Giffen (Re)

Giffen (Re)
Collection
Supreme Court Judgments
Date
1998-02-12
Report
[1998] 1 SCR 91
Case number
25193
Judges
L'Heureux-Dubé, Claire; Sopinka, John; Gonthier, Charles Doherty; Cory, Peter deCarteret; McLachlin, Beverley; Iacobucci, Frank; Major, John C.
On appeal from
British Columbia
Subjects
Bankruptcy and insolvency
Notes
SCC Case Information: 25193
Decision Content
Giffen (Re), [1998] 1 S.C.R. 91
IN THE MATTER OF the Bankruptcy of Carol Anne Giffen
R. West & Associates Inc. and
the Attorney General of British Columbia Appellants
v.
Telecom Leasing Canada (TLC) Limited Respondent
and
The Attorney General of Canada,
the Attorney General for Ontario and
the Attorney General for Alberta Interveners
Indexed as: Giffen (Re)
File No.: 25193.
1997: October 8; 1998: February 12.
Present: L’Heureux‑Dubé, Sopinka,* Gonthier, Cory, McLachlin, Iacobucci and Major JJ.
on appeal from the court of appeal for british columbia
Bankruptcy and insolvency ‑‑ Personal property security ‑‑ Company employee leasing vehicle ‑‑ Lessor failing to register financing statements under B.C. Personal Property Security Act and thus perfect its security interest ‑‑ Employee making assignment in bankruptcy ‑‑ Property of bankrupt vesting in trustee under Bankruptcy and Insolvency Act ‑‑ Unperfected security interest in collateral not effective against trustee under Personal Property Security Act ‑‑ Whether trustee entitled to proceeds of sale of vehicle ‑‑ Personal Property Security Act, S.B.C. 1989, c. 36, s. 20(b)(i) ‑‑ Bankruptcy and Insolvency Act, R.S.C., 1985, c. B‑3, ss. 67(1) , 71(2) .
The respondent lessor leased a car to a company which in turn leased it to G, one of its employees. The lease between G and her employer was for more than one year and gave G the option of purchasing the vehicle from the lessor. Although the lessor was not a party to the lease agreement, it played an important role in the arrangement. The lessor received a deposit from G, it fixed the lease rates, and it was entitled to receive payments directly from G if her employer stopped paying her. The lessor and G were also named as the owners of the vehicle in the registration and insurance documents; the lessor was described as the “lessor” and G was described as the “lessee”. G made an assignment in bankruptcy. Neither the lessor nor the employer had registered financing statements under the British Columbia Personal Property Security Act (“PPSA”) in respect of their leases, with the result that the lessor’s security interest in the car was not perfected. The lessor seized the vehicle and sold it with the appellant trustee’s consent. The trustee subsequently brought a motion for an order that it was entitled to the proceeds of sale, relying on s. 20(b)(i) of the PPSA, 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. The lessor opposed the claim on the grounds that the bankrupt never owned the car and that the trustee could not have a better claim to the car than the bankrupt had. The trial judge held that the lessor’s unperfected security interest was of no effect as against the trustee. The Court of Appeal reversed the decision and held that the proceeds properly belonged to the lessor.
Held: The appeal should be allowed.
The definition of “security interest” in the PPSA explicitly includes leases for a term of more than one year. The lessor’s interest in the car is the reservation of title in the car; this interest, created by the lease agreement, falls within the ambit of the PPSA. Since the lessor did not have possession of the car and did not register its security interest, it held an unperfected security interest in the car prior to the bankruptcy. The bankrupt’s right to use and possession of the car constitutes “property” for the purposes of the Bankruptcy and Insolvency Act (“BIA ”), which passed to the trustee by virtue of s. 71(2) . Section 12(2) of the PPSA also recognizes that a lessee obtains a proprietary interest in leased goods. Here, the trustee’s possessory interest in the car comes into competition with the unperfected security interest of the lessor. On a plain reading of s. 20(b)(i) of the PPSA, the lessor’s interest in the car is ineffective against the trustee. While the effect of s. 20(b)(i), on the present facts, is that the trustee ends up with full rights to the car when the bankrupt had only a right of use and possession, s. 20(b)(i) modifies the principle that a trustee is limited to the rights in the property enjoyed by the bankrupt. The issue is not ownership of the vehicle, but rather priority to it. Although federal bankruptcy legislation provides that a trustee shall step into the shoes of the bankrupt and as a general rule acquires no higher right in the property of the bankrupt than that which the bankrupt enjoyed, it is a policy choice of the legislature that an unsecured creditor’s position, as represented by the trustee, is more meritorious than the unperfected security interest of a secured creditor.
