Q.B.G. A.D. 1998 No. 1992 J.C.S. IN THE QUEEN`S BENCH JUDICIAL CENTRE OF SASKATOON BETWEEN: ASSOCIATES LEASING (CANADA) LTD. and HUMBOLDT FLOUR MILLS INC. RESPONDENT D.F.G. Quennell for the applicant D.R.P. Sanders for the respondent JUDGMENT BAYNTON J. December 15, 1998 [1] Associates applies under s. 63 of The PersonalProperty Security Act, 1993 for an order declaring thepriority of competing security interests held by Associatesand Humboldt in two reefer trailers. It also applies for anorder giving directions respecting the exercise of the rightsof the secured party with the prior interest. When the application came before me in chambers, the parties filed an agreed statement of facts and focussed their submissions solely on the priority issue as if the application had been brought under s. 66. have proceeded as if this were so. [2] Associates` purchase-money security interests wereacquired pursuant to its leases of the trailers to Lake AirServices ("Lake Air") on December 22, 1997. Humboldt`s security interests were acquired pursuant to security agreement granted to it by Lake Air in May 1996 on present and after acquired property as amended in January 1998 to specifically include the trailers. Positions of the Parties [3] Associates maintains that s. 34(2) gives its purchase money security interests in the two trailers priority over Humboldt`s security interests in them. Associates says that its security interests were perfected, as required by s. 34(2), within fifteen days by registration on January 5, 1998. Humboldt maintains that Lake Air acquired constructive possession of the trailers on December 19, 1997 (prior to the dates of the written leases) and that accordingly Associates cannot rely on s. 34(2) for priority because its purchase money security interests were not perfected within fifteen days of that date as required by the section. [4] The gist of Humboldt`s position is that Lake Air acquired constructive possession of the trailers on December 19, 1997 when Lake Air verbally arranged the acquisition of the trailers with special equipment from GJ Bell International Ltd. ("GJ Bell"). GJ Bell would not proceed with the transaction without confirmed sales transaction. Associates advised GJ Bell that it would finance the acquisition of the trailers and equipment by purchasing them and leasing them to Lake Air. GJ Bell then signed contract dated December 19, 1997 with Mid-Canada Thermo King ("Mid-Canada") for the installation of the equipment on the trailers in accordance with the specifications given GJ Bell by Lake Air. The trailers were then delivered by GJ Bell to Mid-Canada so that the installation work could be done. The trailers were leased by Lake Air from Associates by written agreements dated December 22, 1997. The sales agreement between GJ Bell and Associates was dated December 29, 1998. The Issue [5] The issue to be determined is what is meant by theterm "possession" in s. 34(2)(a) and when, in thecircumstances of this case, Lake Air obtained possession orconstructive possession of the trailers within the meaning ofs. 34(2)(a). [6] The Agreed Statement of Facts filed by the parties is reproduced in full except for the schedules which are in part illegible due to the poor quality of the facsimiles. AGREED STATEMENT OF FACTS 1. The Respondent, Humboldt Flour Mills Inc., ("HFM") was granted security interest by Lake Air Services Ltd. ("Lake Air") and registered financing statement perfecting that security interest, on May 29, 1996. The security interest registered by the financing statement included all present and after-acquired property and certain specified serial numbered goods. By an amendment registered on January 23, 1998, there was added to the registration over serial numbered goods the following Reefer Vans (among other collateral): 1998 Wabash RCA-102 Reefer Van, serial number 1JJV482W6WL439499; and 1998 Wabash RCA-102 Reefer Van, serial number 1JJV482W0WL439501. Attached as Schedule "A", to this Agreed Statement of Facts, is copy of the Personal Property Registry search against Lake Air Services Ltd. showing the registration on behalf of HFM commencing at page 16. 2. Associates Leasing (Canada) Ltd. ("Associates") entered into lease agreements with Lake Air, both of which agreements are dated December 22, 1997, and copies of each of the lease agreements are attached hereto as Schedule "B" to this Agreed Statement of Facts. By the terms of these lease agreements, Associates leased the trailers with Reefers referred to above, to Lake Air, for term of 60 months. Associates registered financing statement against Lake Air on January 5, 1998. The registered security interest is shown at pages of the Personal Property Search result, attached as Schedule "A". 3. Lake Air arranged the acquisition of the trailer units from GJ Bell International Ltd. ("GJ Bell Trucking"). GJ Bell Trucking directly dealt with Cummins Mid- Canada Ltd. to purchase two Reefers and to install those Reefers on those trailer units. 