Baker (re), 2022 NSSC 115

SUPREME COURT OF Nova Scotia IN BANKRUPTCY AND INSOLVENCY Citation: Baker (re) , 2022 NSSC 115 Date: 20220427 Docket: No. 44807 Registry: 02 Truro-Pictou Estate Number : 51-2592157 In the Matter of: The bankruptcy of Mark Arthur Baker Registrar: Raffi A. Balmanoukian, Registrar in Bankruptcy Heard: August 25, 2021, in Amherst, Nova Scotia Final Written Submissions: October 5, 2021 Counsel: Stephen Kingston and Hilary Gilroy, for the appellant, Amherst Chrysler

(1999) Limited Tim Hill, QC, for the Respondent Trustee, MNP Ltd. Mark Arthur Baker, not participating or attending Balmanoukian, Registrar: Introduction [ 1 ] This is an appeal pursuant to

Section 135 of the Bankruptcy and Insolvency Act , RSC 1985, c. B-3 , as amended. Amherst Chrysler

(1999) Limited (“Amherst”) appeals against a disallowance of its claimed security on a vehicle possessed by Mark Arthur Baker (“Baker,” or the “bankrupt”), by his trustee, MNP Ltd. (the “Trustee”).

Amherst claims that its relevant security is valid without registration under the Personal Property Security Act , SNS 1995-6, c. 13 as amended (“PPSA”), either because it is a “true lease,” or because it is for a lease of not more than one year, including renewals. [ 2 ] The Trustee originally took the position that the security was invalid because Amherst’s registered financing statement, which was for the same vehicle over a four year period, omitted the debtor’s middle name. As it turns out, this financing statement did not govern the debtor-creditor relationship at the time of bankruptcy.

Instead, Baker returned the subject vehicle to Amherst a few days prior to his assignment in bankruptcy (that assignment was December 4, 2019), and entered into a new lease arrangement for a one year period (November 2019-2020) and again for a second one year period (2020-21). These are the arrangements in issue in these proceedings. All were for precisely the same amount, namely $818.35 monthly plus tax.

The 48 month lease contained a note as to a residual value of $15,000 [1] ; the one-year leases did not. [ 3 ] The Trustee, though counsel, originally appeared to impugn the veracity or authenticity of the twelve month leases, seeking to cross-examine Amherst’s officials. Those aspersions were abandoned at the beginning of the hearing (but not before), and the matter proceeded with oral and written submissions, and affidavit evidence.

No objection was otherwise taken to the scope of evidence, or to my authority to consider it. [ 4 ] No evidence was adduced to me as to the grounds, reasonable and probable or otherwise, for these suspicions. I will return to that at disposition. [ 5 ] It was in evidence that a PPSA search, using proper search protocols, would not have revealed the original 48 month lease. As such, the disallowance of that security, as against the Trustee, was quite proper. The Trustee’s current error, says Amherst, is that it did not reconsider its position upon being informed of the subsequent 12-month leases.

Again, it says that these are valid as against the world either as “true leases,” or as leases which, together with renewals, are for not more than one year. [ 6 ] While Amherst submitted the relevant security is a “true lease,” it focused on its assertion that the relevant leases are for not more than a year. [ 7 ] The Trustee says that these are not “true leases,” and as each lease provides for month-to-month “continuations,” they are for a period of over one year and require registration to be valid as against the Trustee. Since they weren’t so registered, the Trustee says they aren’t valid against it.

[ 8 ] At the conclusion of oral submissions, I asked both parties to submit post-hearing briefs on whether there is a distinction in law, as it pertains to the PPSA, between lease “renewals” (as that language appears in the PPSA), and “extensions” (or, in the language of the lease, “continuations”). I further asked for submissions whether a “renewal,” or “terms,” for the purposes of the PPSA, must be for the same term as the original. I also asked, as a corollary, whether anything that takes the contractual relationship over one year triggers the perfection requirement under the PPSA.

Both parties made such post-hearing submissions. I consider this point crucial because the impugned leases contain the following provision: (

c) Extended Lease Term on a month to month basis as to any Vehicle shall be permissible. Either Lessor or Lessee may, at least 30 days, but not more than 90 days, prior to expiration of this Lease, offer in writing to the other party to continue the lease, and if the offer is accepted, the Lease shall be continued on a month to month basis , and all terms thereof shall remain [2] otherwise in full force and effect. [emphases added].

