Innovation Credit Union v. Bank of Montreal [2009] S.J. No. 147; 2009 SKCA 35, on appeal from 2007 SKQB 471

October 1991:     Saskatchewan farmer James Buist (“Debtor”) granted a general security agreement to Innovation Credit Union (“CU”). The general security agreement was not perfected under the Saskatchewan Personal Property Security Act (“PPSA”) by registration.

1998 – 2004:      Debtor obtained loans from Bank of Montreal (the “Bank”) secured by s. 427 Bank Act security. Debtor did not tell the Bank about his debt and security to the CU. The Bank searched the PPSA and found no security registration.

Late 2004:      Debtor defaulted on his loans to the CU, which seized his agricultural equipment and hay.

At trial, the Court held in favour of the Bank on the basis that the CU was unsecured at provincial law, being unperfected.

The Court of Appeal disagreed and gave priority to the CU on the basis that:

  1. the Court of Appeal did an exhaustive analysis of the cases interpreting the Bank Act section 428(1) priority rule, and found it provided no rules on priority to prior existing security interest. Section 428(1) provides priority to a bank for subsequently acquired rights;
  2. nor did sections 427(2) and 435(2) of the Bank Act provide a priority rule for this situation. It held section 425(2) gives the Bank only an interest in the rights of the Debtor that existed at the time the section 427 security is created;
  3. the Court turned to provincial law to determine what rights the Debtor had in the collateral when the Bank Act security was taken;
  4. by section 12 of the Saskatchewan PPSA the CU had an “attached” “security interest” to all of the Debtor’s present and future assets;
  5. by section 2 of the PPSA title is disregarded;
  6. a failure to register does not affect the validity or enforceability of the security interest, and the Court gave as an example the section 35 priority rule among unperfected security interests;
  7. therefore, by section 427(2) and 435(2) the Bank acquired its interest in the collateral subject to the prior rights of the CU; and
  8. “In short, in the within appeal, the Bank cannot insist on registration under a system of which it is not a part and that it has not adopted”. [at para. 67]