TransportAction Lease Systems Inc. v. Fung, 2013 ABQB 215

Court of Queen ’ s Bench of Alberta Citation: TransportAction Lease Systems Inc. v. Fung, 2013 ABQB 215 Date: 20130409 Docket: 1203 00321 Registry: Edmonton Between: TransportAction Lease Systems Inc. Plaintiff - and - Kingsley King Hang Fung Defendant _______________________________________________________ Memorandum of Decision of L. A. Smart, Master in Chambers _______________________________________________________ Introduction [ 1 ] The Plaintiff, TransportAction Lease Systems Inc. ( “ TransportAction ” ) applies for

summary judgment pursuant to Rule 7.3 of the Alberta Rules of Court on the grounds that there is no defence to this action. It seeks personal judgment in the amount of $65,634.34 allegedly payable under a lease agreement for a 2008 Gallardo 2DR Convertible Spyder Lamborghini ( “ Lamborghini ” ) the Defendant, Kingsley King Hang Fung ( “ Fung ” ). [ 2 ] Fung argues that TransportAction ’ s application should be dismissed on the grounds that the “ seize or sue ” election contained

in s. 54(3) of the Alberta Law of Property Act , RSA 2000, c. L-7, prevents TransportAction from both seizing the subject property from Fung and commencing action against him in respect of the same. TransportAction having elected to seize arguably raises a defence to TransportAction ’ s action for a money judgment on any shortfall. [ 3 ] It was agreed for purposes of this application that the Lamborghini was a consumer good. Background and Discussion [ 4 ] July 1, 2008, Fung entered into a Lease Agreement (Residual Obligation Lease) (the “ Lease ” ) with TransportAction in respect of the Lamborghini.

The manufacturer ’ s suggested retail price of the Lamborghini was $319,155 and the capitalized amount upon which the payments were based was $319,650. The Lease provided for 24 payments of $3,567.86 for a total of $81,551.04 and a lease termination fee of $80,000. It required a security deposit of $80,000 and gave an option to purchase for $192,000 being the Lease Residual Value, at the end of the term. [ 5 ] The Lease also contained the following terms and conditions: 10.

Terminated Lease; Monthly Rental Adjustments Upon termination of this Lease, either at the expiry of the Lease Term or otherwise, TransportAction shall, provided there is no default under this Lease, pay or credit to you as an adjustment of the Monthly Rental payable by you, the amount, if any, by which the Net Sale Proceeds (as hereinafter defined) of the Vehicle exceeded the Termination Book Value (as hereinafter defined) of such Vehicle or, as the case may be, if the Net Sale Proceeds of the Vehicle are less than the Termination Book Value of such Vehicle, you shall forthwith pay to TransportAction as an adjustment of the Monthly Rental Payable hereunder, the amount, plus applicable taxes, by which the Termination Book Value of the Vehicle exceeds the Net Sale Proceeds of such Vehicle. “ Net Sale Proceeds ” shall mean the sale price proceeds by TransportAction upon the sale of the vehicle less any reasonable sale preparation costs and less a sale processing fee of $100. 15.

Early Termination You may terminate this Lease at any time provided you are not in default. TransportAction may terminate this Lease at any time you are in default. In either case, the Termination Rental Adjustment described in paragraph 10 and the Lease Termination Fee remain applicable. 24. Ownership You and TransportAction agree that this Lease is a true lease for tax, security and credit legislation purposes and that TransportAction named above remains the owner of the vehicle and retains all rights of ownership. [ 6 ] Fung started to go into arrears in January 2010.

On June 17, 2010 a bailiff acting on TransportAction ’ s instructions seized, removed and arranged sale of the Lamborghini. Discussion

[7] The issue is whether the “seize or sue” provision contained in

Part 6 of the Law of Property Act bars TransportAction fromcommencing an action against Fung. The relevant provisions of the Law of Property Act are as follows: (

a) Section 51(

e) defines: “Purchase-money security agreement” as “an agreement that provides for a purchase-money security interest”. (

b) Section 51(

f) defines: “Purchase-money security interest” as “a security interest taken or reserved in consumer goods by a seller tosecure payment of all or part of its purchase price and any credit charges payable in respect of the purchase”. (

c) Section 51(i): “Security Interest” is defined as “an interest in goods that secures payment or performance of an obligation”. (d) Section 53(4): When goods that are collateral under a purchase-money security agreement: (

a) are surrendered by the debtor to the secured party with the secured party’s consent, otherthan for the purpose of perfecting a security interest in the goods pursuant to

section 24 of the Personal PropertySecurity Act, (

b) are taken into custody and control of a receiver or receiver-manager pursuant to thepurchase-money security agreement or

