




CITATION:
Lisec America,
          Inc. v. Barber Suffolk Ltd., 2012 ONCA 37



DATE: 20120120



DOCKET: C53360



COURT OF APPEAL FOR ONTARIO



Blair and LaForme JJ.A. and Benotto J. (
ad hoc
)



BETWEEN:



Lisec America, Inc.



Applicant (Appellant)




and



Barber Suffolk Ltd. and
Roynat Capital Inc.



Respondents (
Respondent in Appeal
)




Brett Harrison and Jeffrey Levine, for the appellant



Craig J. Hill, for the respondent Roynat Capital Inc.

No one appearing for the respondent Barber Suffolk Limited



Heard: October 14, 2011



On appeal from the order of Justice Frank Marrocco of the
          Superior Court of Justice, dated February 9, 2011.



R.A. Blair J.A.:



OVERVIEW

[1]

The issue on this appeal is whether Lisec America Inc. or Roynat Capital
    Inc. holds a prior perfected and first ranking security interest in a large $1.4
    million piece of equipment known as a waterjet glass cutting machine (the
    Waterjet).

[2]

Both parties argue that a proper and commercially reasonable
    interpretation of the governing legislation  the
Personal Property Security
    Act
, R.S.O. 1990, c. P.10 (the PPSA)  supports their position.  In a
    nutshell, here is how the dispute arose.

[3]

Lisec sold the Waterjet to Barber Suffolk Ltd. and, in accordance with
    the agreement, later delivered it to the Collingwood facility of a related
    company, Barber Glass Industries Inc.  Prior to delivery, Lisec perfected its
    security interest in the machine by registering a financing statement against
    Barber Suffolk.  At the same time, Lisec had also sold two other pieces of
    equipment to Barber Glass  a Cutting Line and a Vertical IG Line.  They were
    delivered to Barber Glass in Collingwood at the same time, and Lisec registered
    a financing statement against Barber Glass in order to perfect its security
    interest in that equipment as well.

[4]

What Lisec did not know was that Barber Suffolk had sold its interest in
    the Waterjet to Barber Glass on the day of the original sale.

[5]

Barber Glass was in need of additional financing at the time when the
    equipment was delivered.  It arranged that financing through Roynat Capital. 
    Aware of Lisecs PPSA registration against Barber Glass, Roynat requested Lisec
    either to confirm the details of its security interest or, if paid in full, to
    register a discharge of it.  Lisec discharged the registration, still unaware
    of the transfer from Barber Suffolk to Barber Glass.  It did so on the
    understanding that it would receive payment for the Cutting Line and the
    Vertical IG Line out of the proceeds of the new financing.  Roynat then
    advanced close to $9.5 million to Barber Glass and registered a PPSA financing
    statement against Barber Glass to perfect its own security interest in the
    Waterjet.

[6]

Barber Glass was subsequently placed into receivership.  Lisec and
    Roynat each claim to be entitled to a prior security interest in the Waterjet
    on the basis of the priority of perfection by registration regime set out in
    the PPSA.  Lisec says that its properly perfected interest in the Waterjet
    through the Barber Suffolk registration remained perfected, in spite of the
    unknown transfer of the machine to Barber Glass, because of the saving
    provisions of ss. 39 and 48(2) of the Act.  Roynat appears to agree that would
    be the case but for the intervention of the registration of Lisecs discharge of
    its security interest against Barber Glass.  Roynat submits, however, that the
    discharge caused Lisecs security interest in the Waterjet to become
    unperfected and therefore to be superceded by the Roynat registration on the
    basis of the priority of registration regime set out in s. 30(1), rule 1.

[7]

Lisec applied to the Superior Court of Justice to settle the issue. 
    Marrocco J. ruled in favour of Roynat.  Lisec appeals from that order.  For the
    reasons that follow, I would allow the appeal.

THE FACTS DEVELOPED

[8]

The Barber Glass group of companies is in the business of supplying
    glass products to the transportation industry, heavy equipment manufacturers,
    the architectural market and the furniture market  and has done so for over
    100 years.  Barber Glass and Barber Suffolk are related companies in that
    group, although Barber Suffolk is not in a similar business.  Barber Glass
    operates three facilities, one in Collingwood (for processing oversized glass
    orders) and two in Guelph (a manufacturing facility and a retail facility).

