Registering a financing statement under the Ontario PPSA to perfect a security interest is a key means of protecting a secured creditor’s priority over collateral. It is important for secured creditors to be cognizant however that there are situations where other claims that are not subject to traditional registration requirements may still trump a secured creditor’s registered security interest. This was confirmed in the recent Ontario decision in Dalcor dealing with the priority of a solicitor’s charging order. A motion had been brought by a secured party seeking to assert the priority of its Ontario PPSA registration over any solicitors’ charging order that might be obtained by the debtor’s former solicitors, but that motion was ultimately unsuccessful.
What is a solicitor’s charging order? A solicitor’s charging order provides a solicitor with a proprietary interest of a secured creditor over property that has been recovered or preserved in a court proceeding through the “instrumentality of the solicitor”. A solicitor’s charging order can take the form of either a statutory order under the Solicitors Act or a charging lien under the common law and law of equity. The purpose of the charge is to protect the solicitor’s fees and costs incurred in recovering or preserving the property in the court proceeding. Part of the policy reasoning behind this is that the subject property would not have been preserved and available to other creditors, but for the efforts of the solicitor, and therefore the solicitor must be compensated for his or her efforts. Furthermore, by granting priority over collateral that a lawyer preserves or recovers, solicitors’ charging orders encourage lawyers to represent clients that do not have the initial ability to pay fees upfront.
In Dalcor, the secured party argued that a solicitor’s charging order is subject to the PPSA as it is not explicitly excluded under the legislation. The court acknowledged that there is some ambiguity on this issue as the PPSA does expressly state that charging orders are subject to the PPSA while liens are not, and as described above, a solicitor’s charging order is both a charge and a lien. Justice Sutherland disagreed with the secured party however and chose to resolve the ambiguity by finding that the lien aspect of the solicitor’s charging order was paramount and removed it from the statutory regime of the PPSA and its general priority scheme. Therefore, in the court’s view, an unregistered solicitor’s charging order has priority over a registered security interest under the PPSA.
The court in Dalcor also addressed the common law “first in time” rule and found that solicitors’ charging orders are not subject to this rule as a matter of equity and practicality. Justice Sutherland described that as a practical matter, a solicitor’s charge could not be registered. A solicitors’ charge arises once property has been recovered or preserved by the solicitor’s instrumentality, and is a pre-existing right that is then confirmed by a court order. The court then reiterated the public policy considerations in favour of protecting solicitors’ interests through the granting of a charging order.
The good news for secured creditors is that even if their security interest is subordinated to an unregistered solicitor’s charging order, the practical reality is that under ordinary circumstances such an order will be for a small amount, relative to the overall value of the collateral secured. In addition, solicitors’ charging orders present a rather unique protection for particular circumstances and only extend to the property protected or preserved in the court proceeding. That being said, secured creditors should always remain mindful of the fact that certain prior charges do not need to be registered and are not subject to the PPSA general priority regime.