On September 14th Ontario Bill 154, Cutting Unnecessary Red Tape Act, 2017 passed first reading. The Bill has various Schedules with the names of each Ministry responsible for the statutes being amended or provisions repealed by each Schedule.
Schedule 9, the schedule that deals with statues that fall under the control of the Ministry of Government and Consumer Services, contains amendments to both the Personal Property Security Act (“PPSA”) and the Repair and Storage Liens Act (“RSLA”) (using the same language for both statutes) to provide that despite an error in the debtor’s name, a registration with the correct VIN in the correct place in the registration will give the secured party a perfected security interest or non-possessory lien in that motor vehicle.
Both the Ontario Bar Association and Ontario’s Business Law Advisory Council, have previously recommended to Ontario that existing case law be codified into both the PPSA and the RSLA and it is finally happening.
To disclose my bias, I am personally very much in favour of this change as set out in my article, linked here Vehicle Identification Numbers versus Debtor Names: We Can Improve Accuracy for PPSA and RDPRM Computer Databases 27 B.F.L.R. 585.
The Bill 154 amendments are going to create a fiscal saving for those who finance, lease, repair or store motor vehicles in Ontario by preserving their PPSA and RSLA registrations and rights to the subject motor vehicle. The background to the problem being rectified by these amendments is set out below.
The PPSA amendments read as follows in section 12 of Schedule 9 to Bill 154:
The Act [PPSA] is amended by adding the following sections:
Deemed not likely to be mislead by error or omissions
46.1 (1) For the purposes of subsection 46(4), in the case of a financing statement or financing change statement in respect of collateral that is or includes a motor vehicle, as defined in the regulations, a reasonable person shall be deemed not likely to be misled materially, insofar as the security interest in the motor vehicle is concerned, by the fact that the statement has one or more errors or omissions described in subsection (2) of this section, if,
(a) the motor vehicle’s vehicle identification number is set out correctly in the designated place on the statement;
(b) the statement sets out at least the name of one debtor and, if the debtor is a natural person, his or her date of birth; and
(c) the statement otherwise substantially complies with the requirements that apply for the purposes of subsection 46(1).
Errors or omissions to which subs. (1) applies
(2) The following are the errors or omissions to which subsection (1) applies:
1. Regarding any debtor named in the statement, the debtor’s name is set out incorrectly or in a way that does not comply with the requirements that apply for the purposes of subsection 46(1).
2. Regarding any debtor named in the statement who is a natural person, the date of birth of the debtor is set out incorrectly or in a way that does not comply with the requirements that apply for the purposes of subsection 46(1).
But the secured party or lien holder does have to get the correct VIN for the subject motor vehicle in the correct place in the form:
Deemed likely to be misled by error or omission
46.2 For the purposes of subsection 46(4), in the case of a financing statement or financing change statement in respect of collateral that is or includes a motor vehicle, as defined in the regulations, a reasonable person shall be deemed likely to be misled materially, insofar as the security interest in the motor vehicle is concerned, by any one or more of the following errors or omissions in the statement:
1. In the case where the motor vehicle is classified as consumer goods on the statement,
i. a vehicle identification number for the motor vehicle is not set out on the statement,
ii. a vehicle identification number for the motor vehicle is set out on the statement but not in the designated place, or
iii. a vehicle identification number for the motor vehicle is set out on the statement but is incorrect.
2. In the case where the motor vehicle is classified as equipment or inventory on the statement and the statement sets out a vehicle identification number for the motor vehicle even though that information is not required,
i. the vehicle identification number is not set out in the designated place on the statement, or
ii. the vehicle identification number that is set out is incorrect.
For example, if the secured party is taking a general security agreement from the debtor and the debtor’s collateral includes five motor vehicles, and the secured party makes an error in the debtor’s name in the financing statement but gets the five vehicle VINs correctly entered in the correct place in the registration, the secured party will be unperfected for the other collateral of the debtor secured by the general security agreement, but be perfected for the five motor vehicles that were correctly described.
Schedule 9 to the Bill makes the same additions to section 9 of the RSLA, which should be most helpful to repairers and storers to ensure that they are perfected for their non-possessory liens.
