2011 ABQB 448, 2011 ABQB 448

Court of Queen’s Bench of Alberta Citation: 843504 Alberta Ltd., 2011 ABQB 448 Date: 20110708 Docket: 0303 19663 Registry: Edmonton In the matter of the Bankruptcy and Insolvency Act , RSC 1985, c B-3, as amended; and the Companies’ Creditors Arrangement Act , RSC 1985, c C-36, as amended And in the matter of a Plan of Compromise or Arrangement of 843504 Alberta Ltd. (formerly known as Skyreach Equipment Ltd.) _______________________________________________________ Memorandum of Decision of the Honourable Justice J.E. Topolniski _______________________________________________________ I.

Introduction [ 1 ] This application concerns a 7.5 year old appeal of a monitor’s disallowance of a lessor’s claim to priority over certain assets in the restructuring of 843504 Alberta Ltd. (formerly Skyreach Equipment Ltd.) [Skyreach] under the Companies’ Creditors

Arrangement Act, RSC 1985 c C-36 [ CCAA ]. [ 2 ] The restructuring of Skyreach’s affairs under the CCAA was peculiar in many respects. The delayed prosecution of the lessor’s appeal and the circumstances surrounding it add to the list of unusual events. II. Background [ 3 ] A brief review of the CCAA proceedings and circumstances giving rise to this application is warranted. A. The CCAA Proceedings [ 4 ] Skyreach was in the business of renting, servicing and selling industrial lifts and aerial work platforms to a variety of business sectors.

Its restructuring began in the fall of 2003, when a mezzanine lender, EdgeStone Mezzanine Fund II Nominee Inc. [EdgeStone], initiated the CCAA application. Skyreach clearly was insolvent at the time and met the threshold requirements for protection under the CCAA . The directors largely had abandoned ship and allegations of corporate interference and conflict of interest abounded in terms of the remaining director (who also was the chief executive officer). [ 5 ] An initial order in the CCAA proceedings was granted on October 9, 2003 [Initial Order], naming Pricewaterhouse Coopers as monitor [Monitor].

Skyreach’s primary operating lender, GE Commercial Distribution Finance Inc. [GE], supported the application. Numerous other creditors did not. The Initial Order provided for the usual 30-day moratorium and permitted the Monitor to sell assets up to certain capped amounts without court approval. For a brief period of time, the Monitor was authorized to operate the business.

That function was then assumed by a chief restructuring officer, who was allowed to sell unencumbered assets up to a maximum of $100,000 without court approval. [ 6 ] The Initial Order defined the following terms, among others: 2(e) “Inventory” - means Property which is inventory within the meaning of the applicable personal property legislation; (h) “Other Security Claimants” - means those creditors other than the Lenders with a registered security interest against certain of the Property, including… TransportAction Lease Systems Inc... (k) “Property” - means any present or future property, assets, business and undertakings of the Corporation of any kind or nature whatsoever whether real or personal wherever located and, for greater certainty, does not include any equipment or inventory which is the subject of a True Lease; (m) “True Lease” - means a lease of equipment or inventory to the Corporation, which at common law is in substance a true lease and with respect to which registration and any required notice has been properly effected under any applicable personal property security legislation such that the True Lessor has priority over the security interest of GE; (n) “True Lessor” - means a lessor under a True Lease; and (o) “True Lessor Property” - means equipment or inventory which is the subject of a True Lease in favour of a True Lessor [Emphasis added.] [ 7 ] The Initial Order also provided a mechanism for determining whether particular leases were “True Leases” and authorized the Monitor to elect whether to release equipment to a “True Lessor” or to retain it and pay for use of the equipment during the proceedings (clause 33). [ 8 ] Clause 34 of the Initial Order set out the requisite particulars to prove the status of a “Priority Claimant” whose security has priority over the GSA. “Priority Claimant” was defined as “[a]ny person claiming to hold security ranking in priority to GE’s security with respect to any Property.” [ 9 ] The Initial Order permitted the Monitor to release assets subject to such security, or to retain possession of the assets and pay for their use.

The information required of a person seeking “priority claimant” status is the standard sort of information required in insolvency proceedings generally, including information as to the security, the assets subject to the security, a detailed calculation of the balance owing, proof of delivery, registration and notices of PMSI claims, if applicable, and any other information reasonably requested by the Monitor. [ 10 ] Given the nature of Skyreach’s business operations, it was essential to resolve priorities of securities held by various creditors over the existing assets.

All affected parties agreed that GE held a first-place, valid and enforceable general security agreement [GSA]. Consequently, the claims process focussed on determining the claims of “true lessor” and “priority” claimants (as defined in the Initial Order). [ 11 ] The claims procedure itself was fairly typical of those in many CCAA proceedings. Creditors submitted their claims to the Monitor within a given time frame. The Monitor then decided which, if any, claims took priority to GE.

