a person who owes payment or performance of the obligation secured and who owns or has rights in the collateral; it goes on to provide that if the person who owes payment or other performance of the obligation secured and the person who owns or has rights in the collateral are not the same person, in a provision dealing with the obligation secured, debtor means the person who owes payment or other performance of the obligation secured, whereas in a provision dealing with the collateral, debtor means the person who owns or has rights in the collateral, including a transferee of the debtor s interest in the collateral. In the Barber Suffolk case, Lisec registered its financing statement on 19 June 2008 naming BSL as the debtor, but by then the glass cutter had been transferred to BGI and so Lisec named the wrong debtor. Therefore its registration was invalid and its security interest in the glass-cutter remained unperfected. 8 This point was overlooked in the Barber Suffolk case. 9 The key passage in the Court of Appeal s judgment reads as follows: The purpose of [section 48(2)] is to protect creditors who have taken all proper steps to perfect their security under the PPSA from losing their priority because of an unknown transfer of the protected asset to another debtor. Since the PPSA regime protects priority 8 OPPSA, s.46(4) provides, in effect, that a materially misleading error invalidates a financing statement. 9 A further requirement for perfection is that the security interest must have attached: OPPSA, s.19(1). One of the requirements for attachment is that the debtor must have rights in the collateral: OPPSA, s.11(2). In the Barber Suffolk case, Lisec acquired its security interest on 16 July 2007 and it registered on 19 June The security interest attached on 16 July 2007 and it became perfected on 29 November 2010 when Lisec registered the financing change statement correcting its original registration. It is true that by this date BSL no longer had rights in the water jet, but this did not matter because the attachment requirement had already been satisfied, back on 16 July

7 by means of registration against the name of the debtor, the Act provides a secured party in such circumstances with a grace period after becoming aware of the transfer to preserve its priority by registering a financing change statement against the new debtor as well. Accordingly, since Lisec registered its financing change statement within 30 days of learning the information required to do so, the effect of s.48(2) is that Lisec s security interest in the Waterjet as protected by the Barber Suffolk registration remained perfected and entitled to priority over any registrations made against Barber Glass, and covering the same collateral, during the period between the transfer and the registration of Lisec s subsequent financing change statement. 10 This passage appears to suggest that the provision applies so long as the secured party has registered a financing statement which, but for the transfer of the collateral, would have perfected its security interest. In other words, the reference in the opening words of section 48(2) to a security interest perfected by registration is to be read as meaning a security interest purportedly perfected by registration. But the provision makes no sense unless the security interest was actually perfected because the consequence of non-compliance is that the security interest in the collateral transferred becomes unperfected ; and a security interest cannot become unperfected unless it was perfected in the first place. By the same token, in Barber Suffolk, the court held that the effect of s.48(2) is that Lisec s security interest in the Waterjet as protected by the Barber Suffolk registration remained perfected during the period between the transfer and the registration of Lisec s subsequent financing change statement (emphasis added). This statement presupposes that the security interest was perfected immediately before the transfer, but that cannot be right because the transfer took place on 16 July 2007 and Lisec did not register its financing statement until 19 July The judgment in Barber Suffolk does not mention OPPSA, section 20(1)(c), which provides that an unperfected security interest is ineffective against a transferee of the collateral for value who takes delivery without knowledge of the security interest. The provision is relevant because if it had applied, Lisec s unperfected security interest would have been extinguished following the transfer of the glass cutter to BGI leaving Roynat with an uncontested claim. The court may have overlooked section 20(1)(c) because it assumed that Lisec s security interest was perfected at the time of the transfer. Alternatively, the provision may not have been applicable either because BGI knew about Lisec s security interest or did not give value for the transfer. These are both ONCA 37 at para. [22] (emphasis added). 6

