A registration made under the Ontario PPSA1 serves as notice to all third parties of the existence of a security interest held by a creditor over the assets of a debtor. Registering one’s security interest is a relatively simple process whereby a creditor may unilaterally provide the requisite information to the Ontario PPSA registrar, in the form of a financing statement, in order to complete the registration. Unfortunately, the ease of registering a financing statement under the Ontario PPSA can be exploited by fraudulent parties.

In Myers2, National Bank of Canada (the Bank) retained a law firm (the Firm) to recover the unpaid balance of a line of credit provided by the Bank to Gail and Larry Blackman (collectively,Blackman). Upon receiving a demand letter from the Firm ordering that the unpaid balance be paid, Blackman responded with a request for verification of the debt. Several letters were then exchanged between the Firm and Blackman. The Firm eventually commenced a proceeding in Small Claims Court, which went undefended by Blackman, resulting in a default judgment in favor of the Bank.

After being noted in default, Blackman exchanged additional letters with the Firm where Blackman asserted that a monetary “penalty” would be applied to the Firm if it continued to pursue the outstanding judgment. Ultimately, Blackman responded by registering a financing statement under the Ontario PPSA (the PPSA Filing) purporting to perfect its security interest as a secured creditor of the Firm and provided the Firm with an invoice stipulating the penalty owed by the Firm to Blackman. While the PPSA Filing asserted a security interest in all of the Firm’s personal property, it was patently unfounded as Blackman had registered the security interest in the absence of both a legitimate debt and a security agreement signed by the debtor.  Under the Ontario PPSA, a signed security agreement is a condition precedent to the creation of a valid and perfected security interest.

In response to the discovery of the PPSA Filing against it, the Firm made a demand under Section 56(2) of the Ontario PPSA, requiring Blackman to discharge the PPSA Filing. Upon hearing the application by the Firm, the Court stated that “it is clear on the facts that the PPSA registration against the applicants was filed without colour of right and should be discharged forthwith.”3 Additionally, the Court ordered Blackman to pay $500 to the Firm as per section 56(4) of the Ontario PPSA, and awarded costs on a substantial indemnity basis (75%) to the Firm.

Myers is an excellent depiction of the mechanisms and remedies that exist and are available under the Ontario PPSA to protect debtors from improper filings made against them. Further,Myers serves as a warning to any party that may attempt to file a fraudulent financing statement under the Ontario PPSA in order to extract an advantage in litigation or a contractual dispute that these actions will not be tolerated by the courts.  In the case of such fraudulent activity, a demand letter written by the debtor and provided in accordance with Sections 56(2) and 56(4) to the (fraudulent) secured party requires that secured party to discharge its security interest within 10 days of receiving the demand letter. If the secured party does not comply with Sections 56(2) and 56(4), the Court can (and likely will) discharge the fraudulent security interest and award the cost of litigation, in addition to $500, to the innocent party.