Bank of Montreal v Innovation Credit Union

[52] In the present case the issue of perfection by registration and therefore notice to all of the security interest claimed by the Credit Union is central to the determination of this priority dispute. If the provisions of s. 428 of the Bank Act referring to “all rights subsequently acquired in, on or in respect of [that] property ...” includes priority rights then by the second rule in the Agricultural Credit Corp. of Saskatchewan case the Bank succeeds in its claim of priority in this case. Priority is obtained by the Credit Union in respect of its prior security interest only when that interest is perfected, in this case, by registration. Registration gives notice to all third parties of the nature of the security interest claimed and implicitly its priority.

[52] At bottom, this is an exercise in statutory interpretation, which requires recourse to the general principles of statutory interpretation, including the need to read the words to be interpreted in their entire context. It is clear that the Bank Act provides no express priority rule vis à vis prior security interests. To read a priority rule into the Bank Act in favour of prior interests, and thereby defeat Bank Act security in all cases would have far-reaching ramifications. It would raise, for example, the question as to what types of prior interests would have such effect, which was the conundrum faced by the Chambers judge in the approach that he took.

[53] A conclusion that the Bank Act relies on provincial law to determine the consequences of holding a warehouse receipt or bill of lading avoids this problem. Such a conclusion is in keeping with the history of the Bank Act, and the wording of the sections under consideration. It enhances credit, but not at the expense of prior interests duly taken and valid under the provincial system of secured transactions. It is consistent with s. 428(1), which accords priority to Bank Act security over “rights subsequently acquired,” but to make this statement does not import into the section a priority rule in favour of prior rights. If Parliament did not intend to defer to provincial property law principles, there would be no mechanism to resolve this dispute in the Bank Act, and in consequence, the courts would be thrust back upon a consideration of the principles of the general law of the province including the common law and equity in any event.

[54] In summary, a bank, by virtue of the document of title fiction, acquires whatever interest the debtor has in the property at the time the bank acquired its interest. This, of course, brings us to the question of what the debtor owned in this case when the Bank acquired its interest under the Bank Act, and this, in turn, necessarily takes us to provincial law governing proprietary interests.

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[57] According to the PPSA, an agreement in these terms creates a security interest in the property with respect to which it is granted. Clause 2(1)(qq)(i) of the PPSA defines a security interest as “an interest in personal property that secures payment or performance of an obligation.” There can be no doubt, based on the terms of the General Security Agreement mentioned above, that Mr. Buist granted to the Credit Union a security interest in all his personal property.

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[66] There are clear incentives for lending institutions to register under the PPSA, not the least of which are the consequences of holding an unperfected security interest. By failing to register a security interest, a provincial lending institution stands to be defeated by many more provincial interests than federally created ones. The problem is the age old one of a debtor failing to disclose—either negligently or fraudulently—that it has borrowed money elsewhere. The PPSA provides a solution for the banks as well, but only if they take a security interest under that Act and not under the Bank Act in this jurisdiction, which is a solution that has been adopted elsewhere.

[67] In short, in the within appeal, the Bank cannot insist on registration under a system of which it is not a part and that it has not adopted. The Credit Union is entitled to priority over the Bank of Montreal by virtue of the Credit Union’s prior security interest. The priority rule, resting as it does on ss. 427(2) and 435 of the Bank Act and provincial law, does not depend on whether the prior security interest is perfected.

[48] In my view, it is not open to the Bank in this appeal to now argue that the statutory interest conveyed to the Credit Union is not analogous to a proprietary right. At the time Buist gave the Bank of Montreal its Bank Act security interest, Innovation Credit Union already held a valid security interest in the nature of a fixed charge. This means that any subsequent interest could only be taken in respect of Buist’s equity of redemption in the property.

[49] Nor can I accept the argument that the lack of perfection affects this characterization. Under the PPSA, the time of perfection, or the lack of perfection, determines which of two or more competing security interests takes priority. It does not determine the nature or validity of the interest. With the introduction of the PPSA, the legislation no longer declares unregistered interests void. Section 10 of the PPSA specifies what criteria must be met for a security interest to be enforceable against third parties. As the Bank acknowledges at para. 22 of its factum: “The principal requirement in a situation such as this, where the collateral is tangible equipment, is that pursuant to s. 10(1)(d) there must be a signed security agreement that contains a description of the collateral.” It is not disputed that this requirement is met in this case.

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[70] In summary, a proper interpretation of the Bank Act gives an earlier unperfected PPSA interest priority over a subsequent Bank Act interest, and there is no provision in the PPSA which subordinates an unperfected PPSA interest to a Bank Act interest.