Part 5 of the Personal Property Security Act and are disposed of, (

c) are seized pursuant to the purchase money security agreement or

Part 5 of the PersonalProperty Security Act and/or dispose of, or (

d) are retained by secured party in accordance with

section 62 of the PersonalProperty Security Act the indebtedness of the debtor under the purchase money security agreement, to the extent it relates to all or part of the purchase price ofsome or all of the goods, is extinguished, and any money subsequently paid in respect of the purchase price is recoverable by an actionagainst the secured party. [8] There are two types of leases: true leases and security leases. A true lease is not caught by the “seize or sue” provision; however, a security lease is caught by the legislation (Re Kreutzer, 2000 ABQB 300 , 82 Alta.

L.R. (3rd) 181). [9] The categorization of a lease as a true lease or a security lease is based on the definition of purchase money security interestcontained in the Law of Property Act as well as certain indicia set out in the case law. Fung argues that ultimately, the question comesdown to whether the security interest in the vehicle secures the full purchase price of the vehicle. [10] In an

article written by Michael Burke (Ontario Personal Property Security Act Reform: Significant Policy Changes, 48C.B.L.J. 289 (2009) at 292-295) the difference between true leases and security leases in the context of personal property and securitylaw in Ontario is discussed including a thorough review of the criteria Canadian courts have used to characterize the lease agreement.The Ontario PPSA defines security lease as one that “secures payment or performance of obligation” which is identical to the definitionof security interest in the Alberta PPSA.

[ 11 ] The four primary factors indicative of a security lease according to Burke are described by Justice Topolniski in 843504 Alberta Ltd., Re , 2011 ABQB 448 as follows: (

a) Relevance of the purchase option price – whether the purchase option price is nominal or reflective of the 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 lease/guaranteed residual clauses – whether the lessee is liable for any deficiency in the sale of equipment at the end of the term. (

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

In addition she observed that ultimately the characterization of the lease is determined by its substance not form. [ 12 ] Fung argues the Lease clearly contains an “ Open-End Lease/Guaranteed Residual Clause ” , that is: Where the lessee is liable under an open-end lease for any deficiencies in the sale of the lease property following its return at the end of the scheduled lease term, the current line of authority is to treat such a lease as a security lease, because a lessor is “ guaranteed ” to receive a minimum return on the transaction. [ 13 ] Furthermore, pursuant to the Lease, if Fung did not purchase the Lamborghini at the end of the term of the Lease and it was sold for less than the Lease Residual Value, Fung was liable to TransportAction for the deficiency guaranteeing a minimum return on the transaction. [ 14 ] TransportAction says that the remaining three factors enumerated by Justice Topolniski support the true lease characterization.

It is correct that the option price was not nominal but at market value, nor was it mandatory. There is no evidence that this was a sale-leaseback transaction so it is not applicable. [ 15 ] Both TransportAction and Fung have referred to the decision of Justice Yamauchi in Royal Bank of Canada v. Cow Harbour Construction Ltd. , 2012 ABQB 59 where he described what is referred to as the “ Smith Brother Factors ” which might be considered in determining the true nature of a 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 his expense; 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 and granted 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 UCC financingstatement; 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. [16] TransportAction says that the majority of these support a true lease and, in particular, of the 16 factors numbers 1, 2, 4, 9, 10,12, 13, 14, 15 and 16 support the true lease characterization. Fung says that numbers 2, 5, 6, 7, 8, 11, 13, 14 and 16 support their positionthat the Lease is a security lease.