The trustee can sell the car and confer good title. The lessor could have made a claim against the car under s. 81 of the BIA . This claim would have been defeated by the trustee in reliance on s. 20(b)(i) of the PPSA. Both the defeat of a claim and the failure to make a claim under s. 81 result in the effective abandonment or relinquishment of any claim to the car.
Section 20(b)(i) of the PPSA does not offend the priorities set out in the BIA , but rather is only one element of the provincial legislation which serves to define the rights of the parties involved in a bankruptcy. More particularly, s. 20(b)(i) serves, on the present facts, to define the rights of the lessor and indicates that for the purpose of the bankruptcy, the lessor does not have the status of a secured creditor. Even though bankruptcy is clearly a federal matter, and even though it has been established that the federal Parliament alone can determine distribution priorities, the BIA is dependent on provincial property and civil rights legislation in order to inform the terms of the BIA and the rights of the parties involved in the bankruptcy.
Since s. 20(b)(i) of the PPSA provides that the lessor’s unperfected security interest is ineffective against the interest acquired by the trustee, the trustee need not make an election under s. 30(1) (k) of the BIA in order to realize its interest in the car.
G did not hold the car on resulting trust for the lessor, since the contract of lease does not contemplate the creation of a trust.
Cases Cited
Distinguished: Fleeming v. Howden (1868), L.R. 1 Sc. & Div. 372; Flintoft v. Royal Bank of Canada, [1964] S.C.R. 631; approved: International Harvester Credit Corp. of Canada Ltd. v. Bell’s Dairy Ltd. (Trustee of) (1986), 61 C.B.R. (N.S.) 193; Donaghy v. CNS Vehicle Leasing, [1992] 6 W.W.R. 70; David Morris Fine Cars Ltd. v. North Sky Trading Inc. (Trustee of), [1996] 7 W.W.R. 332; referred to: Paccar Financial Services Ltd. v. Sinco Trucking Ltd. (Trustee of), [1989] 3 W.W.R. 481; Re Perepeluk; Canadian Imperial Bank of Commerce v. Touche Ross Ltd., [1986] 2 W.W.R. 631; Robinson v. Countrywide Factors Ltd., [1978] 1 S.C.R. 753; Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453; Re Nishi Industries, [1978] 6 W.W.R. 736; Re Cadieux and Jas. A. Ogilvy’s Ltd. (1952), 33 C.B.R. 15; Deputy Minister of Revenue v. Rainville, [1980] 1 S.C.R. 35; Deloitte Haskins and Sells Ltd. v. Workers’ Compensation Board, [1985] 1 S.C.R. 785; Federal Business Development Bank v. Quebec (Commission de la santé et de la sécurité du travail), [1988] 1 S.C.R. 1061; British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24.
Statutes and Regulations Cited
Bankruptcy and Insolvency Act, R.S.C., 1985, c. B‑3 [am. 1992, c. 27, s. 2], ss. 2 “property”, 30(1)(k), 67(1) [idem, s. 33], 71, 72, 81, 136(1).
Personal Property Security Act, S.B.C. 1989, c. 36, ss. 1 “security interest”, 2(1), 3 [rep. & sub. 1993, c. 28, s. 16], 12(1)(b), (2), 20(b)(i), 21 [rep. & sub. 1990, c. 11, s. 5], 24, 25.
Authors Cited
Buckwold, Tamara M., and Ronald C. C. Cuming. “The Personal Property Security Act and the Bankruptcy and Insolvency Act : Two Solitudes or Complementary Systems?” (1997), 12 Banking & Finance L. Rev. 467.
Cuming, Ronald C. C. “Canadian Bankruptcy Law: A Secured Creditor’s Heaven” (1994), 24 Can. Bus. L.J. 17.
Waters, D. W. M. Law of Trusts in Canada, 2nd ed. Toronto: Carswell, 1984.
Ziegel, Jacob S. “Personal Property Security and Bankruptcy: There Is No War! ‑‑ A Reply to Roman and Sweatman” (1993), 72 Can. Bar Rev. 44.