If the Monitor disallowed a claim, a notice of disallowance was delivered and the creditor had a given period of time in which to appeal the disallowance to this court. [ 12 ] A report by the Monitor in late October 2003 indicated that Skyreach had sold 80 pieces of encumbered equipment between March 22, 2001 and September 19, 2003. The report did not disclose the name of the secured party. [ 13 ] Transportaction Lease Systems Inc. [Transportaction] is a fleet management company which provides leasing and fleet

management services. In the course of the CCAA proceedings, Transportaction received information that at some time prior to granting of the Initial Order, Skyreach had sold a large number of vehicles or other pieces of equipment [Impugned Sales] that Transportaction believed it had leased to Skyreach under a master lease agreement dated June 1, 2000 [Master Lease]. [ 14 ] Transportaction submitted a claim in the CCAA proceedings as a “true lessor” [Claim], claiming priority over vehicles, tractors and equipment which it had leased to Skyreach under the Master Lease.

On December 19, 2003, the Monitor disallowed the Claim [Disallowance] on the basis that Transportaction did not have “purchase money security interest” [PMSI] priority to any inventory and did not have any priority to the equipment listed in its Alberta Personal Property Registry [APPR] registrations (other than over two pieces of equipment which are not at issue in this matter). [ 15 ] On December 23, 2003, Transportaction filed a notice of appeal of the Disallowance [Appeal]. At the time, the plan for Skyreach’s restructuring was moving quickly.

The intention was to sell the majority of Skyreach’s assets to an arm’s length third party. The remaining assets were to be transferred to a yet-to-be-incorporated company [Newco] without affecting the secured interests in them. [ 16 ] Given the promising outlook under the proposed plan, Transportaction adjourned the Appeal sine die by consent, after informing GE of its intention to do so.

Later, Transportaction filed a “without prejudice” proof of claim for $790,866 as an unsecured creditor [Proof of Claim]. [ 17 ] On January 27, 2004, a plan of arrangement incorporating the intended scheme [Plan] was sanctioned by the court. A vesting and receivership order was granted that day to facilitate implementation of the Plan by appointing a receiver to liquidate the Newco assets and to distribute the proceeds. [ 18 ]

Article 9.1 of the Plan contained a release by Skyreach’s creditors of the company, the chief restructuring officer, the Monitor, the company which was acquiring the majority of Skyreach’s assets, and their officers, directors or employees, of any claims based on anything done or not done at or before the effective date of the Plan, but the release was not to apply to entitlements of GE and EdgeStone, affect the rights of any person to pursue recoveries for a claim that might be obtained against any other person otherwise obligated at law for the claim, and was not to affect the right of any person to pursue claims against directors and officers of Skyreach with respect to collateral leased to or financed with Skyreach that was sold prior to the Initial Order without payment of the proceeds to the lessor or financier. [ 19 ] The vesting and receivership order expressly preserved the Appeal and required that it be heard in the CCAA proceeding.

The order directed that: The issues of priority over GE raised by Notice of Motion dated December 23, 2003 of Transportaction Lease Systems Inc., filed pursuant to s. 34 of the Initial Order in these proceedings, shall be addressed and determined in these receivership proceedings, including any issues of priority with respect to other secured creditors. [ 20 ] After granting of the vesting and receivership order, GE, the Monitor, and (in hindsight, somewhat surprisingly) Transportaction all considered the Appeal to be a dead issue because the GE debt was to be retired without resort to any of the assets over which Transportaction claimed priority. [ 21 ] Only limited activity in the CCAA proceedings has occurred since granting of the vesting and receivership order on January 27, 2004.

B. Transportaction’s Lawsuits Against GE and EdgeStone [ 22 ] In October 2005, Transportaction commenced an action against GE, alleging that the proceeds from the Impugned Sales were deposited into Skyreach’s bank account, GE knew or ought to have known of the terms of the Master Lease, GE received a daily accounting of the funds in the bank account from Skyreach, and GE cleared the bank account on a daily basis, applying the funds to reduce the indebtedness of Skyreach. Transportaction claimed that GE was a constructive trustee of the proceeds and that it breached its duty as such.

It also alleged unjust enrichment and conversion of over $836,000 of Transportaction’s property [Litigation]. GE was not served with the statement of claim until October 2006. [ 23 ] GE argues that Transportaction’s failure to raise its concern about Skyreach’s pre- CCAA sale of encumbered assets before granting of the vesting and receivership order precludes it disputing those sales. [ 24 ] Sometime after 2006, GE applied unsuccessfully for

summary dismissal, but in 2009 it succeeded in obtaining a temporary stay of the Litigation. Belzil J., who heard the stay application, rejected Transportaction’s contention that the Appeal was moot.

