S4 of the PPSA, provides that "except as otherwise provided" in the PPSA, the PPSA does not apply to a number of enumerated liens, charges or other interests, including as set out in s4(a) "a lien, charge or other interest given by an Act or rule of law in force in Alberta".
Also, s32 of the PPSA provides that where a person in the ordinary course of business furnishes materials or services with respect to goods, any lien that that person has with respect to the materials or services has priority over perfected or unperfected PPSA security interests in the goods unless the lien is given by an Act that provides that the lien does not have priority.
This paper discusses some of the "liens, charges or other interests" where, save as otherwise provided under the PPSA, the PPSA priority rules do not apply or are of limited application. Unless otherwise stated, all references to the word "property" in this paper, refer to personal property.
- COMMON LAW LIENS AND RIGHTS OF SET-OFF
1. Common Law Liens
The Master Funduk 1984 decision in Continental Bank of Canada v. Henry Morgensen Transport Ltd.2 ("Continental") contains a good summary of the common law lien broken down into two classes, namely a general lien that allows the lien claimant to retain possession of property to recover both claims relating to the property and not related to the property, and a particular lien, that gives the lien claimant the right to retain possession of property to recover liability relating only to the property.
The more commonly encountered common law liens, consist of:
- the repairer lien, that developed at common law, principally due to the fact that a legal owner under a conditional sales contract or chattel lease, or a secured party under a chattel mortgage or security agreement require the conditional sales purchaser, the lessee or debtor as applicable (collectively the "Debtor") to maintain the property in good repair; and as a result a repairer at common law provided it retains possession of the repaired personal property, was granted a lien in priority to a prior owner, lessor or secured creditor for recovery of the reasonable amounts payable by the Debtor to the repairer for its work and services to the applicable property; and
- the solicitor's lien that consists of either:
- retaining lien3, namely the right of a solicitor to retain documents and other personal property in his possession to recover outstanding fees payable in respect of services performed in respect of such documents or property (including money, as long as such funds are not held in trust for a third party); and
- a general charging lien4, which attaches to property (including money, again as long as such funds are not held in trust for a third party) as an immediate consequence of the work performed by the lawyer for his client in recovering such property, to pay all amounts payable by the client to the solicitor for services relating to, or not relating to, the recovered property.
A common law lien gives the lien claimant the right to hold the property in question, but no further rights5. Essentially, the lien claimant may hold the property as "hostage" until the lien claim is paid, but the common law lien does not give the lienholder the right to dispose of the property, without a court order. If a common law lienholder needs to assert its rights vis-à-vis a PPSA security interest, the writer is of the opinion that a court order disposing of the property free and clear of a PPSA security interest, most likely could be obtained by application of the common law lienholder, on notice to the debtor and other affected secured parties, pursuant to ss64 and 69 of the PPSA.
- Common Law Rights of Set-Off
In those instances where the competition is between the holder of money not subject to a trust in favour of a third party (the "Fundholder") and the owner of the money and/or the holder of a lien, charge or security interest in the funds, the Fundholder, has a common law right of set-off to pay from such funds monies owed by the owner to the Fundholder before releasing the balance of the funds to the owner or otherwise entitled competing secured creditor6.
The common law set-off rights depend upon when the Fundholder received notice of the competing security interest, when the debt to be set-off became payable, and whether the debt to be set-off arose from Fundholder services or obligations related to the funds, or is a collateral debt not related to the funds5.
A solicitor in the case of Canadian Commercial Bank v. Parlee McLaws7, was found to have the right to set-off outstanding fees payable by his client against money held by a solicitor for his client (not subject to any trust in favour of a third party) regardless of whether or not the fees owed to the solicitor were in respect of fees for services that pertain to the monies held by the solicitor, or other fees owing to the solicitor that did not relate to the monies held by the solicitor.
- OTHER ALBERTA STATUTORY LIENS, CHARGES OR OTHER INTERESTS
There are a number of "liens, charges or other interests" given by Alberta statutes other than the PPSA, where the PPSA is limited, or of no help, in determining the priority afforded to these other liens, charges or interests.
What follows, is a summary of a number of the liens, charges or other interests given by other Alberta statutes and their priority, on the assumption that the owner or party in possession of the property is not in bankruptcy, or has not filed proposal proceedings, governed by the Bankruptcy and Insolvency Act8 ("Bankruptcy Act").
- Garage Keepers' Lien Act9 (the "GKLA")
S2 of the GKLA provides that in addition to every other remedy that a garage keeper has for the recovery of money owing to the garage keeper for the storage, repair or maintenance of all or any part of a "motor vehicle" or a "farm vehicle" as defined in the GKLA ("vehicle"), or for the price of accessories or parts furnished to all or any part of the vehicle, a garage keeper has a lien ("GKLA Lien") on the vehicle or part of it for the sum to which the garage keeper in entitled.
Unlike the common law repairer's lien that for the most part ceases upon the repairer surrendering possession of the repaired property, the GKLA allows the GKLA Lien to be maintained by a garage keeper on the vehicle after possession of the vehicle is given up by the garage keeper, provided that:
- the garage keeper obtains from the person who authorized the storage, repair and maintenance or the person who ordered the accessories or parts to be furnished for the vehicle, an acknowledgment of indebtedness by requiring such person, or that person's agent, to sign an invoice or other statement; and
- the garage keeper registers the GKLA Lien at the Alberta Personal Property Registry ("APPR") within the time period provided for in the GKLA.
The following is a summary of other pertinent GKLA provisions:
- s2(2) provides that a GKLA Lien cannot be claimed for the price of fuel, oil or grease furnished to an applicable vehicle;
- s3 provides that the GKLA Lien terminates on the 21st day after possession of the vehicle is surrendered, or after repairs were completed to the vehicle at a time when the garage keeper was not in possession of the property, or after the accessories or parts to the motor vehicle or farm vehicle were furnished, unless prior to such time, the garage keeper registers at APPR a financing statement claiming its GKLA Lien on the vehicle;
- s6 provides that the GKLA Lien terminates six months after the date of registration at APPR unless within the six month period the garage keeper provides the requisite proof of registration and warrant to a civil enforcement agent and causes the vehicle to be seized, or as long as the seizure instructions and proof of registration were provided to a civil enforcement agent within the six month period, the garage keeper obtains, without notice, an order of the Court of Queen's Bench prior to the expiry of the six month period that extends the time for the seizure for a further period not exceeding six months; and
- s4 provides that a GKLA Lien shall be postponed to an interest or charge, lien or encumbrance on the vehicle created in good faith and without notice of the GKLA Lien and was created or arose before the registration of the GKLA Lien as required under s3(1).
Justice K.D. Yamauchi held in the case of Royal Bank of Canada v. Cow Harbour Construction Ltd.10 that the combined effect of s32 of the PPSA and s4 of the GKLA is that a GKLA Lien is postponed to a security interest taken bona fide and without notice in the intervening period between the GKLA Lien arising and notice of it being registered. In other words, a properly registered and enforced GKLA Lien would take priority over a prior perfected or unperfected security interest in the vehicle created before the garage keeper lien arises (s32 of the PPSA), and would take priority over a subsequent charge, lien or encumbrance created after the GKLA Lien is registered, but would not, by virtue of s4 of the GKLA, take priority over a bona fide charge, lien or encumbrance in the applicable vehicle taken without notice of the GKLA Lien created between the period of time after the GKLA Lien arises and it is registered at APPR.
Since s2(1) of the GKLA provides that the GKLA Lien is "in addition to any other remedy that a garage keeper has for the recovery of money" owing to the garage keeper for its work or services to the vehicle, the repairer's common law lien most likely can still be enforced in Alberta as long as the garage keeper/repairer retains possession of the applicable vehicle, and most certainly would apply if the garage keeper/repairer maintains possession of any other property (other than a vehicle) for the recovery of outstanding amounts payable to the garage keeper for the repairs of such property.
