Cooper v. Bar XH Sales Inc., 2011 ABQB 235

Court of Queen ’ s Bench of Alberta Citation: Cooper v. Bar XH Sales Inc., 2011 ABQB 235 Date: 20110407 Docket: 0803 15352 Registry: Edmonton Between: Wendy Cooper and Albert Glen Cooper Applicants - and - Bar XH Sales Inc. Respondent _______________________________________________________ Reasons for Judgment of the Honourable Mr. Justice Brian R. Burrows _______________________________________________________ [ 1 ] Does a security interest in an aircraft, which crashed and was destroyed, extend to the bank account into which insurance payments under the policies insuring the aircraft were deposited?

The security interest in the aircraft was granted to the secured creditor by the lessee of the aircraft. The insurance payments were deposited into the bank accounts of the lessor of the aircraft, who was not the debtor. [ 2 ] This issue arises in an appeal from the Master. Its resolution involves the

interpretation of the Alberta Personal Property Security Act, s. 1(jj) definition of “ proceeds ” . [ 3 ] Before the Master, the issue was characterized differently than I have characterized it above. The Master stated the issue to

[3] Before the Master, the issue was characterized differently than I have characterized it above. The Master stated the issue tobe whether the “insurance proceeds” were “proceeds” to which the security interest extended. The Master decided that they were. Butin my view, “insurance proceeds” is not a sufficiently precise description of the personal property in question. As will be seen, thepersonal property in question is the balance in Bar XH Sales bank accounts into which the payments from the insurer were deposited.

Inmy view, this precision is vital to a proper determination of the issue. [4] For the reasons set out below, I conclude that the bank accounts are not “proceeds” and that the security interest does nottherefore extend to them. I allow the appeal. [5] The secured creditor and original applicant was Agriculture Financial Services Corporation. For reasons which I explainbelow, the style of cause was amended subsequent to the Master’s decision. The Master’s decision was styled, “Agriculture Financial Services Corporation v.

Bar XH Sales Inc.” and is found at 2009 ABQB 723; 2010 ABCA 72 , 20 Alta L.R. 5th 43; 61 C.B.R. (5th) 270. [6] Bar XH Sales Inc. owned a 19 seat 1988 Jetstream 3112 aircraft which had Canadian Registration Mark C-FBIP. [7] In April 2005, Bar XH Sales Inc. leased C-FBIP to Peace Air Ltd. The lease provided that it would commence on May 13,2005 and terminate on May 12, 2006 though the term was subject to renewal for 6 months (i.e. to November 12, 2006). The leaseprovided that “title, ownership and right of property in and to the Aircraft shall at all times remain vested in the Lessor”.

The lease alsoprovided that the Aircraft, during the term of the lease and until re-delivery to the Lessor, would be at the Lessee’s sole risk. It requiredthe Lessee to obtain insurance: . . . naming the Lessor as insured, insuring the Aircraft against loss, damage or destruction, in whole or in part, from any risk whatsoever,both in flight and not in flight, with the full loss payable thereunder to the Lessor. Peace Air obtained insurance coverage as required by this provision.

The coverage was actually contained in two policies of insurance. [8] Bar XH never registered the lease in the Alberta PPR. [9] In December 2005, Peace Air entered into a credit facility with the Agriculture Financial Services Corporation and grantedAFSC general security against all present and after-acquired personal property. C-FBIP was not specifically identified in the securityagreement. Neither was it listed in a list of aircraft owned by Peace Air which had been given to AFSC in connection with Peace Air’sloan application. On December 13, 2005, AFSC registered its general security in the Alberta PPR.

On January 11, 2006, AFSCregistered a serial number security interest against C-FBIP in the Alberta PPR. [10] C-FBIP crashed on January 9, 2007. This was just short of 2 months after the lease term had expired (assuming it had beenrenewed for 6 months). There was no written extension of the lease. The principal of Bar XH, Mr. Les Little, testified when cross-examined on his affidavit, that Peace Air was on a month-to-month lease once the original lease expired. Peace Air was in default on itslease payments at the time of the crash. [11] Peace Air filed a proof of loss in respect of the insurance coverage.

