Bank of Montreal v. Innovation Credit Union

Bank of Montreal v. Innovation Credit Union
Collection
Supreme Court Judgments
Date
2010-11-05
Neutral citation
2010 SCC 47
Report
[2010] 3 SCR 3
Case number
33153
Judges
McLachlin, Beverley; Binnie, William Ian Corneil; LeBel, Louis; Deschamps, Marie; Fish, Morris J.; Abella, Rosalie Silberman; Charron, Louise; Rothstein, Marshall; Cromwell, Thomas Albert
On appeal from
Saskatchewan
Subjects
Commercial law
Notes
SCC Case Information: 33153
Decision Content
SUPREME COURT OF CANADA
Citation : Bank of Montreal v. Innovation Credit Union,
2010 SCC 47, [2010] 3 S.C.R. 3
Date : 20101105
Docket : 33153
Between:
Bank of Montreal
Appellant
and
Innovation Credit Union
Respondent
Coram : McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell JJ.
Reasons for Judgment :
(paras. 1 to 71)
Charron J. (McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Rothstein and Cromwell JJ. concurring)
Bank of Montreal v. Innovation Credit Union, 2010 SCC 47, [2010] 3 S.C.R. 3
Bank of Montreal Appellant
v.
Innovation Credit Union Respondent
Indexed as: Bank of Montreal v. Innovation Credit Union
2010 SCC 47
File No.: 33153.
2010: April 19; 2010: November 5.
Present: McLachlin C.J. and Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell JJ.
on appeal from the court of appeal for saskatchewan
Commercial law — Priorities — Unregistered provincial security interest taken in farm equipment owned by debtor — Bank Act security subsequently taken in same goods without notice of existing security — Property seized by Bank on default — Whether priority should be given to provincial security interest or Bank Act security interest — Bank Act, S.C. 1991, c. 46, ss. 427(2) , 428 , 435(2) — Personal Property Security Act, 1993, S.S. 1993, c. P-6.2, ss. 20(3), 66.
At issue is a priority dispute between a prior unregistered security interest taken under Saskatchewan’s Personal Property Security Act, 1993 (“PPSA”) in farm equipment owned by the debtor, and a subsequent security interest in the same collateral taken and registered under the federal Bank Act .
Innovation Credit Union took a PPSA security interest dated October 7, 1991, and registered on June 28, 2004. The Bank of Montreal, between 1998 and January 2004, took Bank Act security over much of the same property. The farmer, however, did not disclose either the Credit Union’s loans or its security interest and the Bank’s searches of both the PPSA and Bank Act security registries disclosed no prior security interests. After the debtor defaulted, the Bank seized and sold some of his property covered by its security.
The Credit Union brought an application before the Court of Queen’s Bench pursuant to s. 66 of the PPSA seeking a declaration that it had a priority claim over the proceeds of the disposition. The applications judge held that the priority rule in s. 428 of the Bank Act gave the Bank Act security interest priority not only over subsequently acquired rights in respect of the property but also over subsequently acquired priority rights. The Court of Appeal allowed the appeal, holding that the proper interpretation of ss. 427(2) and 435(2) of the Bank Act leads to the application of provincial property law to determine the effect of a prior security interest. The first-in-time PPSA security interest had priority over the Bank Act security because the Bank acquired no greater interest than the debtor had at the time the Bank Act security was taken. The Bank’s security interest was therefore subject to the Credit Union’s prior interest, regardless of the fact that the latter was unperfected.
Held: The appeal should be dismissed.
The focal point for resolving a priority dispute involving a Bank Act security and provincial interests, such as PPSA security interests, is the Bank Act itself. The Bank Act security provisions are valid federal legislation which cannot be subject to the operation of provincially enacted priority provisions. Where the Bank Act contains an express priority provision that is applicable to a particular priority dispute, that provision will govern. Where the priority dispute is between a Bank Act security interest and a conflicting security interest acquired prior to the bank taking its security in the collateral, the priority rule set out in s. 428 does not assist in resolving the dispute. In such cases, the provisions of the Bank Act nonetheless govern. Here, the priority dispute must be resolved by determining what proprietary rights were granted to the Bank under s. 427(2) of the Bank Act .