He found that permitting the Litigation to proceed without first having the Appeal determined would “amount to sanctioning unilateral abandonment by one party of a binding court ordered claims resolution process” ( Transportaction Lease Systems Inc. v GE Commercial Distribution Finance Canada Inc ., 2009 ABQB 626 at para 42 ). [ 25 ] In a separate lawsuit, Transportaction sued EdgeStone, EdgeStone’s nominee director of Skyreach, and the former president of Skyreach for damages resulting from the Impugned Sales [EdgeStone Litigation].

EdgeStone and its nominee director have settled the EdgeStone Litigation for (what it describes as) nuisance value. [ 26 ] As matters now stand: • GE’s debt has been fully retired. • Transportaction has been paid $25,851.03 pursuant to its Proof of Claim. • Skyreach has been inactive since at least early 2004.

• Newco continues as an inactive shell company. • Newco’s receiver remains in place, although no steps other than some distributions have been taken in the receivership since about2004. • The Litigation is temporarily stayed. C. The Parties, Their Security, and Their Personal Property Registry Registrations 1. Transportaction [27] Transportaction’s Master Lease, dated June 1, 2000, was for a term of more than one year. [28] The lease of each vehicle and piece of equipment was for a minimum six month term, commencing on the date of delivery,with successive monthly renewals.

At the end of each term, Skyreach either had to return the unit or continue making monthly payments. [29] The Master Lease prohibited Skyreach from selling or subletting any vehicles or equipment, regardless of the circumstances. [30] Transportaction registered the Master Lease at the APPR on August 9, 2000, describing its “general collateral” as including:“... other vehicles of whatever year, make or model including after acquired property and including proceeds thereof.” The reference to“serial number goods” on the filing form was deleted [2000 APPR Filing]. [31] Transportaction subsequently registered the Master Lease at the British Columbia Personal Property Registry. [32] On October 9, 2003 (coincidentally, the date the Initial Order was granted), Transportaction filed a further registration at theAPPR [2003 APPR Filing], listing 150 serial numbers.

None of the vehicles or equipment sold in the Impugned Sales was registered byserial number prior to October 9, 2003. 2. GE [33] Pursuant to the GSA, Skyreach granted GE a security interest in all of its present and after acquired personal property. GEregistered the GSA at the APPR on October 22, 1999. [34] It is common ground that GE was authorized to sweep (or clear) Skyreach’s bank account on a daily basis before and duringthe CCAA proceedings. 3. EdgeStone [35] The Appeal was heard in two installments. During the first installment, it became apparent that EdgeStone could be affectedby the outcome.

Accordingly, I invited it to make submissions on the Appeal. III. Issues [36] Transportaction and GE agree that evidence taken in the Litigation can be relied on by them for this Appeal. Their agreementin that regard is supportable by case law (Walt Disney Productions v Fantasyland Hotel Inc. (1993), 1993 ABCA 227 , 141AR 291(CA)) and the Alberta Rules of Court (Rule 6.11(1)(f)) . [37] Transportaction and GE are both parties to the Appeal and the Litigation. The core issue, the priority of security claims, is thesame.

Accordingly, their joint application to adduce evidence taken in the Litigation is granted. [38] The remaining issues to be decided on this Appeal include: A. Is the Appeal moot? B. Is the Master Lease an operating lease and, therefore a “Permitted Lien” as defined in the GSA? C. Did GE subordinate its priority position to Transportaction? D. If so, are Transportaction’s APPR registrations sufficient for it to take priority? E. Does the doctrine of laches preclude Transportaction from the relief sought? IV. Analysis A.

Is the Appeal Moot? [39] Transportaction argues that the Appeal is moot given that GE has been paid in full and none of the assets that were the subjectof the Master Lease were required to be sold to repay Skyreach’s indebtedness to GE. Transportation states that as far as it is aware, noassets remain in the receiver’s possession which could be used to satisfy any claim by GE which existed as at the date of the Initial Order

or any present claim. Further, Transportation notes that it does not assert any priority to assets in the possession of Skyreach as at the dateof the Initial Order which were used to retire the indebtedness to GE. It argues that the CCAA proceeding is not meant to deal withdisputes between a creditor of the company and a third party, except perhaps for priority to assets in existence at the Initial Order. Itmaintains that a finding that it or GE has priority will not have any practical affect on the parties. [40] GE takes the position that the Appeal may be determinative of the Litigation.

It argues that if it knowingly received proceedsfrom the Impugned Sales prior to the Initial Order, its justification for retaining those proceeds would be based on the priority of itssecurity compared to that of Transportaction. If Transportaction has priority, GE would have to pay those proceeds to Transportaction,which would serve to revive its claim against Skyreach for the same amount.