APPEAL from a judgment of the British Columbia Court of Appeal (1996), 16 B.C.L.R. (3d) 29, 131 D.L.R. (4th) 453, [1996] 5 W.W.R. 111, 69 B.C.A.C. 161, 113 W.A.C. 161, 37 C.B.R. (3d) 297, [1996] B.C.J. No. 37 (QL), reversing a decision of the British Columbia Supreme Court (1994), 90 B.C.L.R. (2d) 326, [1994] 6 W.W.R. 439, 29 C.B.R. (3d) 309, [1994] B.C.J. No. 857 (QL), allowing the appellant trustee’s action. Appeal allowed.
Geoffrey H. Dabbs, for the appellant R. West & Associates Inc.
R. Richard M. Butler, for the appellant the Attorney General of British Columbia.
John Douglas Shields and Alastair Wade, for the respondent.
Edward R. Sojonky, Q.C., and Jan Brongers, for the intervener the Attorney General of Canada.
Richard J. K. Stewart, for the intervener the Attorney General for Ontario.
Written submissions only by James A. Baird, for the intervener the Attorney General for Alberta.
The judgment of the Court was delivered by
1 Iacobucci J. -- The principal question raised by this appeal is whether s. 20(b)(i) of the Personal Property Security Act, S.B.C. 1989, c. 36 (“PPSA”), can render a lessor’s unperfected security interest in personal property ineffective against the rights acquired in the property by the trustee in bankruptcy, which finds its authority under the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B‑3 (“BIA ”). I conclude that s. 20(b)(i) operates, on the present facts, to defeat the unperfected security interest of the respondent Telecom Leasing Canada (TLC) Limited (the “lessor”), in favour of the interest acquired by the appellant R. West & Associates Inc. (the “trustee”).
2 Constitutional questions were raised in this appeal; however, in my view of the case, it is not necessary to address these issues. A reading of the provisions of the BIA and the PPSA in question reveals that no conflict arises in the operation of the legislation.
1. Facts
3 On October 27, 1992, the lessor leased a 1993 Saturn car to the B.C. Telephone Company, which in turn leased the car to one of its employees, Carol Anne Giffen (the “bankrupt”). The bankrupt and her employer were parties to the agreement of lease entitled “Employee Agreement Personal Vehicle Lease Program/Flex Lease Program”. The term of the lease was for more than one year. The lease gave the bankrupt the option of purchasing the vehicle from the lessor.
4 Although the lessor was not a party to the agreement, it played an important role in the arrangement contemplated by the agreement. More specifically, the lessor received a deposit from the bankrupt, it fixed the lease rates, and it was entitled to receive payments directly from the lessee/bankrupt if her employer stopped paying her. Further, the lessor and the bankrupt were named as the owners of the vehicle in the registration and insurance documents relating to the vehicle; the lessor was described as the “lessor” and the bankrupt was described as the “lessee”.
5 The bankrupt made an assignment in bankruptcy on October 12, 1993. Neither the lessor nor the B.C. Telephone Company had registered financing statements under the PPSA in respect of their leases. The failure to register meant that the lessor’s security interest in the car was not perfected, as defined in the PPSA, at the time of the assignment in bankruptcy.
6 The appellant was appointed as the trustee in bankruptcy. The lessor seized the vehicle and sold it with the trustee’s consent; proceeds of $10,154.54 were held in trust by the lessor’s counsel. The trustee subsequently brought a motion for an order that it was entitled to the proceeds of sale relying on s. 20(b)(i) of the PPSA. The lessor opposed the claim on the grounds that the bankrupt never owned the car and that the trustee could not have a better claim to the car than the bankrupt had.
7 Hood J. of the Supreme Court of British Columbia held that, by virtue of s. 20(b)(i) of the PPSA, the unperfected security interest of the lessor was of no effect as against the trustee. Hood J. ordered that the proceeds from the sale of the vehicle be paid over to the trustee. The lessor appealed to the Court of Appeal for British Columbia; the Attorney General of British Columbia was granted leave to intervene as a party respondent in the appeal. The Court of Appeal allowed the appeal and held that the proceeds properly belonged to the lessor.
2. Relevant Statutory Provisions
8 Personal Property Security Act, S.B.C. 1989, c. 36
2. (1) Subject to section 4, this Act applies
(a) to every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral, and
(b) without limiting the generality of paragraph (a), to a chattel mortgage, a conditional sale, a floating charge, a pledge, a trust indenture, a trust receipt, an assignment, a consignment, a lease, a trust, and a transfer of chattel paper where they secure payment or performance of an obligation.
