Canada: BC PPSA: Clear And Predictable Priority Rules Prevail Despite Unfairness

The British Columbia Court of Appeal has overturned the B.C. Supreme Court decision in KBA Canada¹, which was reviewed in the September 2012 issue of Fully Secured.  In its decision², the Court of Appeal disagreed with the reasoning in the court below, and held that neither equitable principles nor unjust enrichment can be used to override the clear priority rules in the BC PPSA.³

In this case a third party inadvertently discharged a financing statement registered in the B.C. Personal Property Registry ("BC PPR") in favour of KBA Canada, Inc. ("KBA") as secured party against 3S Printers Inc. ("3S") as debtor.  KBA had no knowledge of the discharge at the time it was made, but when it became aware of the discharge it re-registered its financing statement against 3S outside of the statutory 30-day grace period for the reversal of mistaken discharges.  KBA therefore lost the perfected purchase money security interest ("PMSI") priority it had against the asset that was the subject of the registration to two prior-registered holders of general security interests, Supreme Graphics Ltd. ("SGL") and CIT Financial Ltd. ("CIT").

KBA brought an action to re-establish its priority.  The Supreme Court found in favour of KBA, on the basis that it had the power and jurisdiction under sections 68 and 72 of the BC PPSA to apply common law and equitable principles to override the harsh application of the priority rules in the circumstances of the case.  The Court also held that it could apply the equitable principle of unjust enrichment to reverse the windfalls of SGL and CIT.

In no uncertain terms, the Court of Appeal disagreed with the reasoning of the Supreme Court and restored the priority of SGL and CIT. The Court of Appeal, in holding that the BC PPSA did not grant the Courts the broad jurisdiction that had been exercised by the Supreme Court judge, stated that if it did "equitable and common law principles would dominate the determination of priorities. The statutory purpose of replacing those complex and convoluted principles with simple rules that provide certainty and predictability would be undermined."⁴

The Court of Appeal was equally clear that unjust enrichment did not apply, finding that while there had been an enrichment of SGL and a corresponding deprivation to KBA, the BC PPSA priority provisions were a "juristic reason" for the deprivation.

The Court of Appeal decision is a clear statement of the law with respect to the priority regime under the BC PPSA and indicates that predictability and certainty override possible unfairness resulting from strict application of the BC PPSA priority regime.

As a result, secured creditors must be careful to verify and maintain their registrations in the BC PPR, and in particular should have procedures in place for immediately reviewing and dealing with any discharge verification statements that they receive from the BC PPR.

Footnotes

1 KBA Canada, Inc v 3S Printers Inc, 2012 BCSC 1078 [KBA Canada].

2 KBA Canada, Inc v Supreme Graphics Ltd, 2014 BCCA 117 [KBA Canada Appeal].

3 Personal Property Security Act (British Columbia), RSBC 1996, c. 359, as amended [BC PPSA].

4 KBA Canada Appeal at para. 24.

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