8 plausible assumptions, given that BSL and BGI were related companies. But whatever the facts actually were in Barber Suffolk, the point remains that if section 20(1)(c) had applied, section 48(2) would have been irrelevant. The Barber Suffolk case is also open to question on policy grounds. It is easy enough to understand the court s sympathy for Lisec. By complying, as it thought, with section 48(2), Lisec did everything it could, after learning about the transfer, to ensure the perfection of its security interest and it would have been hard to deny it the protection of the provision simply because the glass-cutter happened to have been transferred before Lisec s registration, rather than vice versa. On the other hand, Lisec could have avoided this risk if it had registered in advance of its security agreement with BSL on 16 July The outcome of the case was hard on Roynat, given the A-B-C-D dimension: Lisec s security interest in the glass cutter was registered against BSL s name, but Roynat s transaction was with BGI and a search against BGI s name would not have disclosed Lisec s security interest. On the other hand, Roynat could have protected itself by inquiring into the origins of the glass cutter before transacting with BGI. This would presumably have revealed that BGI had acquired the glass cutter from BSL and a search against BSL s name would have disclosed Lisec s security interest. To summarize, from a policy perspective, the correct outcome in a case like Barber Suffolk turns on an assessment of which party is better placed to avoid the harm. In other words, should the law deny Lisec relief on the ground that it could have protected itself by registering its security interest in advance of its transaction with BSL? Or should the law deny Roynat relief on the ground that it could have protected itself by conducting a chain of title search before transacting with BGI? The Court of Appeal s judgment in the Barber Suffolk case favours the second approach, but without discussion of the competing costs and benefits. (b) The double debtor controversy There is another important aspect of OPPSA, section 48(2) that the Barber Suffolk case glosses over. Ziegel and Denomme argue that the default priority rules in OPPSA, section 30(1) apply only where the competing security interests are given by the same debtor and that, since the statute contains no priority rule for cases where the security interest is given by different debtors, the common law rule of first in time, first in right (nemo dat quod non habet) should be 7

9 applied. 11 But these propositions overlook section 48 (1) and (2), which are clearly drafted on the assumption that the statutory priority rules may apply where the competing security interests are given by different debtors and which would be redundant if the nemo dat rule applied instead. If the court had applied the nemo dat rule in the Barber Suffolk case, Lisec would have had priority over Roynat on the basis that BSL s title to the glass cutter was subject to Lisec s security interest, BGI acquired the glass cutter subject to the same limitation and Roynat s security interest, given by BGI, was correspondingly bounded. As it happens, the court decided in Lisec s favour, but its decision was on the ground that Lisec had complied with section 48(2) by registering a financing change statement within the required time. This variable would be irrelevant if the nemo dat rule applied and so Barber Suffolk is at least indirect authority for the proposition that the statutory priority rules are not limited in the manner Ziegel and Denomme suggest. According to Ziegel and Denomme, the purpose of section 48 is: to preserve the integrity of the registration system by requiring secured parties to keep information respecting their respective security interests current or risk them becoming unperfected....[w]here security interests continue to be claimed in collateral in the hands of a transferee from the original debtor, protection of third parties requires a registration naming the party in possession as debtor. Without such requirements, the registry system becomes unreliable in its function as a notice registry. Accordingly, the secured party is placed under an obligation to register information respecting these events, an obligation which is triggered by either the secured party s consent to the event s occurrence or its subsequent acquisition of knowledge of the details. 12 This passage presupposes that in a competition between a security interest given to A by the collateral transferor (B) and a security interest given to D by the collateral transferee (C), the statutory priority rules apply. If the nemo dat rule applied instead, the perfection or nonperfection of A s security interest would be irrelevant and so it would not matter to the outcome of the case whether A complied with section 48 or not. In summary, the passage quoted above is inconsistent with the view Ziegel and Denomme express elsewhere in their book that the statutory priority rules do not apply where the competition is between security interests given by 11 Jacob S. Ziegel and David L Denomme, The Ontario Personal Property Security Act Commentary and Analysis (2 nd ed., Butterworths, Vancouver and Toronto, 2000) at pp and Ibid. at pp