In those circumstances where the garagekeeper continues to maintain possession of the applicable vehicle after making its repairs, it may be advantageous for the garagekeeper to enforce its common law lien, especially where the garagekeeper wants to claim the price of fuel, oil or grease, failed to register its lien within the 21 days as provided in s3 of GKLA, failed to enforce its lien within the six months as provided in s6, or where the garageman may potentially have a stronger priority under its common law lien then that afforded to it under the GKLA (although a common law repairer's lien most likely cannot be enforced in priority to a subsequent bona fide purchaser or mortgagee for value without notice to the prior common law repairer lien).
- Statutory Solicitor's Lien under the Rule 10.4 of the Alberta Rules of Court – "Charging Order"11
Under Rule 10.4, a lawyer may apply to the court for an order to place a charge on the property of the client- debtor. Granting such an order under Rule 10.4 is subject to several criteria:
- the fees must be unlikely to be paid unless the charging order is granted;
- the property subject to the charge is associated with an action (litigation) conducted by the lawyer on the client's behalf; and
- the lawyer's services result in the recovery or preservation of the client's property.
The courts have interpreted these requirements very strictly, which makes it somewhat difficult to get a charging order under Rule 10.4. In interpreting this rule, the courts have held only the fees incurred in the action giving rise to the property targeted by the solicitor's lien may be recovered.12 Additionally, the charge is restricted to the property recovered or preserved in that action. Furthermore, the court may still refuse to grant the charging order, even if all criteria are satisfied, if it would be unfair to do so.13
The charging order, once and if granted, then grants the solicitor priority to the charged property, over all other creditors and parties except a bona fide purchaser without notice of the charge.14
It may be more advantageous for a solicitor to enforce its common law retaining lien or a general charging lien, or exercise its rights of set-off.
- Woodmen's Lien Act15 ("WLA")
S5 of the WLA grants:
- to any person that performs any "labour or services" (defined in the WLA as including cutting, skidding, felling, hauling, scaling, banking, driving, running, rafting, or booming of any logs or timber, any persons employed in any capacity in any lumbering or timber operations or in or about any timber limit or mill where lumber is processed, and any work done by cooks, blacksmiths, artisans, and others usually employed in the operations of the aforementioned labour and services whether performed by wage earners or others);
- a lien ("WLA Lien") for amounts due to the person for such labour or services on:
- any logs or timber in respect of which the labour or services were rendered;
- any other logs belonging to the same owner that have been mixed with any of the logs or timber in respect of which labour or services were rendered; and
- any lumber made out of any such logs or timber, so long as the lumber has not been sold to and fully paid by a bona fide purchaser for value without notice of the lien
The Alberta Court of Appeal in Brandt Tractor v. Seehta Forest Products Ltd. 16 held that the rental of equipment to a logging company does not constitute labour and services as defined under the WLA and accordingly outstanding rental payments for the leased logger equipment cannot be claimed under a WLA Lien by a lessor. That being said, the Alberta Court of Appeal in Brandt Tractor v. Seehta Forest Products Ltd. also held that the outstanding amounts for repair services or the delivery of replacement parts to the rental equipment performed by the lessor for the logging company, constitute labour and services for which the lessor can claim a WLA Lien.
S5(4) of the WLA provides that a WLA Lien constitutes a first lien or charge on the logs, timber and applicable lumber and has "precedence" over all other claims or liens on them, except claims of the Crown for dues or charges. In addition, in the event any lumber made out of the applicable logs or timber which a WLA Lien attaches, is sold to a bona fide purchaser for value who purchased the lumber without notice of the lien, the WLA Lien takes priority for the amount of the unpaid purchase price payable by the purchaser for the lumber at the date that the purchaser receives notice of the WLA Lien.
A summary of other pertinent WLA sections are as follows:
- s6 provides that any provision in a contract or agreement purporting to deprive any person of the WLA Lien is void;
- s7 provides that to maintain a WLA Lien the person claiming the lien, or someone authorized on such person's behalf:
- must file a statement of the lien in writing that includes the name and address of the person claiming the lien or of the person's solicitor, with the Clerk of the Court at the judicial centre closest to the place where the labour or services or some part of the labour and services have been performed (and where labour and services are performed on logs or timber taken down or run down any river or streams within Alberta, such statement at the option of the lien claimant may be filed with the Clerk of the Court at the judicial centre closest to the place where the log drive terminates or reaches its destination); and
- cause a copy of the statement of the claim to be served on the owner (or agent of such owner who holds possessions, custody and control of the liened logs, timber or lumber), of the logs, timber or lumber, in which the lien is claimed, and upon any other person that is not the owner of the logs, timber or lumber, that may owe the amount to the WLA Lien claimant;
- ss8 and 9 provide that:
- if the outstanding labour or services claimed in the WLA Lien are performed between October 1 and the following June 1, the statement of claim for the amount due to the lien claimant that describes the logs, timber or lumber in which the lien is claimed must be filed by on or before June 30, but if the labour or services are done or performed on or after June 1 and before
October 1 in any year, then the required statement of claim must be filed within 30 days after the last day that the labour or services were performed; and
- any mortgage, sale or transfer of the logs, timber and lumber on which a WLA Lien exists during the time limited for the filing of the required statement of claim and prior to its filing, or after its filing and during the time limited for the enforcement of it, in no way affects the WLA Lien that remains in full force against the logs, timber or lumber, no matter who is in possession or where such logs, timber or lumber may be found;
- s10 provides that:
- as long as the outstanding amount payable to the lien claimant is due, or where credit has been given by the lien claimant, after the expiry of the period of such credit, a lien claimant may enforce its WLA Lien by the regular practice and procedure of the Court of Queen's Bench in the district in which the claimed logs, timber or lumber or any part of them are situate at the time of the commencement of the statement of claim to enforce the WLA Lien; and
- the WLA Lien on the applicable logs, timber or lumber named in the statement of claim ceases to exist, unless proceedings to enforce the statement of claim are taken by the lien claimant within 30 days of filing the statement of claim, or within 30 days after the expiry of the period of credit, as applicable;
- ss13 - 21, inclusive, in summary provide that:
- a lien claimant whose claim is not less than $10.00, upon the filing with the applicable Clerk of the Court of a copy of its claim and an affidavit sworn by the lien claimant supporting its WLA Lien deposing that:
- the lien claimant has good reason to believe and does believe that the logs, timber or lumber subject to the Lien are about to be removed, the person indebted for the amount of the Lien has absconded from Alberta with the intent to defraud or defeat such person's creditors, or the logs, timber or lumber are about to be disposed of or dealt with in such a way that they cannot be identified; and
- the lien claimant is in danger of losing its lien claim if an attachment does not issue, the Clerk of the Court of the jurisdiction in which the applicable logs, timber are lumber or
situate, must issue a writ of attachment to direct a civil enforcement agency to attach, seize, take and safely keep the claimed logs, timber or lumber, or a sufficient portion thereof, to secure the amount owing to the lien claimant, inclusive of the lien claimant's costs;
- a seizure by the civil enforcement agency cannot be made on the applicable logs or timber if they are in transit by water from the place where such logs or timber were cut to the place of destination;
- once the Clerk issues the writ of attachment, such writ of attachment, if no statement of claim has yet been issued, summons the person that owes the funds ("defendant") to the lien claimant to enter an appearance in the Court;
- the lienholder must cause a copy of the writ of attachment to be served on the defendant, and as well if a defendant is not the owner of the logs, timber or lumber claimed by the lienholder, the writ must also be served on the owner or any agent or person who has possession custody and control of the claimed logs, timber or lumber on behalf of the owner;
- upon service of the writ of attachment, the person that owes the claimed lien, or the applicable owner, must file a statement of defence to the lien claimant's claim, failing which judgment may be entered in accordance with the practice or procedure where the lawsuit was begun by statement of claim; and
- once the writ of attachment is issued, the person who owes the WLA Lien, or any other person on behalf of the owner, may file with the Clerk of the Court a good and sufficient bond in favour of the person claiming the lien executed by two sureties and approved by the Clerk, or pay sufficient monies to the Clerk to cover the amounts claimed by the lienholder, inclusive of all damages, costs, charges and disbursements and expenses, and once such bond is filed or payment is made, the Clerk shall issue an order to the civil enforcement agency to release the seizure of the logs, timber or lumber;
- ss22 - 24, inclusive, in summary provide that:
- upon filing of a statement of defence, an application can be made by the lienholder to a judge in chambers to have its lien claim determined and to settle the applicable priorities;
- once the judge makes its order, if the amount payable to the lien claimant is not paid within eight days, the applicable logs, timber or lumber may be sold by a civil enforcement agency for the satisfaction of the lien amounts found due by the judge; and
- the procedure to be followed by a civil enforcement agency in selling the liened logs, timber or lumber is the same procedure set out in the Civil Enforcement Act for the enforcement of a writ of enforcement unless the judge otherwise directs another procedure; and
- s30 provides that nothing in the WLA disentitles any lien claimant to any other remedy other than that afforded by the WLA for its recovery of the amounts due for its outstanding labour or services performed, and when a suit is brought to enforce a WLA Lien, but no lien is found to exist, judgment can nevertheless be directed for the amount due in the lienholder's action.
