Coleman Management Services Limited Applicant And: M.M.H. Prestige Homes Inc. Respondent And: 65827 Newfoundland & Labrador Inc. First Third Party And: Humber Valley Paving Ltd. Second Third Party, 2018 NLSC 45

court crest IN THE SUPREME COURT OF NEWFOUNDLAND AND LABRADOR GENERAL DIVISION Citation : Coleman Management Services Limited v. M.M.H. Prestige Homes Inc. , 2018 NLSC 45 Date : March 05, 2018 Docket : 201501G0122 Between: Coleman Management Services Limited Applicant And: M.M.H. Prestige Homes Inc. Respondent And: 65827 Newfoundland & Labrador Inc. First Third Party And: Humber Valley Paving Ltd. Second Third Party Before: Justice Garrett A. Handrigan Place of Hearing: St. John’s, Newfoundland and Labrador Dates of Hearing: February 5 and 6, 2018

Summary: Coleman’s and Prestige Homes each took security interests in collateral belonging to 65827. A question arose as to which of the two

security interests has the prior claim on the collateral. The Court found that the security interests of both Coleman’s and Prestige Homes attached to 65827’s collateral and that each had perfected its interest. However, Prestige Homes perfected its interest before Coleman’s did, so that Prestige Homes’ has the prior claim. Appearances: Gregory M. Smith & Travis Payne Appearing on behalf of Coleman Management Services Limited Daniel M. Boone, Q.C. & Giles W. Ayers Appearing on behalf of M.M.H. Prestige Homes Inc. Darren D. O'Keefe & Patrick Power Appearing on behalf of 65827 Newfoundland & Labrador Inc. Megan S.

Sheppard Appearing on behalf of Humber Valley Paving Ltd. Authorities Cited: CASES CONSIDERED: Dapper Apper Holdings Ltd. v. 895453 Ontario Ltd. , [1996] O.J. No. 426 ; Skybridge Holidays Inc., Re , [1998] B.C.J. No. 1296 . STATUTES CONSIDERED: Personal Property Security Act , SNL 1998, c. P-7.; Personal Property Security Act , R.S.O. 1990, c. P.10; Fraudulent Conveyances Act , R.S.O. 1990, c. F.29; Assignments and Preferences Act , R.S.O. 1990, c. A.33. TEXTS CONSIDERED: Cuming, Walsh & Wood, Personal Property Security Law , Second Edition, 2012.

REASONS FOR JUDGMENT Handrigan, J. : INTRODUCTION [ 1 ] On January 14, 2015, Coleman Management Services Limited (“Coleman’s”) filed an originating application in this Court asking for a declaration that its security interest in the collateral of 65827 Newfoundland & Labrador Inc. ranks in priority to the security interest of M.M.H Prestige Homes/Maisons Prestige M.M.H. Inc. (“Prestige Homes”) in the same collateral. Coleman’s relies on

section 68 (

a) of the Personal Property Security Act , SNL 1998, c. P-7.1 which provides that “…an interested person…may…[apply to court for] …an order determining questions of priority or entitlement to collateral”. [ 2 ] Prestige Homes replied to the originating application on March 13, 2015. I heard Coleman’s application on February 5 and 6, 2018 and reserved my ruling until now. The Issue [ 3 ] Does Coleman’s security interest in 65827’s collateral have priority over Prestige Homes’ security interest in the same collateral?

The Law [ 4 ] The Personal Property Security Act provides for the preservation and protection of the security interests that creditors have in the personal property of their debtors. It does so with a personal property registry in which creditors give notice of their security interests in the collateral of their debtors.

Section 2(1)(pp) of the Act defines “security interest”, in part, as “…an interest in personal property that secures payment or performance of an obligation”: section 2(1)(pp)(i); and the definition also includes the “interests” of “consignors”, “lessors”, “transferees” and “buyers” (in specified contexts), where the interest “…does not secure payment or performance of an obligation”: section 2(1)(pp)(ii) [Underlining mine]. [ 5 ] The registry also provides “third parties” with access to information about debtors and strives to maintain a balance between a third party’s right to know of all claims on the assets of its debtors and a secured creditor’s property rights in those assets.

Thus, the Act obliges secured creditors to give notice of the security agreements they enter into with their debtors. [ 6 ] The Act defines “security agreement” as “…an agreement that creates or provides for a security interest…” (section 2(1)(oo)) and it requires creditors to give notice of a security agreement by registering a “financing statement” in the personal property registry.

The Act defines “financing statement” as “…the data authorized by the regulations to be entered in the registry to effect a registration for the purpose of perfecting a security interest in collateral under this Act …” (section 2(1)(r)). [ 7 ] The Act obliges creditors who give notice of security agreements to meet evidentiary requirements before they can enforce their agreements against third parties.

While there are three possible requirements, it is sufficient, for our purposes, for the creditor to show that the debtor has signed a security agreement that describes the collateral. [ 8 ] Otherwise, the Act requires the creditor’s security interest to be “perfected”. The Act provides several ways for a creditor to perfect its security interest in the collateral; but again, only one is relevant for our purposes: register a financing statement for the security interest in the personal property registry; and as

section 26 of the Act confirms, “[s]ubject to s. 20 [of the Act ], registration of a financing statement perfects a security interest in collateral”. [ 9 ]

Section 20 of the Act reads, as follows: 20. A security interest is perfected when (

a) it has attached; and (

b) all steps required for perfection under this Act have been completed, regardless of the order of occurrence. [ 10 ] The Act does not define “attachment”, but a creditor cannot enforce its security interest until the interest attaches to the collateral. Section 13(1) of the Act says when a security interest attaches. It reads, in part: 13(1). A security interest… attaches when (

a) value is given; (

b) the debtor has rights in the collateral or power to transfer rights in the collateral to a secured party; and (

c) except for the purpose of enforcing rights as between the parties to the security agreement, the security interest becomes enforceable within the meaning of

section 11. [ 11 ] Sections 11(1)(b)(

i) of the Act sets out when a security interest is enforceable against a third party; again, only as it relates to this matter: 11.