[9]

On July 16, 2007, Lisec sold the Waterjet to Barber Suffolk.  The
    equipment purchase agreement provided for a Purchase Money Security Interest (a
    PMSI) in favour of Lisec.  At the same time, Lisec also sold additional
    equipment to Barber Glass  the Cutting Line and the Vertical IG Line  destined
    for the Barber Glass facility in Collingwood.

[10]

Unbeknownst to Lisec, Barber Suffolk in turn sold the Waterjet to Barber
    Glass on July 16, 2007.

[11]

A year later, all three pieces of equipment were delivered and, in
    accordance with the equipment purchase agreement, Lisec delivered the Waterjet
    to Barber Glass Collingwood facility as well.  On June 19, 2008  before
    delivering the equipment  Lisec registered a financing statement against
    Barber Suffolk to perfect its PMSI in the Waterjet.  It also registered a
    financing statement against Barber Glass to perfect its PMSI in the two pieces
    of equipment sold to Barber Glass.  Neither registration, on its face,
    indicated any particular collateral description.

[12]

Lisec did not know when the equipment was delivered that Barber Suffolk
    had earlier transferred its interest in the Waterjet to Barber Glass.

[13]

Barber Glass was looking for additional financing at about the same
    time.  It approached Lisec asking Lisec to release its security interest in the
    Barber
Glass
equipment so that Barber Glass could obtain additional
    financing.  The new financing was to result in Lisec invoices respecting the
    Cutting Line and the Vertical IG Line being paid.

[14]

Enter Roynat Capital, which was to provide the refinancing.  Having
    learned of the June 19, 2008 Lisec registration against Barber Glass, Roynats
    solicitors contacted Lisec by a letter dated June 23, 2008 asking for
    confirmation of the details of its security interest and requesting that, if
    in fact the registration has been paid in full, Lisec discharge its
    registration.  Lisec did not respond to the letter, but on July 9, 2008, it
    registered a financing change statement discharging its registration against
    Barber Glass.

[15]

On the basis of that discharge, Roynat proceeded to advance $9.5 million
    to Barber Glass pursuant to a Debenture dated July 7, 2008.  The Debenture
    specifically granted Roynat a security interest in the Waterjet.  Roynat in
    turn perfected that security interest by registering a financing statement
    sometime thereafter.  Some of Barber Glass indebtedness to Lisec was repaid
    out of the funds advanced.

[16]

Barber Glass financial difficulties began to mount, however, and on
    November 10, 2010 it was placed in receivership.  Lisec shortly learned for the
    first time that Barber Suffolk had earlier sold the Waterjet to Barber Glass
    and that the Waterjet was considered in the receivership as an asset of Barber
    Glass.  On November 17, 2010, Lisec claimed a PMSI in the Waterjet and on
    November 29, 2010, it registered a financing statement showing Barber Glass as the
    new debtor in respect of its security interest in that machine.

[17]

As part of the Barber Glass receivership proceedings the receiver is
    seeking to sell Barber Glass assets.  Lisec objected to the inclusion of the Waterjet
    in the asset sale, and applied to the Superior Court of Justice for a
    determination of its right and entitlement in the machine.  As noted above, the
    application judge dismissed its application.

THE REASONS OF THE APPLICATION JUDGE

[18]

The application judge accepted Lisecs argument that its PMSI over the
    Waterjet had not become unperfected as a result of the transfer of the machine
    from Barber Suffolk to Barber Glass.  Lisec did not know about the transfer
    until the receivership occurred and properly registered a financing change
    statement within 30 days of learning about it, and its perfected security was
    therefore preserved by the operation of s. 48(2) of the PPSA.

[19]

That was not the end of the matter for the application judge, however. 
    He reasoned that because Lisec had registered a financing statement against
    Barber Glass, because the wording of that financing statement was sufficiently
    broad to capture the Waterjet as well as the two other pieces of equipment sold
    to Barber Glass, and because Lisec had discharged the Barber Glass registration
    without qualification, the effect of that discharge was to unperfect Lisecs
    PMSI in the Waterjet.  Lisecs subsequent attempt to continue to perfect that
    interest by its November 29, 2010 registration was to no avail because Roynat
    had perfected
its
security interest in the machine after the discharge
    and before the subsequent Lisec registration.