It suggests that it would have recourse not only againstSkyreach but also Newco (both hollow entities), EdgeStone (which received the “next in line” payments under the Plan) or the Monitorand receiver (for not having sought court approval of distributions). GE asserts that if, on the other hand, its security has priority,Transportaction could not succeed in the Litigation. [41] The issue of whether the Appeal is moot was decided by Belzil J. on the stay application in the Litigation, which involved thesame parties. In fact, it appears that Transportaction relied on the same authorities then as it does now.

No new evidence or specialcircumstances have been raised by Transportaction. [42] In Ernst and Young Inc. v Central Guaranty Trust Co., 2006 ABCA 337, 397 AR 225 [Ernst and Young], the Alberta Courtof Appeal discussed res judicata, issue estoppel, collateral attack and abuse of process by re-litigation.

According to the court (at para29), the doctrine of res judicata has two branches, one of which is issue estoppel, which “precludes the litigation of an issue previouslydecided in another court proceeding.” The party alleging issue estoppel must establish that the issue is the same as that decided in theprior judicial decision, that decision was final (even if made in an interlocutory proceeding), and the parties to both proceedings are thesame (or their privies) (para 30). [43] At para 47, the court in Ernst and Young quoted the following description of the rule against collateral attach from Wilson vThe Queen, (SCC), [1983] 2 S.C.R. 594 at 599: It has long been a fundamental rule that a court order, made by a court having jurisdiction to make it, stands and is binding andconclusive unless it is set aside on appeal or lawfully quashed.

It is also well settled in the authorities that such an order may not beattacked collaterally - and a collateral attack may be described as an attack made in proceedings other than those whose specific object isthe reversal, variation, or nullification of the order or judgment. [44] Courts have an inherent and residual discretion to prevent an abuse of process.

The court in Ernst and Young at para 52 citedthe following passage from Toronto (City) v Canadian Union of Public Employees, Local 79, 2003 SCC 63 at para 37, [2003] 3 SCR77: Canadian courts have applied the doctrine of abuse of process to preclude relitigation in circumstances where the strict requirements ofissue estoppel ... are not met, but where allowing the litigation to proceed would nonetheless violate such principles as judicial economy,consistency, finality and the integrity of the administration of justice. [45] In my view, the doctrines of issue estoppel, collateral attack and abuse of process by re- litigation apply in thesecircumstances.

To permit Transportaction to re-litigate the question of mootness would sanction wasting the parties’ and the court’sresources, encourage forum shopping and create the potential of inconsistent decisions. [46] Even if I had found otherwise, I would have rejected Transportaction’s contention that the issues in the Appeal are moot. Thedoctrine of mootness applies if the decision does not have the effect of resolving some controversy which affects or may affect the rightsof the parties (Borowski v Canada (Attorney General), (SCC), [1989] 1 SCR 342 at paras 15-16).

The outcome of theAppeal may well be determinative of the issues in the Litigation. The decision in this case will not be academic. It will resolve a livecontroversy that will affect the parties’ rights. B.

Is the Master Lease an Operating Lease and, Therefore, a “Permitted Lien” asdefined in the GSA? [47] Transportaction contends that characterization of the Master Lease as a True Lease or otherwise is irrelevant as the mechanismfor determining that as provided for in the Initial Order was established only to assess whether equipment lessors should be paid duringthe CCAA proceedings for use of their equipment, and it makes no such claim. [48] However, Transportaction also asserts that the GSA contained a subordination of GE’s priority in favour of those such as itwith “Permitted Liens.” In my view, in order to decide the priority issue as between Transportaction and GE, it is essential to determinewhether the Master Lease was a “Permitted Lien” for purposes of the GSA, which in turn depends on whether it was an operatinglease/true lease or a capitalized/security/financing lease. [49] I note that the distinction was the basis for the Monitor’s Disallowance of the Claim. [50] Transportaction contends that GE’s officer’s acknowledgement under questioning that he thought the Master Lease was a“Permitted Lien” is evidence that it was.

GE argues that the answers were given in the context of the defined term “Permitted Liens” asbeing “lessor’s Liens arising from operating leases.” I need not decide the issue as the officer’s evidence only concerns what GE thoughtafter the GSA was drafted. Whether the Master Lease was a “Permitted Lien” for purposes of the GSA does not depend on what thecompany thought but rather is a matter of law and

interpretation. [51] The GSA provides in part: 10.4 Encumbrance of Assets: Borrower will not, and will not permit a Subsidiary to, mortgage, pledge, grant or permit to exist a