(1) A security interest is enforceable against a third party only where (

b) the debtor has signed a security agreement that contains (

i) a description of the collateral by item or kind as "goods’, "chattel paper", "investment property", "documents of title", "instruments", "money" or "intangibles". [ 12 ] Generally,

section 10 of the Act says, “a security agreement is effective according to its terms”, unless, of course, “…this or another Act” provides otherwise.

[ 13 ] Let me summarize then how a secured creditor ensures that its security interest in a debtor’s collateral both obtains and retains priority over other secured creditors and can be enforced against third parties: • Obtain a signed, effective security agreement from the debtor that describes the collateral; and, • Register a financing statement in the registry of personal property as notice of the security agreement before other secured creditors over whom the secured creditor claims priority, register their financing statements. [ 14 ] There are ways for a creditor to perfect a security interest in a debtor’s collateral, other than by registering a financing statement, such as: the debtor transfers possession of tangible collateral to the secured creditor; a bailee of a debtor issues a document of title in the name of the secured creditor; or the secured creditor takes “control” of an investment property.

There is even “automatic perfection” of a security interest but none of the other methods, including automatic perfection, are relevant to the present discussion of perfection by registration. [ 15 ] This is the law I will apply to the issue I stated above. I will refer to the Act often when I discuss the ancillary issues this application raises, but this statement of the law is sufficient for now. I turn now to analyze the main and ancillary issues Coleman’s application presents, beginning with the background to it.

Analysis Background [ 16 ] Starting in the fall of 2012 and continuing into the summer of 2013, the Coleman Group of Companies, including 65827, hired Prestige Homes of Sussex, NB to build and supply camp trailers for a road construction project in southern Labrador.

Don Darling of Prestige Homes negotiated mainly with Frank Coleman and Peter Byrne of the Coleman companies, but he also dealt with other Coleman family members from Corner Brook, NL, as circumstances dictated. [ 17 ] In July 2013, Prestige Homes and the Coleman companies agreed on terms for the construction and supply of the camp trailers; and as result, Prestige Homes and 65827 entered into a series of agreements to document their terms.

These included an asset purchase agreement between 65827 and Prestige Homes, a promissory note between 65827 and Prestige Homes for $1,198,323.35 and a security agreement between 65827 and Prestige Homes, securing the repayment of the same amount. [ 18 ] By the asset purchase agreement, dated July 26, 2013, 65827 agreed to pay Prestige Homes $1,261,393 being the total consideration for the project, less a 5 percent deposit of $63,069.65 (plus HST), for the net amount of $1,198,323.35. 65827 undertook to pay that amount to Prestige Homes in 12 equal payments of $99,860.28 (plus applicable taxes) on the first day of each month, starting January 1, 2014.

Prestige Homes agreed to supply 65827 with “worker accommodation units along with related furnishings, kitchen units, and laundry unit, as more particularly described in

Schedule A-1, A-2 and A-3” attached to the asset purchase agreement. [ 19 ] The security agreement is dated July 25, 2013 and is attached to the asset purchase agreement as

Schedule C. The agreement is drawn between 65827 as the “Borrower” and Prestige Homes as the “Lender”. Paragraph 1.1 of the security agreement refers to the asset purchase agreement and notes that it is dated July 19, 2013. By the security agreement, 65827 confirms that it is indebted to Prestige Homes for $1,198,323.35 and that it gave Prestige Homes a promissory note for the amount; and that the Promissory Note is dated July 26, 2013.

In paragraph 2.1 of the security agreement, 65827 “mortgages, charges, assigns and transfers to…[Prestige Homes] a security interest in and full access to all…[65827’s] right, title and interest in and to the Camp Assets and all proceeds therefrom (all of which is hereinafter collectively called the ‘Collateral’)”. [ 20 ] By paragraph 3.1 of the security agreement, 65827 “…acknowledges that the Security Interests hereby created attach upon the execution of this Agreement or, in the case of any after acquired property, upon the acquisition thereof, that value has been given, and that…[65827] has, or in the case of after acquired property will have upon its acquisition, rights to the Collateral”.

Schedule D is attached to the security agreement. It is a copy of the promissory note between 65827 and Prestige Homes and is dated July 23, 2013. [ 21 ] The promissory note contains details of the payment arrangement that 65827 and Prestige Homes agreed to for the Camp Assets. But the note varies the repayment

schedule slightly so that the first monthly payment of $99,860.28 is due on January 15, 2014 and not January 1, 2014, as the asset purchase agreement provided. All subsequent payments are due on the first day of each month, until the balance owing is paid in full, on December 15, 2014. The note refers to the asset purchase agreement as dated July 19, 2013. [ 22 ] On July 26, 2013, Coleman Management Services Limited transferred $71,268.70 to Prestige Homes by wire. This was the 5 percent deposit of $63,069.65, plus HST that 65827 owed to Prestige Homes under the asset purchase agreement.

The funds were drawn on Coleman’s banker in Corner Brook, NL and credited to Prestige Homes’ banker in Sussex, NB. [ 23 ] Prestige Homes registered its financing statement on January 28, 2014, at the personal property security registry as registration number 11672607. It amended the financing statement twice, first on January 29, 2014 and again on February 18, 2014. The amendments appear as registration numbers 11674462 and 11713641 respectively.

I will describe the original registration and the subsequent registrations in more detail later in these reasons. [ 24 ] Neither Coleman’s nor 65827 paid any money to Prestige Homes, other than the $71,268.70 deposit. On May 1, 2014, Prestige Homes gave notice to 65827 of its intention to enforce its security against the Camp Assets. It was seeking $1,128,421.16 then from 65827.