Law [ 9 ] The parties essentially agree that the applicable provisions of the PPSA are as follows: 2(1) (y) “lease for a term of more than one year” includes … (iii) 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 , [with exceptions not applicable here; emphasis added] 4

(1) Subject to

Section 5, 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; …

(2) Subject to Sections 5 and 56, this Act applies to (

a) a commercial consignment; (

b) a lease for a term of more than one year ; (

c) a transfer of an account or chattel paper; and (

d) a sale of goods without a change of possession, that does not secure payment or performance of an obligation. [ 10 ] Although neither party referred to it, the definition of “security interest” is also relevant: (2)(a) (ar) “security interest” means (

i) an interest in personal property that secures payment or performance of an obligation , but does not include the interest of a seller who has shipped goods to a buyer under a negotiable bill of lading or its equivalent to the order of the seller or to the order of an agent of the seller, unless the parties have otherwise evidenced an intention to create or provide for a security interest in the goods, and (ii) the interest of (

a) a consignor who delivers goods to a consignee under a commercial consignment, (

b) a lessor under a lease for a term of more than one year , (

c) a transferee under a transfer of an account or a transfer of chattel paper, or (

d) a buyer under a sale of goods without a change of possession, that does not secure payment or performance of an obligation ; [emphases added] [ 11 ] Section 4(1)(

a) might be paraphrased as the “substance over form” provision. Section 4(2)(

b) might be paraphrased as the “true lease” provision, provided that it is not for more than one year (as defined by the PPSA). Analysis – True lease versus security interest [ 12 ] Amherst submits that its lease, being for less than a year, does not “secure payment or performance of an obligation;” in other words, is a true lease that is not captured by either 4(1) or 4(2) of the PPSA. The Trustee begs to differ. [ 13 ] Amherst points out that the 12-month lease in question does not contain an option to purchase, or a vesting at lease end. It says that it is Amherst’s “policy,” if it becomes aware of a lessee’s financial difficulty, to terminate any existing arrangements and to reassess

on a case-by-case basis. It says that is what happened here – Mr. Baker, only freshly into his 48 month arrangement, returned the vehicleshortly before his assignment in bankruptcy. The vehicle, and he personally, were deemed worthy of a new, but shorter, leasearrangement. They did so – twice. [14] It will be recalled that each of the three leases were on identical payment terms.

The 48 month lease had a notation as to a$15,000 residual value; the 12 month leases did not. [15] Amherst says that a significant factor in whether a financial arrangement is a “true lease” or a “lease to secure an obligation” iswhether the contract contains an option to purchase or automatic vesting or obligation to purchase.

It says, citing Personal PropertySecurity Law (Toronto: Irwin Law Inc., 2005) that since none of these exist in the lease at bar, it is a “true lease” and thus outside of thescope of the PPSA. [16] The Trustee submits that the western legislation analyzed by Amherst is different from that in Nova Scotia. The Trustee citesDonaghy v. CSN Vehicle Leasing (1992), (AB KB), 4 Alta. LR (3d) 40 (QB), which notes that in Alberta, thequestion of “lease for more than a year” is germane whether or not it secures payment or performance of an obligation.

Thus, in Alberta,the only issue is the second one at bar, not whether the impugned arrangement is or is not a “true lease.” [17] The Trustee goes on to say in its brief that “[t]he efforts by Amherst Chrysler…..that the lease did not create a security interest‘in substance,’ founders upon the inclusive nature of the provisions of the PPSA,” going on to submit that if it was for more than a year,it must be registered. [18] I take a somewhat different view on the “substance versus form” question.

The legislature, by explicitly saying that a lease formore than a year that “does not secure payment or performance of an obligation” is subject to the PPSA, is clearly saying that a lease forless than that is not subject to the PPSA if it does not secure payment or performance of an obligation. Otherwise, the

section (andduration of the lease) would be meaningless. It further makes this distinction clear in the definition of “security interest” by saying that alease for more than one year that does not secure payment or performance of an obligation is captured in the definition. [19] Thus, we return squarely to the question of whether this is a “true lease.” If it is not, then regardless of length, it is subject tothe PPSA.

If it is a true lease, then the secondary question of whether it is for more than one year arises. [20] That said, I also do not agree with Amherst’s submissions which appear at least to imply that the question of “what happens atthe end of the lease” is nearly if not actually determinative of the question of “true lease.” Amherst appears to submit that if thelanguage does not contain a requirement to purchase, or automatic transfer of title at lease-end, then it is ipso facto a true lease.

