Canada: To Err Is Human And To Forgive, Divine - British Columbia Judge Relies On Equitable Principles To Save An Errant Discharge

Every now and again, a mistake is made and a PPSA financing statement is discharged in error. The law is quite clear that a discharged financing statement can be re-perfected and, that provided there have been no intervening registrations or advances under loans, the priority remains. However, in all PPSA provinces, other than Ontario, the re-registration must take place within thirty days in order to maintain priority (Ontario does not have a thirty day rule). The recent case in the Supreme Court of British Columbia between KBA Canada, Inc. ("KBA") and 3S Printers, Inc. ("3S"), CIT Financial Ltd. ("CIT") et al., applied equitable principles in order to save a lapsed registration of over thirty days. As will be discussed below, the use of equity is a double edged sword as it may lead to uncertainty and undesirable results.

Facts

The lessor had a lease with 3S which was a duly registered PMSI. Subsequent to the lessor's PMSI registration, each of CIT and Supreme Graphics Ltd. ("Supreme Graphics") entered into secured transactions with 3S, both of which were duly registered under the PPSA. 3S defaulted in its obligations under the lease to the lessor and the lessor assigned the lease to KBA. At that time, lessor caused the registration perfecting its security interest to be amended to show KBA as the secured party. Lessor later accidently discharged the KBA registration without KBA's approval or knowledge. The court took specific notice of the fact that verification statements of the discharge was sent by ordinary mail and as such, there was no certainty that KBA had or could have had knowledge of the discharge. KBA learned of the discharge on July 15, 2010 and lessor immediately re-registered.

Law

In order to maintain priority, sub-section 35(7) of the B.C. PPSA requires that re-registration occur within thirty days of the discharge. Any party who registers or advances funds during the lapse period would have priority over the lapsed registration. Ontario law has the same result except re-registration may occur at any time as there is no thirty day requirement to re-register.

As the registration was not re-registered within thirty days, both KBA would lose its priority and CIT and Supreme Graphics would have the benefit of the KBA collateral.

The court referred to this result as a 'windfall' for the other creditors, including CIT and Supreme Graphics.  However, given that clear wording of Section 35(7) of the B.C. PPSA, what jurisdiction did the court have to not follow the strict reading to the Act?

KBA argued that Section 68(1) and Section 70 of the Act allowed the court to use its equitable power to rectify the situation. The court noted that the use of equity in the context of a strict code such as the PPSA is not to be utilized lightly as there are significant benefits to the finance community at large to have the certainty set out in the code. Notwithstanding this importance of certainty, the court held that in the very specific circumstances at hand, being that a third party discharged the registration and that there was no certain delivery system of the verification statement, it would be unjust not to apply equity and provide KBA with a first priority in the collateral.

Comment

While the result in the case strikes an Ontario lawyer as correct (as there is no thirty day requirement under Ontario), it is a dangerous precedent that may be utilized in other less clear circumstances. By way of example, Ontario has very strict rules for perfecting a PMSI, including the requirement to register within fifteen days of the date of delivery of the equipment. Often the secured party misses this fifteen day period providing a general secured creditor with a 'windfall'. Using the tests as set out in the KBA case, there could be an equitable reason not to accept the strict reading of the Act. While the current case can be distinguished as unique due to the third party discharge and the non-delivery of the verification statement, it leaves the door open for parties to generalize the result. This could lead to increased litigation and uncertainty. Perhaps this is a dangerous slippery slope. While forgiveness may be divine, it may have many unintended consequences.

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