4. Dennis Foret of GJ Bell Trucking was contacted by telephone by representative of Associates on or about December 19, 1997. At that time he was advised that Associates had agreed to proceed with the transaction with Lake Air. Associates had agreed that it would finance the trailers through lease agreement with Lake Air. Dennis Foret confirmed that GJ Bell Trucking would not proceed with the acquisition of the Reefers or the installation of the Reefers on the trailer units unless it had confirmed sale transaction. Based upon the discussions with the representative of Associates, GJ Bell Trucking arranged the purchase of the Reefers with Cummins Mid-Canada Ltd. Attached hereto as Schedule "C" is the price quotation dated December 19, 1997, which price quotation resulted in the telephone acceptance of the transaction by Associates, and which then prompted the delivery of the units to Cummins Mid-Canada Ltd. to have the Reefers attached to the 5. The lease agreements between Associates and Lake Air are dated December 22, 1997, as is the sales invoice between Cummins Mid-Canada Ltd. and GJ Bell Trucking. Commencing December 19, 1997, work began to attach the Reefers to the 6. By Vehicle Purchase Order dated December 29, 1997, copy of which is attached as Schedule "D", Associates purchased the Reefer trailers from GJ Bell Trucking. DATED at Regina, Saskatchewan this 5th day of October, 1998. [7] have set out the relevant sections of The Personal Property Security Act, 1993, including s. 22. It is not applicable to the type of priority dispute that arises in the case before me, but the wording of the provisions respecting possession and constructive possession are similar. As well, s. 22(2) sheds some light on what is meant by these terms. 2(1) In this Act: (g) "collateral" means personal property that is subject to security interest; (m) "debtor" means: (i) person who owes payment or performance of an obligation secured, whether or not that person owns or has rights in the collateral; (iii) lessee pursuant to lease for term of more than one year; (jj) "purchase-money security interest" means: (i) security interest taken in collateral to the extent that it secures all or part of its purchase price; (ii) security interest taken in collateral by person who gives value for the purpose of enabling the debtor to acquire rights in the collateral, to the extent that the value is applied to acquire those rights; (iii) the interest of lessor of goods pursuant to lease for term of more than one year; or (iv) the interest of consignor who delivers goods to consignee pursuant to commercial consignment; but does not include transaction of sale and the lease back to the seller and, for the purposes of this clause, "purchase price" and "value" include credit charges and interest payable for the purchase or loan credit; (qq) "security interest" means: (i) an interest in personal property that secures payment or performance of an obligation, but does not include the interest of seller who has shipped goods to buyer under negotiable bill of lading or its equivalent to the order of the seller or to the order of an agent of the seller, unless the parties have otherwise evidenced an intention to create or provide for security interest in the goods; and 22(1) purchase-money security interest in: (a) collateral, other than an intangible, that is perfected not later than 15 days after the day on which: (i) the debtor obtains possession of the collateral; or (ii) another person, at the request of the debtor, obtains possession of the collateral; whichever is earlier; or (b) an intangible that is perfected not later than 15 days from the day on which the security interest attaches; has priority over the interest of person mentioned in subsection 20(1) or (2). (2) For the purposes of this section, where goods are shipped by common carrier to debtor or to person designated by the debtor, the debtor does not obtain possession of the goods until the debtor or third party at the request of the debtor obtains actual possession of the goods or document of title to the goods, whichever is earlier. 34(2) Subject to subsection (6) and section 28, purchase-money security interest in: (a) collateral or its proceeds, other than intangibles or inventory, that is perfected not later than 15 days after the day on which the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier; or (b) an intangible or its proceeds that is perfected not later than 15 days after the day on which the security interest in the intangible attaches; has priority over any other security interest in the same collateral given by the same debtor. [8] There is no dispute that the Associated lease agreements are for more than one year, that they pertain to collateral that does not consist of intangibles or inventory, that they constitute purchase money security agreements, and that Lake Air as lessee of the trailers is debtor as defined by the Act. Nor is there any dispute that section 34(2)(a) gives properly perfected purchase-money security interest priority over an earlier properly perfected non purchase-money security interest granted by the same debtor in the same collateral. In Royal Bank of Canada v. Tisdale Credit Union Ltd. (1992), 1992 CanLII 8170 (SK QB), 104 Sask. R. 128, Grotsky J. comprehensively reviews the legal and commercial rationale for the "super- priority" given by the Act to purchase-money security [9] Nor is there any dispute that the time within which the purchase-money security must be perfected begins to run from the earliest date that the debtor either obtains possession of the collateral or has constructive possession of it. use the term "constructive possession" to mean the possession of the collateral by "another person at the request of the debtor" as set out in s. 34(2)(a). But what constitutes "possession" of collateral by the debtor within the meaning of this section is very much in dispute in this [10] In Richard H. McLaren`s, Secured Transactions in Personal Property in Canada, Second Edition, (Toronto: Carswell, 1998) (Release 2) para. 5.02[4], the author discusses the ongoing debate as to what is meant by "possession" in provision in the Uniform Commercial