Good News for Lenders to Leasing Companies in Canada

In April 2008, Century McMynn Leasing Partnership (“Century”) leased three buses to Perimeter Transportation Ltd. (“Perimeter”) for a term of more than one year and failed to file a financing statement against Perimeter with the BC Personal Property Registry. Following the lease transaction, Century entered into a financing transaction with GE Canada Equipment Finance GP (“GE”) whereby GE advanced funds to Century and took a security interest in the three buses leased to Perimeter, among other things. GE filed a financing statement against Century and included a serialized description of the three buses in its registration.

In November 2008, Perimeter declared bankruptcy, and the priority dispute ensued. The question before the court was who had priority to the buses: Perimeter's trustee in bankruptcy on behalf of the unsecured creditors, Century or GE? Relying on legal advice, the trustee returned the buses to Century at GE's direction, taking the position that the buses were subject to GE's security interest. The trustee subsequently determined that GE was not entitled to the buses and brought a motion for the return of the buses or payment of an amount equal to their value. The BC Supreme Court found in favor of GE, and the trustee appealed.

In upholding the BC Supreme Court's finding in favor of GE, the Court of Appeal focused on two sections of the BC PPSA:

1. Section 20(b)(i) which provides that a security interest in collateral is not effective against a trustee in bankruptcy if the security interest is unperfected at the date of the bankruptcy; and
2. Section 30(2) which provides that where goods are sold or leased in the ordinary course of business of the seller or the lessor, the buyer or lessee enjoys the goods free of any security interests granted in the leased goods by the seller or lessor.

Pursuant to Section 20(b)(i), the court held that the trustee was able to defeat Century's interest in the buses because the security interest created by the lease was not registered and as such, was not effective against the trustee. Based on this finding, the court was then faced with determining GE's priority in the buses if Perimeter took its interest in the buses “free of GE's security interest” pursuant to Section 30(2) of the PPSA. The court held that GE's interest in the buses could not be enforced until the lease to Perimeter had ended. Since the trustee had already unconditionally returned the buses to GE, the leases were effectively terminated and GE was now entitled to assert its rights in them, as granted by Century as lessor.

The Court of Appeal held that GE, by doing all it was required to do to perfect against Century would not be defeated by the trustee in bankruptcy of a lessee. Also, by the court's decision that the return of the buses to Century terminated the lease, the court did not have to decide if the trustee would have been required to make the payments under the lease to Century if the trustee had retained the buses. However, based on the court's analysis, that would be the logical deduction of this decision.

Conclusion

This ruling provides some certainty for those lenders who are not always able to track all leases being made by their borrowers in the leasing business. However, it is important to note that while a party in the position of GE may defeat the ultimate lessee's trustee in bankruptcy, the case does not address a situation between a party in GE's position, and a perfected secured creditor of the ultimate lessee. This case highlights the priority dispute that ensues when the lessor does not properly perfect its security interest against a lessee. Lessors should make sure that they fall within the parameters of the PPSA and take the necessary precautions to obtain a properly perfected security interest in their collateral.

Amanda Plastina and Dahlia Tessler are attorneys at Cassels Brock & Blackwell LLP in the firm's Financial Services Group. Plastina's practice focuses on general corporate, reorganization and finance matters, representing both borrowers and lenders in a variety of domestic and cross-border secured and unsecured lending transactions. Tessler's practice focuses on corporate finance matters, including corporate and commercial lending, banking and equipment finance. They may be reached at [email protected] and [email protected], respectively.

U.S. lessors doing business in Canada should be aware of recent developments in Canadian case law that establish the priorities between a lessor and a funding source in a leasing transaction. The recent British Columbia Court of Appeal case of Perimeter Transportation Ltd. (Re) 2010 BCCA 509 (the “Perimeter case”), provides some relief to companies that finance lessors when the lessor fails to properly register financing statements against its lessees. It also reinforces the importance of a lessor properly registering financing statements against its lessees.