ANALYSIS

[20]

For purposes of the analysis, a brief resumé of the chronological
    timeline may be helpful:

July
    16, 2007:                       Lisec sells the Waterjet to Barber Suffolk and
    two other pieces of equipment to Barber Glass

July
    16, 2007:                       Barber Suffolk transfers its interest in the Waterjet
    to Barber Glass

June
    19, 2008:                      Lisec perfects its security interests by registering
    PPSA financing statements against both Barber Suffolk and Barber Glass
    (thinking it is doing so against Barber Suffolk in relation to the Waterjet and
    against Barber Glass in relation to the other two pieces of equipment)

June
    28, 2008:                      All three pieces of equipment are delivered to
    the Barber Glass facility in Collingwood

July
    9, 2008:                         Lisec discharges its registration against
    Barber Glass, at Barber Glass and Roynats request

After
    July 9, 2008:               Roynat registers a PPSA financing statement against
    Barber Glass, perfecting its security interest against the Waterjet, and
    thereafter advances its financing

November
    10, 2010:            Barber Glass is placed in receivership

November
    17, 2010:            Lisec claims a PMSI in the Waterjet

November
    29, 2010:            Lisec registers a financing change statement after
    learning that the Waterjet had been sold by Barber Suffolk to Barber Glass


Did the Unknown Transfer Affect Lisecs
    Registration Against Barber Suffolk?

[21]

The application judge correctly determined that the unknown transfer
    from Barber Suffolk to Barber Glass did not unperfect Lisecs PMSI in the
    Waterjet because Lisec properly registered a financing change statement against
    Barber Glass within 30 days of learning of the transfer.  This conclusion
    follows from the operation of subsection 48(2) of the PPSA, which states:

Where a security interest is perfected by
    registration and the debtor, without the prior consent of the secured party,
    transfers the debtors interest in all or part of the collateral, the security
    interest in the collateral transferred becomes unperfected thirty days after
    the later of,

(a) the
    transfer, if the secured party had prior knowledge of the transfer and if the
    secured party had, at the time of the transfer, the information required to
    register a financing change statement; and

(b) the
    day the secured party learns the information required to register a financing
    change statement,

unless the secured party registers a financing
    change statement or takes possession of the collateral within such thirty days.

[22]

The purpose of this provision is to protect creditors who have taken all
    proper steps to perfect their security under the PPSA from losing their
    priority because of an unknown transfer of the protected asset to another
    debtor.  Since the PPSA regime protects priority by means of registration
    against the name of the debtor, the Act provides a secured party in such
    circumstances with a grace period after becoming aware of the transfer to preserve
    its priority by registering a financing change statement against the new debtor
    as well.  Accordingly, since Lisec registered its financing change statement
    within 30 days of learning the information required to do so, the effect of s.
    48(2) is that Lisecs security interest in the Waterjet  as protected by the Barber
    Suffolk registration  remained perfected and entitled to priority over any
    registrations made against Barber Glass, and covering the same collateral,
    during the period between the transfer and the registration of Lisecs
    subsequent financing change statement.

[23]

Were that the only issue, therefore, Lisec would clearly have priority
    over Roynat in the dispute over security in the Waterjet.  But that is not the
    only issue.  Lisecs discharge of its registration against Barber Glass  a
    registration that was never intended to apply to the Waterjet  muddies the
    waters.

[24]

I turn to that issue now.

Discharge of the Barber Glass Registration

[25]

The application judge concluded that the effect of Lisecs discharge of
    its registration against Barber Glass on July 9, 2008, was to unperfect its
    PMSI in the Waterjet.  Since Roynat had perfected a security interest in the
    assets of Barber Glass  including the Waterjet  before Lisec registered its
    subsequent financing change statement, it followed that the Roynat registration
    took priority.

[26]

The rationale for this conclusion was that Lisecs registration against
    Barber Glass, even though not intended to protect its interest in the Waterjet,
    was nonetheless broad enough to do so.  It covered all of Barber Glass goods,
    inventory, equipment and accounts.  The application judge reasoned that
    creditors should understand that the registration of a discharge of a
    generally-worded financing statement unperfects all security interests in the
    collateral described in the financing statement, and that any security
    interest they hold in the assets of the debtor in question will become
    subordinated.

[27]

The difficulty with this reasoning is that creditors in the position of
    Lisec have no reason to believe that the contested collateral in a situation
    like this  the Waterjet, here  is amongst the assets over which the creditor
    has agreed to release its interest.  That said, the other interest at play 
    the second creditor in the position of Roynat  advanced its funds and
    perfected its security interest in the second debtors collateral without
    knowing that the first creditor claimed a security interest in the collateral;
    indeed, in this case, Roynat had every reason to believe that Lisec did not,
    since Lisec has expressly discharged its registration against the collateral at
    Roynats request before it advanced its funds.