As the combined effect of ss. 427(2) and 435(2) is that the Bank can acquire no greater interest in the collateral than the debtor has at the relevant time, it becomes necessary to determine the nature of the debtor’s interest in the collateral at the time the Bank took its security interest. The question which arises, therefore, is the nature of the interest already conveyed to the Credit Union under the PPSA. Because the security regime contained in the Bank Act is property-based, the right claimed by the competing Credit Union must be characterized as a matter of property law. While the provinces cannot legislate in order to oust the bank’s rights, they can alter the law as it relates to property and civil rights. Saskatchewan did so when it enacted the PPSA. While the PPSA does not contain any provisions which identify the nature of a PPSA security interest in proprietary terms, the effect of the legislation is to create a statutory interest which is analogous to an inchoate property right. At the time the debtor gave the Bank its Bank Act security interest, Innovation Credit Union already held a valid security interest in the nature of a fixed charge. The lack of perfection did not affect this interest.
The existing statutory scheme under the Bank Act does not permit the judicial creation of a first-to-register or, alternatively, a first-to-perfect priority rule as proposed by the Bank. Such a rule would have to be enacted by Parliament if it saw fit to do so. Under the common law, a priority dispute between two legal interests in the same property is determined in accordance with the maxim nemo dat quod non habet. Sections 427(1) and 435(2) of the Bank Act operate in the same way. The application of these provisions to the present case grants priority to Innovation Credit Union’s interest.
Cases Cited
Applied: Bank of Montreal v. Hall, [1990] 1 S.C.R. 121; Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 S.C.R. 411; referred to: Royal Bank of Canada v. Radius Credit Union Ltd., 2010 SCC 48, [2010] 3 S.C.R. 38; Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559; Royal Bank of Canada v. Agricultural Credit Corp. of Saskatchewan (1994), 115 D.L.R. (4th) 569; Landry Pulpwood Co. v. Banque Canadienne Nationale, [1927] S.C.R. 605; Giffen (Re), [1998] 1 S.C.R. 91.
Statutes and Regulations Cited
Bank Act, S.C. 1890, c. 31, s. 74.
Bank Act, S.C. 1991, c. 46, ss. 425(1) , 427 , 428 , 435(2) .
Civil Code of Lower Canada.
Civil Code of Québec, S.Q. 1991, c. 64, Book Six.
Federal Law—Civil Law Harmonization Act, No. 1, S.C. 2001, c. 4 , preamble.
Interpretation Act, R.S.C. 1985, c. I-21, s. 8.1 .
Personal Property Security Act, S.S. 1979-80, c. P-6.1 [rep. S.S. 1993, c. P-6.2, s. 72].
Personal Property Security Act, 1967, S.O. 1967, c. 73.
Personal Property Security Act, 1993, S.S. 1993, c. P-6.2, ss. 2(1)(pp), (qq), 3(1)(a), 4, 9(2), 10, 12, 18, 20(2), (3), 25, 35(1), 59, 60, 66, 72.
Uniform Commercial Code [2000 rev.], art. 9.
Authors Cited
Canada. Law Commission. Modernizing Canada’s Secured Transactions Law: The Bank Act Security Provisions. Ottawa: The Commission, 2004.
Cuming, Ronald C. C. “Case Comment: Innovation Credit Union v. Bank of Montreal — Interface between the PPSA and Section 427 of the Bank Act : Desirable Policy vs. Hard Legal Analysis” (2008), 71 Sask. L. Rev. 143.
Cuming, Ronald C. C., and Roderick J. Wood. “Compatibility of Federal and Provincial Personal Property Security Law” (1986), 65 Can. Bar Rev. 267.
Cuming, Ronald C. C., Catherine Walsh and Roderick J. Wood. Personal Property Security Law. Toronto: Irwin Law, 2005.
Moull, William D. “Security Under Sections 177 and 178 of the Bank Act ” (1986), 65 Can. Bar Rev. 242.
Poirier, Marc-Alexandre. “Analysis of the Interaction between Security under Section 427 of the Bank Act and Provincial Law: A Bijural Perspective” (2003), 63 R. du B. 289.
Saskatchewan. Law Reform Commission. Tentative Proposals for a New Personal Property Security Act. Saskatoon: The Commission, 1990.