security interest in or lien upon any of the Collateral, now owned or hereafter acquired except for the Permitted Liens. 12.1 Events of Default: Borrower will be in default under this Agreement, each a “Default”: if… 12.1.14 Liens Other than Permitted Liens: Any of the Collateral becomes subject to any Lien, claim, encumbrance or securityinterest other than a Permitted Lien.” [52] “Lien” is defined in the GSA as meaning (clause 1.1): ... any security interest, mortgage, pledge, lien, hypothec, hypothecation, judgment lien or similar legal process, charge, encumbrance,title retention agreement or analogous instrument or device (including, without limitation, the interest of lessors under capitalized leasesand the interest of a vendor under any conditional sale or other title retention agreement), reservations, exceptions, encroachments,easements, rights of ways, covenants, conditions, restrictions, leases and other title exceptions and encumbrances affecting any ofBorrower’s property. [Emphasis added.] [53] “Permitted Lien” is defined as meaning, in part (clause 1.1): (

d) lessor’s Liens arising from operating leases entered into in the ordinary course of business; [Emphasis added.] [54] The term “operating lease” is used interchangeably with the term “true lease” (see for example Re Woodward's Ltd. (1993), (BC SC), 84 B.C.L.R. (2d) 206 at para 24; J-1 Contracting Ltd. v John Deere Ltd., 2004 NLSCTD 50, 44 BLR (3d)10; Robert Michaels Group v Shaw Communications Inc., 2004 ABQB 745; and CCLI

(1994) Inc. v Canada, 2007 FCA 185 at para 7,365 N.R. 94). A true lease, in essence, is a bailment contract. Title to the leased goods remains with the lessor and the lessee pays for useof those goods. [55] A security agreement disguised as a lease is a security lease (R.C.C. Cuming, “True Leases and Security Leases UnderCanadian Personal Property Security Acts” (1983) 7 Can Bus LJ 251 at 256 (cited in Re Smith Brothers Contracting Ltd. (1998), (BC SC), 53 BCLR (3d) 264 at para 48 [Smith Brothers]).

The terms “security lease,” “financing lease” and “capitalizedlease” are used interchangeably. [56] In Re Winnipeg Motor Express Inc., 2009 MBQB 204, 243 Man R (2d) 31, leave to appeal ref’d 2009 MBCA 110, 245 ManR (2d) 274, Suche J. observed (at para 31) that: “... the true nature of arrangements involving the supply of equipment can be verydifficult to peg.” [57] Farley J. in Re Philip Services Corp. (1999) (ON SC), 15 CBR (4th) 107 at para 3 (Ont SCJ) [PhilipServices] described the court’s task as: “... not a simple analysis of determining between black and white but rather the shade of greywhere all factors are weighed in the balance as to whether the scales would tip towards a true lease relationship - or alternatively againstbeing a true lease relationship.” [58] The characterization of a transaction involving a “lease” requires a functional analysis of the parties’ relationship.

Whatmatters is substance, not form (Smith Brothers; Royal Bank of Canada v Cow Harbour Construction Ltd., 2010 ABQB 637 at para 32,37 Alta LR (5th) 82, leave to appeal ref’d 2010 ABCA 394 [Cow Harbour]; Philip Services; M.E. Burke, “Ontario Personal PropertySecurity Act Reform: Significant Policy Changes” (2009) 48 Can Bus LJ 289). [59] In Smith Brothers at para 67, Bauman J. (as he then was) considered the following factors in determining whether thecontract at issue in that case constituted a true lease. 1. Whether there was an option to purchase for a nominal sum; 2.

Whether there was a provision in the lease granting the lessee an equity or property interest in the equipment; 3. Whether the nature of the lessor's business was to act as a financing agency; 4. Whether the lessee paid a sales tax incident to acquisition of the equipment; 5. Whether the lessee paid all other taxes incident to ownership of the equipment; 6. Whether the lessee was responsible for comprehensive insurance on the equipment; 7. Whether the lessee was required to pay any and all licence fees for operation of the equipment and to maintain the equipment at hisexpense; 8.

Whether the agreement placed the entire risk of loss upon the lessee; 9. Whether the agreement included a clause permitting the lessor to accelerate the payment of rent upon default of the lessee andgranted remedies similar to those of a mortgagee; 10. Whether the equipment subject to the agreement was selected by the lessee and purchased by the lessor for this specific lease; 11. Whether the lessee was required to pay a substantial security deposit in order to obtain the equipment; 12.

Whether the agreement required the lessee to join the lessor or permit the lessor by himself to execute a U.C.C. financing statement(this would not apply in Canada); 13. Whether there was a default provision in the lease inordinately favourable to the lessor;

14. Whether there was a provision in the lease for liquidated damages; 15. Whether there was a provision disclaiming warranties of fitness and/or merchantability on the part of the lessor; 16. Whether the aggregate rental approximated the value of purchase price of the equipment. [ 60 ] As Yamauchi J. observed in Cow Harbour at para 32 , no one factor “is the sine qua non for determining whether a document is a true lease or a financing lease.