It citesand distinguishes Registrar Cregan’s decision on Re Doran, 2006 NSSC 123 on that basis. [21] In Doran, the bankrupt had a weekly lease, renewable for three years; it also contained an option to purchase. At the end (thatis, in the language of the lease, “if you renew your agreement for 156 successive weeks”), ownership transferred to the lessee. [22] I agree with Registrar Cregan’s analysis that the subject contract was in substance a security agreement, requiring registration,because of its renewability and end-date vesting.

However, I disagree with Amherst that this necessarily leads to two conclusions itwould have me draw from that: first, that the lack of a vesting / option to purchase in Amhert’s contract makes it a “true lease,” andsecond that this type of vesting/option is the only way to make a lease arrangement a transaction captured by the “substance over form”language in s. 4(1) of the PPSA. [23] Put another way (and to reiterate), if a lease is for more than one year, it must be registered to be valid as against a Trustee,whether or not it secures payment or performance of an obligation (as captured in the definition of “security interest” above); if it is for ayear or less, one must then look to the “substance over form” as to whether the impugned transaction “in substance creates a securityinterest, without regard to its form…” [24] Justice Rosinski has reviewed “true leases” versus “security interests” in the context of contributions for CCAA costs in ReAtlantic Diversified Transportation Systems, 2018 NSSC 77.

Although this classification was not the central issue before him, thedistinction was important as it factored into how much (if anything) the lessee would have to contribute towards professional fees as “incircumstances of a ‘true lease,’ lessors are generally exempted from the allocation of such administrative expenses.” (para. 27) Heconcluded, on the facts of that case, and recognizing the distinction between “a ‘true lease’ rather than a ‘security interest or ‘financinglease’” (para. 26), that the leases in issue were “true leases.” [25] So what do we have here?

It will be noted that each contract between the bankrupt and Amherst had identical monthlypayment terms. The first 48 month lease was for a new vehicle[3]; the first 12 month lease was for a nearly-new vehicle; the second 12month lease was for a vehicle with 16 months’ service. [26] I do not have evidence of what a ‘true rental’ rate would be for 12 or 48 months. But what I do have in evidence is that the ratefor a brand new vehicle, a slightly-used vehicle, and a vehicle in its second year on the road are all identical.

Would a person ‘off thestreet,’ with the independence to pick any of these, be ambivalent about which one they leased and be prepared to pay precisely the sameamount for the next 12 (or 48) months? Certainly not. [27] It is therefore clear to me that what was in place here was a situation in which Amherst was prepared to continue doingbusiness with the bankrupt, but on a short term and “take it or leave it” basis, and only with the same cash flow as would have been thecase had Mr. Baker not encountered his financial difficulties.

Amherst admits that it has a repossession policy if it becomes aware of abankruptcy or insolvency, even if the lease is being paid, and that it will enter into new arrangements on a case-by-case basis. [28] I therefore conclude that the substitution of a 48 month lease with 12-month leases, identical financially except as to term andreference to the residual, created in substance a “financing lease” rather than a “true lease.” To hold otherwise would ignore thecommercial reality that the parties treated a 48 month lease on a new truck, a 12 month lease on a slightly used truck, and a 12 monthlease on a truck with 16 months’ service as identical when in the real world, they are not.

While I do not have in evidence what the

residual value is of the vehicle at each milestone, it is clear the parties were working the math on the same trajectory, regardless of when each had the right to walk away. [ 29 ] This is adequate to dispose of the appeal. However, in the event that I am wrong and the relevant transaction between the parties is in fact a “true lease,” I turn to the question of whether the 12 month lease was for “more than a year” so as to come within the registration requirement for it to be valid as against the Trustee.

Lease for more than a year [ 30 ] It will be recalled from the above that the 12 month lease is for exactly a year. It however provides for either party, on proper notice, to “continue” the lease on a month to month basis. It will further be recalled that that PPSA definition of “lease for a term of more than one year” includes a lease with an original term of a year or less, but which contains provisions for renewal, either by agreement or at the instance of one of the parties.

The question is then whether these provisions for continuance make it a “lease for more than a year” so as to require registration so as to be valid as against the Trustee. [ 31 ] As noted above, I asked counsel to provide post-hearing briefs on whether (

a) there is a distinction in law, for PPSA purposes, between a lease renewal and a lease extension and (

b) whether, for PPSA purposes, such an ongoing relationship must be for the same length as the original term (ie one year) to constitute a “renewal” within the meaning of the PPSA – in other words, whether a continuation of a year’s lease on a month to month basis is or is not a “renewal” for the PPSA. [ 32 ] Neither counsel, despite diligent and commendable efforts, found cases directly on point. [ 33 ] Amherst candidly concedes that “[w]e have not located any judicial