The notice refers to the security agreement dated July 25, 2013 and a “registration pertaining to the same at the Newfoundland and Labrador Personal Property Security Registry on January 28, 2014 as registration number 11672607…” as amended by two subsequent registrations. Details of the Camp Assets are provided in

Schedule “A” to the notice, including serial numbers for each of the 16 trailers listed.

[ 25 ] On August 18, 2014, Prestige Homes gave 65827 and Coleman’s notice of its intention to dispose of the Camp Assets within 20 days. Three months later, on November 21, 2014, Prestige Homes registered a discharge of registration number 1162607 confirming that 1162607 was fully discharged. By then Prestige Homes had sold the Camp Assets to enforce the security interest it claimed in the assets.

For Prestige Homes this ended its dealings with the Camp Assets, the asset purchase agreement, the security agreement, the promissory note, and generally with the Coleman group of companies. [ 26 ] But Prestige Homes was not the only one who took a security interest in the Camp Assets. On February 14, 2014, 65827 entered into a security agreement with Coleman’s, taking a security interest in various assets belonging to 65827, including, of particular interest to this application, the 16 trailers in which Prestige Homes also claimed a security interest.

The security agreement purported to secure obligations that 65827 had to Coleman’s.

The “Obligations Secured” paragraph of their security agreement provided that “…the security interests hereby created are not in substitution for any other mortgage, charge, assignment or security interest now or hereafter held by…[Coleman’s] from…[65827]…”. [ 27 ] “Secured Obligations” are defined in the security agreement as “…all indebtedness and liability of…[65827] to…[Coleman’s] (including interest thereon), present or future, absolute or contingent, joint or several, direct or indirect, matured or not, extended or renewed, pursuant to the Promissory Note and any ultimate balance owing thereon”. [ 28 ] “Promissory Note” is also defined in the security agreement, to mean “…the promissory note attached hereto as

Schedule ‘A’, as it is amended, modified or supplemented, restated or replaced from time to time…”.

Schedule “A” attached to the security agreement does not contain a promissory note, but is a comprehensive description of the collateral the security agreement purports to cover. [ 29 ] Coleman’s claims that it advanced $1,577,000 to 65827 as evidenced by seven canceled cheques it issued to 65827 for varying amounts between February 20, 2014 and April 16, 2014.

Coleman’s also notes that it obtained five promissory notes from 65827 to cover the advances it made to the numbered company between February 19, 2014 and March 14, 2014, again with varying amounts, but totaling $1,498,000. [ 30 ] Coleman’s registered the financing statement that refers to its security agreement on February 28, 2014. The statement appears in the personal property security registry as registration number 11735057. Unlike Prestige Homes, Coleman’s did not amend its financing statement.

I will describe the original registration in more detail later in these reasons. [ 31 ] Coleman’s and Prestige Homes join issue on their respective registrations. Coleman’s says it has priority over Prestige Homes to the Camp Assets, because of its security agreement as perfected by its financing statement at registration number 11735057; and Prestige Homes says it has priority over Coleman’s to the Camp Assets, because of its security agreement as perfected by its financing statement at registration number 11672607.

I turn now to discuss the parties’ respective positions, starting with Coleman’s claim of priority. Discussion Coleman’s Priority [ 32 ] Coleman’s says it perfected its security interest in all personal property belonging to 65827 by registering its financing statement on February 28, 2014.

Schedule “A” to its security agreement with 65827 contains a comprehensive description of the “General Collateral Security” that 65827 pledged to Coleman’s.

Schedule “A” lists generic categories of property, such as “Equipment”, “Inventory”, “Accounts”, “Other Personal Property” and “Intangibles”; but the

Schedule also includes a “TOGETHER WITH” add-on, that runs to three further pages and lists specifically the 16 camp trailers that 65827 contracted for Prestige Homes to build, as well as other similar items. [ 33 ] The descriptions of the camp trailers are complete and all encompassing. They contain serial numbers, lists of the contents of the trailers and details of the utilities available in each. The descriptions Coleman’s provides are more than adequate to meet its obligation under section 11(1) (

b) of the Personal Property Security Act to describe the collateral in which it claims a security interest so that third parties searching the registry will be informed of Coleman’s claim. [ 34 ] However, Prestige Homes challenges Coleman’s priority on more basic grounds: It says that Coleman’s has not shown that it transferred anything of value to 65827 so that the Coleman’s has an enforceable security interest in the 65827’s collateral.

In particular, Prestige Homes says that the security agreement between Coleman’s and 65827, which purports to secure the numbered company’s $1,577,000 debt to Coleman’s, requires nothing from 65827 at all. [ 35 ] Prestige Homes’ argument runs this way: Coleman’s says it advanced $1,577,000 to 65827 by issuing seven cheques to 65827 totaling that amount between February 20, 2014 and April 16, 2014. Coleman’s provided copies of the canceled cheques as Exhibit “2” to an affidavit that Darrell Oram, Coleman’s CFO filed on April 25, 2017 to support Coleman’s originating application. Mr.

Oram also provided what he described as “a complete copy” of Coleman’s security agreement, as Exhibit “1” to the same affidavit. Attached to the “complete copy” of the security agreement are copies of the five promissory notes between Coleman’s and 65827 that I referred to above. [ 36 ] Prestige Homes acknowledges both the canceled cheques and the promissory notes but says that neither creates an obligation to Coleman’s that supports the security interest that Coleman’s purports to take in 65827’s collateral.

First, Prestige Homes says that when Coleman’s and 65827 signed the security agreement on February 14, 2014, no promissory note existed then because 65827 did not sign the first of the five notes until five days later, on February 19, 2014. Furthermore, says Prestige Homes, Coleman’s did not issue the first of the canceled cheques to 65827 until February 20, 2014; six days after 65827 signed the security agreement. [ 37 ] Prestige Homes claims that the absence of any legal obligation between 65827 and Coleman’s is fatal to Coleman’s claimed priority over it.