Interesting that both parties claim that four of the same factors support their respective positions. [17] Justice Topolniski in 843504 was of the view that these secondary factors were not in and of themselves determinative of theproper characterization of a lease and the presence of some of those factors may be insufficient to outweigh the clear effect of theprimary factors. Justice Yamauchi in Cow Harbour Construction observed that the court may use some or all of the Smith Brothers’factors when assessing the characterization of a lease but that it is the substance of the transaction that is determinative.

It is neithernecessary for all of the factors to be present for a lease to be characterized as a security lease nor would the existence of a primary factorbe determinative in every case. [18] Finally, I am urged by TransportAction to carefully consider the reasoning of the Alberta Court of Appeal in Ramsey v.Pioneer Mach. Co. Ltd, 1981 ABCA 56 , 15 Alta. L.R. (2d) 140 where it determined that until such time as an option wasexercised there was no “right to recover the purchase price” under s.19 of the Conditional Sales Act, RSA 1970, c.61.

As in Ramsey,there having been a default, seizure and sale, the option could not be exercised. Examining the

definitions with respect to purchasemoney security interests and agreements under the Law of Property Act, and using the rationale of Ramsey, there can be no securityinterest taken or reserved by a seller to secure payment of all or part of the purchase price unless the option was exercised converting theLease into a sale agreement. Conclusion [19] The issue is whether TransportAction is entitled to

summary judgment for a deficiency following sale of the Lamborghini.The test for

summary judgment is expressed in many different ways but succinctly, the question is whether the defence of Fung flowingfrom the proper characterization of the Lease and the application of the “seize or sue” restriction imposed by the Law of Property Act isbound to fail (Murphy Oil Co v. Predator Corp., 2006 ABCA 69). [20] The authorities present a number of primary and secondary factors which the court may take into account when determiningthe proper characterization of a lease either as a true lease or a security lease.

Clearly, this transaction has an open-end lease/guaranteedresidual clause where Fung is liable for any deficiency in the sale of the Lamborghini at the end of the term, one of the primary factorsindicative of a security lease. On the other hand, the purchase option price is reflective of the fair market value and is not mandatory, twothe primary factors indicative of a true lease. TransportAction says that 10 of the 16 secondary factors support their position, while Fungsays that nine of the 16 supports his position.

As noted both parties cite four of the same factors as supporting their position. [21] The proper characterization, however, is not determined by tallying the number of factors in your favor whether they beprimary or secondary factors, albeit a single primary factor may outweigh even a long list of secondary factors. In every case the courtmust look to the substance of the transaction. [22] I accept the argument of TransportAction that the reasoning in Ramsey that there must be a “sale” found before the limitationsof the Law of Property Act apply.

Under this Lease there are four possible scenarios contemplated by its provisions. During the term ofthe lease it could be terminated by Fung at any time (provided there is no default) or at the end of the term, the Lease Termination

Fee/Security Deposit would be applied, the Lamborghini sold and to the extent that the Net Sale Proceeds exceeded the Termination Book Value being the present value of the sum of all the remaining monthly payments for the balance of the lease term, if any, plus the Lease Residual Value, Fung would receive a payment, or conversely, to the extent that the Net Sale Proceeds were less than the Termination Book Value, he would be liable for the shortfall.

Alternatively, Fung could exercise his option, the Lease Termination Fee/Security Deposit would be applied and he would pay the Lease Residual Value as expressed in the Lease. Finally, as it occurred in this case, if there was a default TransportAction could seize the vehicle, the Lease Termination Fee/Security deposit would be applied and in the event of a shortfall after application of the Net Sale Proceeds, he would be liable for the shortfall. [ 23 ] In

summary, the Lease Value/MSRP was to be paid in full by Fung in every case. Having regard to all of the scenarios above, the transaction has the attributes of a sale by TranportAction to Fung. In my view, looking to the substance of the transaction it is clearly arguable that the Lease was not a true lease but a security lease thereby bringing into effect the “ seize or sue ” provisions of the Law of Property Act . [ 24 ] Accordingly, I am unable to conclude that the defence raised by Fung is bound to fail and the application for

Summary Judgment is dismissed. Dated at the City of Edmonton, Alberta this 9 th day of April, 2013. L. A. Smart M.C.C.Q.B.A. Appearances: D. Robb Robb & Everson for the Plaintiff Desiree Ryzluk Ogilvie LLP for the Defendant