interpretation or guidance on the difference between renewals and extensions in the specific context of the PPSA.” However, it goes on to cite several cases in which courts have drawn this distinction at common law, including Pothier v. Parkland Fuel , 2021 NSSC 41 . [ 34 ] Amherst is also candid in its admission that the Court’s question of whether a ‘renewal’ within the meaning of the PPSA must be for the same length of time as the original lease, or if it can be for another term, is a “novel issue that requires statutory

interpretation.” Amherst goes on to cite cases which skirt the issue of whether different-term continuations run afoul of the “more than one year” PPSA requirement, but do not directly address it. [4] [ 35 ] In this regard, the Trustee agrees. Both cite, quoting different cases [5] , the well-known catechism from Driedger, Construction of Statutes , 2 nd . Ed. (Toronto: Butterworths, 1983) at p. 87 that …the words of

an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament. [ 36 ] So what is that scheme, object, and intention in the PPSA? In my view, the Trustee is on point when it cites Walsh, An Introduction to the New Brunswick Personal Property Security Act , (para. 11 of its brief).

In discussing the rationale for the “one year” rule, Professor Walsh states, at p. 34: However, s. 3(2)(b) [of the New Brunswick Act, identical to Nova Scotia’s 4(2)(b)], in company with its western counterparts, also brings all true leases [6] in excess of one year in term within its scope. Two rationales support this initiative . The first is the so-called ostensible ownership problem.

Financing leases and true leases share a common characteristic: both involve a separation of ownership and possession thereby creating a potential prejudice to third parties who deal with the lessee in the belief that possession means ownership. The imposition of a registration requirement ensures that the true state of title is publicized. The second rationale is to avoid unnecessary litigation and ensure that doubtful or borderline cases do not escape the application of the Act . The issue is whether an agreement in the form of a lease is a true lease or a financing statement under

article 9 of the OPPSA, neither of which include true leases within their scope. [emphasis added] [ 37 ] In my view, the scheme, purpose, and intention of the PPSA is to require registration if, in fact, the commercial reality of the lease is such that the relationship between the parties is contemplated to exceed a year. The purposes outlined by Professor Walsh do not turn on the form of contract – that is made clear by the “substance over form” provision in s. 4(1) of the PPSA.

Similarly, the fact the relationship between the parties may “continue” – to use the exact wording in the lease at bar – beyond a year does not turn on whether it is for the same term as the original. The point is that the legislature intended to capture commercial arrangements that would, or could , go beyond a year either as of right or by agreement of the parties.

This is buttressed by the legislature’s choice of wording that the registration requirement is triggered if “one or more terms…. may exceed one year.” [ 38 ] I do not agree with counsel for the Trustee in his oral submissions that “renewal” as used in the PPSA and “continue” as used in the lease is “just semantics.” I do however conclude that the ultimate purpose of the PPSA is to capture commercial realities in which possession of a leased chattel otherwise subject to the Act may, by agreement or as of right, remain with the lessee for more than one year. [ 39 ] In the present case, the reality is Amherst terminated its original 48 month lease in favour of two consecutive twelve month leases, all of which had the “month to month continuation” clause 9(c).

The parties, each time, clearly contemplated that their relationship could, by agreement, go beyond the original term. I thus conclude that each of these is a lease captured by the definition of “lease for a term of more than one year” in 2(1)(

y) of the PPSA, and required the not-onerous act of registration under 4(2) to be valid as against the Trustee. Conclusion [ 40 ] I dismiss Amherst’s appeal. The disallowance of security is sustained. For greater certainty, this applies to the original

disallowance, as well as to the 12 month lease in effect at the bankruptcy. [ 41 ] Ordinarily, this disposition would entitle the Trustee to costs. In this case, the matter was set down for Amherst as counsel for the Trustee sought to cross-examine three deponents, all in the Amherst area, where the contract arose and where the debtor resides. This initial requirement for witness attendance appears to have been founded on the Trustee’s challenge, via counsel, as to the authenticity or veracity of one or more of the leases.

No evidence or basis for such challenge was ever made known to the Court, and at the last minute these challenges and requirement for witness attendance/cross examination were abandoned. Given the seriousness of the aspersions, in my discretion I decline to award costs. Each party shall bear their own. Balmanoukian, R. [6] It will be recalled that I have found that the lease at bar is not a “true lease.” However, Nova Scotia’s PPSA imposes the registration requirement on both “financing leases” over a year. Thus, Prof.

Walsh’s rationale for the registration requirement applies here, if I find that the lease in question is “for more than one year.”