It points, in particular, to the earliest of promissory notes that 65827 signed on February 19, 2014 and says that the promissory notes could not have been an obligation contemplated by the security agreement since they did not exist when 65827 and Coleman’s signed the agreement on February 14, 2014. Thus, says Prestige Homes the security agreement is only enforceable against it,

if the agreement “secures” some or all of 65827’s obligations to Coleman’s; and it does not. [ 38 ] Prestige Homes’ challenge to Coleman’s security agreement raises three questions: • Is the security agreement between 65827 and Coleman’s a “security agreement” as defined in the Act ? • Does the “security agreement” between 65827 and Coleman’s give Coleman’s a “security interest” in 65827’s collateral? • Does Coleman’s “security interest” require 65827 to pay a debt to Coleman’s or secure an obligation that 65827 owes to Coleman’s? [ 39 ] Paragraph 2 (oo) of the Personal Property Security Act says a “security agreement” “means an agreement that creates or provides for a security interest” and includes, “where the context permits”, both “(

i) an agreement that creates or provides for a prior security interest, and (ii) a writing that evidences a security agreement”. (Note: The adjectival “prior” in paragraph 2(oo)(

i) is ambiguous but I am satisfied that it means “prior in time” and not “prior in interest”.) [ 40 ] Thus, the meaning of “security agreement” is tied to the concept of “security interest”; so that to be a “security agreement”, it must have created or provided for a “security interest”, unless, of course, it refers to a prior security interest or is simply a writing that acknowledges the existence of another security agreement, apart from itself. Paragraph 2(pp) of the Act defines a “security interest” as “an interest in personal property that secures payment or performance of an obligation”.

The definition also includes four other transactions that ordinarily do not secure payment of a debt or performance of an obligation: transfers of accounts, transfers of chattel paper, consignments, and leases for a term of more than one year. [ 41 ] As I noted above, this is the thrust of Prestige Homes’ attack on Coleman’s security agreement: The agreement neither requires 65827 to make a payment to (or perform any obligation for) Coleman’s, nor does it fall within one of the four exceptional categories that are listed in paragraph 2(pp)(ii) of the Act .

Thus, it is not a “security agreement” as defined in the Act and cannot give Coleman’s any priority over the collateral of 65827 that is listed in

Schedule “A” to the security agreement. I do not accept Prestige Homes’ claim. Let me explain why. [ 42 ] In Dapper Apper Holdings Ltd. v. 895453 Ontario Ltd. , [1996] O.J. No. 426 , Sedgwick, J. voided a general security interest that the defendant, a numbered company which operated a family-owned business, Dunn’s Deli, gave to I. Devine and M. Dunn, owners of the business, to secure money they advanced to it. The agreement granted the owners a security interest in all present and future personal property of Dunn’s Deli, both tangible and intangible.

Dunn’s Deli perfected its security interest by registering a financial statement under the Personal Property Security Act , R.S.O. 1990, c. P.10. [ 43 ] Sedgwick, J. found that the owners failed to prove that they loaned the money to the business: “As to documents supporting the assertion that all these moneys put into Dunn's Deli were loaned to Dunn's Deli by I. Devine or M. Dunn, there are none. There are no loan agreements. There are no promissory notes or other evidences of indebtedness. There is no documentary evidence of any obligation to repay these moneys….

There is no documentary evidence as to the terms of the alleged loans including any obligation to pay (or not to pay) interest”. [ Dapper Apper , paragraph 31] [ 44 ] Sedgwick, J. also found that the owners intended to protect their investment in Dunn’s Deli by shielding it from the unsecured claims of unpaid creditors. He declared the general security agreement void both as a fraudulent conveyance under the Fraudulent Conveyances Act , R.S.O. 1990, c. F.29 and as a fraudulent preference under the Assignments and Preferences Act , R.S.O. 1990, c.

A.33: “Accordingly, the GSA is, in my opinion, both a fraudulent conveyance within the meaning of the Fraudulent Conveyances Act and void as against Dapper Apper and other creditors of Dunn's Deli under that Act; and a fraudulent preference within the meaning of the Assignments and Preferences Act and void as against Dapper Apper and other creditors of Dunn's Deli. Dapper Apper is entitled to a declaration to that effect”. [Dapper Apper, paragraph 74] [ 45 ] I acknowledge that Sedgwick, J. in Dapper Apper v. 895453 was not dealing with conflicting priorities as I am here.

However, he voided the general service agreement between the numbered company that operated Dunn’s Deli and I. Devine and M. Dunn, the owners of the business, because the owners had not proved they loaned the money to the business that the agreement purported to secure. [ 46 ] Critical to Sedgwick, J.’s finding was the absence of loan agreements or promissory notes, or any other evidence that Dunn’s Deli was indebted to the owners or under any obligation to repay the money.

Without a legitimate loan, the security agreement did not grant the owners a security interest in Dunn’s Deli’s collateral that gave them priority over other creditors. [ 47 ] The circumstances here and those in Dapper Apper may be compared to useful effect. 65827 executed the security agreement it made with Coleman’s on February 14, 2014.