A typical financing structure used in Canada to fund the leasing industry is for third-party funders, either through a securitization or a traditional loan, to lend against a pool of leases which the borrower has entered into with its clients (lessees). A typical covenant in the financing contract is that the lease is supposed to be registered under the Personal Property Security Act (“PPSA”) to protect against the lessee's insolvency. The issue has always been unclear as to what if the lessor failed to register. Did the financing source lose its security? The Perimeter case now provides clarity and, to the funding source, a welcome relief, but also serves as a wake-up call to lessors.

Factual History

In April 2008, Century McMynn Leasing Partnership (“Century”) leased three buses to Perimeter Transportation Ltd. (“Perimeter”) for a term of more than one year and failed to file a financing statement against Perimeter with the BC Personal Property Registry. Following the lease transaction, Century entered into a financing transaction with GE Canada Equipment Finance GP (“GE”) whereby GE advanced funds to Century and took a security interest in the three buses leased to Perimeter, among other things. GE filed a financing statement against Century and included a serialized description of the three buses in its registration.

In November 2008, Perimeter declared bankruptcy, and the priority dispute ensued. The question before the court was who had priority to the buses: Perimeter's trustee in bankruptcy on behalf of the unsecured creditors, Century or GE? Relying on legal advice, the trustee returned the buses to Century at GE's direction, taking the position that the buses were subject to GE's security interest. The trustee subsequently determined that GE was not entitled to the buses and brought a motion for the return of the buses or payment of an amount equal to their value. The BC Supreme Court found in favor of GE, and the trustee appealed.

In upholding the BC Supreme Court's finding in favor of GE, the Court of Appeal focused on two sections of the BC PPSA:

1. Section 20(b)(i) which provides that a security interest in collateral is not effective against a trustee in bankruptcy if the security interest is unperfected at the date of the bankruptcy; and
2. Section 30(2) which provides that where goods are sold or leased in the ordinary course of business of the seller or the lessor, the buyer or lessee enjoys the goods free of any security interests granted in the leased goods by the seller or lessor.

Pursuant to Section 20(b)(i), the court held that the trustee was able to defeat Century's interest in the buses because the security interest created by the lease was not registered and as such, was not effective against the trustee. Based on this finding, the court was then faced with determining GE's priority in the buses if Perimeter took its interest in the buses “free of GE's security interest” pursuant to Section 30(2) of the PPSA. The court held that GE's interest in the buses could not be enforced until the lease to Perimeter had ended. Since the trustee had already unconditionally returned the buses to GE, the leases were effectively terminated and GE was now entitled to assert its rights in them, as granted by Century as lessor.

The Court of Appeal held that GE, by doing all it was required to do to perfect against Century would not be defeated by the trustee in bankruptcy of a lessee. Also, by the court's decision that the return of the buses to Century terminated the lease, the court did not have to decide if the trustee would have been required to make the payments under the lease to Century if the trustee had retained the buses. However, based on the court's analysis, that would be the logical deduction of this decision.

Conclusion

This ruling provides some certainty for those lenders who are not always able to track all leases being made by their borrowers in the leasing business. However, it is important to note that while a party in the position of GE may defeat the ultimate lessee's trustee in bankruptcy, the case does not address a situation between a party in GE's position, and a perfected secured creditor of the ultimate lessee. This case highlights the priority dispute that ensues when the lessor does not properly perfect its security interest against a lessee. Lessors should make sure that they fall within the parameters of the PPSA and take the necessary precautions to obtain a properly perfected security interest in their collateral.

Amanda Plastina and Dahlia Tessler are attorneys at Cassels Brock & Blackwell LLP in the firm's Financial Services Group. Plastina's practice focuses on general corporate, reorganization and finance matters, representing both borrowers and lenders in a variety of domestic and cross-border secured and unsecured lending transactions. Tessler's practice focuses on corporate finance matters, including corporate and commercial lending, banking and equipment finance. They may be reached at [email protected] and [email protected], respectively.