Uniform Law Conference of Canada. Uniform Law Conference of Canada — Commercial Law Strategy, vols. 1 and 2. Ottawa: The Conference, 2005 (loose-leaf updated 2010).
Ziegel, Jacob S. “Interaction of Personal Property Security Legislation and Security Interests Under the Bank Act ” (1986-87), 12 Can. Bus. L.J. 73.
Ziff, Bruce. Principles of Property Law, 4th ed. Toronto: Thomson, 2006.
APPEAL from a judgment of the Saskatchewan Court of Appeal (Sherstobitoff, Jackson and Smith JJ.A.), 2009 SKCA 35, 324 Sask. R. 160, 451 W.A.C. 160, 306 D.L.R. (4th) 407, [2009] 8 W.W.R. 473, 51 C.B.R. (5th) 163, 14 P.P.S.A.C. (3d) 149, [2009] S.J. No. 147 (QL), 2009 CarswellSask 156, reversing a decision of Zarzeczny J., 2007 SKQB 471, 306 Sask. R. 227, [2008] 4 W.W.R. 143, 39 C.B.R. (5th) 260, 12 P.P.S.A.C. (3d) 223, [2007] S.J. No. 679 (QL), 2007 CarswellSask 748. Appeal dismissed.
Rick M. Van Beselaere and Peter T. Bergbusch, for the appellant.
Donald H. Layh, Q.C., and Shawn M. Patenaude, for the respondent.
The judgment of the Court was delivered by
Charron J. —
1. Overview
[1] At issue in this appeal, as well as in its companion case, Royal Bank of Canada v. Radius Credit Union Ltd., 2010 SCC 48, [2010] 3 S.C.R. 38, are competing security interests taken pursuant to the provisions of the Bank Act, S.C. 1991, c. 46 , and Saskatchewan’s The Personal Property Security Act, 1993, S.S. 1993, c. P-6.2 (“PPSA”). In order to resolve the dispute, it is necessary to consider the interaction between the old and somewhat archaic Bank Act security scheme on the one hand and the modern provincial regime under the PPSA on the other. The PPSA, as well as other provincial personal property statutes in Canada, has radically changed the conception of security interests as they were understood at the time the Bank Act was enacted over a century ago. Conflicts arising from the interaction between the two regimes, not surprisingly, have been numerous and wide-ranging. Indeed, there appears to be a broad consensus that the difficulties are not entirely soluble without legislative reform. However, legislative action has not been forthcoming in this area. It therefore falls to this Court to decide the present cases and to provide some guidance in this muddled area of law.
[2] In this case, the priority dispute is between a prior unregistered security interest taken under the PPSA in agricultural implements owned by the debtor at the time, and a subsequent security interest in the same collateral taken and registered under the Bank Act . In first instance, the applications judge held that because the Credit Union had not perfected its security interest through registration under the PPSA, the Bank’s security had priority. In his view, the priority rule specified by s. 428 of the Bank Act , which gives a Bank Act security interest priority over subsequently acquired rights in respect of the property, also gives the bank priority over subsequently acquired priority rights (2007 SKQB 471, 306 Sask. R. 227 ). The Court of Appeal for Saskatchewan allowed the appeal, finding that this reading of s. 428 cannot be supported. Rather, the proper interpretation of ss. 427(2) and 435(2) of the Bank Act leads to the application of provincial property law to determine the effect of a prior security interest. Here, the first-in-time PPSA security interest had priority over the Bank Act security because the Bank acquired no greater interest than the debtor himself had at the time the Bank Act security was taken. The Bank’s security interest was therefore subject to the Credit Union’s prior interest, regardless of the fact that the latter was unperfected (2009 SKCA 35, 324 Sask. R. 160 ).
[3] On appeal before this Court, the Bank of Montreal argues that no proprietary interest in the collateral was conveyed to the Credit Union under its PPSA security agreement and that, consequently, it acquired an unencumbered interest in the debtor’s property at the time the Bank Act security was taken. Alternatively, it argues that the first-in-time principle should not apply to give priority to the first to execute a security agreement as banks have no way of discovering the existence of undisclosed and unregistered PPSA interests. As giving such interests priority over subsequent Bank Act interests would expose banks to unreasonable commercial risk, the rule should be modified so as to give priority to the first to register its security agreement.