Subject to a WLA lienholder's satisfaction of its obligations in enforcing its WLA Lien, a valid W LA Lien, by virtue of s5(4) of the WLA and s32 of the PPSA, in the writer's opinion would take priority over all perfected and unperfected competing PPSA security interests in the logs, lumber or timber subject to the WLA Lien17.
- Innkeepers Act18 ("IA")
The IA provides a statutory mechanism by which an "innkeeper" (defined as persons operating a hotel, motel, inn, or any other person who provides lodging to guest willing to pay for accommodation) can retain and dispose of property brought by the guest to the lodging premises to satisfy unpaid lodging charges.
S2 of the IA permits an innkeeper in possession of the detained property to sell the property at public auction if debt remains outstanding for more than one month after the start of detention, and requires the innkeeper to post a public announcement in a local newspaper at least one week before the auction.
S3 provides that the auction proceeds may be applied to the outstanding debt and the costs of the advertising and auction, any surplus funds may be paid, on application to the court, to party claiming an interest in the
surplus, and if surplus funds are not claimed within one year, they fall to the Minister of Justice and Solicitor General as part of the General Revenue Fund.
S4 provides that the debtor can dispute the innkeeper's claim, by paying into court, $10 or 10% of the disputed amount, whichever is greater, and by serving notice of the payment upon the innkeeper. Upon the payment into court, all of the innkeeper's right to the detained property ceases. If, within 30 days of notice of the debtor's payment into court, the innkeeper brings an action to recover the debt, the money paid into court cannot be released until the matter is disposed of. If the innkeeper fails to commence the action within 30 days of notice of the debtor’s payment into court, the money is returned to the debtor (or authorized recipient) and, for the purposes of the IA, the matter is disposed of.
There is no provision in the IA that grants a specific lien to an innkeeper or that grants priority to the innkeeper over the claims that the owner of the detained property or any security charging the detained property. That being said, Justice Kirby found in R. Cunningham Enterprises Ltd. v. Vollmers et al.19, by following the 1914
Ontario Court of Appeal decision in United Typewriter Co. v. Edward Hotel Co., that the IA is a codification of an innkeeper's common law lien that can be enforced in priority to the true owner of the detained goods as well as any detained goods owned by the lodger.
Since the IA is a codification of an innkeeper's common law lien and grants to an innkeeper an interest in the detained goods ("IA Lien") to enable the innkeeper to sell the detained goods, the interest of an innkeeper under the IA most likely takes priority over a perfected or unperfected security interest in the goods governed by the PPSA. That being said, an innkeeper's lien in the writer's opinion does not fit within s32 of the PPSA because lodging services are not furnished with respect to the liened goods.
- Animal Keepers Act20 ("AKA")
S1 of the AKA defines:
- "animal" as "cattle, horses, swine, sheep, bison, deer, elk, goats, mules and asses";
- "animal keeper" as the person who receives payment for boarding, feeding or caring for an animal owned by another person;
- "debt" as the liability for the cost of boarding, feeding or caring for an animal, or the cost of storing gear; and
- "gear" as meaning tack equipment used for riding, driving, showing or caring for animals, and stock trailers, horse trailers, sleighs, buggies and carriages.
S2 of the AKA grants a lien ("AKA Lien") to an "animal keeper" against an "animal" and "gear" for the "debt" payable to the animal keeper.
S3 of the AKA permits an animal keeper to claim the AKA Lien on more than one animal or gear belonging to the same owner, or to limit the lien to specific animals and gear and release the balance to the owner.
S4 of the AKA provides that when an animal keeper detains an animal or to enforce its an AKA Lien, the animal keeper must keep the detained property in its custody possession, and is responsible for the proper care of each detained animal in accordance with accepted industry standards.
Pursuant to s6, the owner of the detained animal and gear must discharge the debt within 14 days, failing which the animal keeper may sell the detained animal and gear by public auction or in any other reasonable manner on providing notice of the sale under ss7 - 9 inclusive.
S10 of the AKA provides that when a detained animal and gear is sold by the animal keeper in compliance with the AKA, the sale proceeds are to be applied firstly to the animal keeper's expenses, secondly in satisfaction of the animal keeper's AKA Lien, and the balance to be paid if one or more other person has or have, as applicable, an interest in the sold animal or gear to that person, or if no other person has an interest in the sold animal or gear, to the Minister of Justice and Solicitor General, or paid into court by application made under s12 of the AKA.
S12 provides that any person with an interest in the liened animal or gear that has either been detained or sold may apply to the Court of Queen’s Bench to determine the rights of the applicable parties. S12 grants the Court the power to make any orders it considers necessary to give effect to any rights or any question that arises with respect to the amount of the AKA Lien, the right of the animal keeper to a AKA Lien, the circumstances surrounding the sale, the application of the proceeds under s10 of the AKA, the disposition of the balance of the proceeds or other matters arising out of the operation of the AKA. Ss12(3) provides that the balance of the proceeds of any animal or gear sold under the AKA, are, if an application is made pursuant to s12 of the AKA, to be distributed according to the rights and priorities established under the PPSA or any other applicable legislation, and ss12(4) provides that the application under s12 must be made within one year and one week after the date of sale of the animal or gear.
The AKA replaces the Livery Stable Keepers Act which contained similar provisions as the AKA.
The Alberta Court of Appeal in the case of Twin Rivers Feed Lot Ltd. (Trustee of) v. V & B Feeds Ltd.21 held that the lien granted under the previous Livery Stable Keepers Act, could be enforced against any animal or gear of the owner whether or not the debt claimed in the lien related to the actual animal or detained by the lienholder. The case also provides that any payment of the outstanding debt to the animal keeper made by the owner for the release of the lien does not constitute a fraudulent preference as the payment is made to discharge the secured claim of the animal keeper under the Livery Stable Keeper' Act which gives the lienholder priority over the owner's unsecured and other secured creditors.
- Builders' Lien Act 22 ("BLA")
In addition to the statutory lien on improved land of the owner granted in the BLA (the "BLA Land Lien") to any person that causes any work or services in respect of an improvement of such land, or furnishes any material to be used in respect of an improvement on such land (which is beyond the purview of this paper), s17(2) of the BLA:
- grants a charge (the "BLA Materials Charge") in favour of a person ("Material Supplier") that furnishes material to the land to be used for an improvement but not as yet incorporated in the improvement, for recovery of the debt payable to the person for the supply of the material; and
- provides that such material is not subject to any other execution or process to enforce any other debt, other than the debt payable to the Material Supplier.
The s17 BLA Materials Charge is virtually identical to s16 of the previous 1960 Alberta Mechanics Lien Act, and s14 of the previous 1980 Builders’ Lien Act. In the writer's opinion, it is settled in the case law that the BLA Materials Charge is a separate charge from that of the BLA Land Lien on the owner's lands, and can be to be determined. Also, the warehouser upon paying the surplus into Court must file with the Court a statement of account that accounts for the surplus.
S9 provides that before any sale is made, any person with an interest or right to possession of the goods, may pay the warehouser the outstanding amount owing, and if such payment is made, the warehouser is to deliver the goods to such person, provided that person is entitled to possession of the goods, otherwise the warehouser shall retain possession of the goods according to the warehouser's storage contract.