One must look at the whole document to get a flavour of the [parties'] intentions...” [ 61 ] Applying the Smith Brothers factors to the Master Lease discloses the following: 1. Option to purchase for a nominal sum - None. 2. A provision in the lease granting the lessee an equity or property interest in the equipment - None. 3. The lessor's business was to act as a financing agency - No. 4. Whether the lessee paid a sales tax incident to acquisition of the equipment - No Evidence. 5. Whether the lessee paid all other taxes incident to ownership of the equipment - Yes. 6.

Whether the lessee was responsible for comprehensive insurance on the equipment- Yes. 7. Whether the lessee was required to pay any and all licence fees for operation of the equipment and to maintain the equipment at his expense- Yes 8. Whether the agreement placed the entire risk of loss on the lessee- Yes. 9. Whether the agreement included a clause permitting the lessor to accelerate the payment of rent on default by the lessee and granted remedies similar to those of a mortgagee - No. 10.

Whether the equipment subject to the agreement was selected by the lessee and purchased by the lessor for this specific lease - No evidence. 11. Whether the lessee was required to pay a substantial security deposit in order to obtain the equipment - No. 12. Whether the agreement required the lessee to join the lessor or permit the lessor by himself to execute a U.C.C. financing statement - Not applicable. 13. Whether there was a default provision in the lease inordinately favourable to the lessor - No. 14. Whether there was a provision in the lease for liquidated damages - No. 15.

Whether there was a provision disclaiming warranties of fitness and/or merchantability on the part of the lessor - No, but there were no representations or warranties, either express or implied. 16. Whether the aggregate rental approximated the value of the purchase price of the equipment - No Evidence. [ 62 ] M.E. Burke, in his

article “Ontario Personal Property Security Act Reform: Significant Policy Changes” at pp 291-291, discusses how certain factors have been weighed by the courts: Although Canadian courts will refer to various factors as being relevant in their determination as to the characterization of a lease, they rarely indicate the relative weight given by them to each of the indicia or factors. It is possible, however, to make the following generalizations from the case law.

First, from the universe of factors or indicia that have been mentioned in the jurisprudence, some factors or indicia (referred to in this paper as “primary factors”) are clearly more important than other factors or indicia (referred to in this paper as “secondary factors”). Second, the presence of a primary factor in a lease will often be determinative of the characterization of the agreement. Third, secondary factors generally have a corroborative value and are not in and of themselves determinative of the characterization.

Accordingly, the presence of a number of secondary factors that are indicative of a characterization that is contrary to the characterization indicated by the primary factor will not be sufficient to overturn the weighting given by a court to the primary factor. Fourth, in those situations where the primary factor is ambiguous or absent, then the relative weighting given by a court to the secondary factors will be relevant in determining the characterization of the lease in question. [ 63 ] The author identifies (at pp 292-294) the following as “primary factors:” (

a) Relevance of the purchase option price - whether the purchase option price is nominal or reflective of fair market value. (

b) Mandatory purchase options - whether there is a mandatory purchase option that obligates the lessee to purchase the equipment at the end of the term. (

c) Open-end leases/guaranteed residual clauses - whether the lessee is liable for any deficiency in the sale of the equipment at the end of the term. (

d) Sale-leaseback transactions- whether the transaction is structured as a sale and leaseback.

[64] The Master Lease provides (clause 5) that after expiry of the six month minimum lease term for any vehicle and on notice toTransportaction, Skyreach may return the vehicle and Transportation will sell it. Skyreach remains responsible for payment of rent untilthe end of the month in which the returned vehicle is sold. If the sale proceeds of a vehicle exceed the termination book value, Skyreachkeeps the surplus. If there is a shortfall, Skyreach pays it (clause 6).

This provision is indicative of a security lease since it renders thelessee liable for a deficiency on the sale at the end of the term (“Ontario Personal Property Security Act Reform: Significant PolicyChanges” at 294, citing Crop & Soil Service Inc. v Oxford Leaseway Ltd. (2000), (ON CA), 186 DLR (4th) 85, 48OR (3d) 291 at para 6 (CA); Re Cronin Fire Equipment Ltd. (1993), (ON SC), 14 OR (3d) 269). [65] The following are the “secondary factors” described by M.E. Burke in “Ontario Personal Property Security Act Reform:Significant Policy Changes” at 295-298: (

a) The ability to replace/exchange leased equipment is indicative of a true lease. (

b) The lessor’s ability to accelerate payments and the residual value are generally inconsistent with a true lease. However, it is equallyconsistent with a true lease if the acceleration clause limits the lessor’s damages to the present value of the remaining rents, plus thepresent value of the residual value at the end of the term, minus the value of net proceeds from a sale of the assets. If the accelerationclause is more narrowly crafted, it favours a security lease. (

