CONTINENTAL SHED RENTALS INC., – v. –, 2023 NBKB 184

IN THE COURT OF KING’S BENCH OF NEW BRUNSWICK TRIAL DIVISION JUDICIAL DISTRICT OF MONCTON Continental Shed Rentals Inc. v. Trustee in Bankruptcy, Allan Marshall & Associates Inc. 2023 NBKB 184 NB26206 BETWEEN: CONTINENTAL SHED RENTALS INC., – and – TRUSTEE IN BANKRUPTCY, ALLAN MARSHALL & ASSOCIATES INC. DECISION BEFORE: Justice Robert M. Dysart AT: Moncton, New Brunswick DATE OF HEARING: October 20, 2023 DATE OF DECISION: October 20, 2023 (orally) APPEARANCES: Lyndsay Scovil, for the Applicant Frederick Welsford, K.C., for the Respondent

DYSART, J. (Orally) INTRODUCTION [ 1 ] This is a motion brought by the Applicant, Continental Shed Rentals Inc., seeking to set aside a Notice of Disallowance issued by Allan Marshall & Associates Inc. as the trustee in Bankruptcy of the estate of Ileana Negru. [ 2 ] The facts of this case are not complicated. [ 3 ] Continental entered into a Lease Agreement with Ms. Negru on January 27, 2020. According to the terms of that lease agreement, Continental leased Ms. Negru a 12’ x 40’ utility shed, bearing serial number CSUTX-T100706-1240-112819-T. [ 4 ] The Lease Agreement provided for an initial term of one month.

The lease payment was to be $563.93, inclusive of HST. The term of the lease was to be automatically renewed for successive terms of one month on the payment by Ms. Negru of the following month’s lease payment. [ 5 ] The Lease Agreement further provided that, upon payment of those monthly lease payments for 60 months, ownership of the shed would transfer to Ms. Negru. That is, this was a lease-to-own agreement. [ 6 ] The evidence is that over the course of the next several months, Ms. Negru defaulted on some of the monthly payments.

She made sporadic payments from April 2020 to the summer of 2021, but never completely brought the arrears up-to-date. [ 7 ] In the summer of 2021, well over one year after the shed was leased to Ms. Negru and was in her possession, Continental then took steps to privately recover the shed, but was unable to do so. [ 8 ] As a result, Continental filed a small claim action with the Small Claims Court of New Brunswick, eventually recovering a judgment issued by that court in January 2023. Ms. Negru did not appear at the hearing before the Small Claims adjudicator.

She had asked for an adjournment, which was refused. The decision of the small claims adjudicator was that Ms. Negru, in failing to make payments on a monthly basis, was in default under the lease agreement and that Continental was entitled to recover possession of the shed. That led to the issuance of a formal “Order for Delivery of Personal Property” issued by the court. [ 9 ] Continental then requested that the Sheriff seize the shed in accordance with that order. However, because Ms.

Negru filed a Reconsideration Application with the small claims court, arguing she had been unfairly denied an adjournment of the trial, the Sheriff declined Continental’s request to proceed with the seizure of the shed. [ 10 ] That Reconsideration Application was denied by the small claims court on May 29, 2023. [ 11 ] Before the Sheriff could execute on the Order for Delivery of Personal Property, however, Ms. Negru filed an assignment in bankruptcy.

Allan Marshall & Associates became the Trustee. [ 12 ] Continental then submitted a Proof of Claim pursuant to s. 81 of the Bankruptcy and Insolvency Act , arguing that the shed, which had remained in the possession of Ms. Negru, was in fact the property of Continental, arguing that the Lease Agreement specified that legal ownership of the shed would remain with Continental unless and until Ms. Negru had paid all 60 monthly instalments under the lease-to-own agreement.