[28]

Herein lies the dilemma.  Whatever the result, an innocent provider of
    credit will suffer a loss.  The application judge was dealing with a case of
    first impression.  I have been able to find no other case where the effect of
    an intervening discharge by the first creditor against the assets of the second
    debtor in circumstances such as this has arisen.

[29]

Respectfully, however, I disagree with the conclusion of the application
    judge.  I say this for two reasons.

Lisecs
    Security Interest in the Waterjet Did Not Attach Through Barber Glass

[30]

First, I am not persuaded  as the application judge and the parties
    appear to have accepted  that the Lisec registration against Barber Glass operated
    to perfect a Lisec security interest in the Waterjet enforceable against Barber
    Glass.  Lisec did not have a security interest in the Waterjet that could have
    been perfected in that fashion because Barber Glass never granted it one.

[31]

Registrations under the PPSA do not operate in the air.  They operate to
    protect a security interest in collateral that has attached.
[1]
Section 11 of the PPSA provides that a security interest is not enforceable
    against a third party unless it has attached.  Section 19 requires that, to be
    perfected, a security interest must (a) have attached, and (b) been perfected
    in accordance with the Act.  A security interest cannot attach, however, unless
    (amongst other things) the debtor has signed a security agreement containing a
    description of the collateral in which the security interest has been given: see
    s. 11(2).

[32]

Here, Barber Suffolk and Barber Glass did not grant Lisec a general
    security agreement or other instrument that would have provided security over
    all of their assets.  They executed equipment purchase agreements granting
    security interests in specific pieces of equipment  in the case of Barber
    Suffolk, the Waterjet; in the case of Barber Glass, the Cutting Line and the
    Vertical IG Line.  At no time did Barber Glass sign a security agreement
    granting Lisec a security interest in the Waterjet.  As Professor Ziegel and
    David Denomme note, [w]here collateral is transferred by a debtor to another
    person the new debtor has not created a security interest in [the first secured
    creditors] favour; he merely holds an interest in collateral subject to the
    prior security interest: Jacob S. Ziegel & David L. Denomme,
The
    Ontario Personal Property Security Act Commentary and Analysis
, 2d ed.
    (Toronto:  Butterworths, 2000) at pp. 253-54.

[33]

As Mr. Quast observed in his December 20, 2010 affidavit filed on behalf
    of Lisec, [the Barber Glass registration] was entirely unrelated to Lisecs
    PMSI in the Barber Suffolk Equipment, i.e., the Waterjet.  Accordingly, although
    Lisecs security interest in the Waterjet both attached and was perfected by
    registration against Barber Suffolk, Lisec never had a security interest in the
    Waterjet that attached through Barber Glass and therefore that could be
    perfected through a registration against Barber Glass.

[34]

On this analysis, Lisecs registration against Barber Glass could not
    have perfected a security interest in the Waterjet.  Given the wording of the
    security agreements in question, the fact that Barber Glass ultimately became
    the owner of the machine does not alter this result.  It follows, then, that if
    Lisecs registration against Barber Glass did not cover the Waterjet, neither
    it nor its discharge could have had an impact on the operation of ss. 39 and
    48(2) in preserving the priority of Lisecs security interest in the Waterjet. 
    The state of affairs is not different than if there had been no Barber Glass
    registration in the first place.

The Lisec
    Registration and Discharge Against Barber Glass Are Irrelevant In Any Event

[35]

There is a second reason why Lisecs priority must prevail.

[36]

The application judges conclusion that the intervening Barber Glass
    discharge operated to unperfect Lisecs security interest in the Waterject for
    purposes of Roynats priority is premised on the view that Lisecs Barber
    Suffolk registration somehow became subsumed in its Barber Glass registration
    and therefore that Lisecs discharge of the Barber
Glass
registration
    operated to discharge the Barber
Suffolk
registration.  In my view, that
    is not the case.

[37]

Lisecs Barber Suffolk registration is a stand-alone registration.  It
    is not dependent upon nor was it replaced by the Barber Glass registration 
    assuming for the purposes of this discussion that the latter also sheltered
    Lisecs security interest in the Waterjet, upon the transfer from Barber
    Suffolk to Barber Glass.