Since the storage of goods are services that relate to the goods, the writer is of the opinion that s32 of the PPSA grants the Warehouser Lien priority over any competing security interest in the goods.
- Possessory Liens Act 26 ("PLA")
S2 of the PLA, provides that a person has a lien ("PLA Lien") for payment of the debt owing to the person on a chattel on which the person has expended the person's money, labour or a skill at the request of the owner and in doing so enhanced its value. This in essence, is the codification of a common law lien.
S14 provides that the PLA only applies where there is no provision for realizing the lien in any statute, and there is no provision made in any statute for determining the rights of the owner of the goods and chattels, and that of a bailee (a party in possession). In particular, s14(b) provides that the PLA does not apply to a lien given under the IA, the AKA or the Warehousemen's Lien Act (misspelled in the PLA as "Warehouser's Liens Act"). On the other hand, s15 provides that nothing in the PLA affects the law respecting general liens, and accordingly the writer is of the opinion where a person has a common law lien, separate and apart from a lien created in a statute otherwise not applicable to the PLA, such person could still enforce its common law lien.
S3 of the PLA provides that an owner or keeper of a wharf has a lien for the owner or keeper's lawful charges on the chattel entrusted to the owner or keeper, and s4 of the PLA provides that a bailee whether gratuitous or for reward, has a lien on the chattel bailed to the bailee for any charges due to the bailee under the bailment contract.
S6 of the PLA provides that the lienholder can only claim balances due to him for amounts expended in respect of the property, but not other amounts generally due to the lienholder by the owner.
Under s10 of the PLA, but subject to s12, if the debt and storage charges are outstanding for three months in the case of a motor vehicle, or six months in the case of any other property, the lienholder is then entitled to serve notice by registered mail or personal service to the person owing the debt to the lienholder, and in default of payment, the lienholder must apply to Court within 30 days of issuing such notice for an order enforcing the lien by sale as the Court may direct.
S12 provides that the outstanding debt and storage charges are unpaid for three months in the case of a motor vehicle or six months in the case of any other detained property, and such detained property has a value less than $300.00, the lienholder notwithstanding the procedure in s10 of the PLA, may sell the property by any means for a reasonable price.
Under s13, the proceeds of sale are to be applied firstly in payment of the outstanding lien inclusive of expenses, and the balance must be paid to the person entitled to the remainder, failing which the party conducting the sale after payment of the lienholder, must pay the balance to the Minister of Justice and the Solicitor General pending application that may be made by the person or any creditor entitled to the remainder within a year, and if such application is not made, the remainder forms part of the Alberta General Revenue Fund.
- Landlord's Distress Priority
Prior to the proclamation of the Alberta Civil Enforcement Act27 (the "CEA"), the landlord's right of distress was codified in s19 of the Seizures Act28. S19 of the Seizures Act, as it was prior to being replaced when the CEA was proclaimed in force on January 1, 1996, is substantially similar to s104 of the CEA that is the current codification in Alberta of the landlord's right of distress that can be made against personal property of the tenant, any other person liable to pay rent, and of any other person who has a security interest in the property of the tenant or person liable to pay rent on the leased premises, other than a person who maintains a "purchase money security interest" in such personal property as original collateral or as proceeds.
In essence, without giving consideration to s48.2 of the CEA (discussed below), it was relatively clear at law29, that provided the tenant or person at the premises liable to pay the rent was not assigned or adjudged into bankruptcy, a landlord's distress, by causing a civil enforcement agent under the CEA to seize and sell the available goods on the premises for outstanding rent, takes priority over all security interests, whether prior or subsequent, and whether registered or not, for the recovery of the outstanding rent and costs payable to the landlord under its lease with its tenant, save for:
- a secured creditor that holds a purchase money security interest in any of the goods seized; or
- the holder of a prior security interest that causes the available goods on the premises to be seized prior to the landlord effecting its seizure, and thereby places such property "in custodia legis", or in other words under the custody of the Court30.
S104(c)(iii) of the CEA provides that a landlord can distrain (seize) property located on the leased premises owned by the tenant or any other person liable to pay rent under its lease, in priority to any person that has a security interest in such property (save for a person that has a purchase money security interest), but there is no definition in the CEA of "security interest" or of "purchase money security interest.
Prior to the proclamation of the CEA, s19 of the Seizures Act had been amended to refer to a "security interest" on the personal property on the premises subject to a landlord's distraint, and to a "purchase money security interest" on such goods that took priority over a landlord's distraint. This amendment to the Seizures Act defined "security interest" and the "purchase money security interest", identical to the PPSA definitions, save that they did not include the PPSA deemed purchase money security interests consisting of an interest of a lessor under a lease of a term of more than one year and of a commercial consignor of goods. The net effect of this, at least under the previous Seizures Act, was that a landlord could not distrain upon goods on the premises owned by a lessor under a true lease (that did not secure an outstanding purchase price to be paid by conditional payments over time) or goods owned by a consignor.31
Since the CEA does not define "security interest" and "purchase money security interest", an argument can still be made that such terms should be given the meanings as set out in the PPSA, or at the very least as set out in s19 of the Seizures Act that was replaced by the CEA when it was proclaimed in force in 1996.
Prior to the inclusion of s48.2 of the CEA, property could not be seized twice by competing creditors. When any goods were seized, they were considered to be "in custodia legis" or, in other words, in the custody of the Court, and if a prior holder of a security interest in the goods on leased premises seized them before a landlord, a landlord could not effect its right of distraint, because the principle of "in custodia legis" prevented the landlord's second seizure or made it of no force and effect.
S48.2 of the CEA now provides that competing creditors of the same debtor can distrain or seize personal property notwithstanding that they are already under seizure. The CEA by enacting s48.2 may have eliminated the concept of "in custodia legis" that previously applied to give a competing secured creditor that seized first priority over a landlord's distress.
S48.2(iii) of the CEA provides that any action taken to either distrain or seize seized property after they have already been under seizure, does not affect priority to the seized property or its proceeds.
The question that still must be determined by the Court, is whether or not the holder of a security interest that seizes goods on the leased premises first before a landlord affects its subsequent distraint (second seizure) of the same goods:
still takes priority of the landlord, since the first seizure placed the seized goods "in custodia legis", namely the custody of the Court (NOTE: under this interpretation s48.2(iii) would mean that it preserves the concept of "in custodia legis" to give the first seizing secured creditor priority over the landlord distress); or
no longer has priority over the landlord's distraint due to the fact that s104 provides that such landlord distraint effected by the landlord's second seizure authorized in s48.2 gives the landlord priority over such security interest (NOTE: under this interpretation, the combined effect of ss48.2 and 104 eliminates the concept of "in custodia legis" in those instances where the competition to the goods on leased premises is between a prior seizing secured creditor and the subsequent landlord's distress, and s48.2(iii) would be interpreted to mean that it preserves the landlord's priority granted under s10432).
- Workers' Compensation Act33 ("WCA")
The WCA requires employers to which the WCA applies, to contribute premiums to an accident fund to be used to compensate workers injured in the course of their employment. The premium payments are based on the employer employee's payroll.
Under s117 of the WCA, if an employer is in default of its WCA obligations, the Workers' Compensation Board ("WCB") is empowered to levy an assessment of the amount owing by the employer, and such amount is payable notwithstanding that the WCB makes no demand or request for payment.
Furthermore, s118 of the WCA provides that even when an employer is liable to pay outstanding premiums that have not been assessed by the WCB, the employer is nevertheless liable to WCB for the amount for which the employer should have been assessed, or so much of it as the WCB considers just and reasonable, and the payment of such amount may be enforced by the WCB against the employer as if the WCB had assessed the employer for such amount.
S129 of the WCA provides that any amount due to the WCB by an employer under the WCA, is a fixed, specific and continuing charge on the employer's property and proceeds thereof (the "WCB Charge"), whether such property is acquired or is to be acquired before or after the amount becomes due to the WCB, in priority to all other writs, judgments, debts, liens, charges, security interests defined in the PPSA, rights of distress, assignments and all other claims or encumbrances, including claims of the Crown, whether legal or equitable in nature, and whenever created or to be created, save that the WCB Charge does not take priority over the wages due by the employer to its workers.