These amendments only apply to motor vehicle collateral and give no other saving to other errors. However, given over 80% of the PPSA and RSLA registrations include motor vehicle descriptions, this change is very important to reduce financial losses and hits to secured parties’ and lien holders’ bottom lines.
For lawyers acting for those purchasing businesses that include motor vehicles, then PPSA and RSLA searches should always be done on both the name of the vendor, and on the VINs of the vehicles being acquired as has been the case since the decision of the Ontario Court of Appeal in Re Lambert (1994), 20 OR (3d) 108, 119 DLR (4th) 93, 28 CBR (3d) 1 (Ont. CA); leave to appeal to SCC refused (1995), 33 CBR (3d) 291n (SCC).
Background to the Problem:
The Ontario computerized registration system for both the PPSA and the RSLA is searchable only by debtor name or by a “vehicle identification number” (“VIN”) of a “motor vehicle”, (as these words are defined by the Regulation and Minister’s Orders to both statutes). Over 80% of the registrations in this computer data base include a description of a motor vehicle including its VIN.
If more than 80% of registrations contain a VIN, why do we insist that the debtor’s name be correct, when the database can search on the VIN and the secured party’s registration be found? Australia’s new PPSA only uses VINs and no debtor names for vehicle collateral registrations.
Getting individual names (consumers or as sole proprietors or partners) correct for a computerized registry can be difficult. Ontario case law has held that the correct name and birthdate for PPSA and RSLA registrations should be those shown on the birth certificate if the individual is born in Canada or on the Canadian citizenship card if the individual was born outside Canada. Some of the other PPSA jurisdictions regulate a waterfall of documents that should be used to name people for the registry.
In the real world, people do not usually carry these identification documents when they attend motor vehicle dealerships or vehicle repair locations.
Searches of other government databases or source records are needed to obtain the correct names for corporations in both official languages, limited partnerships, general partnerships, and other types of unincorporated businesses or entities. Not all secured parties or lien holders have the capacity to conduct these searches.
Subsection 46(4) of the PPSA provides that errors in a financing statement are not fatal, unless the error is likely to mislead the searching public.
46(4) A financing statement or financing change statement is not invalidated nor is its effect impaired by reason only of an error or omission therein or in its execution or registration unless a reasonable person is likely to be misled materially by the error or omission.
Since the database is searchable only by debtor name or VIN, then case law has held that errors in debtor names and birthdates and VINs leave the secured party unperfected and subordinate to the debtor’s prior registered creditors, or his or her or its bankruptcy trustee because their registration may not appear in a search performed on the correct name or VIN. Since the PPSA priority rules apply without regard to who owns the collateral, an unperfected security interest results in the conditional sale vendor, financier, or lessor losing its motor vehicle collateral.
But the unpaid lender, lessor, repairer or storer of the subject motor vehicle is able to accurately obtain the vehicle’s VIN from the machine itself. In fact in most business situations, only the VIN is searched. For example:
i) a dealer accepting a trade in used vehicle from the customer only searches the VIN of the trade in;
ii) the Ontario government’s Used Vehicle Information Package which must be provided to the purchaser by the vendor who is not a licenced vehicle dealer, gives a PPSA search only on the VIN; and
iii) most commercial searches, such as CarProof or CarFax, only use the VIN.
Prior Ontario case law has previously held that a reasonable searcher of the government’s database for motor vehicle collateral, would do two searches, and hence the searcher would find the secured party’s interest listed in a VIN search despite an error in the debtor’s name. The chief cases are:
i) Re Lambert, op cit. – for a motor vehicle used as “consumer goods”; and
ii) Magna International Inc. v. Formulated Coatings Ltd. (2009), 15 PPSAC (3d) 32; 2009 CanLII 29907 – for a motor vehicle used as “equipment”.
Note that Bill 154 also includes a saving provision for a vehicle used as “inventory” by the debtor, which I am given to understand was a request from vehicle lessors where their corporate head office debtor is subletting vehicles among the corporate family, and hence these vehicles are “inventory” in the debtor’s hands.