2013 ONSC 2190, 2013 ONSC 2190

CITATION : Home Trust Company v. Kitchener (City), 2013 ONSC 2190 COURT FILE NO.: 13-39636 DATE: 2013-04-16 ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: ) ) Home Trust Company ) ) ) James Riewald, for the Applicant ) Applicant ) ) - and - ) ) ) The Corporation of the City of Kitchener ) ) ) Corinn Shantz, for the Respondent ) Respondent ) ) ) ) HEARD: March 26, 2013 CAVARZAN J. REASONS FOR JUDGMENT [ 1 ] This application was heard on March 26, 2013, at the conclusion of which I granted the relief sought by the applicant in accordance with written reasons to follow. These are those reasons.

Background [ 2 ] The applicant, Home Trust Company (“Home Trust”) was the mortgagee of a residential property in Kitchener registered in the name of Linda Khozani. Ms. Khozani entered into a Dealer Conditional Sales Contract (the “agreement”) with the municipally-owned utilities company Ultra Comfort with respect to a Keeprite Air Conditioner.

The air conditioner appears to have been the outdoor compressor unit situated adjacent to an exterior wall and attached to the residence by the requisite piping and electrical supply lines. [ 3 ] The respondent, the Corporation of the City of Kitchener (the “City”) became an assignee under the agreement. [ 4 ] The chronology of events is as follows:

December 14, 2009 – property transfer to Khozani June 4, 2010 – charge: Khozani to Home Trust June 6, 2010 – air conditioner installed on the property July 7, 2010 – Khozani signs the agreement September 22, 2011 – Khozani defaults and Home Trust issues a Notice of Sale November 14, 2011 – the City registers a Notice of Security Interest on title, perfecting its security interest December 2, 2011 – Home Trust sues Khozani for payment under the mortgage and for possession of the property July 31, 2012 – Home Trust takes possession of the property under power of sale [ 5 ] At the time that Home Trust took possession of the property, the Keeprite Air Conditioner was no longer on the property. [ 6 ] Having sold the property, Home Trust wrote to the City asking it to have its Notice of Security Interest discharged.

The City declined, saying that it had not repossessed the air conditioner and demanded from Home Trust full payment from the proceeds of the sale of the property for the amount owing under the agreement. [ 7 ] It is not disputed that the air conditioner was removed by some unknown party without the knowledge of either Home Trust or the City. [ 8 ] In order to facilitate the closing of the sale, the City discharged its Notice of Security Interest on a without prejudice basis on the understanding that the applicant would hold in trust the amount claimed by the City pending a determination by this court as to whether the City is entitled to funds from the proceeds of the sale. [ 9 ] The City framed the issues as follows:

a) Having regard to the provisions and language of the Personal Property Security Act, R.S.O. 1990, c. P. 10 (the PPSA), do the facts create a priority dispute?

b) Do the facts of the case at bar require the City to delete its Notice of Security Interest without securing payment of the obligation?

c) Does the fact that the property was sold under power of sale affect the answer to b), if the mortgage steps into the shoes of the mortgagor? [ 10 ] The position of the applicant is that the purpose of the Notice of Security Interest is to prevent the air conditioner from accruing to its benefit. No benefit can accrue to Home Trust where the air conditioner has been removed from the property and is no longer a fixture on the land.

A Notice of Security Interest registered on title to the property where the collateral is no longer located is a nullity and ought to be discharged from title to the property. [ 11 ] The position of the respondent is that it cannot be the case that mere removal of the collateral from the property can defeat the policy of the PPSA to secure payment or performance of an obligation as contemplated by the definition of “security interest” in subsection 1(1) of the PPSA: “security interest” means an interest in personal property that secures payment or performance of an obligation…” [ 12 ] This is a question-begging proposition because the subsection 1(1) definition of “security interest” does not embody the policy of the PPSA .

It must be interpreted in the context of the entire Act, the underlying assumption throughout being that a chattel or fixture exists on the property. [ 13 ] The respondent invokes

section 27 of the Mortgages Act, R.S.O. 1990, c.