The recent case of Smed v. Alberta (Workers' Compensation Board)34 ("Smed"), has held on the Smed facts that the WCB charge extends to:
personal property owned by the employer at the time that the employer became indebted to the WCB, whether or not such property at the time that the charge is enforced, is still owned by the employer; and
any property subject to the WCB charge at a time when the employer is indebted to WCB, is not only subject to the amounts payable to the WCB at the time that the property may have been sold to a third party, but as well is subject to future amounts payable by the employer to WCB.
Justice Jones in Smed, recognized how powerful the retroactive WCB Charge is, and suggested that any purchaser wishing to purchase property from a vendor that has potential obligations to the WCB, should, as a condition of the purchase, obtain a representation and warranty from the employer that the property being purchased is free and clear of any and all present and future claims, including any WCB Charge. Such representation and warranty is of little assistance however, if the employer, at the time that the WCB retroactively enforces the WCB Charge, is insolvent and has no means to satisfy its representation and warranty to the purchaser.
S132 of the WCA provides in a case where a purchaser is purchasing an entire industry, or stock or equipment in bulk use in connection with such industry, the purchaser can require the vendor to deliver to the purchaser before it closes its purchase, a certificate from the WCB stating it has no claim under the WCA against the vendor industry, or stock or equipment being purchased in bulk. If such certificate is obtained, the purchaser can safely purchase the business or stock or equipment in bulk without any future liability for outstanding WCB premiums payable then or in the future by the vendor. If the purchaser fails to obtain such certificate, the purchaser is liable to the WCB for an amount equal to all amounts payable by its vendor under the WCA, up to an amount equal to the fair market value of the purchased business or stock or equipment, as applicable. S133 provides for similar provisions in a case where a purchaser is purchasing primary timber products from a vendor/employer.
S134 effectively provides that the clearance that could otherwise be given to a purchaser under ss132 and 133 of the WCA does not apply to a non-arm's length/related party that acquires any stock or equipment or other assets from the related employer.
Although the super priority of the WCB Charge would most probably not apply to a purchaser of property (e.g. inventory) from an employer in the ordinary course of the employer's business without notice of the WCB outstanding claim, the WCB super priority charge will take priority over a PPSA security interest granted to a lender by an employer in the ordinary course without the lender's knowledge of any outstanding premiums payable by the employer. In those instances where counsel acts for secured creditors in placing the security granted by an employer, a search is commonly done to the WCB to determine whether the employer is in good standing with the WCB. Such search however, merely provides comfort to the lender that its customer has no outstanding issue with the WCB, but does not serve to give the lender any priority over any WCB super priority claims claimed in the future under s129 of the WCA for recovery of outstanding premiums.
S135 provides for a procedure by which the WCB can enforce its super priority charge through seizure and sale and the service of the required notices.
Without prejudicing the WCB Charge granted in s129 of the WCA, s127 of the WCA provides that the WCB, upon default in the payment to it of any premium due to the WCB under the WCA, may issue a certificate or certified statement setting out the basis of the payment to be made, the amount remaining unpaid, and the person by whom it is payable and directing the payment of that amount by that person ("WCB 127 Interest"), and the WCB may register a financing statement at APPR against the debtor claiming its Interest. S127(2) provides that such certificate or certified statement may be filed with the clerk of the Court of Queen's Bench at any judicial centre, and when filed it may be enforced as a judgment of the Court, and s127(3) provides that the filing does not affect the super priority of the WCB Charge. (NOTE: see section E below).
1. Employment Standards Code35 ("ESC")
Ss109(3) and (4) of the ESC effectively grant a security interest ("ESC Employee Priority Charge") to an employee against all property of the employer for the recovery of outstanding wages, overtime pay, vacation pay and general holiday pay, up to a maximum amount of $7,500, in priority to all other claims to the employer's property including any claim or right of the Crown in Alberta, and including the claims or rights of the WCB, and any security interest, lien, charge, encumbrance, mortgage, assignment, debenture or other security of whatsoever kind of any person whether or not perfected within the meaning of the PPSA, save that such security does not take priority over the holder of a purchase money security interest, as defined in the PPSA, provided it was:
granted prior to the time that the outstanding wages, overtime pay, vacation pay becoming due and payable; and
was registered not later than 15 days after the day that the employer obtained possession of the tangible property, or within 15 days after the holder of the purchase money security interest attached to the employer's intangible personal property (namely the requirements of s22 of the PPSA must be complied with).
The ESC Employee Priority Charge, save for the rights of enforcement of the holder of a duly perfected purchase money security interest over the employer's property subject to such interest, ranks in priority to all other PPSA Security Interests and any and all other liens, charges and interest created under any Alberta statute (but note section E below).
Municipal Government Act36 ("MGA")
S348 of the MGA provides that all amounts owing to a municipality by any person (the "Municipality Debtor") are recoverable as a debt due to the municipality and take priority of the claims of every person, except the Crown, against a Municipality Debtor, and constitutes a special lien ("MGA Lien") on goods of the Municipality Debtor for recovery of outstanding business taxes, a community revitalization levy, well drilling equipment tax, a community aggregate payment levy or property tax imposed in respect of a designated manufacturing home in a manufactured home community.
The MGA Lien takes priority over security interests to which the PPSA applies (but note section E below).
B. FEDERAL STATUTORY LIENS, CHARGES OR INTERESTS
There are a number of "liens, charges or other interests" given by federal statutes in force in Alberta, where the PPSA is also of limited, or of no help, in determining the priority afforded to these liens, charges or interest.
What follows is a summary of a number of such liens, charges or other interest given by a federal statute in force in Alberta and their priority, on the assumption that the owner or party in possession of the property subject to these federal liens, charges or other interests, is not in bankruptcy, or has not filed proposal proceedings, governed by the Bankruptcy Act.
1. Bank Act37
Ss427 - 429 of the Bank Act, enables a bank chartered under the Bank Act ("Bank") to obtain security in the prescribed form ("s427 Security") in certain present and after acquired property of a Bank's customer to secure loans and credit advanced to the Bank's customer carrying on the specific businesses, all as set out in ss427(1)(a) - (p) inclusive.
In summary, a Bank may lend money and make advances secured by s427 Security against the following property of its customers engaged in the following businesses:
all present and future products, goods, wares and merchandise, and good, wares and merchandise used or procured for packing any such products, goods, wares and merchandise, of the Bank’s customer that carries on the business of a wholesale or retail purchaser or shipper or dealer in any such products, goods, wares or merchandise, manufactured or otherwise (NOTE: essentially on the inventory of a wholesaler, retailer or manufacturer, and goods, wares and merchandise of any shipper or dealer in any such inventory);
aquacultural stock growing or produced, aquacultural equipment, aquacultural implements, aquatic broodstock or aquatic seedstock, aquatic plants and animals, aquacultural electric system, of a Bank's customer that carry on an aquaculture business;
present and future growing or produced crops, agricultural equipment, agricultural implements, present and future seed grain, seed potatoes, fertilizer or pesticide, and livestock that is not exempt under Alberta law, to secure loans to farmers advanced to carry on their crops and livestock farming business or for the purpose of purchasing required goods and chattels, or repairing or altering any agriculture equipment, erecting or constructing fencing or works for drainage, and the construction, repair or alteration to any additions to any building on a farm, and other purposes for which a loan
defined in the Canadian Agricultural Loans Act38 applies (NOTE: essentially on all non-exempt
crops, livestock, equipment and implements, seedstock, fertilizer and pesticides produced or used in carrying on a farming business);
on fishing vessels, fishing equipment and supplies and products of the sea, lakes and rivers, to a fisherman to assist such customer in carrying on their fishing business; and
fertilizer, pesticide, forestry equipment, forestry implements or products of the forest, to secure loan advances to a forestry producer or customer.
S427(4) requires that a Bank, prior to obtaining the s427 Security, to obtain a Notice of Intention in the prescribed form, signed by the customer giving the s427 Security, and register such Notice of Intention at the appropriate Bank Act Registry for the province or provinces in which the customer carries on business not more than three years immediately before the s427 Security is granted by the customer. If the Bank does not, its s427 Security is void.