[4] In my view, the Bank’s contention that no interest affecting the debtor’s title was conveyed to the Credit Union under its prior, albeit unperfected, security agreement cannot be supported in law. The Court of Appeal was correct in its interpretation of the Bank Act . At the time that the Bank of Montreal took its Bank Act security, the debtor had already given the Credit Union a security interest in that collateral under the PPSA. As I will explain, the statutory interest acquired by the Credit Union is correlative to a proprietary right at common law and the Bank therefore took its security interest subject to it. The Bank’s argument that this interpretation leads to commercially absurd results echoes the numerous cries for legislative reform and is not without merit. However, in its current manifestation, I see no satisfactory interpretation of the existing statutory scheme that would permit the judicial creation of a first-to-register or, alternatively, a first-to-perfect, priority rule as proposed by the Bank.
[5] I would dismiss the appeal.
2. The Facts and the Proceedings Below
[6] James Buist, a Saskatchewan farmer, obtained a loan from Innovation Credit Union. In order to obtain this loan, he provided the Credit Union with a security interest governed by the PPSA in all of his present and after-acquired personal property pursuant to a security agreement dated October 7, 1991. The Credit Union did not register this security interest until June 28, 2004.
[7] After the loans were provided by the Credit Union, the Bank of Montreal lent Buist money. In order to secure its loan, the Bank entered into security agreements with Buist between 1998 until January 2004, validly taking Bank Act security over much of the same property that the Credit Union had earlier taken a security interest in. Buist had not disclosed the existence of the loans from the Credit Union or the Credit Union’s security interest when he sought financing from the Bank. While the Bank performed searches of both the PPSA and Bank Act security registries, no prior security interests appeared in the course of that search, as the Credit Union’s security interest had not been registered.
[8] Buist ultimately defaulted on his loans and, in December 2004, the Bank seized some of Buist’s property covered by its Bank Act security. The Credit Union brought an application before the Court of Queen’s Bench pursuant to s. 66 of the PPSA seeking a declaration that it had a priority claim over the proceeds of the disposition of that property.
[9] The applications judge, Zarzeczny J., ruled in favour of the Bank of Montreal, holding that the unregistered PPSA interest was subordinate to the Bank’s Bank Act interest. Zarzeczny J. found that the priority rule specified by s. 428 of the Bank Act — which gives a Bank Act security interest priority over “all rights subsequently acquired in, on or in respect of that property” — also gives the bank priority over subsequently acquired priority rights. On this basis, Zarzeczny J. held that a security interest under the PPSA would only have priority over a subsequently taken Bank Act interest where the PPSA interest had been perfected prior to the bank taking its security interest under the Bank Act . Because the Credit Union obtained priority through registration only after the Bank had taken its Bank Act interest, Zarzeczny J. gave priority to the Bank under s. 428 .
[10] In addition to its being a reasonable interpretation of the text of the Bank Act , Zarzeczny J. viewed this interpretation as best promoting two policy goals reflected in the Act. First, it provides a means of achieving compatibility and resolving future conflicts between the PPSA and the Bank Act . Second, it promotes commercial and business lending efficacy and predictability.
[11] The Saskatchewan Court of Appeal unanimously overturned Zarzeczny J.’s decision. Jackson J.A., writing for the court, conducted a thorough review of the jurisprudence, and ultimately decided that s. 428 of the Bank Act did not resolve the case, as Zarzeczny J. had concluded. Rather, she turned to ss. 427(2) and 435(2) of the Bank Act to resolve the dispute. Jackson J.A. held that under those provisions, when the Bank took its Bank Act security, it acquired only the right and title that the debtor had to give. At the time that the Bank of Montreal took its Bank Act security, the debtor had already given the Credit Union an interest in that collateral by granting it a PPSA security interest. The Bank’s interest in the collateral was therefore subject to the Credit Union’s prior interest and the Credit Union had priority over the proceeds.
[12] The Bank of Montreal now appeals with leave to this Court.
3. Analysis
[13] While the Bank Act and the PPSA both allow creditors to make secured loans by taking security interests in a debtor’s collateral, they have different historical origins and employ radically different conceptual frameworks. I will therefore briefly outline the history and structure of each of these statutory frameworks as a background for the discussion that follows.