10 different debtors. The court s approach in the Barber Suffolk case is consistent with the view expressed in the quoted passage. The apparent contradiction in Ziegel and Denomme s position could be resolved by saying that where the competing security interests are given by different debtors, the nemo dat rule applies except where policy considerations indicate that the statutory rules should apply instead. For example, Lysaght and Stewart argue that while, in general the nemo dat rule should govern in such cases: We would apply the rules of the personal property security legislation to a dispute between a perfected and an unperfected security interest even though the security interests were given by different debtors. In this we are not inconsistent. We do so because the policy of the common law and the relevant statutes is to encourage notice filing and to punish non-filing. Therefore, to deny priority to the non-filing secured party affirms and supports the policies of the common law and the statutes. For the same reason we would deprive [A] of priority for any interests acquired by [D] who acquired those interests during the period, after [A] acquires knowledge of the transfer from [B] to [C] and before [A] amends the registry to reflect the new debtor, when [A s] security is vulnerable pursuant to [OPPSA, section 48]. [A] loses priority because it failed to meet the timely registration requirements of the statutes. 13 However this approach arguably underplays the significance of section 48. As indicated above, the provision clearly implies that the statutory priority rules apply whether or not the competing security interests are given by the same debtor and the Barber Suffolk case supports this reading. In other words, section 48 is not just an exception to the nemo dat rule; on the contrary, it provides a strong indication that the nemo dat rule does not apply at all. The corresponding provision in the other provincial PPSAs is differently worded and so it may not support the same inference. However, at least so far as Ontario is concerned, section 48 seems to leave no room for the application of the nemo dat rule. But this conclusion raises a further difficulty, which is illustrated by Example 2. Example 2. On Date 2, B gives A a security interest in its glass cutter and A registers a financing statement. Previously, on Date 1, C had given D a security interest in all C s 13 Leon H Lysaght and George R Stewart, Exploring The Borderland Between Personal Property Security Rules And The Common Law (1995) 74 Can. Bar Rev. 50 at pp

11 present and after-acquired personal property and D registered a financing statement on the same date. On Date 3, B sells the glass cutter to C, outside the ordinary course of B s business. On Date 4, A learns about B s sale of the glass cutter and it immediately registers a financing change statement substituting C s name for B s. A has complied with the requirements of section 48(2) and so its security interest remains perfected. However, if the section 30(1) priority rules apply, as section 48 seems to suggest, D has priority because it was the first to register. This outcome is intuitively unappealing. A complied with the statute by registering a financing change statement within the required time and, given the chronology, there is little A could have done to protect itself other than by constantly monitoring the collateral in B s hands. 14 On the other hand, there may be circumstances where D could have taken precautions. For example, if D s security interest secures future advances, D could investigate the source of any second-hand collateral before making an advance against it. In provinces other than Ontario, the statute expressly addresses this problem. For example, section 35(8) of the Saskatchewan PPSA provide as follows: (8) Where a debtor transfers an interest in collateral which, at the time of the transfer, is subject to a perfected security interest, that security interest has priority over any other security interest granted by the transferee before the transfer, except to the extent that the security interest secures advances made or contracted for: (a) after the expiry of 15 days from the day the secured party who holds the security interest in the transferred collateral has knowledge of the information required to register a financing statement disclosing the transferee as the new debtor; and (b) before the secured party referred to in clause (a) amends the registration to disclose the name of the transferee as the new debtor or takes possession of the collateral. 15 There is no corresponding provision in the Ontario PPSA. Therefore, to decide in A s favour, an Ontario court would first have to conclude that the statutory priority rules did not apply and that the nemo dat rule applied instead. 16 However, it would be difficult to reconcile this approach with section 48 which, as indicated above, is clearly drafted on the assumption that the statutory 14 Ibid. at p Section 35(9) provides that subsection (7) does not apply where the transferee acquires the debtor s interest free from the security interest granted by the debtor. 16 See Ronald C.C. Cuming, Double Debtor A-B-C-D Problems in Personal Property Security Legislation (1992) 7 BFLR 359 at p

