Canada: Court Of Appeal Rejects Use Of Equity To Override PPSA Priority Rules

The BC Court of Appeal has ruled that equitable principles cannot be used to avoid the priority scheme contained in the PPSA.

In KBA, Inc. v. Supreme Graphics Limited, 2014 BCCA 117, the Court overturned a BC Supreme Court decision that altered the priority scheme under the Personal Property Security Act ("PPSA") by granting an "equitable priority" to a secured creditor, KBA, Inc. ("KBA").

KBA's financing statement in respect of its purchase money security interest in a printing press was discharged by a third party, without KBA's knowledge or consent. By the time KBA became aware of the discharge and re-registered a financing statement, it had lost priority over other perfected security interests, including a General Security Agreement registered in favour of Supreme Graphics Limited ("Supreme"). KBA applied to a judge of the Supreme Court to reinstate the priority of its security interest, relying upon PPSA sections 68 and 70, and the doctrine of unjust enrichment.

Sections 68 and 70 of the PPSA provide as follows:

The chambers judge found that the court had equitable jurisdiction to grant the relief sought, both under ss. 68 and 70 of the PPSA and the doctrine of unjust enrichment, and gave KBA's interest priority over the interests of two other creditors, including Supreme.

Supreme appealed, arguing that the priority scheme set out in s. 35(1) of the PPSA is a complete code, designed to provide necessary commercial certainty, and that it could not be altered by the application of equitable principles.

The BCCA agreed, observing that "...the overriding goal of the PPSA is to provide commercial certainty and predictability to personal property financing. The statute includes clear rules for registration of financing statements in respect of security interests and for priorities among secured creditors. Courts have been very reluctant to circumvent or modify the explicit statutory provisions through the use of extra statutory principles of common law or equity" [paragraph 20].

PPSA sections 68 and 70, the BCCA ruled, allow "...principles of common law, equity, and the law merchant to be applied only to fill interstices in the statute, or to cover areas that are beyond the scope of the legislation...[but do] not allow the court to apply such principles instead of the clear statutory precepts" [paragraph 26]. The court therefore concluded that ss. 68 and 70 do not permit the application of equitable principles in preference to the residual priorities scheme established in s. 35.

The BCCA similarly rejected the chambers judge's application of unjust enrichment principles to avoid the PPSA priority rules. The court noted, rather logically, that valid legislation (including in particular the priority scheme set out in the PPSA) provides a juristic reason for any enrichment resulting from the very application of that legislation, and concluded that the judge "...erred in finding that the doctrine of unjust enrichment could be used to navigate around the clear statutory provisions" [paragraph 42].

This decision reverses the recent trend in BC toward the judicial alteration of legislated priorities*, and reinforces the concept that certainty and predictability, fostered by the strict application of commercial statutes, should prevail. This is a development that will undoubtedly be welcomed by lenders and their legal counsel.

*See, for example, Pacific Shores Resort & Spa Ltd. (Re), 2013 BCSC 480 (CanLII), and CFI Trust v. Royal Bank of Canada, 2013 BCSC 1715 (CanLII).

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