3. Subject to sections 4 and 55, this Act applies to
(a) a transfer of an account or chattel paper,
(b) a commercial consignment, and
(c) a lease for a term of more than one year
that do not secure payment or performance of an obligation.
20. A security interest
. . .
(b) in collateral is not effective against
(i) a trustee in bankruptcy if the security interest is unperfected at the date of the bankruptcy, . . .
21. Where the interest of a lessor under a lease for a term of more than one year or of a consignor under a commercial consignment is not effective against a judgment creditor under section 20 (a) or a trustee or liquidator under section 20 (b), the lessor or consignor is deemed, as against the lessee or consignee, as the case may be, to have suffered, immediately before the seizure of the leased or consigned goods or the date of the bankruptcy or winding‑up order, damages in an amount equal to
(a) the value of the leased or consigned goods at the date of the seizure, bankruptcy or winding‑up order, and
(b) the amount of loss other than that referred to in paragraph (a) that results from the termination of the lease or consignment.
Bankruptcy and Insolvency Act, R.S.C., 1985, c. B‑3
30. (1) The trustee may, with the permission of the inspectors, do all or any of the following things:
. . .
(k) elect to retain for the whole [or] part of its unexpired term, or to assign, surrender or disclaim any lease of, or other temporary interest in, any property of the bankrupt;...
67. (1) The property of a bankrupt divisible among his creditors shall not comprise
(a) property held by the bankrupt in trust for any other person,
(b) any property that as against the bankrupt is exempt from execution or seizure under the laws of the province within which the property is situated and within which the bankrupt resides,
but it shall comprise
(c) all property wherever situated of the bankrupt at the date of his bankruptcy or that may be acquired by or devolve on him before his discharge, and
(d) such powers in or over or in respect of the property as might have been exercised by the bankrupt for his own benefit.
71. (1) A bankruptcy shall be deemed to have relation back to, and to commence at the time of the filing of, the petition on which a receiving order is made or of the filing of an assignment with the official receiver.
(2) On a receiving order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with his property, which shall, subject to this Act and to the rights of secured creditors, forthwith pass to and vest in the trustee named in the receiving order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any conveyance, assignment or transfer.
72. (1) The provisions of this Act shall not be deemed to abrogate or supersede the substantive provisions of any other law or statute relating to property and civil rights that are not in conflict with this Act, and the trustee is entitled to avail himself of all rights and remedies provided by that law or statute as supplementary to and in addition to the rights and remedies provided by this Act.
(2) No receiving order, assignment or other document made or executed under the authority of this Act shall, except as otherwise provided in this Act, be within the operation of any legislative enactment in force at any time in any province relating to deeds, mortgages, judgments, bills of sale, chattel mortgages, property or registration of documents affecting title to or liens or charges on real or personal property.
81. (1) Where a person claims any property, or interest therein, in the possession of a bankrupt at the time of the bankruptcy, he shall file with the trustee a proof of claim verified by affidavit giving the grounds on which the claim is based and sufficient particulars to enable the property to be identified.
(2) The trustee with whom a proof of claim is filed under subsection (1) shall within fifteen days thereafter or within fifteen days after the first meeting of creditors, whichever is the later, either admit the claim and deliver possession of the property to the claimant or give notice in writing to the claimant that the claim is disputed with his reasons therefor, and, unless the claimant appeals therefrom to the court within fifteen days after the mailing of the notice of dispute, he shall be deemed to have abandoned or relinquished all his right to or interest in the property to the trustee who thereupon may sell or dispose of the property free of any lien, right, title or interest of the claimant.
(3) The onus of establishing a claim to or in property under this section is on the claimant.
(4) The trustee may give notice in writing to any person to prove his claim to or in property under this section, and, unless that person files with the trustee a proof of claim in the prescribed form within fifteen days after the mailing of the notice, the trustee may thereupon with the leave of the court sell or dispose of the property free of any lien, right, title or interest of that person.
(5) No proceedings shall be instituted to establish a claim to, or to recover any right or interest in, any property in the possession of a bankrupt at the time of the bankruptcy, except as provided in this section.
(6) Nothing in this section shall be construed as extending the rights of any person other than the trustee.
136. (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows. . . .
3. Judicial History
A. British Columbia Supreme Court (1994), 90 B.C.L.R. (2d) 326
9 Hood J. held that the trustee was entitled to the proceeds from the car. He began his analysis by examining the relationship between the parties and found that the respondent was the lessor and the bankrupt was the lessee of the car, even though the respondent was not party to the lease agreement. He also found that the lease agreement, which was for a period of more than one year, was a “security interest” for the purposes of the PPSA.
