Canada: Important New Decision Clarifies Claims Against Financial Institutions And Defences Under The "Personal Property Security Act"

The opening paragraph of the Reasons for Judgment of the Honourable Mr Justice Myers in CFI Trust v. Royal Bank of Canada 2013 BCSC 1715 is one of the best in the history of Canadian law:

To those who have seen the film Fargo, the factual underpinnings of this case might seem familiar; both involve vehicles that have been double-sold and financed by a dishonest car dealer. However, unless one views the law of secured transactions as akin to a black comedy, the similarity with Fargo ends there. This is a somewhat drier commercial dispute between two secured lenders of the dealership. And the only things that may have been chopped up are 242 motor vehicles, which have disappeared without a trace.

The decision goes beyond literary merit, to provide important new law that may protect financial institutions against claims based in knowing receipt and unjust enrichment. It also provides important new law in the world of personal property security, and in the interpretation of the Personal Property Security Act ("PPSA") statutes across Canada. The case is essential reading for counsel assisting financial institutions and any business dealing in secured transactions.

Increasingly, victims of fraud and breach of trust are seeking compensation from the deep pockets of banks and other financial institutions where the perpetrators of such acts place themselves beyond execution. The broad legal tests for unjust enrichment, and knowing receipt of funds obtained in breach of trust, leave banks vulnerable to such claims. CFI greatly clarifies the law governing such claims, and articulates more comprehensively than do earlier cases that a party who fails to be vigilant with respect to a potential fraud may not later seek to claim against another party that has less potential information about that fraud.


In CFI Trust, the plaintiff CFI and the defendant RBC were both creditors to a large and now-defunct Vancouver car dealership, each providing funding for certain vehicles. Each creditor held a security agreement with the dealership. Each registered its security interests in the British Columbia Personal Property Registry. In the course of the unfolding drama, the CFI security interest was discharged in error, then re-registered, and then discharged in error once again.

RBC and CFI also entered into a priority agreement with each other. The Priority Agreement gave priority to RBC over a long list of different kinds of personal property owned by the dealership, including "money", "intangibles" and "instruments". The Priority Agreement gave CFI priority over CFI-funded "vehicles" but was silent as to who held priority over the proceeds flowing from sale or lease of those vehicles. CFI argued that it held priority over the proceeds by implication, while RBC relied upon the plain text of the agreement, and the fact that the technical and exhaustive listing of kinds of assets could and would have expressly given CFI priority to the vehicles "and their proceeds" had that been the intention of the parties.

RBC had a further connection to the dealership: the dealership held its general operating account at the bank. Each month, approximately a million dollars flowed into and out of the account: practically all of the dealership's payments went in and out via the RBC operating account. The CFI-related business constituted a small percentage of the overall activity of the dealership. Each day the bank automatically deducted from or topped up the operating account to ensure that it was never in a negative balance, and to allow the dealership to continue to meet its day-to-day obligations. The dealership authorized the bank to use any positive balance to pay down its various loans and credit facilities.


As set out in the opening quotation above, the car dealership appears to have sold some 242 securitized vehicles, but did not report their sale, or remit the sale proceeds to CFI, as was required under the CFI financing agreements. Instead, the dealership deposited the proceeds from those vehicles into its RBC operating account in breach of the dealership's obligations under the agreements. Some of these deposits were via cheques; other deposits were made by electronic transfer.

As the dealership was largely defunct and judgment-proof, CFI turned to the bank for compensation, seeking just over $5 million, representing the deposits made into the operating account with respect to the missing vehicles. There was no allegation of any wrongdoing against the bank. Instead, CFI claimed that RBC had benefitted from the illicit deposits, as the dealership may have used those funds to repay the various loans and credit facilities owed by the dealership to the bank.

CFI claimed, first, that CFI had priority over the CFI-funded vehicles and their proceeds, both under the PPSA and under the Priority Agreement. CFI also claimed in equity that RBC had knowingly received funds obtained by the dealership in breach of trust, and that RBC was unjustly enriched by the deposits.


In well-crafted and detailed reasons, the Court dismissed CFI's claim:

  1. As a complete answer to the CFI claim, the Priority Agreement gave RBC priority over all proceeds of the dealership's business, including the proceeds of the CFI-funded vehicles.
  2. CFI could not trace the proceeds into RBC's hands because under common law and under s.31(3) of the PPSA, RBC was a bona fide purchaser for value without notice when it received the deposits and used them to pay off the dealership's indebtedness to RBC on various loan facilities.
  3. Even though CFI is entitled to have its accidentally-discharged security registration retroactively reinstated to the date of discharge, that registration would still be subject to the Priority Agreement giving RBC priority over the proceeds.
  4. RBC was not liable for knowing receipt or unjust enrichment, as it took the deposits as a bona fide purchaser for value without notice of the alleged fraud. Further, RBC's loan agreement with the dealership constituted a juristic reason justifying that enrichment.
  5. Alternatively, even if CFI were to succeed on the claim, it would receive only a pro rata amount representing its claim as a percentage of the overall volume of deposits into the account (some $775 million) during the relevant period (i.e. CFI would have received only some $32,000).
  6. CFI's laxity and delay in investigating and acting on the suspicious circumstances at the dealership denied it equitable relief under knowing receipt, unjust enrichment, or tracing.


The Reasons provide several important and valuable precedents for financial institutions in general, as well important rulings with respect to the PPSA, and claims in unjust enrichment, and knowing receipt.