The Bank Act Registry for Alberta, and indeed each of the other provinces of Canada, (but not the Territories) is maintained by Canadian Securities Registration Systems at Suite 200, 4126 Norland Avenue, Burnaby, BC, V5G 3S8. Since this Registry acts as the Alberta Bank Act Registry and for the Bank Act Registry for the other provinces, it is important to be sure that not more than three years before the Bank obtains its s427 Security, that the required Notice of Intention is signed by the Bank's Alberta farming customer, and registered at the Alberta Bank Act Registry and not mistakenly registered at a BC or other provincial Bank Act registry (otherwise the Bank's s427 Security would be unenforceable in Alberta). Mistakes do occur, from time to time, where a Notice of Intention executed by an Alberta farming customer was intended to be registered at the Alberta Bank Act Registry, but mistakenly registered in another provincial Bank Act Registry. Such mistakes are difficult or impossible to rectify, and generally can only be rectified by obtaining a new Notice of Intention signed by the Bank's Alberta farming customer and causing it to be registered at the Alberta Bank Act Registry within three years prior to a customer's execution of the s427 Security.
S429(1)(b) of the Bank Act requires the Bank, if it wishes its s427 Security to secure present and future loans and advances ("Operating Credit") to its customer, prior to advancing such Credit, to obtain a written promise signed by its customer to grant the Bank s427 Security to secure Operating Credit.
S427 Security grants to the Bank a legal charge in the covered present and after-acquired (if covered) property of the customer39. The Bank can only obtain a charge on the actual property interests of the customer at the time that the s427 Security was granted, and if at the time that the Bank's s427 Security is granted, the property covered by the Bank's s427 Security is subject to a prior interest in favour of another secured creditor of the
customer, the Bank's s427 Security, save for the exceptions set out in s428 of the Bank Act, takes subject to such prior interests.40
After the Supreme Court of Canada decisions previously cited41, the Bank Act was amended in May 2012, which included an amendment to s428 of the Bank Act that provides that a Bank's duly constituted s427 Security gives the Bank priority to the rights of the customer in the covered property over all subsequent acquired interests, and also takes priority over the prior interests (provided that Bank has no knowledge of such prior interests) of any unpaid vendor or any person who has been granted a prior security interest in the covered property, that
was unperfected at the time that the Bank acquired its security on the covered property.42
S4(b) of the PPSA effectively provides that save as provided under the PPSA, the PPSA does not apply to s427 Security. The priorities between a PPSA security interest and Bank Act security are to be determined by applying the Bank Act priority rules and not the PPSA priority rules. Not only is this set out in the PPSA, but as well since the Federal Crown (Parliament) under the Canadian Constitution is given exclusive domain to legislate in all matters dealing with banking in Canada, under the doctrine of paramountcy, the priority afforded to s427 Security under the Bank Act cannot be altered or affected by the Alberta statute which conflicts with the priority given to a Bank under s427 Security under the Bank Act.
As a result, S427 Security, unless the Bankruptcy Act applies (see Section E below), may not take priority over a prior PPSA security interest (save for a prior non-perfected security that the Bank is not aware of), or a prior common law lien, GKLA Lien, Solicitor's Charging Lien, WLA Lien, IA Lien, AKA Lien, BLA Material Charge, Warehouser's Lien, PLA Lien, Landlord's Distress, WCB Charge, ESC Employee Priority Charge and a MGA Lien, but would take priority over such subsequent "liens, charges and security interests granted under Alberta statutes.
This conclusion is supported in the case of Toronto Dominion Bank v. Dunn-Rite Cattle Corp43 ("Dunn"). In her Queen' Bench decision, Justice Ross held, by applying the doctrine of paramountcy that applies to s427 Security, that the Bank's prior s427 Security in the livestock of its customer, took priority over the subsequent livery stable lien (now an AKA Lien). The Justice Ross Dunn decision was overturned by the Alberta Court of Appeal44 because the Alberta Court of Appeal found on the Dunn facts that the Bank could not take priority over the Bank's customer's prior livery stable lien that was in place and known of by the Bank at the time the Bank's s427 Security was taken.
The WCB Charge under the WCA has been found not to conflict with the priority afforded to a Bank under the Bank Act, and as noted by Justice Ross in the Dunn case, it may follow from the fact that the WCA premiums are a form of provincial taxation empowered by s92 of the British North American Act, 1867, now the Constitution Act, 1867.45
1. Federal Crown ("Crown") Deemed Trusts
The Canada Pension Plan46 ("CPP"), Employment Insurance Act47 ("EIA") and Income Tax Act48 ("ITA") require an employer to:
deduct from the employee's gross pay, the employee's required CPP, EIA and ITA payments (federal and provincial income tax) payable to the Crown (collectively the "Employee Source Deductions"), and to pay the deducted Employee Source Deductions to the Crown within the time required by legislation; and
also pay to the Crown within such required time, the employer’s share of CPP and EIA levies that the employer is obliged to pay to the Crown (the "Employer CPP/EIA Levies").
The CPP, EIA and ITA oblige an employer to also pay interest and penalties in the event the employer defaults in paying to the Crown the Employee Source Deductions and Employer CPP/EIA Levies within the time required by the legislation.
The Excise Tax Act49 ("ETA") obliges, save for some exceptions, each vendor of property and supplier of services ("GST Charger") to which GST applies to collect such GST from the purchaser or applicable customer and to pay such GST less the GST Charger GST credits (generally the GST paid by the GST Charger to their vendors or service providers) to the Crown quarterly over a taxation year (the "GST Debt"), and in default of the required GST Debt payment to the Crown, the ETA obliges the GST Charger to also pay interest and penalties to the Crown.
S23(4) of the CPP, s86(2.1) of the EIA, s227(4) of the ITA, and s223(3) of the ETA, upon a Crown debtor default, immediately vests to the Crown deemed trusts for recovery of all unpaid Employee Source Deductions and GST Debt, that effectively grant to the Crown a super priority in all of the Crown debtor's present and after acquired property, including a super priority over all past, present and future security interests in such property, whether statutory or otherwise50 (including the PPSA security interests and other interests and charges
discussed in sections B and C above), save for limited exceptions.
In addition to the GST deemed trust priority exception that applies upon the bankruptcy of the Crown debtor (discussed in section E below), other limited exceptions to the Crown's deemed trust super priority to recover Employee Source Deductions and GST Debt, include true chattel leases51, security leases or conditional sales contracts52, and the sale of the Crown debtor’s personal property in the ordinary course of the Crown debtor’s business53 (in such situations though Crown's deemed trusts attach the sales proceeds of such property).
There is case authority suggesting that a Fundholder's set-off rights discussed in section B.2 above, in some circumstances, constitute a security interest to which the Crown's deemed trust for recovery of Employee Source Deductions and GST Debt take priority; but those cases deal with sums of money deposited with the applicable Fundholder (i.e. a Bank) that could only be enforced by the Bank through realization on its security granted by the Crown debtor.
In the writer's opinion, as noted in obiter by Rothstein J. in Caisse populare Desjardins de l'Est de Drummond v. Canada54, a Bank would have the right of set-off monies deposited in a Crown debtor's operating account, in priority to the Crown's deemed trust, since the Bank owns the money once deposited in the Crown debtor's operating account and owes the deposited funds to its customer, and the money is available for set-off against
debt due and owing to the Bank by its customer without realizing on security granted by such Crown debtor to the Bank.
It is the writer's view that a Fundholder that owes a receivable to the Crown debtor is also entitled to set-off from the receivable debt owing by the debtor to the Fundholder in priority to the Crown's deemed trusts, especially if the Fundholder set-off rights involve deficiencies and other claims arising under the contract that created the receivable that can be enforced without the need to realize on security.
The Crown debtor's deemed trust priority does not apply to the Crown debtor's obligation to pay Employer CPP/EIA Levies, or to pay any interest and penalties to the Crown.