3.1 The Bank Act
[14] The statutory scheme currently grounded in s. 427 of the Bank Act , which allows federally regulated banks to take security interests in certain classes of debtors’ property for the purpose of taking collateral, has been a feature of the Canadian secured lending landscape in roughly its current form since the enactment in 1890 of s. 74 of The Bank Act, S.C. 1890, c. 31: see W. D. Moull, “Security Under Sections 177 and 178 of the Bank Act ” (1986), 65 Can. Bar Rev. 242, at p. 243. For nearly a century prior to the enactment of statutes like Saskatchewan’s PPSA, the Bank Act afforded federally regulated banks a mechanism of providing secured loans to borrowers, which was undoubtedly superior to the mechanisms for taking security which existed at that time at common law and equity. This in turn had the effect of greatly facilitating the making of loans to Canadian businesses in need of capital. Indeed, as Justice La Forest remarked in Bank of Montreal v. Hall, [1990] 1 S.C.R. 121, at p. 140, what is now the s. 427 security interest has “played a primordial role in facilitating access to capital by several groups that play a key role in the national economy”.
[15] The general structure of the regime governing Bank Act security can be summarized as follows. Section 427(1) authorizes banks to lend money to a variety of borrowers for a range of purposes and to take security in specified classes of property when making such loans. Section 427(2) states that the bank acquires certain rights and powers in the property upon the delivery of a document giving security to the bank in respect of that property. More specifically as it relates to this appeal, s. 427(2) (c) grants the bank taking a Bank Act security “the same rights and powers as if the bank had acquired a warehouse receipt or bill of lading in which that property was described”; in turn, s. 435(2) specifies that the effect of acquiring a warehouse receipt or bill of lading is to vest in the bank all the right and title of the owner of the goods. As we shall see, ss. 427(2) (c) and 435(2) are of critical importance on the issue that occupies us as, by their terms, the bank can acquire no greater interest in the collateral than the debtor himself has at the relevant time. Section 427(4) then states that unless the bank registers a notice of intention with the appropriate authority, its security interest will be void as against third parties. Finally, s. 427(3) provides the bank with an efficient mechanism of accessing its collateral by allowing the bank to seize property in the event of the debtor’s non-payment of a loan to the bank.
[16] The Bank Act contains relatively few provisions which explicitly address whether a Bank Act security has priority over other interests in the same property. On the question that occupies us, it is particularly noteworthy that while s. 428 expressly gives a Bank Act security interest priority over “all rights subsequently acquired in, on or in respect of that property”, the Bank Act is silent with respect to conflicting third party interests acquired prior to the attachment of the bank’s security in the collateral. In the result, the Bank Act leaves most priority disputes to be resolved by considering whether, on the basis of applicable principles of property law, the proprietary rights granted to the bank under s. 427(2) have precedence over the competing proprietary interests. On this basis, the Bank Act can be characterized as a property-based security regime. This approach stands in stark contrast with modern provincial personal property security statutes such as the PPSA, to which I now turn.
3.2 The Personal Property Security Act
[17] Although of recent origin, provincial personal property security statutes provide the dominant legal framework for secured lending throughout Canada. Based in part on Article 9 of the American Uniform Commercial Code (2000 rev.), every territory and common law province has now adopted its own personal property security act (“PPSA”), beginning with Ontario in 1967, Personal Property Security Act, 1967, S.O. 1967, c. 73. Quebec has its own civil law regime which has also undergone relatively recent changes with the proclamation of the new Civil Code of Québec, S.Q. 1991, c. 64, in 1994 (now R.S.Q., c. C-1991). While different jurisdictions adopting their own PPSAs have modified certain provisions of the statute in order to tailor the Act to respond to particular circumstances or meet specific objectives, the broad structure of these statutes is essentially the same in each enacting jurisdiction. Saskatchewan first enacted such a statute in 1980 with The Personal Property Security Act, S.S. 1979-80, c. P-6.1. This earlier statute was repealed with the enactment of The Personal Property Security Act, 1993, s. 72 with which we are concerned in the present case.
[18] The Saskatchewan PPSA, like all other provincial personal property security statutes, has greatly clarified, simplified, and rationalized the law of secured lending in personal property by essentially rendering irrelevant the distinctions between the wide variety of instruments which existed at common law and in equity for taking security interests in another person’s personal property. It does so by employing a functional approach to determining what security interests are covered by its provisions. Section 3(1)(a) of the PPSA stipulates that the Act 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”. “Security interest” is in turn defined at s. 2(1)(qq) to include “an interest in personal property that secures payment or performance of an obligation”, subject to certain exceptions which are not relevant here. These provisions have the effect of extending the provisions of the PPSA to almost anything which serves the function of a security interest.