10 Hood J. analysed the holding of the Saskatchewan Court of Appeal in International Harvester Credit Corp. of Canada Ltd. v. Bell’s Dairy Ltd. (Trustee of) (1986), 61 C.B.R. (N.S.) 193. The Saskatchewan Court of Appeal found that a trustee in bankruptcy may acquire a higher interest in property than that enjoyed by the bankrupt through the operation of the PPSA. The court also concluded, in accordance with the Saskatchewan PPSA, that a lessor’s security interest is subordinate to the interest of a trustee in bankruptcy where the lessor failed to perfect its interest. Hood J. added that the trustee’s claim in the present case was even stronger than that of the trustee in International Harvester since s. 20(b)(i) of the PPSA provides that an unperfected security interest will be “not effective against” a trustee in bankruptcy whereas the Saskatchewan equivalent provides that an unperfected security interest will be “subordinate to” the interest of a trustee in bankruptcy.
11 Hood J. held that the PPSA applied on the facts and in so doing he rejected the lessor’s argument that this was a matter of exclusive federal jurisdiction governed by the BIA . He noted that the constitutionality of the PPSA was not in issue before him, and that in Paccar Financial Services Ltd. v. Sinco Trucking Ltd. (Trustee of), [1989] 3 W.W.R. 481 (Sask. C.A.), the Saskatchewan equivalent to s. 20(b)(i) was held to be constitutionally valid.
12 The learned trial judge rejected the lessor’s argument that the trustee had disclaimed the property by failing to elect to retain the lease under s. 30(1) (k) of the BIA . He found that this argument ignored the statutory rights granted to the trustee under s. 20(b)(i) of the PPSA. Hood J. also dismissed the lessor’s argument that a resulting trust existed between the bankrupt and the lessor, and therefore the vehicle did not form part of the bankrupt’s estate, as provided by s. 67(1) (a) of the BIA . In Hood J.’s view, the equitable principle of resulting trust could not usurp the clear provisions of the PPSA and the rights it conferred upon the trustee. The lessor had also argued that the trustee was estopped from claiming that the vehicle was part of the bankrupt’s estate, given that the bankrupt signed a statement of affairs which referred to the vehicle as “fully encumbered”. Hood J. stated that the bankrupt’s conduct or view of her interest was not determinative of the question of law at issue.
13 Hood J. concluded that the trustee was entitled to the net sale proceeds from the vehicle, together with an accounting.
B. British Columbia Court of Appeal (1996), 16 B.C.L.R. (3d) 29
14 Finch J.A., Macfarlane and Wood JJ.A. concurring, overturned Hood J. and held that the lessor was entitled to the proceeds of the car.
15 Finch J.A. disagreed with the reasoning and the result in International Harvester, which had been followed by the trial judge. In his view, both International Harvester and Hood J.’s decision in the case on appeal failed to account for the role of the BIA in the circumstances of a bankruptcy. Section 67 of the BIA provides that the trustee in bankruptcy shall receive only the “property of the bankrupt” thus there was no legitimate basis for granting to a trustee in bankruptcy a greater claim to the property than that which the bankrupt enjoyed. Finch J.A. held (at p. 40) that to allow the trustee a greater claim to the property than the bankrupt had would “overlook fundamental concepts of bankruptcy law” as expressed in Fleeming v. Howden (1868), L.R. 1 Sc. & Div. 372 (H.L.), and Flintoft v. Royal Bank of Canada, [1964] S.C.R. 631.
16 Finch J.A. rejected the Saskatchewan Court of Appeal’s characterization of the trustee as “a representative of the creditors of the bankrupt”, and he found that the Saskatchewan Court erred in relying on Re Perepeluk; Canadian Imperial Bank of Commerce v. Touche Ross Ltd., [1986] 2 W.W.R. 631 (Sask. C.A.), as authority for that proposition. He did not find that Perepeluk “[laid] down any broad statement of principle to the effect that the trustee’s obligation is to the creditors as opposed to the bankrupt” (p. 42). Further, Finch J.A. noted that the Saskatchewan Court of Appeal failed to consider that a trustee is an officer of the court, appointed to stand in the bankrupt’s shoes and to represent the bankrupt’s interests, even where those interests are adverse to the interests of the creditors. With these principles in mind, Finch J.A. underlined that the trustee could only succeed to the rights of the bankrupt.