In March 2007, a total of $1,183,573.12 was paid by theinsurers in cheques payable to Peace Air and Bar XH Sales jointly. There were actually two policies and two cheques for $591,796.56. Peace Air endorsed the cheques to Bar XH Sales. It did so because the lease clearly required that the full loss would be payable to BarXH. Before the end of March 2007, Bar XH deposited one cheque in an account it held at the Bank of Nova Scotia and the other chequein another account it held at the same bank. [12] In 2008 AFSC claimed priority to the insurance monies. Mr.

Little swore in his affidavit (which was filed on this appeal andwas not before the Master) that by the time AFSC advised of its claim, the insurance funds which had been deposited into the Bar XHbank accounts many months earlier were no longer identifiable or traceable. He was cross-examined on this point and testified that thefunds in the accounts had been used in the ordinary course of Bar XH’s business.

[ 13 ] AFSC commenced these proceedings by Originating Notice on October 31, 2008. On December 8, 2009, Master Smart issued his decision. He declared that AFSC was entitled to the insurance payment not exceeding the amount of the debt owed to AFSC. Bar XH Sales filed an appeal on April 1, 2010. [ 14 ] Subsequently, Wendy Cooper and Albert Glen Cooper paid Peace Air ’ s debt to AFSC pursuant to personal guarantees.

They became subrogated to AFSC ’ s interest in the insurance funds and the style of cause was amended to the style which appears on this decision by consent order. [ 15 ] But for the issue raised by AFSC ’ s application, there is no dispute that Bar XH would be entitled to the insurance proceeds.

As a matter of contract between Peace Air and Bar XH, Peace Air was to acquire insurance on the aircraft and Bar XH was to be solely entitled to receipt of any loss payable under that insurance. [ 16 ] There is also no dispute that the aircraft lease was a “ lease for a term of more than one year ” , as that term is defined in s. 1(

z) of the PPSA. It is therefore a security agreement under the PPSA and its priority vis- à -vis other security agreements depends on their respective times of registration or perfection.

Since the lease was never registered, it had no priority over AFSC ’ s interest which was registered. [The possibility that the lease in effect at the time of the crash was not a lease for a term of more than one year, the original lease having expired and having been tacitly replaced by a month-to-month lease less than 2 months before the crash, was not raised or discussed by counsel on the application and I have accordingly not considered it.] [ 17 ] Another consequence of the aircraft lease being a lease for a term of more than one year is that whatever restrictions the lease document put on Peace Air ’ s interest in the aircraft (it had only the right to possess and use the aircraft) and whatever title interest the lease expressly reserved to Bar XH ( “ . . . title, ownership and right of property in and to the aircraft shall at all times remain vested in the Lessor. . . ” ) have no significance to the determination of the priority contest between Bar XH and AFSC. (PPSA, s. 3) [ 18 ] The only question is whether AFSC ’ s security interest extended to the bank accounts into which the insurance payments resulting from the claims on the policies insuring the aircraft against loss were deposited. [ 19 ]

Section 28 of the PPSA provides that a security interest in collateral extends to the “ proceeds ” of the collateral. It says:

(1) Subject to this Act, where collateral is dealt with or otherwise gives rise to proceeds, the security interest (

a) continues in the collateral, unless the secured party expressly or impliedly authorized the dealing, and (

b) extends to the proceeds, but where the secured party enforces a security interest against both the collateral and the proceeds, the amount secured by the security interest in the collateral and the proceeds is limited to the market value of the collateral at the date of the dealing. (1.1) . . . (not relevant) . . .

(2) A security interest in proceeds is a continuously perfected security interest if the interest in the original collateral is perfected . . .