1. The Crown's Enhanced Garnishment
Under s224(1.2) of the ITA, for recovery of outstanding Employee Source Deductions, Employer CPP/EIA Levies, outstanding income tax plus interest and penalties, and under s317(3) of the ETA for recovery of outstanding GST Debt plus applicable interest and penalties, the Crown is granted an enhanced garnishment remedy against a receivable (that would include amounts deposited in a Crown debtor's bank account), that are payable by the Fundholder to the Crown debtor ("Crown Debtor's Receivable"), either at the time that the Crown serves their enhanced garnishment by way of the prescribed requirement to pay ("RTP") upon the Fundholder or that may become payable by a Fundholder within one year from the date of service of the RTP.
Once the RTP is served by the Crown upon the Fundholder, the Crown's enhanced garnishment under s224(1.3) of the ITA and s317(3) of the ETA, ranks in priority to all security, liens and other charges whatsoever in the applicable Crown Debtor's Receivable payable by the served Fundholder, including a prior general
assignment of book debts55 and a builder's lien claimed against lien funds.56
The Crown's enhanced garnishment super priority, depending upon the time that a factoring company (namely a company that purchases one or more Crown Debtor's Receivable(s) for a discounted price) acquires the Crown Debtor's Receivable(s), the time that the RTP is served by the Crown upon the Fundholder, and the form of transfer or security granted by the Crown debtor to the factoring company, may or may not take priority over the factoring company.57
The writer is of the opinion as well, that the super priority of a Crown's enhanced garnishment is subject to the common law rights of set-off of the Fundholder, where the applicable Crown Debtor Receivables are subject to a Fundholder's common law rights of set-off that can be made without the need to realize on security.
Otherwise, the Crown enhanced garnishment super priority, once the RTP is served upon the Fundholder, grants to the Crown a super priority to the amount of the attached Crown Debtor's Receivable for the recovery of the Crown debtor debt claimed in the RTP (NOTE: It is important to review the RTP to determine exactly what debt is being claimed by the Crown under its enhanced garnishment when served upon the Fundholder), in priority to all past and future secured claims against the attached Crown Debtor's Receivable (NOTE: but see section E below as to the effect of the Crown’s enhanced garnishment priority once the debtor files Bankruptcy Act proposal proceedings or goes bankrupt).
1. Crown Liens and Prerogative Writ
S223 of the ITA for any amounts payable by a Crown debtor under the ITA, CPP or EIA, and s316 for any amount payable by the Crown debtor under the ETA, establish a procedure by which the Minister of Finance may issue a certificate identifying any amount owing by the Crown debtor, and upon registering such certificate in the Federal court, the certificate serves as a judgment of the court of the amount owing plus interest.
Once the certificate and corresponding judgment in favour of the Crown (either under s223 of the ITA for outstanding amounts payable by a Crown debtor under the ITA, CPP and EIA, or under s316 of the ETA for recovery of outstanding GST Debt plus interest and penalties), the Crown may register such certificate at the APPR. Upon such registration, the Crown under both sections, holds a charge or lien ("Crown APPR Lien") in all personal property of the tax debtor for the recovery of the outstanding Crown judgment, but such priority is subject to all charges, liens or binding interests that were effective at law before the registration of the Crown APPR Lien.
Also at common law, a Crown judgment, by virtue of its "prerogative writ", ranks ahead of any prior or subsequent judgments entered in favour of an unsecured creditor of a Crown debtor.58 Accordingly, in those instances where there is a prior judgment and corresponding writ of enforcement registered against a Crown debtor, the Crown can claim priority over the prior unsecured registered judgment and corresponding writ of enforcement by virtue of the prerogative of the Crown’s judgment.
Bankruptcy Act and Companies' Creditors Arrangement Act59 ("CCAA") Discretionary Charges
S243(6) of the Bankruptcy Act, is a codification of the inherent jurisdiction of the Court developed at common law. It specifically empowers the Court, upon any application to appoint a receiver ("Receiver") of all or substantially all of the inventory, accounts receivables or other property of a debtor, to grant to the Receiver a charge ("Receiver's Charge") that can rank ahead of:
all prior secured creditors (that could include the prior perfected PPSA security interests and any and all common law and statutory liens, charges and other interests over all of the property of the debtor placed in receivership); but
save for a Receiver's obligation in respect of environmental damage preserved in s14.06(7) of the Bankruptcy Act, the security for unpaid wages payable by the debtor limited to $2,000 protected in s81.4(1) of the Bankruptcy Act, and security for pension plans protected under s81.6(2) of the Bankruptcy Act);
provided the Court is satisfied that the applicable secured creditors will not be materially affected by the order and that such secured creditors were given reasonable notice and an opportunity to make representations.
The Receiver's Charge, to the extent granted in a Receivership Order, gives the Receiver priority to the property of the bankrupt to recover all of its fees and disbursements, including the Receiver's solicitor's reasonable fees and disbursements, subject to the future taxation and approval of the Court. S243(7) provides that "disbursements" referenced in s243(6) does not include payments by a Receiver to operate the debtor's business.
The Court also has inherent jurisdiction at common law to grant to the Receiver a borrowing charge, that entitles the Receiver to borrow funds under a Receiver's certificate issued to its lender, subject to the limit set out in the appointing Court order, to operate the debtor's business and otherwise to utilize such funds to perform the
Receiver's powers and duties authorized by the appointing order ("Borrowing Charge")60. S31of the Bankruptcy Act authorizes the Court to grant the Receiver a Borrowing Charge that the Court at common law is empowered to grant, provided it is satisfied that the applicable secured creditor(s) will not be materially affected and that such secured creditor(s) were given reasonable notice and an opportunity to make representations regarding the Borrowing Charge.
Again, the Receiver's Borrowing Charge would rank ahead of all secured creditors, but would be subject to ss14.06(7), 81.4(4) and 81.6(2) of the Bankruptcy Act, that as noted above, also apply to the Receiver's Charge.
The CCAA grants to the Court the discretion, provided that the applicable secured creditors are given prior notice and the Court is satisfied that such secured creditors will not be materially prejudiced, to grant the following charges when a company that owes more than $5,000,000 in aggregate to its creditors, makes application for protection under a Court order granted under the CCAA (generally for the purpose of the company filing and eventually approving a plan of arrangement by which its various classes of creditors would recover more than they otherwise would recover in a liquidation):
S11.2 gives the Court the discretion to grant a debtor in possession financing charge ("DIP Charge"), by which the company is given authority to borrow additional funds up to a specified limit determined by the Court from a lender on the security of the company's property, that would rank in priority in the company property for the repayment of the DIP Charge over the applicable prior affected company's secured creditors;
s11.4 gives the Court the discretion, in those cases where a debtor company requires, in order to carry on its business, the continued supply from a critical supplier that is essential to the debtor company's operations, to give such critical supplier a super priority charge in all company property over prior secured creditors for the recovery of the debt payable by the company to the critical supplier for its supply of services to the company after the company obtains the CCAA Court ordered protection;
s11.51 gives the Court the discretion to grant charges in the company property in favour of any director or officer of the company to indemnify such director or officer against any obligations and liabilities they may incur while the company continues to carry on its business after the company obtains the CCAA court ordered protection that could also rank in priority to prior secured creditors; and
s11.52 gives the Court the discretion to:
grant a charge in favour of the Monitor (that must be appointed under the protecting CCAA order) to give the Monitor priority to the company property over prior company secured creditors for the recovery of the Monitor's fees and expenses, including the fees and expenses of any financial, legal or other expert engaged by the Monitor in the performance of its duties; and
grant a charge in favour of any financial, legal or other experts engaged by the company that obtains the CCAA court ordered protection, or any financial, legal or other experts engaged by any other interested person that the Court considers necessary for their effective participation in the rearrangement proceedings granted by the Court under the CCAA, for recovery of their fees from the company property in priority to prior company secured creditors.
Where the Court exercises its discretion under the CCAA to grant one or more of the respective charges under s11, the initial CCAA order establishes the priorities under the respective charges.
BANKRUPTCY ACT REORDERED PRIORITIES
Under our Canadian Constitution the Crown (ie. Parliament) is given exclusive authority to deal with all matters arising within the domain of bankruptcy and insolvency. Accordingly, where there is a conflict regarding the liens, charges and other interests set out in an Alberta statute, between that of the priorities established by the
Bankruptcy Act, the provisions of the Bankruptcy Act apply61.