17 Finch J.A. distinguished Robinson v. Countrywide Factors Ltd., [1978] 1 S.C.R. 753, which the appellant Attorney General cited in support of the argument that assets other than those of the bankrupt may be distributed upon bankruptcy. Finch J.A. held that recovering for a bankrupt’s estate property which the bankrupt had unlawfully concealed is not comparable to the present circumstances where provincial legislation operates to add to the bankrupt’s estate property which never belonged to the bankrupt.
18 Finch J.A. also considered Husky Oil Operations Ltd. v. Minister of National Revenue, [1995] 3 S.C.R. 453, where this Court held that valid provincial workers’ compensation legislation was inoperative where it conflicted with federal priorities as established by the BIA . The lessor argued that Husky Oil stood for the proposition that provincial legislation can neither remove nor add something to a bankrupt’s estate owing to the primacy of the priority scheme of the BIA . Finch J.A. reviewed Gonthier J.’s comments in Husky Oil regarding the analysis which must be undertaken to determine whether two laws are in operational conflict. He then found that s. 20 (b)(i) and the BIA do conflict since s. 20 (b)(i) purports to define the property of the bankrupt in a way which is inconsistent with the definition provided in the BIA . He further found that s. 20 (b)(i) is inconsistent with the BIA since it permits property which does not belong to the bankrupt to be distributed among the bankrupt’s creditors.
19 Finch J.A. stated that the real question at issue is who holds title to the car. That is, did the bankrupt or the trustee in bankruptcy obtain title to the vehicle by reason of the lessor’s failure to register its security interest? The bankrupt acquired only a right to use the car and a contingent future right of purchase. The learned judge concluded that s. 20(b)(i) cannot possibly have the effect of transferring title from the lessor, the true owner, to the trustee in bankruptcy because this would give the trustee greater proprietary rights in the car than the bankrupt enjoyed.
20 Finch J.A. rejected the argument that Re Nishi Industries, [1978] 6 W.W.R. 736 (B.C.C.A.), in which the British Columbia Conditional Sales Act, 1961, S.B.C. 1961, c. 9, was held to be constitutionally valid and was found to give a trustee in bankruptcy priority over a secured creditor, supported the trustee’s position. He distinguished that case on the basis that, under a conditional sale or chattel mortgage, the mortgagee or the purchaser acquires a property interest, whereas in the present case the lessee does not acquire a property interest in the collateral. Rather, the bankrupt held only the right to possess the car while payments were being made.
21 Finch J.A. also dismissed the lessor’s argument based on s. 30(1) (k) of the BIA , under which a trustee may elect to retain a lease. Finch J.A. found that s. 30(1) (k) applied only to leases of property belonging to the bankrupt and had no application where the bankrupt has leased the property of another.
22 Finding it unnecessary to address the other issues raised by the lessor or to deal with the constitutional questions raised by the Attorney General, Finch J.A. allowed the appeal and directed that the proceeds be paid to the lessor.
4. Issues
23 There is one principal issue in the present appeal: can s. 20(b)(i) of the PPSA extinguish the lessor’s right to the car in favour of the trustee’s interest, or is the operation of s. 20(b)(i) limited by certain provisions of the BIA ?
24 In my view, this issue can be resolved through a normal reading of the relevant provisions of both the PPSA and the BIA , buttressed by the policy considerations supporting these provisions.
5. Analysis
A. The Locus of Title Is Not Determinative
25 At the outset, it is important to note that the Court of Appeal’s holding in the present appeal rests on the principle that the “property of the bankrupt” shall vest in the trustee (s. 71(2) BIA ) and that only the property of the bankrupt shall be distributed among the bankrupt’s creditors (s. 67(1) BIA ). In the opinion of the Court of Appeal, the bankrupt, as lessee, did not have a proprietary interest in the car, and since the trustee obtains its entitlements to the contents of the bankrupt’s estate through the bankrupt, the trustee cannot assert a proprietary interest in the car. In my view, the Court of Appeal, with respect, erred fundamentally in focussing on the locus of title and in holding that the lessor’s common law ownership interest prevailed despite the clear meaning of s. 20(b)(i).
