The Ontario Court of Appeal recently rendered a decision on the enforceability in Ontario of personal property security legislation under the Civil Code of Quebec (the "CCQ"). This decision is of particular importance to companies who purchase, lease or otherwise deal with motor vehicles located in Quebec. It illustrates that good faith buyers in the ordinary course of business may, in some cases, be subject to security interests registered against the seller in Quebec even if such interests do not appear anywhere at the time of the sale.

The Decision

In General Motors Acceptance Corp. of Canada Ltd. v. Town & Country Chrysler Ltd. and Devolin Auto Group Ltd, the Court of Appeal upheld the decision of a trial judge stating that both Town & Country ("T&C"), an Ontario corporation that had purchased a motor vehicle from a vendor in Quebec, and Devolin Auto Group Ltd. ("Devolin"), a subsequent purchaser of the vehicle, were presumed to have knowledge of the respondent's, General Motors Acceptance Corp. ("GMAC"), unregistered security interest in the vehicle at the time of purchase.

Facts 

On November 24, 1999, a wholesale dealer of vehicles in Quebec purchased a Corvette from a dealership in Montreal. In order to finance the purchase, the wholesaler and the dealership entered into a conditional sale agreement. The interests of the dealership, as seller in the conditional sale agreement, were assigned on the same day to GMAC who advanced the money directly to the dealership. The Quebec wholesaler then sold the Corvette the next day (November 25, 1999) to T&C while representing that there existed no liens against the vehicle other than the vendor's. At that time, there was no notice of any interest of GMAC. Later that same day, T&C sold the Corvette to Devolin.

While GMAC advanced the funds for the purchase of the Corvette on November 24, 1999, it did not register its ownership interest in the vehicle (under the CCQ a conditional seller does not register a security interest but rather a "reservation of ownership") in Quebec at the Register of Personal and Movable Real Rights ("RPMRR") until December 7, 1999. GMAC, upon learning that the Corvette had been moved to Ontario, subsequently registered its security interest on January 24, 2000 in that jurisdiction. This took place within the 60-day time period allowed under the Personal Property Security Act of Ontario ("PPSA") and the validity of this registration was not challenged by the parties.

GMAC later commenced an action in March 2000 to seek declaratory relief concerning its interest in the Corvette and damages against the appellants, Devolin and T&C. GMAC claimed that when T&C and Devolin respectively purchased the Corvette, GMAC had a valid registered interest in the vehicle pursuant to Quebec law since GMAC had retroactively registered its ownership interest in the vehicle within the designated 15-day period provided under Article 1745 of the CCQ.

Arguments 

GMAC argued that it had a validly perfected interest in the vehicle under Article 1745 and relied on Article 2943 of the CCQ, which creates a presumption of knowledge by a person acquiring or publishing a right in the same property. GMAC provided expert evidence to the effect that the appellants had not taken the steps that a prudent purchaser would take in a similar situation. The appellants argued that under the CCQ, the presumption of knowledge of registration of a purchaser is rebuttable and that they could not have reasonably been expected to know of GMAC's interest since no registration was in place when they purchased the Corvette. Furthermore, the appellants argued that they were unaware of the RPMRR as it had only been established three months prior to the transaction and had always had a problem-free relationship with the Quebec dealership. For these reasons, the appellants claimed that they acted in good faith and that, pursuant to the CCQ, their good faith rebutted the presumption of knowledge.

Trial Decision

The trial judge, without relying on the expert evidence, found in favour of GMAC and awarded damages in the amount of $49,000.

The Appeal

The Ontario Court of Appeal did not agree with the trial judge's analysis, and chose instead to rely on the expert evidence of GMAC, which provided that a prudent purchaser would in similar circumstances have:

  1. checked the RPMRR for any prior registration;
  2. retain the purchase price until expiry of the 15-day period and checked the RPMRR again; and,
  3. inquired more closely into the chain of title back to the wholesaler.