The agreement is replete with references to the debt that 65827 owes to Coleman’s and the obligations that 65827 has to Coleman’s that the agreement secures: • The agreement identifies 65827 as the “Debtor” and Coleman’s as the “Secured Party”; • The agreement defines “Secured Obligations” as “…all indebtedness and liability of the Debtor to the Secured Party (including interest thereon), present or future, absolute or contingent, joint or several, direct or indirect, matured or not, extended or renewed, pursuant to the Promissory Note and any ultimate balance owing thereon”;

• The Agreement gives Coleman’s a “security interest in 65827’s collateral…as security for the payment and performance of the Secured Obligations…”; • The Agreement confirms that “…the security interests hereby created are in addition to and not in substitution for any other mortgage, charge, assignment or security interest now or hereafter held by the Secured Party from the Debtor…”; • The Agreement gives Coleman’s the right to seize the collateral and sell it “…at public auction, by public or private tender or by private sale” to satisfy the Secured Obligations if 65827 defaults; and • The Agreement requires 65827 to pay any deficiency on the sale to Coleman’s “immediately”. [ 48 ] There is, of course, other evidence besides the security agreement that the relationship between 65827 and Coleman’s was that of debtor-creditor.

For example, 65827 gave Coleman’s five promissory notes between February 19, 2014 and March 14, 2014, in which it acknowledges that it received from Coleman’s and is liable to repay $1,498,000. In each promissory note, 65827 identifies as the “Corporation” and the notes say “…the Corporation is indebted to…[Coleman’s] pursuant to a shareholder loan evidenced by this promissory note in accordance with the terms set out in this note”.

Elsewhere, each note says “…the Corporation…agrees and promises to pay on demand to…[Coleman’s] the principal sum…together with interest thereon as well after as before maturity, default and judgment upon the following terms…”. [ 49 ] Finally, Coleman’s issued seven cheques to 65827 drawn on its account for varying amounts totaling $1,577,000 between February 20, 2014 and April 16, 2014. 65827 provided the promissory notes to cover these advances and secured its obligations to Coleman’s by providing a security interest in its collateral through the security agreement. [ 50 ] Coleman’s perfected its security interest in the collateral when it registered a financing statement on February 28, 2014.

The financing statement lists 65827 as the “Debtors” and Coleman’s as the “Secured Parties”. It notes that 65827 provided a security interest to Coleman’s in 65827’s “General Collateral”, comprising “Assignment of Rents, Leases, Receivables and Intangibles from all property owned by the Debtor”. [ 51 ] Prestige Homes attacks Coleman’s security agreement with 65827 by claiming that the agreement does not oblige 65827 to make a payment to or perform any obligation for Coleman’s. As I discussed above, Prestige Homes notes Coleman’s failure to attach a promissory note as

Schedule “A” to the security agreement and says none of the five promissory notes or seven canceled cheques that Coleman’s relies on even existed when 65827 executed the security agreement on February 14, 2014. [ 52 ] It appears that Prestige Homes misapprehends the purposes of security agreements when it attacks Coleman’s security agreement for those reasons. The Personal Property Security Act says a “security agreement” is an agreement between the parties that “creates or provides for a security” interest.

The focus when considering the efficacy of a security agreement is on whether it achieves that purpose as opposed to whether it actually obliges the debtor to make a payment or perform an obligation. The debts or obligations secured by the security agreement may be created outside the security agreement; by, for example, as we have here, standalone promissory notes. [ 53 ] It is true that the Act defines the “security interest” that a security agreement creates as “an interest in personal property that secures payment or performance of an obligation”.

But a security agreement that acknowledges the existence of a debt or an obligation and provides a security interest in collateral to secure its payment or performance will suffice, even if the security agreement does not actually create that debt or obligation.

Coleman’s security agreement achieves the statutory purpose: 65827 acknowledges in the agreement that is indebted to Coleman’s and it provides a security interest in its collateral to secure the debt and to assure Coleman’s that it will repay the debt. [ 54 ] My opinion of what constitutes a valid security agreement is strengthened by three further considerations. First, the definition of “security interest” in the Act extends to other “interests” that are not normally recognized as securing payment of a debt or performance of an obligation”.

I refer, of course, to transfers of accounts, transfers of chattel paper, consignments, and leases for a term of more than one year.

Yet, security agreements could create security interests in the collateral of consignors, lessors or transferors even though security agreements creating them do not secure payment of a debt or performance of an obligation. [ 55 ] Next, I note that Cuming, Walsh & Wood, Personal Property Security Law , Second Edition, 2012, say that only three components are required to satisfy the “evidentiary requirement” for an effective security agreement: “First, the agreement must contain language sufficient to qualify as a security agreement within the meaning of the PPSA, that is an agreement that creates or provides for or evidences a security interest.

Second, it must include the debtor’s signature. Third, it must set out a description of the collateral” [Page 268]. [ 56 ] The learned authors go on to say that “[t]hese requirements need not all be satisfied by a single document. A series of writings may be relied on provided that they sufficiently incorporate by reference, and provided that the debtor’s signature appears on the same document that contains the provisions that create or evidence the security interest” [Page 269]. [ 57 ] Finally, I offer Skybridge Holidays Inc., Re , [1998] B.C.J. No. 1296 .

In that case, Mackenzie, J. considered whether monies a bankrupt travel agency received from travelers for travel services to be arranged by the agency created security interests for the travelers in the funds. The learned justice decided not, finding, unlike Coleman’s and 65827 that the fees the travelers paid the agency did not

make them creditors of the agency. [ 58 ] She stated her rationale this way: “The travellers have become creditors of the bankrupt only incidentally, as a result of the bankruptcy. They paid their money for tickets and other travel receipts which Skybridge agreed to provide from carriers and others. I do not think either the travellers or Skybridge would have considered their relationship to be one of creditor and debtor. The travellers are simply consumers of travel services” [ Skybridge , paragraph 7].

She concluded: “I am satisfied that the transactions in substance were not transactions to secure payment or performance of obligations and the assumed trusts are not security interests to which the PPSA applies” [ Skybridge , paragraph 10]. [ 59 ] In her brief judgment, the learned justice noted that the “substance of the transaction, rather than its form, is normally determinative” [ Skybridge , paragraph 6] when deciding whether or not a security interest arises under the Act . Section 4(1)(

a) of our Act also confirms that it applies “to 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”. [ 60 ] To that end, Coleman’s security agreement meets the requirements of the Act , both in form and in substance.