12 priority rules do apply. A possible alternative would be to fall back on the approach Lysaght and Stewart advocate, which is to apply the statutory priority rules only if policy considerations dictate and otherwise to apply the nemo dat rule. But, again as indicated above, this approach is likewise inconsistent with section 48. The implication is that as the Ontario statute presently stands, there is no solution to the problem Example 2 poses and that, therefore, consideration should be given in Ontario to enacting a provision along the lines of the Saskatchewan model. OPPSA, section 33, dealing with purchase-money security interests, must also be taken into account. The various priority rules in section 33 are expressed to apply only if the competing security interests were given by the same debtor and this could be read as confirmation of the legislature s intention that the statutory priority rules should not apply if the security interests are given by different debtors. 17 However, there are policy reasons for limiting the pmsi-holder s special priority to cases where the security interests are given by the same debtor and so it would be unsafe to draw inferences from section 33 about the scope of the other statutory priority rules. 18 The implications of this point are illustrated by Example 3. Example 3. On Date 1, B gives A a non-purchase money security interest in B s glass cutter and A registers a financing statement. On Date 2, B sells the glass cutter to C outside the ordinary course of business and without A s knowledge. C borrows from D to pay B and D takes a security interest in the glass cutter to secure repayment. D registers a financing statement on the same date. On Date 3, A and D both claim the glass cutter. Section 33 does not apply because A s and D s security interests were given by different debtors. However, it does not follow that the courts must necessarily revert to the nemo dat rule. Section 17 Ziegel and Denomme, supra footnote 11 at p.253. Contrast Cuming, supra footnote 16 at pp , arguing that the phrase given by the same debtor in s.33 suggests that the legislature did not intend other provisions in the statute, where the phrase does not appear, to be similarly limited (expressio unius est exclusion alterius). 18 Lysaght and Stewart, supra footnote 13 at p.60: The purpose of the pmsi priority sections is to allow subsequent suppliers or lenders who finance acquisitions of new collateral to gain priority over a prior secured party with an after-acquired property clause. To allow the first-in-time secured creditor with an after acquired property clause to retain its priority based on first-to-file principles would be to allow such first secured creditor an unearned and undeserved windfall. In addition, the possibility of purchase-money priority facilitates competition, and avoids situational monopoly, by allowing the debtor to shop around for the best credit terms while still being able to provide first priority in the financed collateral. [ Allowing D to obtain priority over A in a case like Example 3, below] supports none of these purposes. 11

13 33 is a special priority rule and its non-application opens the way for the application of the default priority rules instead. 19 Assuming the default priority rules apply where the security interests are given by different debtors, the result is that, since A was the first to register, it has priority. 20 (c) Debtor s name change and amalgamations OPPSA, section 48(3) provides that where a security interest is perfected by registration and the secured party learns that the debtor s name has changed, the security interest becomes unperfected thirty days after the secured party learns of the name change unless the secured party registers a financing change statement or takes possession of the collateral within the 30 days. The provision appears to be drafted on the assumption that the secured party correctly states the debtor s name in its initial registration and the debtor s name changes subsequently. 21 However, the Barber Suffolk case suggests that the provision may equally apply if the debtor s name changes before the secured party registers and, in ignorance of the change, the secured party writes the debtor s previous name in its financing statement. This point is important because if section 48(3) did not apply in the latter case, the secured party s only remedy would be to register a financing change statement under section 49(a) when it finds out about the name change. 22 The disadvantage of section 49(a) is that the security interest is unperfected from the date of the original registration until the date the secured party registers the financing change statement. On the other hand, whether the secured party should have the benefit of section 48(3) in these circumstances is a matter for debate. It could be argued that the secured party should have double-checked the debtor s name before registering and that allowing it to rely on section 48(3) reduces the incentive to take this precaution. But the challenge is to find a textual basis for discriminating between section 48(2) and (3) in this connection. The two provisions are similarly worded and if section 48(2) is read as applying without regard to the sequence of events, it seems unavoidable that section 48(3) must be given the same construction. 19 Contrast Ziegel and Denomme, supra footnote 11 at p.285 and Lysaght and Stewart, supra footnote 13 at p OPPSA, s.30 (1), Rule See Wayne D Gray, David L Denomme and Jacob S Ziegel, Perfection Under a Predecessor Debtor Name: Comment on Charter Finance Company v. Royal Bank of Canada (2005) 41 CBLJ 431 at pp Ibid. 12