Code that is similar to s. 34(2) of our Act. One approach measures the perfection period from the time at which physical possession passes. An alternative line of authority measures the period from the date the security agreement is executed and value is given despite the fact that physical possession was obtained earlier. The rationale is that until there has been transfer of value and the execution of security agreement respecting the property, physical delivery alone cannot effect an attachment nor create security interest in the property. [11] variation of this alternative approach is to focus on the word "debtor" in s. 34(2)(a). lessee, for example, does not become debtor in possession until the terms of the lease are met and the security agreement is executed and delivered. But, as McLaren points out, does the term "debtor" merely identify one of the parties or does it restrict the application of the section to debtor as defined in s. 2(m) of the Act? The term "collateral" is also defined by s. 2(g) as "personal property that is subject to security interest". The term "security interest" is in turn defined by s. 2(qq)(i) as "an interest in personal property that secures payment or performance of an obligation...." Unless the property qualifies as "collateral" person cannot possess it as "debtor" within the meaning of the priority section. Messrs. Cummings and Wood, at pp. 175-6 of Saskatchewan and Manitoba Personal Property Security Acts Handbook (Toronto: Carswell, 1994) pose an example to illustrate the problem of determining when debtor`s possession begins for the purpose of calculating the fifteen days within which the purchase-money interest security must be perfected. There is matter involving the issue of possession by the debtor that is not directly addressed in the section. This problem is illustrated in the following scenario: On June "seller" delivers photocopier to prospective buyer on 30-day "sale or return" basis. On July 1, the prospective buyer decides to buy the machine, and on that date security agreement is executed. The seller registers financing statement on July 15. However, on July 10 an execution creditor of the buyer causes the photocopier to be seized under writ of execution. The execution creditor will argue that the secured party did not perfect his security interest with 15 days of the debtor obtaining possession of the machine. The debtor got possession on June 1. The secured party will counter by pointing out that, although the customer was in possession of the machine on June 1, she was not in possession of it as "debtor" until the security agreement was executed on July 1, with the result that the security interest was perfected not later than 15 days from the date the debtor obtained possession. [13] Although the example is posed in comment to s. 22, it is equally applicable to s. 34(2) as indicated by the authors in note on page 265 as follows: The 15-day period does not start to run merely because the debtor is in possession as lessee or other type of bailee. See Royal Bank v. Toronto-Dominion Leasing (1987), P.P.S.A.C. 103 (Sask. Q.B.); McLeod Co. v. Price Waterhouse Ltd. (1992), P.P.S.A.C. (2d) 171 (Sask. Q.B.). more detailed discussion of this point may be found in &22[2]. [14] Counsel for Humboldt made persuasive submission that "possession" for the purposes of calculating the perfection period in s. 34(2)(a) should be interpreted as physical possession or constructive possession of the collateral independent of the formalization of the associated property rights and obligations between the parties. He submitted that the rationale for using the date the prospective debtor acquires physical possession of the collateral, rather than the date the security interest arises, is to prevent purchase-money security interest holders from abusing their super-priority position. Once they permit prospective debtor to take physical possession of the property, they clothe that person with ostensible ownership of the property which might be relied upon by other security interest holders to their detriment. Unless purchase-money security interest holders act promptly in perfecting their security once the prospective debtor is in possession of the collateral, they should lose their super-priority. [15] The case law in Saskatchewan however has interpreted "possession" to constitute more than mere physical possession. Walker J. in Royal Bank v. Toronto-Dominion Leasing (1987), P.P.S.A.C. 103 stated at p. 107: When does "the debtor obtain possession" of the collateral under s. 34(1)? "Possession" means simple physical control upon the delivery of the goods, not formal acceptance under the law of sales. It may be more difficult to answer the question in the context of possession given "on approval" "for inspection purposes only", "on trial", "on sale or return" or "for reasonable testing purposes", or in the context of an option to purchase or the context of late signing of sale documents. However, it seems reasonably clear that "naked possession" is not enough to start the fifteen-day period running. The buyer is not necessarily to be construed "debtor" the instant delivery is made. Mere physical control does not necessarily constitute "possession" under s. 34(1). The fifteen-day period does not begin to run until the party in possession of equipment becomes "debtor" obligated to pay the purchase price. But, that is not the case here. [16] Matheson J. in McLeod Co. v. Price Waterhouse Ltd. (1992), P.P.S.A.C. (2d) 171 stated at p. 176: Ford Credit did not become the creditor of Avonlea until it