[ 13 ] The Trustee then issued its Disallowance of Security. The Trustee concluded that the lease agreement was, in fact, a lease which exceeded 12 months, and that pursuant to s. 12 of the Personal Property Security Act , it was a security interest which had to be registered on the PPSR in order to be perfected. The evidence is clear that Continental did not register any security interest on the PPSR with respect to the shed. [ 14 ] The Trustee reasoned that s. 20(2)(

a) of the PPSA provides that an unperfected security interest is ineffective as against the trustee in bankruptcy if it remains unperfected at the date of bankruptcy. [ 15 ] The Trustee also reasoned that s. 70 of the Bankruptcy and Insolvency Act states that every bankruptcy order and every assignment under that legislation takes precedence over any other judicial order, including a judgment of the kind obtained by Continental in this case for the return of personal property, unless that judicial order has been fully executed upon.

Here, the order had not been fully executed, as the Sheriff had not yet seized the shed and returned it to the possession of Continental. [ 16 ] As a result, the Trustee concluded that Continental was a simple unsecured creditor for the small judgment it received for the outstanding lease payments – in the range of $7,000. [ 17 ] That is the decision which is now challenged by Continental. [ 18 ] Continental maintains that the Trustee erred by failing to consider whether the bankrupt had any ownership or proprietary interest in the shed as of the date of her bankruptcy.

To put is simply: Continental argues that because Ms. Negru was in unlawful possession of the shed, she had no lawful proprietary interest which could transfer to the Trustee. Since the Trustee steps into the shoes of the bankrupt, it is argued, the Trustee has no interest in the shed either. [ 19 ] Continental states that it has not asserted any secured interest in the shed, and that the Trustee has improperly relied upon those provisions of the Bankruptcy and Insolvency Act and the PPSA. Continental argues that the effect of the judgment from the small claims court was to extinguish any right Ms.

Negru may have had to either possess the shed or to have any ownership interest in it, and is in effect a distinct declaration of ownership by Continental, irrespective of the lease agreement. [ 20 ] That, in essence, is the position of Continental. [ 21 ] The starting point, from the Court’s perspective, is the PPSA. [ 22 ] S. 1(1) of the PPSA defines a “security interest” as including the interest of a lessor under a lease for a term of more than one year. [ 23 ] That same

section defines a “lease for a term of more than one year” as including the following: (

b) a lease of goods initially for a term of one year or less if the lessee, with the consent of the lessor, retains uninterrupted or substantially uninterrupted possession of the leased goods for more than one year after the lessee, with the consent of the lessor, first acquired possession of the goods, but the lease does not become a lease for a term of more than one year until the lessee’s possession extends beyond one year, and (

c) a lease of goods for a term of one year or less where the lease provides that it is renewable for one or more terms automatically or at the option of one of the parties or by agreement of the parties if the total terms, including the original term, may exceed one year, [ 24 ] Based upon that definition, the Court is satisfied that the lease agreement between Continental and Ms. Negru was, in fact, a “lease for a term of more than one year,” as it specifically contemplated an automatic renewal for a period of up to 60 months; and because the lessee, Ms.

Negru, was in possession of the shed for a period of more than one year, apparently with the consent of Continental; and since Continental was still accepting partial payments in the summer of 2021, and took absolutely no steps to repossess the shed until that time, the Court is satisfied that this was a lease for a term of more than one year.

[25] Section 3(2) of the PPSA provides that the Act applies to any lease for a term of more than one year. The PPSA applies to thissituation. [26] To recap, the lease agreement between Continental and Ms. Negru was a lease for a term of more than one year and wastherefore a security interest which is covered by and governed by the provisions of the PPSA. That is not genuinely disputed byContinental. [27] It is further acknowledged by Continental that it did not perfect its security interest by registering it on the PPSR.

It wastherefore, by definition, an unperfected security interest. [28] Section 20(2) of the PPSA states: 20(2) An unperfected security interest in collateral is not effective against (

a) a trustee in bankruptcy if the security interest is unperfected at the time of the bankruptcy, [29] So, what does it mean to say the unperfected security interest is not effective as against the Trustee? [30] The Trustee cites the Supreme Court of Canada decision in Giffen (Re), (SCC), [1998] 1 SCR 91, where thelessor of a vehicle had failed to register the security interest prior to the bankruptcy of the lessee.