Since Devolin and T&C had not taken such steps, the Court denied their appeal. The Court also rejected the argument that presumption of knowledge could be rebutted by the mere fact that the registration did not appear in the RPMRR at the time of the sale, or that the newness of the registration system was a relevant consideration. The Court did point out that the expert evidence submitted by GMAC, although it appeared on its face to produce a sensible approach, was essentially unchallenged. This decision stresses the importance of conducting the necessary searches and taking the appropriate precautions when dealing with motor vehicles in Quebec even if such goods are purchased in good faith in the ordinary course of business.

Good Faith Purchasers in the Ordinary Course of Business in Quebec

It is interesting to note that the CCQ does not contain a blanket provision like section 28 (1) of the PPSA, which provides that buyers in the ordinary course of business are not subject to security interests. This is largely due to the fact that Quebec, when it adopted personal property legislation, opted against a uniform approach to security interests. Therefore, the CCQ provides for (a) movable hypothecs which are essentially security interests (as understood under the PPSA), and which are registered at the RPMRR and rank amongst themselves much like PPSA security interests, and (b) ownership interests under leases, leasings and conditional sales. Such ownership interests are also registered at the RPMRR but are subject to different provisions, remedies and priority rules than those available to hypothecary creditors. This duality defeats to a large extent the guiding principles behind personal property legislation which are uniformity and consistency between the various holders of security interests and unfortunately leads to decisions that are not in keeping with commercial realities as the GMAC case illustrates.

In Quebec, purchasers in the ordinary course of business are not subject to hypothecs encumbering the assets of a seller by virtue of Article 2700 of the CCQ (as interpreted by the Quebec court of Appeal). Moreover, purchasers in the ordinary course of business are not subject to the registration of ownership interests (e.g. lease, leasings or conditional sales) provided such interests are registered pursuant to Article 2961.1 that allows for registrations over a universality of assets (e.g. registration of a master lease agreement). However, if the registration of an ownership interest contemplates only one asset, like the GMAC Corvette, then the purchaser in the ordinary course of business is no longer protected and has to demonstrate good faith in order to prevail. Good faith can only be asserted if the purchaser has conducted searches at the RPMRR as prescribed by Article 2943 of the CCQ.

Obviously, this is problematic from a commercial standpoint: why is a purchaser subject to the rights of a previous owner in one case and not in the other? Until the Quebec legislator resolves this inconsistency, we are of the view that purchasers of motor vehicles in Quebec - even if such motor vehicles are purchased in the ordinary course of business - should systematically conduct VIN number searches at the RPMRR and wait for the 15-day period between the date of the sale and the payment of the purchase price to elapse and update their searches in order to adequately protect themselves. Rather than waiting 15 days, a purchaser may alternatively request evidence of ownership from the seller, such as a bill of sale and proof of payment, in order to satisfy themselves that the motor vehicle is not subject to a conditional sale agreement. That being said, they should still perform VIN searches at the outset in order to be able to claim good faith under Article 2943.

Assets Other Than Motor Vehicles

Interestingly, motor vehicles are the only type of assets that can be specifically searched at the RPMRR. One cannot search serial numbers for other types of personal property such as office equipment or aircraft. For this reason, we are of the view that the precautionary steps that apply to motor vehicle purchasers may not be required for purchasers in the ordinary course of business of other types of goods. That being said, because of the knowledge of registration presumption created by Article 2943 and the CCQ's inconsistent treatment of hypothecs and ownership interests, we would nonetheless (i) caution purchasers to search under the sellers' name to ensure that the assets they are buying are not otherwise encumbered by ownership interests and (ii) if possible, request evidence of ownership from the seller (e.g. bill of sale, proof of payment).

Please note this decision emanates from an Ontario court and, although it likely has some influence over the courts of the province of Quebec, it does not bind them. Interestingly, leave for appeal from a decision of the Quebec Court was granted on January 8, 2008 by the Quebec Court of Appeal (EYB 2008-128975) in a challenge to a decision rendered under Article 2943 of the CCQ. We will keep you appraised of the outcome of this decision.