nan QUEEN’S BENCH FOR SASKATCHEWAN Citation: 2006 SKQB 519 Date: 2006 12 08 Docket: Q.B.G. No. 1690/2006 Judicial Centre: Regina BETWEEN: BANK OF MONTREAL and PATCHRITE INC. Counsel: Rick M. Van Beselaere for the applicant Michael J. Morris for the respondent JUDGMENT ZARZECZNY J. December 8, 2006 INTRODUCTION [1] The Bank of Montreal (the “Bank”) presents a motion to the Court to determine the priority position of the Bank and the respondent Patchrite Inc. (“Patchrite”) respecting assets leased by Patchrite to Sweeprite Mfg. Inc. (“Sweeprite”). The applications are brought pursuant to ss. 63 and 66 of The Personal Property Security Act, 1993, S.S. 1993, c. P-6.2 (the “PPSA”). [2] Counsel for the parties have cooperated in having this motion heard and decided by filing an Agreed Statement of Facts (“Agreed Statement”) with attached exhibits. photocopy of the Agreed Statement (without exhibits) is attached as Schedule “A” to this judgment. The whole of the Agreed Statement with exhibits is incorporated by reference into this judgment. BACKGROUND FACTS AND CIRCUMSTANCES [3] Sweeprite was incorporated by Leslie Hulickso in January of 1985 and it commenced business as an equipment manufacturing company specializing in the manufacture of commercial street and parking lot sweepers. Patchrite was also incorporated by Mr. Hulickso, in May of 1990, for the purpose of manufacturing and marketing pothole patching machines. It never commenced that business. [4] third company involved in these circumstances is Gateway Capital Corp. (“Gateway”) incorporated as capital pool company. [5] In 2000 Mr. Hulickso began negotiating the sale of Sweeprite to Gateway. Although the sale was initially hoped to include Sweeprite’s land, building and equipment located at 1891 Albert Street North in Regina, Saskatchewan, the deal ultimately concluded was for Sweeprite’s business only. Its land, building and equipment assets were not included in the sale. Rather, these assets were transferred by Sweeprite to Patchrite by virtue of “Rollover Agreement” dated May 1, 2001. Sweeprite maintained possession and use of the land, building and equipment throughout. Patchrite obtained mortgage over the real property and Sweeprite made the mortgage payments. Amounts paid by Sweeprite to Patchrite were treated by both companies as rental expenses and income. [6] In February of 2002, Sweeprite and Gateway signed Letter of Intent whereby Gateway agreed to acquire Sweeprite by share purchase to close May of 2002. formal agreement was signed April 11, 2002, however, for various reasons, the closing date for the sale transaction was extended and it did not close until January 31, 2003. Upon closing Sweeprite and Gateway amalgamated and continued as Sweeprite. [7] An equipment lease (the “Equipment Lease”) covering the equipment that is the subject of the application before the Court (the “leased equipment”) was signed by Sweeprite as lessee and Patchrite as lessor on May 23, 2002 (exhibit “B” to the Agreed Statement). The leased equipment was the equipment that had been used and continued to be used by Sweeprite in its manufacturing processes. It is listed as Schedule “A” to the Equipment Lease. The total book value of the leased equipment was $331,738.00. [8] The Equipment Lease was for term of three years. By its provisions the lease term was not to begin until after the closing date of the agreement between Sweeprite and Gateway January 31, 2003. The lease provided for the payment of minimum annual rental of $24,000.00 and it includes an offer to purchase the leased equipment for $212,000.00. The first monthly rental payment under the lease of $2,000.00 was made by Sweeprite to Patchrite in February of 2003. [9] In June of 2005, Patchrite and Sweeprite executed Lease Extension and Amending Agreement. It provided that the Equipment Lease’s term would be extended to May 1, 2007. Patchrite never registered an interest at the personal property security registry as lessor of the equipment leased to Sweeprite either of the original Equipment Lease or the extension or renewal agreement. [10] The parties have agreed that this Equipment Lease is the only written lease of equipment (personal property) by Patchrite to any lessee. Patchrite has no other personal property leases. [11] After the land, building and equipment Rollover Agreement of May 2001, in December of 2001 Patchrite became actively engaged in and has since earned income from contract with Rite Way Mfg. Co. Ltd. (“Rite Way”). The work for Rite Way involves research, design and development work for the “python” grain harvesting combine. It has not yet entered production. [12] Patchrite is not and has never been wholesaler or retailer of any kind of goods (personal property). [13] In April of 2004, Sweeprite granted the Bank security interest in all of its present and after-acquired personal property (Appendix “C” to the Agreed Statement) in support of loan facilities provided to Patchrite by the Bank. The Bank registered financing statement in the personal property registry on April 6, 2004. [14] Sweeprite ran into financial difficulty in the fall of 2005 and was unable to meet all of its obligations. The Bank appointed receiver and manager. Subsequently Sweeprite was deemed to have made an assignment in bankruptcy in January of 2006. In the course of the administration of the bankruptcy of Sweeprite, this dispute has now arisen between Patchrite and the Bank regarding priority to the leased equipment. [15] By agreement between the Bank and Patchrite, the leased equipment has now been sold and the sum of $100,000.00, the amount the parties have agreed represents the value