[19] Contemporary personal property security statutes, such as the Saskatchewan PPSA at issue here, also employ a conceptual framework which is radically different from that employed by the Bank Act and common law mechanisms of secured lending. In contrast with the property-based regime in the Bank Act , contemporary personal property security statutes have followed what can be characterized as a priority-based approach. The PPSA does not rely on either the common law notion of title or the equitable concepts of beneficial interest or equity of redemption to resolve priority disputes. Rather, for those interests that come within the scope of the Act, the PPSA provides a compendium of rules establishing priority rankings both as between different security interests as well as between security interests and other interests in the collateral, with no regard to the question of who actually has title to the collateral.
[20] A security interest under the PPSA is also enforceable against a third party. Section 10 specifies the criteria that must be met for a security interest to be enforceable against third parties in respect of the property. In a case such as this one where the collateral is tangible equipment, the principal requirement pursuant to s. 10(1)(d) is that there must be a signed security agreement that contains a description of the collateral. One of the central concepts in the PPSA, is the idea of attachment. As between competing security interests under the PPSA, attachment is of central importance since it defines when the creditor acquires an interest in specified property. In cases where the debtor owns the property at the time of execution of the security agreement, the creditor obtains a security interest in the property upon extending or promising to extend credit to the debtor, unless the parties have agreed to postpone the time of attachment. More precisely, s. 12 of the PPSA provides that a security interest attaches to property when:
12. (1) . . .
(a) value is given;
(b) the debtor has rights in the collateral or power to transfer rights in the collateral to a secured party; and
(c) except for the purpose of enforcing rights between the parties to the security agreement, the security interest becomes enforceable within the meaning of section 10;
unless the parties have specifically agreed to postpone the time of attachment, in which case it attaches at the time specified in the agreement.
[21] A security interest that is attached to property will be either unperfected or perfected. Like attachment, perfection is also a concept central to the PPSA. The significance of perfection in the PPSA scheme is that a perfected security interest generally takes priority over an unperfected security interest: s. 35(1)(b). Indeed, subject to certain exceptions, the security interest in collateral that is perfected first in time generally gives the secured creditor the strongest possible claim a secured creditor can have under the PPSA. While there are myriad mechanisms for perfecting security interests that need not be discussed in any detail here, it suffices to note that the registration of a financing statement is one of the most important mechanisms of perfecting a security interest: s. 25. Unlike the Bank Act , however, the PPSA does not void a secured creditor’s rights vis-à-vis third parties if the security interest is not registered.
[22] The PPSA provides a detailed set of rules for resolving priority disputes between competing security interests; perfection and various temporal priority rules generally serve as the default priority rules where there is no more specific rule that governs in a particular circumstance: s. 35(1). While having a security interest gives the secured creditor an interest which is enforceable both as against the debtor and against third parties, the PPSA recognizes other stakeholders’ interests in collateral by subordinating secured creditors’ interests to third parties’ interests in various circumstances. For example, unperfected secured interests are subordinated to the interests of a trustee in bankruptcy and in certain circumstances to transferees for value without notice: ss. 20(2) and (3). Thus, within the domain of application of the Act, the PPSA provides a complete set of priority rules for ranking the interests of both creditors and third parties in particular property.
[23] The PPSA is not, however, a fully comprehensive code. Section 4 of the PPSA lists a number of interests to which the PPSA does not apply. Of relevance to this case is s. 4(k) which provides that the Act does not apply to “a security agreement governed by an Act of the Parliament of Canada . . . including an agreement governed by sections 425 to 436 of the Bank Act ”. More will be said later about this provision.
