THE BANK OF NOVA SCOTIA, v. SCOTIA DEALER ADVANTAGE INC.,, 2022 NBKB 203

Citation: 2022 NBKB 203 Date: October 25, 2022 Docket: FC-66-2022 IN THE COURT OF KING’S BENCH OF NEW BRUNSWICK TRIAL DIVISION JUDICIAL DISTRICT OF FREDERICTON BETWEEN: THE BANK OF NOVA SCOTIA, and SCOTIA DEALER ADVANTAGE INC., Plaintiffs – and – DARCY TUCKER HOLDINGS LTD., Defendant Date of Hearing: June 14, 2022 Date of Decision: October 25, 2022 Subject Matter: PPSA Priorities Before: Justice Terrence J. Morrison At: Burton, New Brunswick Appearances: Anthony S. Richardson for the Plaintiff W. Allen Miles for the Defendant

D E C I S I O N Morrison, J. I. INTRODUCTION [ 1 ] This is a motion by the Bank of Nova Scotia and Scotia Dealer Advantage (collectively “BNS”) seeking orders pursuant to the Personal Property Security Act , SNB 1973, CP-7.1 (the “PPSA”) for the recovery of possession and disposition of certain vehicles currently in the possession of the Defendant, Darcy Tucker Holdings Inc. (“DTHI”). II. FACTS [ 2 ] DTHI is a vehicle wholesaler. DTHI entered into an arrangement with Auto Pride Ltd., doing business as DMR Auto Sales (“DMR”), whereby DTHI would supply DMR with vehicles.

DMR would then sell the vehicles to its customers in the ordinary course of business. [ 3 ] Part of the arrangement between DTHI and DMR was that DTHI would retain the registration of the vehicles in its name until the vehicles were sold and DMR paid DTHI. In furtherance of this arrangement, DTHI would conduct a weekly inventory check to determine what vehicles had been sold. [ 4 ] DMR would sometimes arrange financing of vehicles sold, or to be sold, to customers through BNS.

Customers would sign credit agreements with DMR, which credit agreements would be assigned to BNS in return for advancing purchase financing. [ 5 ] DMR sold four vehicles (the “Vehicles”), described below, to four separate customers:

a) a 2019 Ford F150, VIN# 1FTEW1E57KFB51187

b) a 2019 Chevrolet Silverado, VIN# 1GCPYDEK3KZ271268

c) a 2017 Chevrolet Silverado, VIN# 3GCUKREC4HG508868

d) a 2016 Hyundai Santa Fe, VIN# 5XYZUDLA2GG3611998 [ 6 ] The customer of each of the Vehicles signed credit agreements with DMR that DMR then assigned to BNS. BNS took “purchase money security interests” or “PMSIs” in the Vehicles as financing was advanced to DMR Auto.

The PMSI security interests taken by BNS were then registered by way of financing statements in the New Brunswick Personal Property Security Registry System within fifteen days of the customer taking possession of the respective vehicle. [ 7 ] A sales representative of DMR allegedly engaged in fraudulent activity in that he sold vehicles to customers without paying DTHI for the vehicles pursuant to the arrangements made between DTHI and DMR.

DTHI was not made aware of these transactions and was not paid for the Vehicles. [ 8 ] DMR filed for bankruptcy on December 22, 2021. [ 9 ] Upon learning of the BNS security interests in the Vehicles and the names of the customers who bought them, in January 2022, DTHI began seizing the Vehicles. DTHI continues to have possession of the Vehicles.

[ 10 ] BNS, citing its registered and ranking perfected security interests in the Vehicles, demanded that DTHI return the Vehicles to BNS. DTHI has refused to do so. [ 11 ] As a result of DTHI’s failure to return the Vehicles, BNS commenced the within action against DTHI, seeking return of the Vehicles or, alternatively, damages for unlawful seizure. The present motion is brought, seeking a determination of the priorities in the Vehicles and certain enforcement orders pursuant to s. 34(1)(a), 63 and 67 of the PPSA .

Alternatively, BNS seeks an order for interim recovery of personal property pursuant to Rule 44 of the Rules of Court . III. ISSUES [ 12 ] The following are the issues for determination: (

a) Has BNS used the proper procedure to apply for the relief sought? (

b) Should this matter be determined pursuant to s. 63 and 67 of the PPSA without a full-blown trial? (

c) Does BNS have priority to the Vehicles? IV. ANALYSIS AND DECISION A. Has BNS used the proper procedure to apply for the relief sought? [ 13 ] BNS initiated this proceeding by commencing an action by way of a Notice of Action With Statement of Claim Attached. BNS then brought this motion for relief under s. 63 and 67 of PPSA . Both of those sections state that “on application” by a person with an interest in the collateral, the court may make certain orders. Counsel for DTHI submits that the

section requires that BNS proceed by Notice of Application, and not by Notice of Action, and then a motion. Counsel for DTHI did not refer to any case law to support this position. I disagree. [ 14 ] One can apply to the court either by way of Notice of Motion or Notice of Application. The use of the words “on application” in s. 63 and 67 of the PPSA does not require that the application be made by way of notice of application. The circumstances when one must proceed by way of Notice of Application are determined in accordance with Rule 16.04, or by specific statutory direction.