agreed, on November 2, 1989, to accept the debt. Conversely, until Ford Credit became the creditor Avonlea could not be the debtor of Ford Credit. Avonlea was therefore not in possession of the collateral, as "debtor", until November 2, 1989. Consequently, Ford Credit perfected its purchase-money security interest in the collateral within the 15-day period prescribed by s. 34(1)(a) of the P.P.S.A. Its purchase- money security interest in the tractor thereby took priority over the existing security interest in the same collateral which Avonlea had granted to SEDCO. In that case Avonlea had been in possession of the collateral for several months before November 2, 1989. [17] Although each of these cases were decided under the former Act, sections 22 and 34(2) of the new Act (formerly s. 21 and 34(1)) are essentially unchanged except for the addition of the concept of constructive possession which I`ll discuss later. In my view the two cases have cited establish that the term "possession" in these sections is not necessarily equivalent to bare physical possession. Messrs. Cummings and Wood appear to be of the same view. Their Handbook respecting the former Act preceded these two cases. In their commentary they indicated that the possession issue was still undecided in Canada. Their commentary on this issue in their current Handbook on the new Act contains no such statement. It has been replaced by commentary at p. 176 that analyses the two cases in connection with the example that quoted previously as follows: .. In Royal Bank v. Toronto-Dominion Leasing the Saskatchewan Court of Queen`s Bench held that the debtor must be in possession qua debtor not in some other capacity in order for the 15-day period to start to run. So long as the prospective buyer in the above scenario was in possession of the machine under sale or return arrangement, she was not debtor because she was under no obligation to buy it. Only when the contract to buy the machine was executed (July 1) did the prospective buyer become the buyer- debtor. Where the sales agreement is conditional on the buyer obtaining financing, it is the time that the condition is satisfied and not the time that the sales agreement is executed that will determine when the bailee becomes debtor. The outcome is different if the bailee has possession of the goods under transaction that is deemed security agreement. For example, true lease for term of more than one year may contain an option to purchase. The date on which the lessee exercises the option is of no consequence in this context. The definition of "debtor" in section 2(1)(m)(iii) (clause (c) of the definition in section [Man.]) includes lessee under lease for term of more than one year. Therefore, the 15-day period in section 22 begins to run from the date the lessee obtained possession of the goods as lessee, and not from the date that the lessee became buyer of the goods. [18] As far as am aware, the case law in this province has not as yet interpreted the constructive possession terms of either section 34(2) or section 22. These terms were not contained in either s. 21 or s. 34(1) of the previous Act. Section 22(2) restricts the scope of constructive possession somewhat but it applies only to s. 22 not to s. 34. [19] In my view, a person is not in constructivepossession of collateral within s. 34(2)(a) unless that personis a "debtor" as defined, unless the collateral is"collateral" as defined, and unless another person "obtained"physical possession of the collateral "at the request of "that debtor. There is no constructive possession by the debtor within the meaning of the section if another person obtained possession of the collateral at the request of someone other than the debtor. Nor does another person obtain possession "at the request of the debtor" simply by handling the collateral or transporting it to the debtor as is the case respecting common carrier under s. 22. As well, until the debtor becomes legally entitled to the physical possession of the collateral, another person cannot be in possession of it at the "request" of the debtor. [20] reject the contention of Humboldt that Lake Air and Humboldt were legally committed to lease of the trailers on December 19, 1997, when Associates obligated itself to buy the trailers from GJ Bell. Although the fact that the lease agreements between Associates and Lake Air are dated December 22, 1997 does not preclude the court from finding that the parties had prior verbal agreement, there is no evidence to convince me that this was so. Even if have erred in this conclusion, it does not follow that Lake Air obtained either the actual or constructive possession of the trailers before December 22, 1997. The evidence convinces me otherwise for several reasons. [21] It is obvious that before December 22, 1997, the trailers were not in the physical possession of Lake Air. They were first in the possession of GJ Bell as vendor and then in the possession Mid-Canada as installer of the equipment. As well, the first term of each lease agreementcontained an acknowledgement by Lake Air that the respectivetrailer was delivered to it by Associates at the location andon the date set out in the lease. Such a clause isinconsistent with the submission that Lake Air had actual orconstructive possession at an earlier date. [22] I also conclude that Lake Air did not haveconstructive possession of the trailers prior to December 22,1997, through either GJ Bell or Mid-Canada. Neither GJ Bellnor Mid-Canada was in possession of the trailers "at therequest of" Lake Air. The December 19, 1997 contract for