of the equipment, has been placed in trust to be paid out in accordance with the determination by this Court of the legal priorities to the leased equipment in issue between these parties. THE ISSUE [16] By their agreed statement the parties have agreed to and stated the issue for determination by this Court as follows at paragraph 31: 31. The issue to be decided by the Court is which of the Bank of Montreal or Patchrite has priority to, or entitlement to, the equipment subject to the Lease. That issue requires a determination on whether the Lease was a “lease for a term of more than one year” as defined in s. 2(1)(y) of The Personal Property Security Act, 1993.... [17] Subsections 3(2) and 2(1)(y) of the PPSA define and apply to leases of personal property for term of more than one year. They provide as follows: 3(2) Subject to section and section 55, this Act applies to transfer of an account or chattel paper, to lease for term of more than one year and to commercial consignment, that does not secure payment or performance of an obligation. 2(1) In this Act: ... (y) “lease for term of more than one year” includes: (i) lease for an indefinite term, including lease for an indefinite term that is determinable by one or both of the parties not later than one year after the day of its execution; (ii) lease initially for term of one year or less than one year, where the lessee, with the consent of the lessor, retains uninterrupted or substantially uninterrupted possession of the leased goods for period of more than one year after the day on which the lessee, with the consent of the lessor, first acquired possession of them, but the lease does not become lease for term of more than one year until the lessee’s possession extends for more than one year; and (iii) lease for term of one year or less where: (A) the lease provides that it is automatically renewable or that it is renewable at the option of one of the parties or by agreement of the parties for one or more terms; and (B) the total of the terms, including the original term, may exceed one year; but does not include: (iv) lease involving lessor who is not regularly engaged in the business of leasing goods; (v) lease of household furnishings or appliances as part of lease of land where the goods are incidental to the use and enjoyment of the land; or (vi) lease of prescribed goods, regardless of the length of the lease term. [Emphasis added] [18] Patchrite argues that, by virtue of subclause 2(1)(y)(iv), “lease for term of more than one year” does not include “a lease involving lessor who is not regularly engaged in the business of leasing goods ...” Patchrite claims that it is “not regularly engaged” in the business of leasing goods. This lease of equipment to Sweeprite was the only lease transaction which it ever has or ever expects to engage in. Leasing is not part of the business Patchrite regularly engages in. It sees its business as consisting of research and development in particular for the python combine by virtue of its contract with Rite Way. [19] The phrase “regularly engaged in the business of leasing goods” appears in the PPSA legislation of most provinces. number of decisions have been rendered interpreting and applying this phrase to the circumstances of companies that find themselves with an unregistered lease interest in personal property that is also subject to competing claim of registered security holder. Often this is in the context of bankruptcy and/or security enforcement proceedings taken by the registered interest holder. [20] In the case of Paccar Financial Services Ltd. v. Sinco Trucking Ltd. (Trustee of), 1989 CanLII 287 (SK CA), [1989] W.W.R. 481; (1989), 74 Sask. R. 181 (C.A.), Paccar had leased certain vehicles to Sinco who subsequently made bankruptcy assignment. The trustee in bankruptcy claimed the trucks relying upon s. 20(1)(d) of the PPSA. The trustee asserted that Paccar was required to register financing statement in respect of its lease which was for term of more than one year. Paccar argued it was not regularly engaged in the business of leasing goods and therefore did not need to register financing statement. Paccar claimed the exception provided for by subclause 2(1)(y)(iv) of the PPSA. [21] Paccar argued that the four trucks in question were leased for the first time and that it was the first time that it had carried on business in that fashion. Its general business involved selling trucks upon conditional sales contracts or financing leases with options to purchase. [22] The trial judge held that the exemption claimed by Paccar did not apply. On appeal the Court of Appeal stated at p. 496: ... Paccar did not fit the description because it was large financial institution regularly engaged in financing the purchase of Kenworth trucks, and that while lease transactions were rarely used, they were in fact used for financing and as result the exemption did not apply.... [23] Similar conclusions were reached by Gunn J. of this Court in the case of East Central Development Corp. v. Freightliner Truck Sales (Regina) Ltd., 1997 CanLII 11021 (SK QB), [1997] W.W.R. 231; (1997),153 Sask. R. 161 (Q.B.) and by Ball J. in Karkoulas v. Farm Credit Canada, 2005 SKQB 367 (CanLII); (2005), 270 Sask. R. 291 (Q.B.). In the latter case, Ball J. focussed upon the substantial nature of the personal property lease and observed at para. 20, “... it is not the number or frequency of the leases that determines the application of the PPSA; it is whether the lease involved lessor who was regularly engaged in leasing the goods.” [24] The only authority which appears to come to contrary result is the case of Planwest