Neither prohibits the use of a Notice of Motion in this case. B. Should this matter be determined pursuant to s. 63 and 67 of the PPSA without a full-blown trial? [ 15 ] Counsel for DTHI submits that this matter should not be determined without a full-blown trial. DTHI argues that there are factual disputes, and the motion by BNS for relief under s. 63 and 67 of the PPSA is an attempt to decide these issues without the important procedural steps of a trial. I disagree. [ 16 ] First, DTHI’s position runs counter to the Supreme Court of Canada’s direction in Hryniak v.

Mauldin , emphasizing a cultural shift away from the conventional trial in favour of proportional procedures tailored to the needs of a particular case. [ 17 ] Second, it is clear that s. 63 and 67 of the PPSA give the court liberal supervisory powers, and provide for an expedited process for resolving priority disputes. In her text, An Introduction to the New Brunswick Personal Property Security Act , (1995), Faculty of Law, University of New Brunswick, Professor Catherine Walsh provides insightful commentaries with respect to the provisions of the PPSA .

The commentary with respect to s. 63, found at p. 295, is as follows: During the enforcement process, it may become necessary for the secured party, the debtor or an interested third party to seek judicial recourse to enforce compliance, or to obtain relief from compliance, with the default enforcement provisions of the Act or simply to request directions in the face of unforeseen circumstances. S. 63 ensures that the Court has liberal discretionary powers in this regard. [Emphasis added]

[18] With respect to s. 67, Professor Walsh has this to say, at p. 308: Disputes regarding priority and entitlement to collateral typically turn on the law. Usually there is no need to have a full-blown trial since the relevant facts can be established by affidavit evidence or agreement. S. 76 therefore confirms the right of “aninterested person” to proceed by way of notice of application for an order determining questions of priority or entitlement to collateral.

On the hearing of the application, the Court is empowered to make the order or, in the event complications emerge, to direct an action tobe brought or an issue to be tried. [Emphasis added] [19] In my view, the record discloses sufficient facts to determine the priority interests in this matter without the need for a trial. C.

Does BNS have priority to the Vehicles? [20] Counsel for DTHI submits that DMR did not own or control the Vehicles and therefore had no power or authority to transferrights in the Vehicles to BNS by way of security, or to third-party purchasers, until DTHI was paid for the Vehicles and registrationtransferred. In support of its position, DTHI points to the following facts: 1. DTHI retained the registration of the Vehicles in its name. 2. DTHI had no involvement with third-party purchasers. 3. DMR did not pay DTHI for the Vehicles and DTHI did not transfer ownership of the Vehicles to DMR. 4.

Although DMR had the keys to the Vehicles, this was only for the purpose of moving the Vehicles on the lot as the need arose. [21] DTHI argues that the indicia of ownership favours a finding that it was (and is) the true owner of the Vehicles. Accordingly,DTHI submits that, DMR having no proprietary right in the Vehicles, could not grant or acquire security interests in them.

A basic PPSArequirement is that the debtor must have rights in the collateral before a security interest can attach (s. 12(1); Cuming, Walsh, and Wood,Personal Property Security Law, Irwin Law, 2012 (2d) (“Cuming”) at 247). [22] BNS submits that, except for retaining the registrations of the Vehicles, all of the indicia of title resided with DMR, andthrough it, to the third-party purchasers. In support of its position, BNS points to the following facts: 1. DMR had possession and control of the Vehicles on their lot, including the keys to the Vehicles. 2.

The third-party customers attended the DMR premises and entered into credit agreements under which the customers were referred toas “Borrower (Buyer)” and DMR as “Seller (Dealer)”. 3. The credit agreements provided for an outright bona fide sale, for, after signing the credit agreements, the customers took possessionof the Vehicles. [23] With respect to the question of DTHI retaining the registration, BNS points to several cases where the registered owner wasfound not to be the true owner, where other indicia of title resided with another party (Thériault v. Aubin, (1991) (NBCA), 121 NBR (2d) 235; Bourgeois v.

Economical Mutual Insurance Company, 2018 NBQB 85; Estephan v. Dykeman, 2020 NBQB 65). [24] In my view, but for retaining the registration, all other indicia of title resided with DMR, and through it to the customers. Inany event, it must be remembered that the PPSA is not concerned with ownership but rather a proprietary interest. Attachment of asecurity is governed by s. 12(1) of the PPSA. In Cuming, supra, at p. 247-248, the authors comment on the attachment rules of s. 12(1)as follows: A security interest is a proprietary interest. As such, it requires the debtor to have a proprietary right in the collateral.

Otherwise, there is nothing to which the security interest can attach. This basic idea is reflected in the PPSA requirement that the debtormust have “rights in the collateral” before a security interest can attach. While the debtor’s rights must be proprietary in character, they need not amount to full ownership. Any type of proprietaryright is sufficient.

…..

