GE financed two tractor trailers for Brampton Leasing & Rentals Ltd. (“Debtor”) under conditional sale contracts and perfected its security under the Personal Property Security Act (Ontario) (“PPSA”).

The Debtor leased the vehicles to lessees, who obtained vehicle insurance from ING. GE was not named as a loss payee by the Debtor or the lessees.

The vehicles were stolen. In the loss claims, Debtor misrepresented to ING that there were no secured claims in the vehicles. ING paid the insured claim, less deductibles, and took salvage in the lost vehicles by operation of statutory condition 6(7) of the Insurance Act (Ontario).

The Debtor became bankrupt. GE learned of the stolen vehicles. ING had recovered both stolen vehicles and sold one of them. GE claimed the one vehicle and sale proceeds of the other.

At trial, the Court held in favour of ING on the basis that the combined effect of s. 4(1)(c) of the PPSA and statutory condition 6(7) deprived GE of the priority that perfection would otherwise afford GE under the PPSA.

The Court of Appeal disagreed. It held in favour of GE for the following reasoning:

  1. The interplay of s. 4(1)(c) of the PPSA and statutory condition 6(7):
    1. Section 4(1)(c) and statutory condition 6(7) do not address priorities. To determine priorities in this case, resort must be had to s. 9(1) of the PPSA. Neither s. 4(1)(c) of the PPSA nor statutory condition 6(7) of the Insurance Act, alone or in combination, constitute an exception to the s. 9(1) PPSA general priorities rule. On the facts of this case, GE’s PMSIs in the Trucks are effective as against ING under s. 9(1).
    2. Under s. 4(1)(c), ING was relieved of the obligation to provide notice of its interests under the ING policies in the PPSA registry. However, while s. 4(1)(c) freed ING from the need to protect its own interests under the PPSA, it did not relieve it of the requirement to be mindful of the PPSA-protected interests of other parties in the same collateral.
    3. The reach of ING’s salvage rights under statutory condition 6(7) is determined by Brampton’s salvage rights as they existed before ING triggered statutory condition 6(7). Brampton’s salvage rights in the Trucks did not extinguish or displace the priority of GE’s PMSIs in the Trucks and their proceeds. As against GE, therefore, ING is in no better position in respect of its salvage rights than was Brampton.” [para. 60]
  2. This was not a s. 28(1) PPSA Sale by the Debtor to ING in the ordinary course of business free and clear of GE’s security interests. The Court quoted G. Fridman in “Sale of Goods in Canada” (5th edition at p. 11-12) to find that a compulsory transfer by law of goods by one party to another is not a purchase transaction.

    Here there was no agreement of purchase and sale at market value, but instead a statutory transfer to enforce the insurer’s rights of subrogation.

  3. There was no s. 25(1) specific or implied consent of GE to a disposition by the Debtor. The Court of Appeal did not see GE’s registration of the vehicle collateral as “inventory” in the financing statement as evidence GE consented to sale of the collateral.

    The court stated that this was a case involving the priorities as between two innocent parties. However, it was the Debtor who misrepresented the facts to the insurer and it must make good to the insurers for any loss occasioned by its lack of good faith or honesty.