the installation of equipment on the trailers was between Mid- Canada as an installer and GJ Bell as customer. The only mention of Lake Air in the contract was its name after the term "Reference". Presumably Mid-Canada held possession of the trailers for GJ Bell and would not have relinquished possession of them until it was paid by GJ Bell. The December 29, 1997 contract respecting the purchase of the trailers was between GJ Bell as "Seller" and Associates as "Purchaser". The only mention of Lake Air in that contract was its name after the term "Lessee". Presumably GJ Bell held possession of the trailers for Associates and would not have relinquished possession of them until it was paid by Associates. [23] As Lake Air had neither actual nor constructive possession of the trailers before December 22, 1997, the perfection of Associates` purchase-money security interest by January 5, 1998 fell within the fifteen days specified in s. 34(2)(a). realize that my interpretation may in some cases "extend" the 15-day perfection date to the detriment of non purchase-money security holders. But in my view the protection the Act gives to purchase-money security holders should be interpreted broadly. agree completely with the comments of Cummings and Wood, Saskatchewan and Manitoba Personal Property Security Acts Handbook, supra, at p. 263: The policy underlying the special status given to suppliers of purchase-money credit is not difficult to identify or to justify. creditor who has provided the credit needed by debtor to acquire the property in which the creditor holds security interest should be given priority to that property. Without this priority, it is unlikely that the creditor would be willing to grant secured credit when the debtor has given prior security agreement that contains an after-acquired property clause. The prior security interest attaches to the property acquired with the purchase-money credit, and would be entitled to priority in the absence of super-priority rule. corollary of this is that the purchase-money priority permits the debtor to obtain secured credit from additional sources in situations where broadly based non- purchase-money security interest has been given in the debtor`s present and after- acquired personal property. This is an important feature of the system because it is very easy for creditor to take and perfect security interest in all of debtor`s present and after-acquired property. [24] In the circumstances of the case before me, to denyAssociates priority over Humboldt would provide Humboldt withan unmerited windfall at the sole expense of Associates whogave full value for the purchase-money security interest itobtained from Lake Air. Conclusion [25] The application of Associates is allowed. It is ordered that its purchase-money security interests in the two reefer trailers have priority to Humboldt`s security interests in them. Associates is entitled to its costs from Humboldt.
Associates, which held purchase money security interests pursuant to its 1997 leases, applied under s.63 of the Personal Property Security Act for an order declaring the priority of competing security interests held by Associates and Humboldt Flour Mills in two reefer trailers. Humboldt's security interests were acquired pursuant to a security agreement granted in 1996 on present and after acquired property as amended in 1998 to specifically include the trailers. It also applied for an order giving directions respecting the exercise of the rights of the secured party with the prior interest. At issue is what is meant by 'possession' in s.34(2)(a) and when Lake Air obtained possession or constructive possession of the trailers. HELD: The application was allowed with costs from Humboldt.  1)The parties filed an agreed statement of facts and focused on the priority issue as if the application had been brought under s.66. 2)'Constructive possession' means possession of the collateral by 'another person at the request of the debtor' as set out in s.34(2)(a). What constitutes 'possession' of collateral by the debtor within s.34(2)(a) was in dispute. Unless the property qualifies as 'collateral' a person cannot possess it as a 'debtor' within the meaning of the priority section. 3)The case law in Saskatchewan has interpreted 'possession' to constitute more than mere physical possession. Sections 22 and 34(2) of the new Act are essentially unchanged except for the addition of the constructive possession. S.22(2) restricts the scope of constructive possession somewhat but it applies only to s.22 not to s.34. 4)A person is not in constructive possession of collateral within s.34(2)(a) unless that person is a 'debtor' as defined, unless the collateral is 'collateral' as defined and unless another person 'obtained physical possession of the colateral at the request of that debtor'. 5)The first term of each lease agreement contained an acknowledgement by Lake Air that the trailer was delivered by Associates at the date and location set out in the lease. Such a clause is inconsistent with Lake Air having actual or constructive possession at an earlier date. Lake Air did not have constructive possession prior to December 1997 through either Bell or Mid-Canada. Neither was in possession of the trailers at the request of Lake Air.  6)The protection the Act gives to purchase-money security holders should be interpreted broadly. To deny Associates priority over Humboldt would provide Humboldt with an unmerited windfall at the sole expense of Associates who gave full value for the purchase-money security interest it obtained from Lake Air.