In the view of the authors, the result in cases of this kind is more coherently analyzed by accepting that a debtor in lawful possession of collateral has sufficient rights to support attachment of a security interest. [Emphasis added] [ 25 ] In her text, An Introduction to the New Brunswick Personal Property Security Act , Professor Walsh has this to say about attachment under s. 12(1), at p. 84: The expression “rights in the collateral” makes it clear that the debtor’s interest need not amount to full title or ownership: any real right, including an equitable interest or a right of possession, suffices. [Emphasis added] [ 26 ] There can be little doubt that DMR was in lawful possession of the Vehicles.

DTHI voluntarily permitted the Vehicles to be placed or remain at the DMR premises and provided the keys to the Vehicles. In fact, DTHI concedes that the arrangement between it and DMR was that DTHI permitted the Vehicles to be on the DMR premises, and it retained the vehicle registration until paid. Although counsel for DTHI submits that it retained possession, that is patently incorrect. Regardless of “ownership”, the Vehicles were in the possession of DMR, with DTHI’s agreement and consent.

In my view, there was a sufficient interest in the Vehicles to support attachment of the security interests. [ 27 ] The focus on possession is particularly important in cases of this kind. Potential customers of DMR attending at their sales lot and seeing cars for sale would naturally believe that DMR had the authority to sell the vehicles and transfer title to them. In such cases, sellers like DMR are effectively representing to customers that they own the vehicles and can transfer title.

This concept is recognized by the customer protective provisions contained in s. 30(2) of the PPSA: 30(2) A buyer or lessee of goods sold or leased in the ordinary course of business of the seller or lessor takes free of any perfected or unperfected security interest given by the seller or lessor or arising under

section 28 or 29, whether or not the buyer or lessee knows of it, unless the buyer or lessee also knows that the sale or lease constitutes a breach of the security agreement under which the security interest was created. [Emphasis added] [ 28 ] Accordingly, the customers who acquired vehicles from DMR took them free of any perfected (or unperfected) security interest that DTHI might have had. [ 29 ] Recall that BNS took (or acquired) a PMSI security interest in each of the Vehicles.

It is clear from the record that the credit agreements in question meet the definition of PMSI, as they facilitated the third-party purchases. Further, it appears that BNS satisfied the procedural requirements of the PPSA by perfecting the security interests within fifteen days. DTHI does not dispute this. [ 30 ]

Section 35 of the PPSA sets out the priority rules that apply to competing security interests. Generally speaking, a perfected security interest takes priority over an unperfected security interest. Among perfected security interests, the order of registration (“first in time”) determines priority. However, s. 34 creates a super-priority for a PMSI. In her text, at p. 158, Professor Walsh explains the super-priority as follows: Under s. 35(1), competing perfected security interests in the same collateral are ranked according to a first in time rule.

Priority follows the order in which the secured parties completed the perfecting steps necessary to perfect a security interest under the Act : viz . registration of a financing statement under s. 25 or taking possession of the collateral under s. 24 or deemed perfection under ss. 5, 7, 26, 29 or 74. S. 34 creates an important exception to the first in time rule in s. 35(1).

Under s. 34, a purchase money security interest (pmsi) in collateral or its proceeds has priority over any other security interest in the same collateral given by the same debtor, including a prior perfected security interest in after-acquired property . S. 34 thus complements s. 22 under which an unperfected pmsi has priority over the intervening interest of a judgment creditor or trustee in bankruptcy if the pmsi is perfected within fifteen days after the debtor obtains possession of the collateral. [Emphasis added]

[ 31 ] When one views the arrangement between DTHI and DMR, it becomes clear that DTHI retained registration of the Vehicles in its name as security for the amounts owed to it by DMR. As a result, DTHI had a security interest in the Vehicles. It is not clear from the record whether the requirements for attachment were satisfied (s. 12(1) PPSA ). However, it is clear that DTHI did not take any steps to perfect its security interest. Specifically, DTHI did not register/file a financing statement. At best, DTHI had an unperfected security interest in the Vehicles.

If it had perfected its security interests by registration/filing, this entire situation may have been avoided. [ 32 ] For the foregoing reasons, BNS has, by virtue of its registered and first-rank perfected security interest in the Vehicles, priority to the Vehicles over DTHI. V. CONCLUSION [ 33 ] The Plaintiffs’ motion is granted and it is hereby ordered as follows:

a) The Plaintiffs, or their agents, shall be permitted to enter the property of DTHI, located at 1976 Route 620 Highway, Royal Road, New Brunswick, or any other location where the Vehicles might be found, to take possession of the Vehicles (as defined in para. 5, above);

b) DTHI shall inform the Plaintiffs, or the Plaintiffs’ agents, of the specific location(

s) of the Vehicles;

c) DTHI, its agents and its employees shall be restrained from interfering with or otherwise preventing the Plaintiffs, or their agents, from taking possession of the Vehicles; and

d) the Plaintiffs shall be permitted to take possession of and dispose of the Vehicles in accordance with subsections 58(2)(a)-(d), 58(6), 59(2), 59(7), and 59(18)(

f) of the PPSA . [ 34 ] The Plaintiffs, having been successful, are entitled to costs, which I fix at $1500.00. DATED at Burton, New Brunswick, this 25th day of October, 2022. ______________________________ Terrence J. Morrison, J.C.Q.B.