Perfection of security interests when assets move jurisdictions

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When a financing statement is registered to perfect a security interest in collateral, it is the responsibility of the secured party to monitor the registration to ensure that a new financing statement is filed if the goods move jurisdictions. A recent decision by the Ontario Superior Court of Justice1 emphasizes this point.

Facts

In July 2014, David Joseph Hughes (the “Debtor”) purchased a vehicle in the province of Alberta for which Snap Auto Finance Corp. (“Snap”) provided the financing. On July 17, 2014 Snap perfected its purchase-money security interest in the vehicle by registering pursuant to the Alberta Personal Property Security Act2. The vehicle was registered with the Alberta Government in July 2014, showing the Debtor as owner.

In November 2015, the Debtor moved to the province of Ontario and brought the vehicle with him. The Debtor continued to work about two-thirds of each month in Alberta, but did not take the vehicle back with him. The Debtor worked at a camp, where he slept and when required, his employer provided him with transportation. On May 24, 2016, the Debtor filed a voluntary assignment in bankruptcy in Ontario.

Snap did not register the vehicle in Ontario under the Ontario Personal Property Security Act (the “OPPSA”)3 until June 17, 2016, approximately 20 days after Snap filed its proof of claim in the bankruptcy of the Debtor.

Claim as secured creditor disallowed, then allowed

BDO Canada Limited, in its capacity as trustee in bankruptcy, (“Trustee”) disallowed the claim of Snap as a secured creditor in the bankruptcy of the Debtor on the basis that Snap had not registered its security interest in the vehicle within the 15-day time frame set out in section 5(2) of the OPPSA.4

On appeal, the Registrar in Bankruptcy reversed the decision of the Trustee and allowed Snap’s claim as a secured creditor on the basis that the vehicle had not been “brought in” to the province of Ontario. The issue before the Superior Court was whether the Registrar erred in this determination.

Factors to determine if collateral has been “brought in”

The Registrar undertook a review of both the residence of the Debtor and the physical location of the vehicle in reaching its decision that the vehicle had not been “brought in” to Ontario. The Debtor had an address in Kingston, Ontario, but spent 20 days of each month in Alberta. The Debtor did not obtain a permit for the vehicle, nor an Ontario driver’s license. According to the Registrar, the vehicle was only located in Ontario as a matter of convenience because the Debtor did not require transportation in Alberta. Therefore the vehicle was not “brought in” to Ontario.

The Court found that the Registrar erred in its determination that the vehicle had not been “brought in” by failing to take into account the date of the Debtor’s initial bankruptcy event, which occurred in Ontario, and the voluntary assignment into bankruptcy, which was made by the Debtor in Ontario, where he had a home. The Superior Court reviewed section 49 of the Bankruptcy and Insolvency Act5, what constitutes an assignment, and that an assignment shall be made to the official receiver in the locality of the debtor. The locality of the debtor is where the debtor has resided during the year immediately preceding the date of the initial bankruptcy event. By filing in Ontario the Debtor had selected Ontario as his residence, which the Registrar had failed to consider.

The Court further determined that the vehicle had been “brought in” to Ontario because of its continuous physical presence in the province since November 2015 and the fact that the Debtor had purchased gas only in Ontario for its use.

Snap did register the vehicle in Ontario under the OPPSA, but not until June 17, 2016. Since the Court had found that the vehicle had been “brought in” to Ontario in November 2015, Snap was outside the 60-day period to register as set out in section 5(2) (a). In addition the Court found that Snap had received notice that the vehicle had been brought in to Ontario on May 25, 2016 when the Trustee of the Debtor sent out the Notice of Bankruptcy to Snap. Again, Snap did not comply with section 5(2) (b) of the OPPSA as it did not register a financing statement within 15 days, as required by this section. For these reasons, the Superior Court determined that Snap was an unsecured creditor of the Debtor and its claim as a secured creditor was ineffective. The Trustee was entitled to the vehicle or its proceeds in priority to Snap.

Secured parties must use vigilance to maintain perfection

Goods such as vehicles that often move from one jurisdiction to another are governed by section 7 of the OPPSA. In the case of Hughes (Re), the issue was specific to a debtor moving jurisdictions and the requirement to register within a prescribed time frame of the goods being “brought in” to Ontario or the secured party receiving notice as set out in section 5. The failure to perfect in Ontario results in the security interest becoming unperfected. The onus on the secured party to monitor this type of situation requires vigilance to protect the value of its perfected security interest.



[1] Hughes (Re), 2017 ONSC 2421

[2] R.S.A. 2000.c.P-7

[3] R.S.O. 1990, c.P.10

[4] 5(2) Perfection of security interest continued—A security interest in goods perfected under the law of the jurisdiction in which the goods are situated at the time the security interest attaches but before the goods are brought into Ontario continues perfected in Ontario if a financing statement is registered in Ontario before the goods are brought in or if it is perfected in Ontario,

  1. within sixty days after the goods are brought in;
  2. within fifteen days after the day the secured party receives notice that the goods have been brought in; or
  3. before the date that perfection ceases under the law of the jurisdiction in which the goods were situated at the time the security interest attached,

whichever is earliest, but the security interest is subordinate to the interest of a buyer or lessee of those goods who acquires the goods from the debtor as consumer goods in good faith and without knowledge of the security interest and before the security interest is perfected in Ontario.

[5] R.S.C. 1985, c.B-3

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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