I find that: • the security agreement granted Coleman’s a security interest in 65827’s collateral; • Coleman’s gave 65827 value for the security interest in 65827’s collateral; • 65827 had rights to its collateral when it signed the security agreement; • Coleman’s security interest attached to the collateral when Coleman’s 65827 signed the security agreement; and • Coleman’s perfected its security interest in 65827’s collateral by registering its financing statement on February 14, 2014. [ 61 ] I turn now to consider the efficacy of Prestige Homes’ security agreement.

Prestige Homes’ Priority Discrepancies in Dating [ 62 ] Coleman’s attacks the efficacy of Prestige Homes’ security agreement on several grounds.

First, it says that there are significant discrepancies between the security agreement and the promissory note that 65827 gave to Prestige Homes; and then it says that the security interests that 65827 purported to grant to Coleman’s under the security agreement were never perfected under the Act . [ 63 ] As to the first ground of attack, Coleman’s refers to three things: • The security agreement between 65827 and Prestige Homes refers to an asset purchase agreement between the parties and says it is dated July 19, 2013; but the asset purchase agreement is actually dated July 26, 2013; • The security agreement refers to a promissory note between 65827 and Prestige Homes and says it is dated July 26, 2013; but the promissory note is actually dated July 23, 2013; and • The promissory note between 65827 and Prestige Homes refers to the asset purchase agreement between them and says it is dated July 19, 2013; but the asset purchase agreement is actually dated July 26, 2013. [ 64 ] As to the other ground of attack, Coleman’s claims that the description of the collateral in which 65827 purports to give Prestige Homes a security interest by the security agreement does not comply with paragraph 11(1)(b)(

i) of the Act . Coleman’s says the consequence for Prestige Homes of its non-compliance is self-evident: It cannot enforce its security interest in 65827’s collateral against Coleman’s. [ 65 ] I will deal with the first ground of attack now. [ 66 ] 65827 and Prestige Homes entered into their asset purchase agreement on July 26, 2013. It acknowledges that 65827 agreed to buy the Camp Assets from Prestige Homes for $1,261,393, to be paid by a deposit of $63,069.65, plus HST and 12 equal payments of $99,860.28, plus applicable taxes.

The payments were scheduled to start on January 1, 2014 and continue until and to include December 1, 2014. The payments were also secured by their security agreement, dated July 25, 2013 (Schedule “C” to the asset purchase

agreement) and a promissory note, dated July 23, 2013 (Schedule “D” to the asset purchase agreement). [ 67 ] The promissory note varies the payment

schedule that appears in the asset purchase agreement so that the first monthly payment of $99,860.28 is due on January 15, 2014 and not January 1, 2014, as the asset purchase agreement provided. While the note says all subsequent payments are due on the first day of each month, it also says they will continue “…until the balance owing is paid in full December 15, 2014”. [ 68 ] Coleman’s did not refer to the variation in the due dates of the monthly payments between what the asset purchase agreement and the promissory note provided for.

I note the variation, simply for completeness, not because this discrepancy or any of the others that Coleman’s relies on affects the efficacy of Prestige Homes’ security agreement. Let me explain why. [ 69 ] Coleman’s attack on Prestige Homes’ security agreement is similar to the attack that Prestige Homes makes on Coleman’s security agreement. I cannot reconcile the variations between the dates that appear in Prestige Homes’ documentation.

Suffice it to say, the dates are “all over the place” and the discrepancies among them demonstrate a surprising lack of exactitude by Coleman’s and Prestige Homes when completing those important documents. [ 70 ] However, my response to Coleman’s claim that Prestige Homes’ “…Security Agreement does not secure any existing payment obligation of 65827 to…[Prestige Homes], including the…[Promissory Note]” (paragraph 8 of the Applicant’s Memorandum of Fact and Law, filed January 14, 2015) is essentially the same as I made to Prestige Homes’ attack on the efficacy of Coleman’s security agreement: It appears that Coleman’s misapprehends the purpose of security agreements when it attacks Prestige Homes’ security agreement for those reasons. [ 71 ] The Personal Property Security Act says a “security agreement” is an agreement between the parties that “creates or provides for a security interest”.

The focus when considering the efficacy of a security agreement must be on whether it achieves that purpose as opposed to whether it actually obliges the debtor to pay a debt to or perform an obligation for the secured creditor.

The debts or obligations secured may be created outside the security agreement; by, for example, as we have here, a promissory note or an asset purchase agreement. [ 72 ] I also note the quotation from Cuming, Walsh & Wood, Personal Property Security Law , Second Edition, 2012, that I referred to earlier, about the three mandatory components to satisfy the “evidentiary requirement” for an effective security agreement: “First, the agreement must contain language sufficient to qualify as a security agreement within the meaning of the PPSA, that is an agreement that creates or provides for or evidences a security interest.

Second, it must include the debtor’s signature. Third, it must set out a description of the collateral”. [ 73 ] It is clear that Prestige Homes’ security agreement has the first two components. As to the third component – the security agreement must set out a description of the collateral – that takes me to the other ground on which Coleman’s attacks Prestige Homes’ security agreement: As Coleman’s claims, the security agreement does not provide a description of the collateral in which 65827 purports to grant a security interest to Prestige Homes that complies with paragraph 11(1) (b)(

i) of the Personal Property Security Act . Inadequate Description of Collateral [ 74 ] A recital to the asset purchase agreement between 65827 and Prestige Homes reads: “WHEREAS…[65827] has agreed to purchase from…[Prestige Homes], worker accommodation units along with related furnishings, kitchen units, and laundry units, as more particularly described in

Schedule A-1, A-2 and A-3 attached hereto, and subject to the terms and conditions provided herein (hereinafter referred to collectively as the ‘Camps’)”. Paragraph 1 of the asset purchase agreement adds this to the description that appears in the asset purchase agreement: “…the Camps, in accordance with the construction specifications set out in the attached

Schedule “B”. [ 75 ] Otherwise, “Camps” is used throughout the agreement purchase agreement to refer to the property that 65827 would acquire from Prestige Homes by the agreement. Schedules A-1, A-2 and A-3 of the asset purchase agreement are floor plans for the dormitory, laundry and kitchen trailers that Prestige Homes contracted to build and provide to 65827.