14 This point has implications for corporate amalgamations. Under provincial business corporations legislation, when two or more corporations amalgamate, the amalgamated corporation is not a new entity, but simply a continuation of the amalgamating corporations. 23 It follows that if, for example, Corporation One gave SP a security interest in its glass cutter, SP registered a financing statement naming One as the debtor and One and Two later amalgamated under the new name Three, OPPSA, section 48(3) applies and the security interest becomes unperfected unless SP registers a financing change statement within 30 days after finding out about the amalgamation. 24 By implication from the Barber Suffolk case, the provision also applies if the amalgamation precedes SP s registration and SP, in ignorance of the amalgamation, registers a financing statement naming One as the debtor. 25 The result, as in the other contexts previously discussed, is to give SP a grace period to register a financing change statement during which its security interest is temporarily perfected. Corporate amalgamations may give rise to double debtor problems, as Example 4 illustrates. Example 4. On Date 1, B gives A a security interest in all A s present and after-acquired personal property and A registers a financing statement naming B as the debtor. On Date 2, D sells C a glass cutter on conditional sale terms and D registers a financing statement naming C as the debtor. On Date 3, B and C amalgamate. The name of the amalgamated company is X. On Date 4, A learns about the amalgamation and it immediately registers a financing change statement substituting X s name for B s. On Date 5, D learns about the amalgamation and it immediately registers a financing change statement substituting X s name for C s. On Date 6, X defaults and A and B both claim the glass cutter. A and D have both complied with OPPSA, section 48(3) and their security interests remain perfected. D holds a purchase-money security interest in the glass cutter, but OPPSA, section 33 does not apply because A s and D s security interests were given by different debtors. However, section 48(3), in common with section 48(1) and (2), is drafted on the assumption that the default priority rules may apply and therefore, since A registered first, it has priority. 23 See Heidelberg Canada Graphic Equipmemnt Ltd v. Arthur Andersen Inc (1992) 4 PPSAC (2d) 116 (Ont. Ct (Gen. Div.)) at p.? and authorities there cited. 24 Gray et al, supra footnote 21 at pp Contrast ibid. at pp 445 and

15 Changing the facts of Example 4, assume now that the amalgamation takes place on Date 2 and that D s transaction takes place on Date 3. D is unaware of the amalgamation and registers a financing statement naming C as the debtor. This is similar to the chronology in Charter Financial Company v. Royal Bank of Canada. 26 On the basis of the foregoing analysis, D can still rely on section 48(3) even though the debtor s name had already changed by the time D registered its financing statement. A s security interest was given by B and D s security interest was given by C. In law, however, X is not a new entity, but simply a continuation of B and C. Therefore, A s security interest and D s security interest were given by the same debtor and section 33 applies. 27 D has priority under section 33(2) provided it perfected its security interest within 15 days after the debtor obtained possession of the collateral. D s initial registration was invalid because it named the wrong debtor but D s security interest was perfected under section 48(3) from Date 2, the date of its initial registration, until Date 4, the date it amended the registration. Therefore, D is in compliance with the timely perfection requirement in section 33(2) and it has priority. This outcome is questionable because D failed to obtain confirmation of the debtor s name before completing its registration and so it does not deserve priority. In any event, it is hard to see why the outcome of a case like Example 4 should be different depending on the sequence of events, in other words, whether D s security interest attaches before or after B and C amalgamate. There may be a case for amending section 33 to make it clear that the provision does not apply in the amalgamations context. Example 5 illustrates a further variation on the same theme. 14 Example 5. On Date 1, B gives A a security interest in all A s present and after-acquired personal property and A registers a financing statement naming B as the debtor. On Date 2, C gives D a security interest in all C s present and after-acquired personal property and D registers a financing statement naming C as the debtor. On Date 3, B and C amalgamate. The name of the amalgamated company is X. On Date 4, A learns about the amalgamation and it immediately registers a financing change statement substituting X s 26 (2002) 4 P.P.S.A.C. (3d) 4 (OCA). 27 Section 179(a.1) of the Business Corporations Act, R.S.O. 1990, c.b-16 provides that upon the articles of amalgamation becoming effective, the amalgamated corporations cease to exist as entities separate from the amalgamated corporation. The provision was enacted in 2004, in response to the Court of Appeal s decision in Charter Financial Company v. Royal Bank of Canada (2002) 4 P.P.S.A.C. (3d) 4. But it is doubtful whether the provision does more than codify pre-existing law on the legal effect of an amalgamation and it appears not to affect the analysis in the text: see Gray et al, supra footnote 21 at pp