[38]

There is nothing in the PPSA that precludes a secured creditor from having
    a perfected security interest in collateral in more than one way or through
    registration against more than one entity.  In short, even if the Barber Glass
    registration did encompass Lisecs security interest in the Waterjet (which,
    for the reasons articulated above, I do not think it did), the discharge of the
    Barber
Glass
registration did not take with it the discharge of the
    Barber
Suffolk
registration; nor does the preservation of the Barber
Suffolk
priority through the operation of ss. 39 and 48(2) constitute an effective
    revival of the Barber
Glass
registration.

[39]

The Barber Suffolk registration remained in place and remained perfected
    at all material times as a result of the operation of s. 48(2) of the PPSA.  The
    Lisec/Barber Glass registration and discharge are red herrings in the analysis,
    in my view, and the Lisec/Barber Suffolk registration therefore takes priority
    over the Roynat registration.  In this way the priority provisions of rule 1 of
    s. 30(1) of the PPSA continue to be respected: priority of registration does
    prevail.  It is simply Lisecs priority of registration that prevails, not
    Roynats.  By operation of s. 48(2), the Barber Suffolk registration is deemed
    to be a prior registration against the Barber Glass equipment.

[40]

On this interpretation, there is no need to engage in the debate about
    whether the common law doctrine of
nemo dat quod non habet
continues to
    play a parallel role in the determination of priority disputes involving
    security interests, or whether it has been ousted by the terms of the PPSA, as
    counsel have invited us to do.  Suffice it to say, as the Supreme Court of
    Canada has recently noted, in
Bank of Montreal v. Innovation Credit Union
,
    2010 SCC 47, [2010] 3 S.C.R. 3, at para 41, the PPSA resolves priority
    disputes through a detailed set of priority rules rather than on the basis of
    title or the form of a transaction.

[41]

To the extent that
nemo dat
principles would otherwise have been
    applicable in these circumstances, it seems to me that they have been
    incorporated into  and are given effect through  the upshot of ss. 9, 39 and
    48(2) of the Act, taken together: (i) a security agreement is effective
    according to its terms against third parties (s. 9); (ii) the rights of a
    debtor in collateral may be transferred, but no transfer prejudices the rights
    of the secured party under the security agreement or otherwise (s. 39); and (iii)
    a registered priority does not become unperfected by an unknown transfer to a
    third party if the secured party registers a financing change statement within
    30 days of learning of the information required to do so (s. 48(2)).  Nothing
    further is required for these purposes.

[42]

Nor does anything in this approach conflict with the well-accepted
    purpose of the PPSA which, as Gonthier J. noted in
Royal Bank v. Sparrow
    Electric Corp
., [1997] 1 S.C.R. 411, at p. 436, is to increase certainty
    and predictability in secured transactions through the creation of a coherent
    system of priorities.

[43]

It is true that lenders in the position of Roynat are vulnerable in
    situations such as this case presents.  But the legislature has given a clear
    indication through the operation of s. 48(2) of the PPSA that lenders in the
    position of Lisec are to prevail.  There is no lack of certainty or
    predictability when the provisions of the Act as a whole are properly applied.

[44]

I note, in concluding, that on this interpretation, Roynat is in no
    worse position than it would have been in had there never been an intervening
    Lisec/Barber Glass registration.  Having conducted a search that would have
    revealed no prior registration, Roynat would have made its advance.  Section
    48(2) would have operated to preserve Lisecs priority through the Barber
    Suffolk registration, however, once Lisec registered its financing change
    statement within the allotted 30-day period after acquiring knowledge of the
    transfer of interest, as it did.

DISPOSITION

[45]

For the foregoing reasons, I would allow the appeal, set aside the order
    below, and declare that Lisecs security interest in the Waterjet ranks first
    in priority to Roynats security interest in the Waterjet.

[46]

Lisec is entitled to its costs of the appeal, fixed in the amount of
    $15,000 all inclusive, as agreed between counsel.

R.A. Blair J.A.

I agree H.S. LaForme
    J.A.

I agree M.L. Benotto
    J. (
ad hoc
)

RELEASED:  January 20, 2012





[1]
The notion of attachment recognizes that a security interest is proprietary in
    nature and must therefore fasten to specific collateral:  see Ronald C.C.
    Cuming, Catherine Walsh & Roderick J. Wood,
Personal Property Security Law
(Toronto:  Irwin Law, 2005), at p. 164; Roy Goode,
Legal Problems of
    Credit and Security,
3d ed. (London:  Sweet & Maxwell Ltd., 2003) at p.
    59; Richard H. McLaren,
The 2012 Annotated Ontario Personal Property Act
(Toronto: 
    Thomson Canada Ltd., 2011) at pp. 143-44.