M. 40 which requires that Home Trust apply the moneys arising from the sale in a particular order, including payment of the amounts due to the subsequent encumbrances according to the priorities. [ 14 ] The respondent’s position is that what is involved in the circumstances here is a priority dispute. [ 15 ] To sum up, then, the City’s claim for priority is based on the provisions of the PPSA and on the underlying policy of the Act, i.e. to secure the interests of registrants under that Act in personal property. [ 16 ] The position of the City is that if registration under the PPSA does not confer priority over the interest of the mortgage, then by simply removing a chattel from the property, the policy of the PPSA is defeated. [ 17 ] The position of Home Trust is that registration under the PPSA cannot, according to the terms of the Act, confer an interest in land.

Whether the chattel or fixture is removed from the property or not, registration continues to be effective against any other claim to an interest in the chattel or fixture.

[ 18 ] As particularized below, I would answer the issues as framed by the City as follows:

a) The facts in this case do not create a priority dispute.

b) Yes. See subsection 56(5)(

b) of the PPSA .

c) No. Analysis [ 19 ] For convenience of reference the following provisions of the PPSA are set forth below: s. 1.(1) “collateral” means personal property that is subject to a security interest; “security interest” means an interest in personal property that secures payment or performance of an obligation... s. 4.

(1) Except as otherwise provided in this Act, this Act does not apply, (

e) to the creation or assignment of an interest in real property, including a mortgage, charge or lease of real property other than, (

i) an interest in a fixture, or (ii) an assignment of a right to payment under a mortgage, charge or lease where the assignment does not convey or transfer the assignor’s interest in the real property; s. 11.

(1) A security interest is not enforceable against a third party unless it has attached.

(2) Subject to

section 11.1 [not relevant here], a security interest … attaches to collateral only when value is given, the debtor has rights in the collateral, or the power to transfer rights in the collateral to a secured party and, (

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

i) a description of the collateral sufficient to enable it to be identified, … s. 34.

(1) A security interest in goods that attached, (

a) before the goods become a fixture, has priority as to the fixture over the claim of any person who has an interest in the real property; or (

b) after the goods became a fixture, has priority as to the fixture over the claim of any person who subsequently acquired an interest in the real property, but not over any person who had a registered interest in the real property at the time the security interest in the goods attached and who has not consented in writing, to the security interest or disclaimed an interest in the fixture. [Underlining added] [ 20 ]

Section 34 is found in

Part III of the PPSA entitled “Perfection and Priorities”. s. 34.

(2) A security interest mentioned in subsection (1) is subordinate to the interest of, (

a) a subsequent purchaser for value of an interest in the real property; or (

b) a creditor with a prior encumbrance of record on the real property to the extent that the creditor makes subsequent advances, if the subsequent purchase or subsequent advance under a prior encumbrance of record is made or contracted for without knowledge of the security interest and before notice of it is registered in accordance with

section 54. [s. 54.

(1) A notice of security interest, in the required form, may be registered in the proper land registry office, where, (

a) the collateral is or includes fixtures or goods that may become fixtures …

(5) Where a notice has been registered under subsection (1), every person dealing with the collateral shall be deemed for the purposes of subsection 34(2) to have knowledge of the security interest.] [ 21 ] The remedy given to the secured party who has priority under the PPSA is found in subsections of

section 34 :

(3) If a secured party has an interest in a fixture that has priority over the claim of a person having an interest in the real property, the secured party may , on default and subject to the provisions of this Act respecting default, remove the fixture from the real property if, unless otherwise agreed, the secured party reimburses any encumbrancer or owner of the real property who is not the debtor for the cost

of repairing any physical injury but excluding diminution in the value of the real property caused by the absence of the fixture or by thenecessity for replacement. …

(7) A person having an interest in real property that is subordinate to a security interest in a fixture may, before the fixture has beenremoved from the real property by the secured party in accordance with subsection (3), retain the fixture upon payment to the securedparty of the amount owing in respect of the security interest having priority over the person’s interest. [Underlining added] [22] The City cited the Ontario Court of Appeal decision in G.M.S. Securities & Appraisals Ltd. v. Rich-Wood Kitchens Ltd., (ON CA), 21 O.R. (3d) 761, [1995] O.J.