3.3 The Troubled Relationship Between the Bank Act and the PPSA
[24] The scheme governing Bank Act security interests has not been without its critics, with commentators highlighting in particular the lack of a coherent interface between the archaic concepts underlying the Bank Act and the modern principles embodied in the provincial personal property security statutes: see e.g. M.‑A. Poirier, “Analysis of the Interaction between Security under Section 427 of the Bank Act and Provincial Law: A Bijural Perspective” (2003), 63 R. du B. 289, at pp. 395-400; Law Reform Commission of Saskatchewan, Tentative Proposals for a New Personal Property Security Act (1990); R. C. C. Cuming, “Case Comment: Innovation Credit Union v. Bank of Montreal — Interface between the PPSA and Section 427 of the Bank Act : Desirable Policy vs. Hard Legal Analysis” (2008), 71 Sask. L. Rev. 143.
[25] Indeed, there appears to be a broad consensus as to the need to reform the scheme so as to harmonize it with the provincial PPSA regimes, and some commentators have gone so far as to suggest its total repeal, arguing that such a scheme is unnecessary in light of contemporary personal property security statutes in the provinces: see J. S. Ziegel, “Interaction of Personal Property Security Legislation and Security Interests Under the Bank Act ” (1986-87), 12 Can. Bus. L.J. 73, at pp. 91-95; Uniform Law Conference of Canada, Uniform Law Conference of Canada — Commercial Law Strategy (loose-leaf); Law Commission of Canada, Modernizing Canada’s Secured Transactions Law: The Bank Act Security Provisions (2004), at pp. 26-30.
[26] There is no question that the provisions relating to Bank Act security interests have given rise to interpretive difficulties, this appeal and its companion case being examples. However, the Bank Act remains an integral part of the Canadian landscape of secured lending, and courts are bound to resolve these difficulties as best as can be done on the basis of the modern approach to statutory interpretation and in light of applicable constitutional principles: see Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559, at para. 26.
3.4 Resolving Priority Disputes Between the Bank Act and the PPSA
[27] The Saskatchewan Court of Appeal in Royal Bank of Canada v. Agricultural Credit Corp. of Saskatchewan (1994), 115 D.L.R. (4th) 569, at pp. 586‑87, formulated three basic rules for resolving priority issues of this sort: “(1) set aside the PPSA from the analysis and determine the priority as if the PPSA did not exist; (2) determine the priority pursuant to [applicable provisions of the Bank Act ] to the extent it is possible to do so; (3) where appropriate, apply the first-in-time priority rule”. This framework of analysis was approved and applied by the Court of Appeal in this case. While this approach did not lead the Court of Appeal into error in deciding this case, it is important to note that, strictly interpreted, this formulation does not accurately reflect the applicable constitutional principles at play. It is correct to say, as directed under step (2), that the focal point for resolving a priority dispute involving a Bank Act security and provincial interests, such as PPSA security interests, is the Bank Act itself: Landry Pulpwood Co. v. Banque Canadienne Nationale, [1927] S.C.R. 605, at p. 615. The PPSA should not be set aside in all respects, however, as step (1) above might be read to suggest. Rather, step (1) means simply that the internal priority rules of the PPSA have no bearing on determining a priority dispute between Bank Act and PPSA security interests. However, the PPSA retains importance in resolving the priority dispute at issue here. I will explain.
[28] As the Court held in Hall, the Bank Act security provisions are valid federal legislation which cannot be subject to the operation of provincially enacted priority provisions (Hall, at pp. 154-55). Because provinces cannot enact provisions that would affect the priority of a validly created federal security interest, the conceptual framework for resolving disputes between PPSA security interests and Bank Act security interests is necessarily that supplied by the Bank Act .
[29] Thus, where the Bank Act contains an express priority provision that is applicable to a particular priority dispute, that provision will govern. For example, s. 428(1) provides that a Bank Act security interest has priority over rights subsequently acquired in the property, as well as priority over unpaid vendors. In such cases, s. 428(1) usually provides the total answer and the analysis can end there. Where the priority dispute is between a Bank Act security interest and a conflicting interest acquired prior to the bank’s taking its security in the collateral, there is no specific priority provision in the Bank Act . In such cases, the provisions of the Bank Act nonetheless govern. These priority disputes are resolved by determining what proprietary rights were granted to the bank under s. 427(2) of the Bank Act . As noted earlier and explained more fully below, the combined effect of ss. 427(2) and 435(2) is that the bank can acquire no greater interest in the collateral than the debtor has at the relevant time.