26 The Court of Appeal did not recognize that the provincial legislature, in enacting the PPSA, has set aside the traditional concepts of title and ownership to a certain extent. T. M. Buckwold and R. C. C. Cuming, in their article “The Personal Property Security Act and the Bankruptcy and Insolvency Act : Two Solitudes or Complementary Systems?” (1997), 12 Banking & Finance L. Rev. 467, at pp. 469‑70, underline the fact that provincial legislatures, in enacting personal property security regimes, have redefined traditional concepts of rights in property:
Simply put, the property rights of persons subject to provincial legislation are what the legislature determines them to be. While a statutory definition of rights may incorporate common law concepts in whole or in part, it is open to the legislature to redefine or revise those concepts as may be required to meet the objectives of its legislation. This was done in the provincial PPSAs, which implement a new conceptual approach to the definition and assertion of rights in and to personal property falling within their scope. The priority and realization provisions of the Acts revolve around the central statutory concept of “security interest”. The rights of parties to a transaction that creates a security interest are explicitly not dependent upon either the form of the transaction or upon traditional questions of title. Rather, they are defined by the Act itself. [Emphasis added.]
27 In International Harvester, supra, the Saskatchewan Court of Appeal recognized that the regime put in place to regulate competing interests in personal property does not turn on title to the collateral (at p. 204):
There is nothing in the language of the section [s. 20 of the Saskatchewan PPSA which is the equivalent of s. 20 of the British Columbia PPSA], or its relationship with other sections, or indeed in the overall scheme of the Act to suggest, for example, that an unperfected security interest, because it is rooted in and attached to the title of particular goods in the possession of a debtor, should be treated as superior to the more generally derived and broadly attached interest which an execution creditor comes to have in a debtor’s goods. Indeed, the very opposite is suggested not only by the language of the section, but by the overall thrust of the Act.
28 The Court of Appeal in the present appeal did not look past the traditional concepts of title and ownership. But this dispute cannot be resolved through the determination of who has title to the car because the dispute is one of priority to the car and not ownership in it. It is in this context that the PPSA must be given its intended effect and it is to this question that I now wish to turn.
B. Definition of “Security Interest”
29 The PPSA applies to “every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral” (s. 2(1)(a)).
30 Section 1 of the PPSA defines “security interest”, in part, as “an interest in goods, chattel paper, a security, a document of title, an instrument, money or an intangible that secures payment or performance of an obligation”. This definition is elaborated upon by paragraph 1(a)(iii) of the PPSA, which provides that “security interest” means the interest of “a lessor under a lease for a term of more than one year, whether or not the interest secures payment or performance of an obligation” (emphasis added). Further, s. 3 of the PPSA deems certain agreements, which do not secure payment or performance of an obligation, to be security agreements for the purposes of the PPSA. Section 3 includes leases “for a term of more than one year that do not secure payment or performance of an obligation”.
31 The elements of the definition of “security interest” explicitly include within the definition of “security interest” leases for a term of more than one year. The lessor’s interest in the car is the reservation of title in the car; this interest, created by the lease agreement, falls within the ambit of the PPSA.
C. The Nature of the Lessor’s Interest in the Car
32 A security interest is valid and enforceable when it attaches to personal property. Section 12(1)(b) of the PPSA provides that a security interest “attaches” when the debtor acquires “rights in the collateral”. Section 12(2) states explicitly that “a debtor has rights in goods leased to the debtor . . . when he obtains possession of them in accordance with the lease”. Thus, upon delivery of the car to the bankrupt, the lessor had a valid security interest in the car that could be asserted against the lessee and against a third party claiming a right in the car. However, the lessor’s security interest remained vulnerable to the claims of third parties who obtain an interest in the car through the lessee including, trustees in bankruptcy. In order to protect its security interest from such claims, the lessor must therefore perfect its interest through registration of its interest (s. 25), or repossession of the collateral (s. 24). The lessor did not have possession of the car, and it did not register its security interest. Thus, prior to the bankruptcy, the lessor held an unperfected security interest in the car. This brings us to the BIA .
D. The Bankrupt’s Interest in the Car Vests in the Trustee
33 Section 71(2) of the BIA provides that, upon an assignment into bankruptcy, the bankrupt’s “property . . . shall, subject to this Act and to the rights of secured creditors, forthwith pass to and vest in the trustee”. Section 2 of the BIA defines “property” very broadly to include “every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property”.