1. PPSA claims

  • Subsection 31(3) of the PPSA (generally identical throughout Canada) allows a bank or other "purchaser of an instrument " to receive that instrument (such as a deposited cheque) free and clear of any existing registered security interest if certain conditions are met. There is little case law on this important section. Some authorities suggests that a bank may only rely upon the protection of this section if the specific account into which the funds are deposited is in an overdraft position (that is, even if the account-holder is in overall debt to the bank, a court is only to look at the status of the individual account to determine whether the protection applies). The Reasons conclude strongly that a court must look at the overall state of the indebtedness of the account-holder to the bank; if the account-holder has multiple accounts and loan facilities, which net out with the account-holder in debt to the bank, the bank is protected by s.31(3). Had the Court concluded otherwise, this defence would be denied in all bank-client relationships where, as here, the account is always kept in a positive balance through automatic deposits from the operating line of credit.
  • A bank is only entitled to the s.31(3) protection if it "acquired the instrument without knowledge that was a subject to a security interest." CFI argued strongly that because RBC knew that CFI held a security interest in some vehicles at the dealership, RBC could not rely upon the defence: any deposit might in theory have been "tainted" as originating in a breach of the CFI security agreement. Again, there is little case law on the subject. The Reasons conclude strongly that the bank loses the protection only if it knows that a specific deposit is made in breach of a security agreement.
  • At the same time, the Court only allowed the s.31(3) defence for deposits made by cheque and denied the defence for deposits made by electronic funds transfer ("EFT"), on the basis that an electronic funds transfer did not fall under the definition of an "instrument" under the PPSA. In this, the Court departed from an earlier decision of the Saskatchewan Court of Appeal, Flexi-Coil Ltd. v. Kindersley District Credit Union Ltd. (1993), 107 D.L.R. (4th) 129. That case had acknowledged the absence of EFTs from the statutory definition of "instrument", but had protected such transfers on policy grounds: in the modern age, it made little sense to draw a distinction between paper and electronic deposits. The CFI decision, in contrast, concluded that it was up to the legislature to correct this gap in the legislation.
  • Finally, the CFI decision also provides a useful precedent for any financial institution or other holder of a registered security interests that is accidentally discharged. Such accidental discharges, although rare, can occur relatively easily and under the personal property registry systems of many provinces may be initiated by any person, and not only by the secured party. Like the PPSA statutes of most provinces, the British Columbia legislation allows a grace period for re-registration after an accidental discharge (30 days in British Columbia). CFI did not re-register within this period, and only attempted to re-register its security 280 days after the discharge. Nonetheless, the court agreed that it should exercise its discretion to allow the retroactive reinstatement of the CFI registration, as no other party had been prejudiced by CFI's failure to re-register in a timely manner. In this, the Court followed the decision in KBA Canada, Inc. v. 3S Printers Inc., 2012 BCSC 1078. Note that the appeal of KBA was just heard by the British Columbia Court of Appeal in October 2013. That appeal decision will likely clarify whether courts should readily exercise the discretion to allow late re-registrations, or whether such corrections would greatly undermine the certainty and finality in the property security registry, which is crucially relied upon by parties to business transactions and financing agreements.

2. Claims in knowing receipt and unjust enrichment

  • The Supreme Court of Canada test for a claim in knowing receipt is very broad: the defendant is liable if it receives funds in circumstances where a reasonable person would be put on notice or inquiry that a breach of trust may have occurred. This test has not been significantly clarified or limited by case law, which is relatively rare and tends to be very fact-specific. The Reasons will provide strong armour to banks and other parties defending against broadly-cast knowing receipt claims, in the following ways:

    • Where an inquiry would not have unearthed any wrongdoing, a defendant cannot be faulted retrospectively for not carrying out an inquiry.
    • The court must look at the relative knowledge of the plaintiff and defendant; if the plaintiff knew or ought to have known more than the defendant financial institution about the alleged breach of trust or conversion, the plaintiff cannot then seek restitution from the defendant.
    • Similarly, where the claimant fails to take appropriate and timely steps to investigate suspicious circumstances and to take steps to protect itself, relief may be denied in knowing receipt.
  • The test for unjust enrichment is also very flexible and potentially broad: the defendant must compensate the plaintiff if it receives a benefit, and the plaintiff is deprived, and there is no juristic reason for that enrichment and deprivation to have taken place. The CFI decision provides a strong defence against such claims:

    • Dilatory conduct on the part of a claimant will also deprive it of a remedy in unjust enrichment and tracing.
    • A loan agreement between a bank and its customer will generally constitute a juristic reason for enrichment, thus defeating a claim in unjust enrichment.
  • Finally, the CFI decision provides a strong precedent that a claimant against a bank for knowing receipt is not entitled to 100 cents on the dollar for its loss, but is only entitled to claim a pro rata amount, discounting the amount claimed to a percentage of the overall deposits into the account in question.

The most important result of the CFI decision is what it does not stand for, in the dismissal of the plaintiff's claim. Had CFI been successful in its claim, it would have been a very negative precedent for financial institutions generally: a bank would serve as a de facto insurer, and could be liable to compensate any victims of a breach of trust by any of its customers, where the funds were later deposited into a bank account, and where the bank knew that the funds in question could conceivably have been subject to a trust: in other words, no deposit could be received in complete confidence that it would not be subject to a later claim. Further, every time a financial institution had in place an automatic system of deposits and withdrawals for a customer's operating account it would lose the benefit of the defence under s.31(3) of the PPSA, thus creating further uncertainty that it received any given deposit free and clear of a potential claim. On both counts, the modern system of banking in Canada would have been severely impaired. In its commonsensical approach to the facts, the CFI Court provides helpful and clearly-articulated legal principles that will usefully address such future claims.

CFI has filed a notice of appeal.

In its successful defence, RBC was represented by David Crerar , Michelle Maniago, and Debbie Asirvatham of the Borden Ladner Gervais LLP Commercial Litigation Group, with substantial contribution from Geoffrey Thompson and Kendall Andersen of the Borden Ladner Gervais LLP Financial Services Group, Vancouver.

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