Schedule B is a two-page document that lists construction specifications for the camp trailers. [ 76 ] Prestige Homes’ security agreement provides this description of the collateral in Recital 1.1: “…camps (sic) units, a laundry unit, a kitchen unit and related furnishings, pursuant to the details outlined in the Purchase and Sale Agreement for the camp (collectively, the ‘ Camp Assets ’)” [Bold in original].

For certainty, the “Purchase and Sale Agreement” is the same document I refer to as the “asset purchase agreement”. [ 77 ] Throughout the security agreement, 65827 refers to its “…right, title and interest in and to the Camp Assets and all proceeds therefrom” as the “Collateral”. 65827 devotes the rest of the security agreement to creating and attaching the security interest it purports to give to Prestige Homes in the collateral and directing how Prestige Homes will enforce the asset purchase agreement and promissory note if 65827 defaults on its obligations to Prestige Homes.

There is no other description of the collateral. [ 78 ] Coleman’s says there are only two options for describing collateral under the Personal Property Security Act : by “item” or by “kind”. Coleman’s relies on section 11(1)(

b) of the Act , which reads: “11.

(1) A security interest is enforceable against a third party only where (

b) the debtor has signed a security agreement that contains (

i) a description of the collateral by item or kind as ‘goods’, ‘chattel paper’, ‘investment property’, ‘documents of title’, ‘instruments’, ‘money’ or ‘intangibles’ [Underlining mine]. [ 79 ] So, Coleman’s notes, if the collateral is not described by “item”, it can only be described by “kind”; and if the latter, it must be of a “kind”, from one of the seven categories enumerated in the paragraph. [ 80 ] Prestige Homes disagrees with Coleman’s. It says that the collateral is adequately described in both the asset purchase agreement and in the security agreement. It notes that 65827 and Prestige Homes entered into these agreements in July 2013, directly as

they settled on the terms of the deal for Prestige Homes to supply the camp trailers to 65827. Prestige Homes says the description the parties used in the asset purchase agreement was all both parties had available to them at the time because it had yet to build the trailers. [ 81 ] Furthermore, Prestige Homes says that section 14(1) of the Act contemplates security interests in after-acquired property if the “…security agreement…provides for a security interest in…[it]”.

Prestige Homes says that the asset purchase agreement expressly provided for Prestige Homes to build the camp trailers and for 65827 to take possession of them when they were built, as 65827 did in late fall 2013.

The security agreement adopts the language of the asset purchase agreement when it describes the “Camp Assets”: “… camps (sic) units, a laundry unit, a kitchen unit and related furnishings, pursuant to the details outlined in the Purchase and Sale Agreement for the camp”. [ 82 ] But, and more to the point, Prestige Homes says that Coleman’s confuses the respective purposes of security agreements and financing statements.

As to the former, Prestige Homes says that “…the purpose of the security agreement – a contractual document – is for the parties to set out the specific terms of their agreement, as between themselves” [paragraph 34 of the Respondent’s Memorandum of Fact and Law, filed May 23, 2017]. [ 83 ] As to the financing statements, Prestige Homes says it is the statements and not security agreements that creditors register under the Act .

For that reason, it is imperative, says Prestige Homes, that financing statements be subjected to a “…higher level of scrutiny [than security agreements] …to provide a party searching the Registry with absolute certainty as to the reliability of the search results” [paragraph 31 of the Respondent’s Memorandum of Fact and Law, filed May 23, 2017]. [ 84 ] Prestige Homes filed its financing statement on January 28, 2014, as registration number 11672607. It amended its financing statement twice, first on January 29, 2014, by registration number 11674462.

At that time, it changed the name of secured party from The Shaw Group Limited to Prestige Homes; and again, on February 14, 2014 when it substituted a new “General Collateral” description for the description of the collateral it included in the financing statement it filed on January 28, 2014. [ 85 ] The February 14, 2014 amendment changed the descriptions of the collateral from the original registration by adding a table setting out the serial numbers and descriptions of the camp trailers. It also changed how Prestige Homes described some of the contents of the camp trailers and the utilities available to them.

However, the amendment changed neither the serial numbers nor the descriptions of the trailers. [ 86 ] I agree with Prestige Homes that the description of the collateral that appears in its security agreement complies with the Personal Property Security Act . Let me explain why. [ 87 ] Earlier in these reasons, I stated the issue between Prestige Homes and Coleman’s this way: Does Coleman’s security interest in 65827’s collateral have priority over Prestige Homes’ security interest in the same collateral?

In all other aspects of the priority issue between Prestige Homes and Coleman’s the parties are on the same footing; except this. So, the answer to that question turns on the

interpretation of section 11(1) (b)(

i) of the Personal Property Security Act . [ 88 ] I have set out the relevant parts of the legislation several times already but do so again for convenience: “11.

(1) A security interest is enforceable against a third party only where (

b) the debtor has signed a security agreement that contains (

i) a description of the collateral by item or kind …” [Underlining mine]. From the issue I stated above, it is clear that Coleman’s is the “third party” and 65827 is the “debtor”. While the

section does not mention “secured party”, it is implicit that it is the “secured party” who wants to enforce its security interest against the third party; and, of course, here, it is Prestige Homes, the secured party, that wants to enforce its security interest against Coleman’s, the third party. [ 89 ] To enforce its security interest, Prestige Homes must show that 65827, a debtor to both it and Coleman’s, has signed a security agreement in which it describes the collateral in which Prestige Homes has a security interest, “by item or by kind”.