c) A full payment lease may be indicative of either form of lease, depending on the language of the provision. (

d) A security deposit is indicative of a security lease. (

e) A substantial down payment is indicative of a security lease. (

f) Covenants relating to maintenance, insurance and risk of loss can be indicators of either type of lease. They are weak evidence of asecurity lease. (

g) Whether the lessor uses different forms for different types of transactions may be some evidence of intention. [66] Applying these (secondary) factors to the Master Lease discloses that: (

a) Ability to replace/exchange leased equipment - Yes. (

b) Acceleration clause - No. (

c) Full payment lease - Yes. (

d) Security deposit - No. (

e) Down payment - No. (

f) Maintenance, insurance and risk of loss - Skyreach was responsible for maintenance, operating costs and expenses, taxes, fees andpenalties (clause 7), licensing and registration (clause 8), and insurance (clause 9). These are weak indicia of a security lease that may beequally consistent with a true lease. This is a neutral factor. (

g) Lessor’s documentation - No evidence. [67] The secondary factors are, in and of themselves, not determinative of the proper characterization of the Master Lease. Thepresence of some secondary factors is insufficient to outweigh the clear effect of the primary factors. [68] In the result, I conclude that the Master Lease is properly characterized as a security/financing/capitalized lease. Accordingly,it is not a “Permitted Lien” under the GSA. C.

Did GE Subordinate its Priority Position to Transportaction? [69] The Alberta Court of Appeal in Chiips Inc. v Skyview Hotels Ltd. (1994), 1994 ABCA 243 , 155 AR 281 (CA)considered a debenture which permitted the assuming or giving of purchase money mortgages or other purchase money liens on propertyacquired by the company provided they were secured only by that property. The appellants argued this amounted to a subordination bythe debenture holder.

At para 56, Harradence JA, in separate and concurring reasons, stated: “[t]he question to be asked is: what did thedebenture holders intend when they included this clause?” [70] Following a review of the authorities, he also indicated (at para 49): From the above cases, the parameters are clear. An explicit and specific waiver clearly gives rise to a valid subordination clause. Avague and non-specific clause is not to be construed as a subordination clause.

The question that arises is simply where on the continuumdo the purported subordination clauses in the case at bar lie? [71] In the present case, the GSA simply exempts “Permitted Liens” from the prohibition against encumbering the collateral. Itdoes not afford a priority over the GSA to “Permitted Liens.” [72] The GSA neither expressly nor impliedly subordinates GE’s priority in favour of the Master Lease. Accordingly,Transportaction’s argument in this regard fails. [73] I do not find Bank of Montreal v Dynex Petroleum (1995), (AB KB), 39 Alta LR (3d) 66 to be helpful in

terms of this issue. D. Are Transportaction’s APPR Registrations Sufficient For It to Take Priority? [ 74 ] Transportaction asserts that it has PMSI super priority. [ 75 ] The Alberta Personal Property Security Act , RSA 2000, c P-7 [ PPSA ] applies to the Master Lease as it captures transactions that create a security interest and true leases for a term of more than one year: 3(1) Subject to

section 4, this Act applies to (

a) every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral, and (

b) without limiting the generality of clause (a), a chattel mortgage, conditional sale, floating charge, pledge, trust indenture, trust receipt, assignment, consignment, lease, trust and transfer of chattel paper where they secure payment or performance of an obligation.

(2) Subject to sections 4 and 55, this Act applies to… (

b) a lease of goods for a term of more than one year, and that does not secure payment or performance of an obligation. [ 76 ] Transportaction’s security interest under the Master Lease was a PMSI: 1(1)(ll) "purchase-money security interest" means … (iii) the interest of a lessor of goods under a lease for a term of more than one year, but does not include a transaction of sale by and lease back to the seller, and, for the purposes of this definition, "purchase price" and "value" include credit charges or interest payable in respect of the purchase or loan. [ 77 ] Section 34(2) of the PPSA gives priority to a PMSI in the following circumstance: 34(2) A purchase-money security interest in (

a) collateral or, subject to

section 28, its proceeds, other than intangibles or inventory , that is perfected not later than 15 days after the day the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier. has priority over any other security interest in the same collateral given by the same debtor. [Emphasis added.] [ 78 ] The PPSA defines “inventory” as follows: 1(1)(y) "inventory" means goods (

i) that are held by a person for sale or lease, or that have been leased by that person, (ii) that are to be furnished by a person or have been furnished by that person under a contract of service, (iii) that are raw materials or work in progress, or (iv) that are materials used or consumed in a business. [ 79 ] “Equipment” in defined in s 1(1)(

p) as meaning "goods that are held by a debtor other than as inventory or consumer goods.” [ 80 ] Transportaction asserts that because Skyreach could neither sublet nor sell the equipment (subject to the Master Lease), the assets must be characterized as equipment rather than inventory. Given my conclusion with respect to the adequacy of the registration, I need not determine that issue. [ 81 ] A security interest in collateral is perfected under the PPSA by registration of a financing statement (s 25). [ 82 ] The Master Lease dealt with vehicles and trailers, which are considered "serial number goods" pursuant to s. 1(1) (

y) of the Personal Property Security Regulation , AR 95/2001 [ Regulation ]. [ 83 ]