The Bankruptcy Act sections that conflict with the priorities of liens, charges and security interests granted under Alberta law, include the following:
ss81.3 and 81.4 of the Bankruptcy Act, limit the otherwise $7,500 ESC Employee Priority Charge granted to employees in Alberta, to a secured claim of $2,000 for unpaid wages earned within six months from the date of bankruptcy or the receivership of the employer, plus grants a travelling salesman security up to $1,000 for outstanding disbursements incurred within the six months prior to the bankruptcy or receivership of the employer;
s136(1)(d), subject to the rights of a bankrupt's secured creditors recognized by the Bankruptcy Act (the "BA Secured Creditors"), grants to the employees of the bankrupt a preferred claim for recovery of any wages, salaries, commissions, compensation or disbursements not paid in respect of their priority given under ss81.3 and 81.4 of the Bankruptcy Act;
s86(1) effectively provides that the WCB Charge granted under s129 of the WCA ranks as an unsecured claim once a debtor is assigned or adjudged a bankrupt; but under s87 of the Bankruptcy Act, provided the WCB has registered the WCB 127 Interest prior to the bankruptcy, the WCB is entitled to enforce such registered WCB 127 Interest as a secured claim for the outstanding premiums payable by a bankrupt, subject to the priorities of the prior BA Secured Creditors;
s136(1)(e) provides that outstanding municipal taxes assessed within two years preceding the bankruptcy are preferred claims subject to the BA Secured Creditors, accordingly, the priority of the MGA Lien no longer applies upon the bankruptcy of the debtor;
the super priority granted to a landlord under s104 of the CEA can no longer be claimed in priority to the BA Secured Creditors, since under 136(1)(f) of the Bankruptcy Act the landlord's claims against its tenant upon its bankruptcy is a preferred claim subject to the priorities of the BA Secured Creditors limited to:
three months rent arrears preceding the bankruptcy and three months accelerated rent (if provided for in the lease);
but not greater than up to the total amount realized from the tenant's property on the leased premises after payout of the priority of the BA Secured Creditors against such property; and
s136(3) of the Bankruptcy Act effectively states that balance of the landlord's rights upon the bankruptcy of the tenant ranks as an unsecured claim; and
s66 of the Bankruptcy Act provides that all of the provisions of the Bankruptcy Act also apply to the proposal proceedings set out in Part 11 of the Bankruptcy Act, and accordingly the Bankruptcy Act reordered priorities as set out above, for the most part not only apply upon the bankruptcy of the debtor, but also apply in the proposal proceedings governed by the Bankruptcy Act.
In the writer's opinion, upon the bankruptcy of a debtor, or the filing of a bankruptcy proposal by a debtor, duly prior perfected security interests governed by the PPSA, together with prior enforceable GKLA Lien, Solicitor's Charging Order, WLA Lien, IA Lien, AKA Lien, BLA Materials Charge, Warehouser's Lien and PLA Lien provided they are in place prior to a bankruptcy or the filing of a proposal, can be enforced against the applicable debtor personal property subject to such security interests, liens, charges and other interests governed by the laws in force in Alberta, since the Alberta laws providing for such security do not conflict with the Bankruptcy Act.62
Pursuant to ss69 - 69.3 of the Bankruptcy Act, the Crown, upon a Crown debtor filing Bankruptcy Act proposal proceedings, is stayed from serving any further RTPs upon any Fundholder that owes any present or future Crown Debtor's Receivable to the bankrupt. That being said, unless the Crown otherwise consents, all outstanding debt payable by a Crown debtor that could be subject to the Crown’s enhanced garnishment under s224(1.2) of the ITA (ie. outstanding Employee Source Deductions, Employer CPP/EIA Levies, outstanding income tax plus interest and penalties) must under the terms of the proposal, be paid to the Crown within six months of the date of the Court approval of the proposal. 63
The Crown’s super priority deemed trust for the recovery of Employee Source Deductions, although stayed once a Crown debtor files Bankruptcy Act proposal proceedings, continues to apply throughout the Crown debtor’s proposal proceedings and in the event a Crown debtor goes bankrupt.
Upon the bankruptcy of a Crown debtor, the Crown is no longer stayed from enforcing the Crown’s deemed trust super priority, or from enforcing its enhanced garnishment upon any Crown Debtor Receivables not attached through a Crown ITA RTP served prior to the bankruptcy, and accordingly the Crown is at liberty, after the bankruptcy of the Crown debtor, to serve its ITA RTP upon the Fundholder of any applicable Crown Debtor Receivables to claim its priority against any such Receivables for the recovery of Employee Source Deductions, Employer CPP/EIA Levies, outstanding income tax plus interest and penalties claimed in the ITA RTP.64
Ss222(1.1) and 317(3) of the ETA, and 86(1) of the Bankruptcy Act, effectively provide that the Crown’s deemed trust and enhanced garnishment for recovery of outstanding GST Debt, is upon the Crown debtor filing
Bankruptcy Act proposal proceedings, or upon the Crown debtor’s bankruptcy, relegated to an unsecured claim, subject to the prior BA Secured Creditors’ secured rights, save for the following exceptions:
if prior to the proposal proceedings or the bankruptcy of a Crown debtor, the Crown has served its enhanced garnishment GST RTP upon a Fundholder to recover any applicable Crown Debtor’s Receivable, the Crown will take priority over the BA Secured Creditors’ rights to such Receivable regardless if it is collected after the proposal proceedings or the Crown debtor’s bankruptcy65;
s87 of the Bankruptcy Act and s316(10.1) of the ETA, provide that if the Crown has registered a Crown APPR Lien for outstanding GST Debt prior to the Bankruptcy Act proposal proceedings or the bankruptcy of a Crown debtor, the Crown APPR Lien can be enforced against the Crown debtor’s personal property, including any receivables, subject to the secured claims of the BA Secured Creditors that were perfected or otherwise effective and in place prior to the registration of the Crown APPR Lien; and
if a GST Charger, prior to filing its notice of intention to file a bankruptcy proposal, or prior to its bankruptcy, holds collected GST in trust for the Crown, such that the "three certainties" of a trust are satisfied (certainty of intent, subject matter and object), CRA may claim priority to such amounts, since the actual GST held by the GST Charger is separate and distinct from its other property, and is not the property of the GST Charger to which any prior registered BA Secured Creditors’ security interests could attach. (NOTE: Unless the GST is actually held by the GST Charger in a separate account in trust for the Crown, any Crown argument to recover the GST portion of a Crown Debtor’s Receivable, would, by virtue of the Supreme Court of Canada Decision in Quebec (Revenue) v.
Caisse populaire Desjardins de Montmagny  SCJ No. 4966, would lose to the rights of the prior BA Secured Creditor’s secured claim to any such Receivable, including the GST portion).
Pursuant to s427(7) of the Bank Act, the Bank's priority under its s427 Security against the property of its customer, upon the bankruptcy of its customer, is subject to (i) outstanding wages, salaries and other remuneration owing to the Bank's bankrupt customer's employees three months preceding, and (ii) is subject to amounts owing by a bankrupt manufacturer to a grower or producer of the products grown or produced and delivered the manufacturer six months prior to the assignment. To avoid the priorities given to unpaid employees and unpaid growers or producers of products over s427 Security upon the bankruptcy of the customer, a Bank can enforce its priority over such claims if it also holds an enforceable PPSA security interest
in the applicable customer property perfected prior to the bankruptcy of its customer67.
This paper does not address all events and circumstances where "priorities outside the PPSA" apply. Rather it serves to summarize some of the applicable facts and principles where liens, charges and other interest in force in Alberta may be afforded priorities outside the PPSA.
In addition the opinions expressed in this paper are mine and may not be shared by others, and in particular, the Court, or may not apply to all facts and circumstances.
This paper has been prepared for presentation at the upcoming LESA seminar on the topic of "Priorities Outside of the PPSA", and cannot be used and relied upon by any person. All persons have a duty to do their own additional research and to form their own conclusions and opinions on the various issues discussed in this paper and the writer disclaims any obligation or liability whatsoever to any person in respect of this paper