No. 44, a case which discussed the “circular priority problem” created by prioritiesestablished under the PPSA, under the Registry Act, R.S.O. 1980, c. 445 and under the Mortgages Act, R.S.O. 1980, c. 296. [23] This appeal involved a dispute about the priority of several security interests. In this case the fixtures were cabinets installed byRich-Wood Kitchens Ltd. The dispute was amongst Rich-Wood, a supplier of personal property, and National Trust and G.M.S., twoland mortgagees of the real property upon which Rich-Wood’s goods had become fixtures.

The dispute was over who was entitled topayment from the proceeds of sale after National Trust had sold the property under power of sale. [24] The G.M.S. case is one in which the fixtures were still on the property. In addressing the “circular priority problem”, the Courtstates at page 4 or 9 that:

Section 36 (now

section 34) of the PPSA deals with the priority of security interests in fixtures and must be the starting point of anyanalysis of this issue. As s. s. (1) [now s. 34(1)(a)] is stated to be subject to s. s. (3) [now s. 34(1)(b)], the first step in the analysis is todetermine what priorities are established by s. s. (3). [Emphasis in the original] [25] The above statement supports the applicant’s submission that the PPSA does not create rights in real property. Furthermore, thestarting point for determining priority of interests is the wording in s. 34 of the PPSA. [26] A second proposition emerging from the reasons in the G.M.S. case (at page 7 of 9) is that: “Section 36(1) [now

Section 34]does not require a fixture financier to register its security interest unless it wishes to obtain priority over subsequent advances andsubsequent encumbrancers”. [Emphasis in the original] [27] The respondent invoked

section 27 of the Mortgages Act which speaks to entitlement to the proceeds of sale when the power ofsale is exercised: 27.

The money arising from the sale shall be applied by the person receiving the same as follows: Firstly, in payment of all the expenses incident to the sale or incurred in any attempted sale; Secondly, in discharge of all interest and costs then due in respect of the mortgage under which the sale was made; Thirdly, in discharge of all the principal money then due in respect of the mortgage; Fourthly, in payment of the amounts due to the subsequent encumbrancers according to their priorities; Fifthly, … and the residue shall be paid to the mortgagor. [Underlining added] [28] The priorities referred to in Fourthly of

section 27 above are those established under the PPSA. Application To The Facts Of This Case [29] The City’s security interest in the air conditioner attached after the goods became a fixture (see the chronology at paragraph 4above). Applying the wording of section 34(1)(

b) Home Trust had a registered interest in the real property at the time the securityinterest in the goods attached. Home Trust has not consented in writing to the security interest or disclaimed an interest in the fixture. Had the air conditioner remained on the property Home Trust’s claim would have had priority over that of the City. [30] Also, in terms of fairness and the reasonable commercial expectations of the parties, Home Trust made the mortgage loan (i.e.advanced the full amount of the loan) before the air conditioner was installed on the property.

Home Trust gained no benefit from thesubsequent installation of the air conditioner. [31] Given that the air conditioner was not on the property when Home Trust exercised its power of sale and took possession of theproperty, this is not a case of competing priorities; rather, the issue is: Who should bear the loss when the fixture is removed from theproperty by a party or parties unknown? [32] The PPSA establishes rights and priorities in relation to chattels and fixtures which exist on properties. The Act is silent as to

circumstances like those in this case. Of course, if Home Trust had simply severed the connections which made the air conditioner afixture, as mooted in paragraph 21 of the City’s factum, in order to defeat the City’s security interest, such an attempted circumvention ofthe PPSA would not likely be tolerated. [33] In my view, the terms of the PPSA in their plain and ordinary meaning support the position of the applicant. Fairness and thereasonable commercial expectations of the parties dictate that the City bears the loss in the circumstances. [34] Accordingly there will be: (

a) A declaration that the Corporation of the City of Kitchener has no interest, pursuant to a Dealer Conditional Sales Contract and/orNotice of Security Interest, in the land and premises described as follows: Lot 17, Plan 58M-346 KITCHENER Property Identification Number 22722-1217 LT and-municipally known as 67 Newcastle Drive,Kitchener, ON, N2R 1X2 (the “Property”) (

b) An order declaring that the applicant is not liable for payment to Kitchener under a Dealer Conditional Sales Contract or Notice ofSecurity Interest or otherwise. Costs [35] The successful applicant is entitled to an award of costs. The respondent submits that since this case involves a novel issue thereshould be no award of costs. Reliance is placed on the following proposition found in paragraph 8 of the Endorsement on Costs in theCorporation of the Township of Ramara v.