[30] In determining what interest the debtor may have already conveyed to another creditor and, in such circumstances, what interest he or she had left to convey to the bank at the time of execution of the Bank Act security agreement, it becomes necessary to resort to the provincial property law, either at common law or under applicable provincial statutes. It is at this point that resorting to the PPSA becomes relevant. It is true that the internal priority rules of the PPSA cannot be invoked to resolve the dispute. However, it does not follow that the provincial security interest created under the PPSA does not exist outside these priority rules. Nor can the fundamental changes brought about by the PPSA be ignored in determining the nature of the prior competing interest. Far from being irrelevant under the Bank Act , provincial property law plays a complementary role in defining the rights granted under the Bank Act : see Agricultural Credit Corp.; R. C. C. Cuming and R. J. Wood, “Compatibility of Federal and Provincial Personal Property Security Law” (1986), 65 Can. Bar Rev. 267, at p. 274; R. C. C. Cuming, C. Walsh and R. J. Wood, Personal Property Security Law (2005), at p. 589.
[31] While the provinces cannot legislate in order to oust the bank’s rights, they can alter the law as it relates to property and civil rights in the province. This is what the common law provinces did when they enacted the PPSAs, and what Quebec did in 1994 when it adopted the Civil Code of Québec, Book Six. Just as the prior rules of the Civil Code of Lower Canada relating to security interests no longer apply, the prior rules of the common law have been significantly altered by statute. Thus, in determining the nature of any competing provincial security interest, resort has to be made to the relevant provincial statute and the Bank Act has to be read in harmony with it. This approach is reflected in the preamble to the Federal Law—Civil Law Harmonization Act, No. 1, S.C. 2001, c. 4 (“Harmonization Act ”):
WHEREAS the harmonious interaction of federal legislation and provincial legislation is essential and lies in an interpretation of federal legislation that is compatible with the common law or civil law traditions, as the case may be;
. . .
WHEREAS the provincial law, in relation to property and civil rights, is the law that completes federal legislation when applied in a province, unless otherwise provided by law;
Section 8.1 of the Interpretation Act, R.S.C. 1985, c. I-21 , as amended by s. 8 of the Harmonization Act specifically provides for the application of the “rules, principles and concepts in force in the province at the time the enactment is being applied”.
[32] Indeed, the relationship between the Bank Act and provincial property law is in many ways analogous to the way in which this Court in Giffen (Re), [1998] 1 S.C.R. 91, at para. 64, characterized the relationship between federal bankruptcy law and provincial law:
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 [Bankruptcy and Insolvency Act ] 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.
In much the same way, the Bank Act is dependent on provincial property law in order to give content to its provisions and to identify precisely the rights of the parties in a priority dispute involving Bank Act security.
4. Application to This Case
[33] Nothing turns on the particular wording of the respective security agreements in this appeal and it is therefore not necessary to set out the relevant parts of each security agreement. It suffices to say that it is common ground between the parties that the Credit Union obtained from Buist a valid PPSA security interest that attached to the collateral in question on October 7, 1991, therefore at a time prior to the Bank acquiring its security interest under the Bank Act . The applications judge nonetheless reasoned that because the Credit Union took priority through perfection only years later after the Bank took its Bank Act interest, s. 428(1) of the Bank Act gave the Bank priority over the Credit Union’s subsequently acquired priority rights. He therefore concluded that s. 428(1) was determinative of the priority dispute.
[34] I agree with the Court of Appeal that the approach adopted by the applications judge cannot be supported. First, his conclusion that s. 428(1) was determinative of the priority issue ignores the fact that the Credit Union had an existing valid security interest in the collateral, albeit unperfected at the time the Bank acquired its interest. On the question whether the Bank’s security interest has priority over this prior unperfected PPSA interest, it is clear that s. 428(1) has no application. Second, the applications judge may be correct in holding that s. 428(1) would give the Bank priority over any additional rights that the Credit Union might have acquired through perfection. Under the PPSA, however, the time of perfection or the lack of perfection does not determine the nature or validity of the interest. Rather, the concept of perfection plays a role in determining which of two or more competing security interests takes priority under the PPSA. This priority scheme cannot be invoked to resolve the dispute in this appeal. This dispute must be resolved by examining what rights were acquired by the Bank when it took its security interest and determining whether those rights were subject to the Credit Union’s prior PPSA interest. This requires a more detailed examinatio