34 In my opinion, the bankrupt’s right to use and possession of the car constitutes “property” for the purposes of the BIA and the trustee, by virtue of s. 71(2) of the BIA , succeeds to this proprietary right. I find support for this conclusion in Paccar Financial Services, supra, where the Saskatchewan Court of Appeal held that “property” as it is used in the BIA is “broad enough to include a leasehold interest” (at p. 494, citing Re Cadieux and Jas. A. Ogilvy’s Ltd. (1952), 33 C.B.R. 15 (Que. Sup. Ct.), at p. 16).
35 The trustee assumes the bankrupt’s possessory interest in the car through the operation of s. 71(2) ; it is upon this basis that the trustee can assert a claim to the car.
36 I note that s. 12(2) of the PPSA also recognizes that a lessee obtains a proprietary interest in leased goods. Section 12(2) states explicitly that “a debtor has rights in goods leased to the debtor . . . when he obtains possession of them in accordance with the lease” (emphasis added). Thus, s. 12 operates to “deem or recognize that a lessee has a proprietary interest” (Buckwold and Cuming, supra, at p. 471). The Saskatchewan Court of Appeal considered a provision similar to s. 12 of the British Columbia PPSA in International Harvester and held that (at p. 206):
. . . a trustee in bankruptcy, upon whom there devolves a chattel in the possession of the bankrupt under a commercial lease for a term exceeding a year, succeeds to the contractual or “possessory” interest of the bankrupt in that chattel, as well as the bankrupt’s statutory or “proprietary” interest therein as conferred upon the debtor by s. 12 of the Act. [Emphasis added.]
37 From the perspective of both the PPSA and the BIA the bankrupt, as lessee, can be described as having a proprietary interest in the car.
E. The Priority Contest and the Operation of Section 20(b)(i)
(i) Purpose of Section 20(b)(i)
38 The Saskatchewan Court of Appeal explained the theory behind s. 20 of the Saskatchewan PPSA in International Harvester (at pp. 204‑5). A person with an interest rooted in title to property in the possession of another, once perfected, can, in the event of default by the debtor, look to the property ahead of all others to satisfy his claim. However, if that interest is not perfected, it is vulnerable, even though it is rooted in title to the goods (at p. 205):
A third party may derive an interest in the same goods by virtue of some dealing with the person in possession of them, and . . . he may become entitled to priority. That is, he may become entitled, ahead of the person holding the unperfected security interest, to look to the goods to satisfy his claim.
Public disclosure of the security interest is required to prevent innocent third parties from granting credit to the debtor or otherwise acquiring an interest in the collateral. However, public disclosure of the security interest does not seem to be required to protect a trustee who is not in the position of an innocent third party; rather, the trustee succeeds to the interests of the bankrupt. In one authority’s opinion, trustees are given the capacity to defeat unperfected security interests because of the “representative capacity of the trustee and the effect of bankruptcy on the enforcement rights of unsecured creditors” (R. C. C. Cuming, “Canadian Bankruptcy Law: A Secured Creditor’s Heaven” (1994), 24 Can. Bus. L.J. 17, at pp. 27-28).
39 Prior to a bankruptcy, unsecured creditors can make claims against the debtor through provincial judgment enforcement measures. Successful claims will rank prior to unperfected security interests pursuant to s. 20. Once a bankruptcy occurs, however, all claims are frozen and the unsecured creditors must look to the trustee in bankruptcy to assert their claims. Cuming describes the purpose of s. 20(b)(i) (at p. 29):
In effect, the judgment enforcement rights of unsecured creditors are merged in the bankruptcy proceedings and the trustee is now the representative of creditors who can no longer bring their claims to a “perfected” status under provincial law. As the repository of enforcement rights, the trustee has status under s. 20(b)(i) of the bcppsa to attack the unperfected security interest.
40 The purpose behind granting a trustee in bankruptcy the power to defeat unperfected security interests was recognized by the Saskatchewan Court of Appeal in International Harvester (at p. 206):
Indeed, the fact that a trustee in bankruptcy is a representative of creditors serves to shed light on more than one aspect of the issue. It explains ‑‑ or at least assists in the explanation of ‑‑ why a trustee in bankruptcy is included in s. 20, as well as why a trustee is not necessarily confined to the interest of the bankrupt.
41 The Saskatchewan Court of Appeal again acknowledged the representative role of the trustee in bankruptcy in Paccar Financial Services, which also involved a priority contest between a trustee and the unperfected security interest of a lessor. The court stated that the trustee, after bankruptcy, acts as the representative of the unsecured creditors of the bankrupt and asserts “the claim of the unsecured creditor