(

c) by the registration of a financing statement that covers the original collateral, if the proceeds consist of money, cheques or deposit accounts in a financial institution. [ 20 ] The term “ proceeds ” is defined in s. 1(jj) “ proceeds ” means identifiable or traceable personal property, including fixtures and crops, (

i) derived directly or indirectly from any dealing with collateral or the proceeds of the collateral, and (ii) in which the debtor acquires an interest, and includes (iii) a right to an insurance payment or any other payment as indemnity or compensation for loss of or damage to the collateral or proceeds of the collateral, and (iv) a payment made in total or partial discharge or redemption of an intangible, chattel paper, an instrument or investment property, and (

v) rights arising out of, or property collected on, or distributed on account of, collateral that is investment property. [ 21 ] If the bank accounts into which the insurance funds received by Bar XH were deposited come within this definition, AFSC ’ s security interest continues as a charge on the bank accounts in the place of the aircraft (subject to a further tracing issue which for reasons set out below I do not need to consider). [ 22 ] The first part of the definition establishes that “ proceeds ” have three characteristics: 1. they are identifiable or traceable personal property, 2. they are derived directly or indirectly from any dealing with collateral (or proceeds), and 3. the debtor has acquired an interest in them. [ 23 ] Subsection (iii) deems “ a right to an insurance payment or any other payment as indemnity for loss of or damage to the collateral or proceeds of the collateral ” to be proceeds.

A right to an insurance payment does not result from “ dealing ” . It results, at least in this case, from an accident. The express inclusion of such a right in the definition of proceeds is necessary since one of the three characteristics in the first part of the definition of “ proceeds ” is missing. [ 24 ] In this case, subsection (iii) applied for the 2½ months between the crash and the payments by the insurance companies.

During that time, AFSC ’ s security interest in the aircraft extended to Peace Air ’ s right as an insured under the policies to file a proof of loss and to claim indemnity for the loss under the policy. But in my view, once the insurers accepted the proof of loss and issued cheques payable to Peace Air and Bar XH jointly, no one, neither Peace Air nor Bar XH, had a “ right to an insurance payment ” any

longer. They had the rights the cheque gave them, not a right to an insurance payment. The right to an insurance payment had crystalized into or merged in the cheque. [ 25 ] The right to an insurance payment was “ first generation ” proceeds because it was within subsection (iii) of s. 1(jj). The cheques issued by the insurance company were “ second generation ” proceeds. They had all three of the characteristics set out in the first half of s. 1(jj). They were identifiable or traceable personal property, having been derived from the first generation proceeds, the right to the insurance payment.

They were derived from dealing with the right to an insurance payment. The dealing consisted of filing a proof of loss. And the debtor had an interest in them. Peace Air was one of two payees on the cheques. [ 26 ] The issue now to be decided is whether the bank accounts into which the cheques were deposited constitute a “ third generation ” of “ proceeds ” . This depends on whether the bank accounts have the three characteristics set out in the first half of the definition in s. 1(jj).

At least before they were paid out in the ordinary course of business, the funds in the bank accounts were identifiable or traceable personal property derived from the “ second generation ” proceeds, the cheques issued by the insurance company. The bank accounts also derived from a “ dealing ” with the second generation proceeds. The dealing consisted of Peace Air endorsing the cheques to Bar XH Sales and Bar XH Sales depositing them in the accounts. The first two characteristics are present. [ 27 ] However the third characteristic is absent. The debtor, Peace Air, had no interest in Bar XH ’ s bank accounts.

The third characteristic required by the definition is not present. [ 28 ] I therefore conclude that the Bar XH bank accounts do not constitute “ third generation ” proceeds.

AFSC ’ s security interest in the aircraft, which extended to the right to an insurance payment, which in turn extended to the cheques issued by the insurance company, did not extend to the bank accounts into which those cheques were deposited. [ 29 ] If the answer had been otherwise, if the bank accounts did constitute third generation proceeds, it would have been necessary to consider whether the funds continued to be identifiable or traceable after they were used in the ordinary course of Bar XH ’ s business.

I do not believe the evidence and argument provided in this application would have been sufficient for that purpose. The tracing rules (which are discussed in Cuming, Walsh and Wood, Personal Property Security Law , Irwin Law, 2005, starting at page 466) were not addressed by counsel in argument. However as the “ proceeds chain ” was broken when the cheques were deposited into bank accounts in which the debtor had no interest, I do not need to consider the further tracing issue. [ 30 ] As noted, the appeal from the Master is allowed. The original application is dismissed. Heard on the 23 rd day of November 2010.

Dated at the City of Edmonton, Alberta this 7 th day of April 2011. Brian R. Burrows J.C.Q.B.A. Appearances: Douglas H. Shell, Q.C.

for the Applicants Jeremy Hockin for the Respondent