First, let it be clear that 65827 did sign a security agreement for Coleman’s in which 65827 provides a description of its collateral that clearly conforms with the legislation. [ 90 ] I found earlier that Coleman’s had an effective security agreement because, amongst other things, its agreement listed the camp trailers, provided some details of their contents and the utilities available to them and provided their serial numbers. So, there is no doubt about the efficacy of Coleman’s security agreement.

Its security interest in the collateral attached when 65827 signed its security agreement on February 14, 2014 and Coleman’s perfected its security interest by registering its financial statement on February 28, 2014. [ 91 ] 65827 signed Prestige Homes’ security agreement and the two parties signed the asset purchase agreement around the end of July 2013. Those agreements, together with the promissory note that 65827 signed about the same time, documented the deal that 65827 and Prestige Homes made for Prestige Homes to build and supply the camp trailers to 65827.

The parties negotiated the terms of the deal between the fall of 2012 and the summer of 2013. Prestige Homes delivered the trailers to 65827 in the November/December 2013 time period. [ 92 ] Until Prestige Homes constructed the trailers, it could do no better than describe the trailers as they did in the asset purchase agreement: “worker accommodation units along with related furnishings, kitchen units, and laundry units, as more particularly described in

Schedule A-1, A-2 and A-3 attached hereto”; and, as supplemented by construction specifications, set out in

Schedule B to the agreement. 65827 adopted that description when it signed the security agreement. Eventually, when Prestige Homes finished building the trailers, Prestige Homes obtained their serial numbers and their other identifiers and included them in the financing statement that it filed on January 28, 2014. [ 93 ] The description that 65827 incorporated into the security agreement meets the requirements of section 11(1)(b)(

i) as a description by “item”. It was as much of a description of the “items” as was available to the parties at the time and it clearly served purposes, as between them then. In effect, the security agreement was both consistent with the terms that 65827 and Prestige Homes agreed to at the time and it was also as far as they were able to go then to create a security interest to secure the transaction. Prestige Homes’ security interest in the collateral did not become a matter of public record until it registered its financing statement on January 28, 2014 and by then Prestige Homes had built and delivered the camp trailers to 65827 and Prestige Homes knew all the itemized

details about them to include on its financing statement. [ 94 ] Coleman’s claims that Prestige Homes had other options, such as: use one of the generic terms that the legislation provides as acceptable extensions of “kind”; say “goods”, for example or, alternatively, refer to the collateral as “all of the debtor’s present and after- acquired personal property”, provided for in section 11(1) (b)(iii).

It is true that those options were available to Prestige Homes but would either have made any difference? [ 95 ] Secured parties are required to describe the collateral they have security interests in so that third parties searching the personal property registry will be informed of those interests as they consider taking security in the same property. Would it help third parties more to know that Prestige Homes had a security interest in 65827’s “goods” or “all of its present and after-acquired property” than in “worker accommodation units along with related furnishings, kitchen units, and laundry units”?

I think not. In effect, Coleman’s simply advocates a slavish adherence to the legislation regardless of the practical effect of such observance when it insists on rote compliance with the descriptive requirements set out in section 11 (1) (b) (i), rather than the approach that 65827 and Prestige Homes adopted in July 2013. [ 96 ] Some (perhaps, a lot) of the difficulty with this case may be attributed to the current rendering of section 11(1)(b)(

i) of the Act . Before July 31, 2007, section 11(1)(b)(

i) required a debtor to sign a security agreement that described the collateral “… by item or kind, or by reference to one or more of the following: ‘goods’, ‘document of title’, ‘chattel paper’, ‘security’, ‘instrument’, ‘money’ or ‘intangible’” [Underlining mine]. This provided the debtor with three options to describe the collateral: by item; by kind; or by reference to…. [ 97 ] I agree that the words 65827 used in Prestige Homes’ security agreement to describe the collateral is more logically a description by “kind” than by “item”.

But, in the circumstances prevailing when 65827 signed the agreement in July 2013, 65827 and Prestige Homes used an adequate description of the collateral. Moreover, the description fits under the rubric of “item” as used in the legislation, if only a little clumsily; and the wording they used works better than either of the other two options that Coleman’s proposes. [ 98 ] To be clear, the wording is better than a generic term like “goods” or an equally generic phrase, like “all of the debtor’s present and after-acquired personal property”.

I note again, of course, that this discussion is focused on how 65827 described the collateral in the Prestige Homes’ security agreement, not in the financing statement that it filed on January 28, 2014 to perfect its security interest in that collateral. [ 99 ] In the result, I find that the security interests of both Coleman’s and Prestige Homes attached to 65827’s collateral and each perfected its interest. However, Prestige Homes perfected its interest before Coleman’s did, so that Prestige Homes’ security interest has the prior claim on the collateral. Costs [ 100 ] I make no order as to costs at this time.

I advised the parties when we finished this matter that I would allow them to speak to costs after I made this ruling. Counsel may contact the Registry to arrange a time convenient to them and the Court.

Summary and Disposition [ 101 ] Coleman’s and Prestige Homes each took security interests in collateral belonging to 65827. A question arose as to which of the two security interests has the prior claim on the collateral. [ 102 ] The Court found that the security interests of both Coleman’s and Prestige Homes attached to 65827’s collateral and that each had perfected its interest. However, Prestige Homes perfected its interest before Coleman’s did, so that Prestige Homes’ has the prior claim. Order [ 103 ] In the result, I order that: 1.

Prestige Homes has a prior claim to the collateral of 65827, as described generally in its security agreement and more particularly described in its financing statement. 2. The parties may apply to Court to be heard on costs. _____________________________ Garrett A. Handrigan Justice