Consultants Ltd. v. Milltimber Holdings Ltd., 1995 CanLII 9153 (AB QB), [1995] 10 W.W.R. 334 (Alta. Q.B.); aff’d 1997 ABCA 318 (CanLII), [1998] W.W.R. 214 (Alta. C.A.). That case involved mortgagee who became owner of the land, building and restaurant equipment in the building as result of foreclosure upon its mortgage. The mortgagee, now owner, leased the land, building and the restaurant equipment in the building to tenant who operated the business as restaurant (as was previously the case). The court concluded that in these unique circumstances the mortgagee, now owner and landlord, was entitled to the exemption from the registration requirements of the PPSA. The owner/landlord was found to be primarily engaged in the purchase, sale and financing of commercial properties, and investment consulting and not regularly engaged in the business of leasing chattels which was only incidental to and not regular part of the business of the lessor on this singular occasion. [25] The situation of Patchrite is quite different and distinguishable from that of Milltimber, the lessor in the Planwest, case, supra. [26] There is no evidence of any business activity at all that Patchrite engaged in until May of 2001 when it had transferred to it Sweeprite’s land, building and equipment. Patchrite in turn rented back the building, land and equipment, none of which ever left Sweeprite’s possession, to Sweeprite under the terms of non-written agreement. Sweeprite paid Patchrite rental for the fiscal period from July 1, 2000 to June 20, 2001 of $22,500.00, for the fiscal period July 1, 2001 to June 30, 2002, $69,659.53, and from July 1, 2002 to January 31, 2003, $23,701.71. [27] Ultimately Patchrite and Sweeprite entered into the equipment lease dated May 23, 2002, for term of three years, term which, by virtue of the agreement, began running January 31, 2003. The equipment lease required Sweeprite pay Patchrite an annual rent of $24,000.00 and recognized that the equipment leased had book value of $331,738.00. Patchrite granted Sweeprite an option to purchase the leased equipment for purchase price of $212,000.00. [28] In 2001 when the non-written lease/rental agreement first began, Patchrite had no other business except the ownership and lease to and/or rental of the land, building and equipment to Sweeprite. It was not until December of 2001 when it obtained the research and development contract with Rite Way. [29] The business of leasing which had started in the spring of 2001 under the non-written arrangement and which continued thereafter by virtue of the equipment lease until the bankruptcy of Sweeprite, was, from May to December of 2001, the only business of Patchrite and thereafter continued to be a significant part of Patchrite’s business. [30] In these facts and circumstances, I find and conclude that Patchrite was “regularly engaged in the business of leasing” within the meaning of subsection 2(1)(y)(iv) of the PPSA and therefore it is not entitled to the exemption from the registration requirements of s. 3. The lease in question was therefore “a lease for a term of more than one year” within the meaning of the PPSA and it required registration. Having failed to register its leasehold interest at the personal property registry Patchrite’s claim to the equipment is subordinate to the registered and first priority claim of the Bank. [31] Orders reflecting this judgment of the Court may issue. J. T. C. Zarzeczny
The Bank presents a motion to the Court to determine the priority position of the Bank and the respondent corporation respecting assets leased by the respondent to Sweeprite. By agreed statement of facts and issue, the parties have agreed that the issue to be determined is whether the Bank has priority to, or entitlement to, the equipment subject to the Lease. This requires a determination of whether the Lease was a 'lease for a term of more than one year' as defined by s. 2(1)(y) of The Personal Property Security Act. HELD: The respondent was 'regularly engaged in the business of leasing', within the meaning of s. 2(1)(y)(iv) of the PPSA and therefore is not entitled to the exemption from registration requirements of s. 3 of the Act. The lease in question was therefore 'a lease for a term of more than one year' within the meaning of the Act and it required registration. Having failed to register its leasehold interest at the personal property registry, the respondent's claim to the equipment is subordinate to the registered and first priority claim of the Bank. 1) There is no evidence of any business activity at all that the respondent engaged in until May 2001 when it had transferred back to it Sweeprite's land, building and equipment. The respondent in turn rented back the building, land and equipment, none of which ever left Sweeprite's possession, to Sweeprite under the terms of non-written agreement. Sweeprite paid rental to the respondent. Ultimately the respondent and Sweeprite entered into the equipment lease for term of years. 2) In 2001 when the non-written lease/rental agreement first began, the respondent had no other business except the ownership and lease to and/or rental of the land, building and equipment to Sweeprite. It was not until December of 2001 when it obtained the research and development contract with Rite Way. 3) The business of leasing, which had started in the spring of 2001 under the non-written arrangement and which continued thereafter by virtue of the equipment lease until the bankruptcy of Sweeprite, was from May to December of 2001 the only business of the respondent and thereafter continued to be a significant part of the respondent's business.