I can do no better than to read thefollowing excerpt from the headnote, which appears to be directly on point. “The definition of “security interest” in the PPSA explicitly includes leases for a term of more than one year. The lessor’s interest in thecar is the reservation of title in the car; this interest, created by the lease agreement, falls within the ambit of the PPSA. Since the lessordid not have possession of the car and did not register its security interest, it held an unperfected security interest in the car prior to thebankruptcy.

The bankrupt’s right to use and possession of the car constitutes “property” for the purposes of the Bankruptcy andInsolvency Act (“BIA”), which passed to the trustee by virtue of s. 71(2). Section 12(2) of the PPSA also recognizes that a lessee obtainsa proprietary interest in leased goods. Here, the trustee’s possessory interest in the car comes into competition with the unperfectedsecurity interest of the lessor. On a plain reading of s. 20(b)(

i) of the PPSA, the lessor’s interest in the car is ineffective against thetrustee. While the effect of s. 20(b)(i), on the present facts, is that the trustee ends up with full rights to the car when the bankrupt hadonly a right of use and possession, s. 20(b)(

i) modifies the principle that a trustee is limited to the rights in the property enjoyed by thebankrupt. The issue is not ownership of the vehicle, but rather priority to it.

Although federal bankruptcy legislation provides that atrustee shall step into the shoes of the bankrupt and as a general rule acquires no higher right in the property of the bankrupt than thatwhich the bankrupt enjoyed, it is a policy choice of the legislature that an unsecured creditor’s position, as represented by the trustee, ismore meritorious than the unperfected security interest of a secured creditor.” [31] Continental argues that the facts of Giffen are distinguishable because the lessee in that case was legally entitled to possess thevehicle under the lease, which was still in existence as of the date of bankruptcy.

The lessee was named, along with the lessor, as aregistered owner on the title to the vehicle. [32] Continental maintains that the decision by the small claims court put an end to the lease such that it ceased to exist, and that Ms.Negru’s possession of the shed was therefore unlawful. Continental argues that it was the only entity with any interest in the shed. However, Continental could not point to any jurisprudence to support its contention that it can effectively side-step the requirements ofthe PPSA and the BIA and become a de facto secured credit under these circumstances.

It was acknowledged by counsel for Continentalthat it would be new law. [33] While Continental maintains that the Oder for Delivery of Personal Property somehow extinguished the lessee’s right ofpossession, that order is a judicial order which Continental acknowledges was never fully executed upon. That is, the shed was neverrepossessed and returned to Continental or its agent. [34] The Trustee cites section 70(1) of the Bankruptcy and Insolvency Act, which reads: “70

(1) Every bankruptcy order and every assignment made under this Act takes precedence over all judicial or other attachments,

garnishments, certificates having the effect of judgments, judgments, certificates of judgment, legal hypothecs of judgment creditors, executions or other process against the property of a bankrupt, except those that have been completely executed by payment to the creditor or the creditor’s representative, and except the rights of a secured creditor.” [ 35 ] Here, we know that Continental is not a secured creditor.

And, given that the Order for Delivery of Personal Property was not fully executed upon by Continental prior to the bankruptcy, s. 70(1) provides that the provisions of the Bankruptcy and Insolvency Act take precedence. [ 36 ] As stated by Houldon, Morawetz and Sarra in their Annotated Bankruptcy and Insolvency Act , the purpose of that provision is to ensure that unsecured creditors do not obtain a preference over other unsecured creditors.

That, in my view, is what Continental is attempting to do – to make itself a secured creditor when it simply is not one. [ 37 ] The Court acknowledges that Continental was thwarted in its efforts to recover the shed from the lessee on default. That is not in dispute. But it cannot be forgotten that, to the extent that Continental will suffer any financial prejudice due to its inability to recover the shed, that prejudice is due to its own failure to comply with the requirements of the PPSA.

If Continental had done so, it would stand as a secured creditor and the shed would be returned to Continental. [ 38 ] I am not, therefore, satisfied that the Trustee has made any error. Rather, I am convinced that the Trustee’s

interpretation is correct. [ 39 ] The motion is therefore dismissed with costs of $2,000.00 inclusive of disbursements and HST. DATED at Moncton, New Brunswick this 20 th day of October 2023. _____________________________________ Robert M. Dysart, Judge of the Court of King’s Bench of New Brunswick