16 name for B s. On Date 5, D learns about the amalgamation and it immediately registers a financing change statement substituting X s name for C s. On Date 6, X acquires a new glass cutter. On Date 7, X defaults and A and B both claim the glass cutter. If the default priority rules in OPPSA, section 30(1) apply, A has priority because it registered first. However, since A and D both did everything that the statute required of them to protect their security interests, this outcome is unduly hard on D and a fairer approach would be to give A and D pro rata shares in the glass cutter. In this connection, Cuming and Walsh have suggested the following new priority rules for amalgamations: (1) When two or more incorporated debtors which have given security interests to separate secured parties amalgamate as provided in the Business Corporations Act or any other applicable legislation: (a) Subject to [section 48], priority of the security interests with respect to the property of each separate corporation existing at the date of the amalgamation is to be determined as if the amalgamation had not occurred; (b) The security interests in after-acquired property of the merged corporation provided for in the security agreements with the separate debtors have equal priority to the value of the obligation owing to each secured party at the date of the amalgamation. (2) The priority of future advances made by a secured party after the amalgamation shall be subject to [subsection (1)]. 28 This proposal has not been acted on, but it remains at least a good starting point for discussion about how the issues identified above might be addressed Conclusion The Barber Suffolk case provides a good demonstration of the role OPPSA, section 48 plays in the registration scheme and it offers a reminder, if one is necessary, that registration is not a failsafe mechanism for the publication of security interests. The case raises a number of interesting interpretational and policy issues and it puts the double debtor controversy once more in the spotlight. Although the judgment does not directly address the double debtor issue, it does 28 Ronald Cuming and Catherine Walsh, A Discussion Paper on Potential Changes to the Model Personal Property Security Act of the Canadian Conference on Personal Property Security Law (paper presented to the Civil Law Section of the Uniform Law Conference of Canada, 1999).

17 underscore the relevance of OPPSA, section 48 to the debate. In terms of the dispute in the case itself, the debate does not matter because, on either view, Lisec would have had priority. However, the debate does have traction in fact situations like Example 2, above. In such cases there is no dispute over what the outcome should be. Rather, the disagreement is over the approach that should be taken to achieving the correct outcome. According to one school of thought, cases like Example 2 should be dealt with by applying the nemo dat rule in place of the statutory priority rules. According to the other school of thought, the appropriate response is to enact a special priority rule for such cases, as most of the provinces have done. The first approach may itself lead to anomalous outcomes unless the courts are prepared to apply the nemo dat rule selectively. But selective application of the nemo dat rule may increase litigation costs by giving the parties more to argue about and it may also make case outcomes less predictable. The second approach avoids these problems. Moreover, as the Barber Suffolk case at least indirectly suggests, the first approach may be inconsistent with OPPSA, section 48, and the second approach avoids this problem as well. It follows that consideration should be given in Ontario to following the other provinces lead and enacting a provision to specifically address the double debtor problem. The Barber Suffolk case also has implications for section 48(3) (change of debtor name). If section 48(2) is to be given an expansive construction, it is hard to see how the courts can avoid giving the same expansive construction to sub-section (3), even though the underlying policy considerations may be different. It follows that amendments may be necessary to clarify the application of section 48(3) and, for that matter, sub-sections (1) and (2) as well. Section 48(3) is relevant in the context of corporate amalgamations which may themselves give rise to variations on the double debtor problem. If the statute is amended to address the double debtor problem in the transferred collateral context, consideration should also be given to addressing the problem in the amalgamation context. Anthony Duggan * * Hon. Frank H Iacobucci Chair, Faculty of Law, University of Toronto. Thanks to David Denomme and Ronald Cuming for reading earlier drafts and for their helpful comments. All errors are mine. 16