A recent decision of the Alberta Court of Appeal has highlighted the need for owners of leased goods to register their deemed security interests in the goods at the Alberta Personal Property Registry for leases longer than a year. A failure to do so may result in a lessee’s creditors having priority to the leased goods.
In the same decision, the Alberta Court of Appeal confirmed that a subordinate creditor can have a priority claim for costs that it incurs to seize and remove collateral if the subordinate creditor incurred the costs in good faith and the costs would have otherwise been incurred by the priority creditor.
Registration of Ownership Interest in Leased Goods
The decision in Fast Labour Solutions involved a US company (“IowaCo”) in the demolition business with an Alberta subsidiary (“AlbertaCo”). IowaCo leased a crane and other equipment to AlbertaCo. A judgement creditor of AlbertaCo (the “Seizing Creditor”) attempted to seize the crane to satisfy its writ and IowaCo filed an objection to the seizure on the basis that the crane was actually the property of IowaCo.
IowaCo did not register its interest in the crane at the Alberta Personal Property Registry. The crane was in the possession of AlbertaCo for more than one year. Under the PPSA, leases of goods for more than one year require registration as deemed security interests, but there are exceptions to the registration requirement, including if the lease involves “a lessor who is not regularly engaged in the business of leasing goods”. IowaCo attempted to rely on this exemption on the basis that its regular business was demolition and not the leasing of goods. The Court did not accept this argument and emphasized that the Act does not require the owner of the goods to only or primarily be in the business of leasing goods. As long as the owner “regularly engages” in the leasing of goods, the Court concluded that this exemption will not apply.
In determining whether or not an owner “regularly engages” in the leasing of goods, the Court noted that the frequency of the leasing is not determinative, nor is making a profit or expecting to make a profit from the leasing activity. The Court found that as long as the leasing is part of an overall business strategy of the owner (including “creditor proofing” through holding and operating companies), the owner will be considered to be “regularly engaged” in the leasing of goods. In reaching this decision, the Court considered the overall purpose of the PPSA, which includes providing a universal registry that can be relied on to disclose all security interests and requiring registration to avoid creating false impressions about the ownership of collateral. The Court noted that, while creditor proofing by leasing goods is a legitimate business strategy, it requires registration to be effective against third parties.
Ultimately, the Court of Appeal upheld the lower Court’s decision to grant priority over the crane to the Seizing Creditor and denied the appeal by IowaCo.
This decision provides an important lesson to those that seek to creditor proof their assets by separating title and possession through a lease arrangement. To ensure that this strategy is effective, the leases should be registered at the Alberta Personal Property Registry.
This decision also more generally emphasizes the need for anyone involved in leasing goods in Alberta for terms of longer than one year, whether to related or unrelated parties, and whether as a part of their actual business operations or just part of their business strategy, to register their deemed security interest in the goods at the Alberta Personal Property Registry. The Court has taken a rather wide interpretation of what it means to be “regularly engaged” in the business of leasing goods in Alberta and it may be unwise to try to rely on this exemption to avoid the PPSA registration requirement.
Costs of Removing Seized Goods
The second issue on appeal was whether a subordinate creditor that has seized and removed property is entitled to priority for its seizure and removal costs.
In this case, the father of one of the co-owners of IowaCo and AlbertaCo, had registered a security interest in the crane and claimed that he had a security interest in all of AlbertaCo’s equipment. The owner of the lands where the crane was located applied to Court to have the crane removed from its lands. The Court ordered the Seizing Creditor to remove the crane. The Seizing Creditor applied for an order confirming that its costs to seize and remove the crane would have priority over any claim to the crane that the father could establish.
The Court of Appeal upheld the lower court’s decision to grant priority to the Seizing Creditor for its seizure and removal costs. In making this decision, the Court noted that costs would be incurred to remove the crane, no matter which creditor had to remove it. If, as in this case, a creditor removes the collateral before the priorities between competing creditors are established, and is later found to have a subordinate interest in the collateral, then the priority creditor would receive a windfall if it were able to download the seizure and removal costs on the subordinate creditor. To avoid a windfall scenario, the Court held that the PPSA and the CEA should be interpreted to provide priority to a subordinate creditor for its reasonable removal and seizure costs, provided it has incurred the costs in good faith and the costs would likely have been incurred by the priority creditor if it were to remove the collateral. The Court emphasized that this is particularly so when the costs arise as a result of a subordinate creditor complying with a Court order.