Section 34 of the Regulation provides that: 34(1) Where a financing statement is submitted for registration in respect of a security interest in collateral that is serial number goods, (

a) if the goods are consumer goods, the secured party must provide a description of the goods by serial number in accordance with

section 35, and (

b) if the goods are equipment or inventory , the secured party may provide a description of the goods in accordance with

section 36 or by serial number in accordance with

section 35. [ 84 ]

Section 35 of the Regulation outlines the requirements for description by serial number, which include the following:

35(1) Where collateral is required to be described under this section, the description must be set out in the space provided for serial number description, and must include (

a) the last 25 characters of the serial number for the collateral or all the characters if the serial number contains less than 25 characters, (

b) the 4 digits for the model year of the collateral, (

c) the make and model of the collateral, and (

d) the appropriate category of collateral as set out in

Schedule 3. [ 85 ]

Section 36 applies to serial number goods not described in accordance with s 35 in the case of inventory or equipment (s 36(1) (b)). Section 36(2) provides that: 36(2) Where collateral is to be described under this section, the secured party must set out the description under “Collateral: General” and must provide (

a) a description of the collateral by item or kind or as “goods,” “chattel paper,” “investment property,” “documents of title,” “instruments,” “money” or “intangibles,” (

b) a statement indicating that a security interest is taken in all of the debtor’s present and after-acquired personal property, (

c) a statement indicating that a security interest is taken in all of the debtor’s present and after-acquired personal property except specified items or kinds of personal property or except personal property described as “goods,” “chattel paper,” “investment property,” “documents of title,” “instruments,” “money” or “intangibles,” or (

d) a description of the collateral as inventory, but such a description is valid for the purposes of this

section only while the collateral is held by the debtor as inventory. [ 86 ] The 2000 APPR Filing described the “general collateral” as being: “... other vehicles of whatever year, make or model including after acquired property and including proceeds thereof.” Neither the 2000 APPR Filing nor the 2003 APPR Filing described the collateral "by item or kind;" that is, a description such as that given in

Schedule “A” to the Main Lease or a description that would enable the type or kind of collateral taken to be distinguished from the types or kinds of collateral not taken. The 2000 APPR Filing did not set out serial numbers. The 2003 APPR Filing included serial numbers. [ 87 ] Since the Impugned Sales occurred before the 2003 APPR Filing, Transportaction’s attempt to cure the 2000 APPR Filing fails. The 2000 APPR Filing was deficient. [ 88 ] The Master Lease could not take priority over the GSA. E.

Does the Doctrine of Laches Preclude Transportaction from the Relief Sought? [ 89 ] Given my findings, I need not address the issue of laches. V. Conclusions [ 90 ] The parties’ joint application to adduce evidence taken in the Litigation is granted. [ 91 ] The doctrines of issue estoppel, collateral attack and abuse of process by re-litigation apply to prevent Transportaction from arguing that the Appeal is moot.

In any event, I find that it is not moot in the circumstances. [ 92 ] The Master Lease is properly characterized as a security/financing/capitalized lease and, therefore, is not a “Permitted Lien” as that term is defined in the GSA. [ 93 ] GE neither expressly nor impliedly subordinated its security interest in the GSA to Transportaction. [ 94 ] Transportaction’s registration of the security interest granted to it by Skyreach is deficient. [ 95 ] The GSA has priority over the Master Lease. [ 96 ] The Appeal is dismissed. [ 97 ] If the parties cannot agree on costs, they may speak to me within 45 days.

Heard on the 20 th day of January, 2011 and the 20 th day of May, 2011. Dated at the City of Edmonton, Alberta this 8 th day if July, 2011.

J.E. Topolniski J.C.Q.B.A. Appearances: Darren Bieganek Duncan & Craig LLP for Transportaction Lease Systems Inc. Jeremy Hockin Parlee McLaws LLP for GE Commercial Distribution Finance Inc. Michael McCabe, Q.C. Reynolds, Mirth, Richards & Farmer LLP for Pricewaterhouse Coopers Kelly Bourassa Blake, Cassels & Graydon LLP for EdgeStone Mezzanine Fund II Nominee Inc.