Mullen, 2012 ONSC 2959 : For an issue to be novel in a way that is legally significant, it might be argued that the issue should not only be one which has not beendecided in the factual context in which it now arises in the instant case, but is also one on which the law in the decided cases does notprovide adequate guidance as to its resolution (whether that is so because of conflicts among the cases or a limitation on the appropriatescope of their application or some other factor).

Such an issue could properly be regarded as open. [36] As noted above, the Court of Appeal has provided significant guidance as to resolution of the issue in this case. The principles ofstatutory

interpretation are well-known and assist in the resolution.[1] Inasmuch as the factual circumstances here bring to light apossible gap or omission in the scheme of the PPSA, it is for the Legislature to rectify the scheme if so advised. [37] There will be an award of costs inclusive of disbursements and applicable taxes in the amount of $2,500.00 payable by therespondent to the applicant within 30 days. ___________________________ Cavarzan J. Released: April 16, 2013 APPENDIX The following extracts from Ronald C. C. Cuming, Catherine Walsh and Roderick J. Wood, Personal Property Security Law (2005)contain helpful commentary on the Ontario PPSA:

Chapter 12 Following and Tracing Into New Forms of Collateral 2) The Priority of a Security Interest in Fixtures The priority provisions of the PPSA governing fixtures cover two different situations. The first is where a security interest istaken in goods before they are affixed to land, the secured party will have priority over a person who has an interest in the land. … A secured party may take a security interest in a fixture that has already been affixed to the land when the security agreement is

entered into. In this case, the security interest in the fixture will be subordinate to existing real property interests unless the holders ofsuch interests consent to the security interest or disclaim their interest in the fixtures. Once the goods are affixed to the land, third parties who thereafter acquire interests in the land will operate under the expectationthat they are acquiring the land including the fixture.

In order to prevent prejudice to these parties, the secured party must file a fixturesnotice in the land registration system to alert such parties that the secured party had the right to remove the fixture from the land. If thesecured party fails to register this notice, it will lose priority against a subsequent real property interest holder who acquires the interestfor value. The security interest will also be subordinate to a prior mortgagee who makes a subsequent advance after the goods areaffixed unless a fixtures notice is registered.

The subordination is not for the entire mortgage debt, but only for the future advance thatwas made. The Ontario Act requires that the subsequent real property interest holder must have been without knowledge of the securityinterest in the fixtures.

Chapter 12 Following and Tracing Into New Forms of Collateral 3) The Role of Real Property Priority Rules The PPSA fixtures provisions are designed to reverse the common law rule that what is fixed to the ground becomes part of theground. This is accomplished by giving the secured party a right to remove the fixtures. In order to assert the right to removal againstsubsequent real property interest holders, it is necessary to register a fixtures notice.

Where a secured party has not registered a fixturesnotice, the security interest in the fixtures may come into competition with both a prior real property interest as well as a subsequent realproperty interest. It is then necessary to understand the interplay between the real property priority rules and the PPSA fixtures priorityrules. [the Ontario Court of Appeal reasons in G.M.S. Securities & Appraisals Ltd. v. Rich-Wood Kitchens Ltd., (1995), (ON CA), 121 D.L.R. (4th) 278 are discussed following the above passage.] CITATION: Home Trust Company v.

Kitchener (City), 2013 ONSC 2190 COURT FILE NO.: 13-39636 DATE: 2013-04-16

ONTARIO SUPERIOR COURT OF JUSTICE B E T W E E N: Home Trust Company Applicant - and - The Corporation of the City of Kitchener Respondent REASONS FOR JUDGMENT Cavarzan J. JC:mg Released: April 16, 2013