Canada: Avoiding The Fire Sale: Protecting Your Security Interest Against Multiple Creditor Claims

The failure to perfect a security interest could result in losing property rights altogether in receivership proceedings despite being the owner of the property. A very recent example of this is the case of Wells Fargo Foothill Canada ULC v Big Eagle Hydro-Vac Inc., 2015 ABQB 546 (Wells Fargo).

The case is a reminder not only about perfecting one's security interest in order to enhance one's priority in the face of competing claims, but also offers helpful insight as to other steps that can be taken to protect that interest.

Analysis

In Wells Fargo, the Big Eagle Defendants (Big Eagle or the Debtor) went into receivership. The court-appointed Receiver brought an application to the Court for advice and direction with respect to multiple creditor claims over personal property of Big Eagle. The first creditor, Wells Fargo, had a security interest in all present and after-acquired personal property of the Debtor. The second was Gator Frac, which is a Texas company in the business of leasing its fracking equipment.

Wells Fargo had provided a credit facility to the Big Eagle Group pursuant to which Wells Fargo and other lenders loaned about $51 million. As security for the credit facility, Wells Fargo obtained a continuing security interest in all of Big Eagle Group's personal property "whether now owned or hereafter acquired or arising and wherever located" and including the Debtor's "right, title and interest in," goods, equipment and fixtures. On June 23, 2008, Wells Fargo registered the security interest at the Alberta Personal Property Registry (the PPR).

The second creditor, Gator Frac, leased two pieces of equipment to Big Eagle, being a trailer mounted frac heater and a truck-mounted frac heater (the Units). Gator Frac and Big Eagle entered into two similar leases for each Unit. The first lease was entered into in December 2013 and the second was entered into in late May 2015. Because the leases were for a term of more than one year, they created security interests such that the provisions of the Alberta Personal Property Security Act (PPSA) applied.

The first lease was terminated on April 29, 2015, and the second lease was terminated on June 4, 2015. Between May and June, Big Eagle and Gator Frac were taking steps to return the Units to Gator Frac's business premises in Texas, however, the Units remained at Big Eagle's yard.

On June 8, 2015, four days after the second lease was terminated, the Court granted a Receivership Order appointing the Receiver over Big Eagle's property. Under that Order, the Receiver was to liquidate Big Eagle's property and distribute the proceeds to its creditors. Wells Fargo claimed that it was entitled to have the Units sold and to receive the proceeds of sale. Gator Frac's position was that the Debtor no longer had any property interest in the Units since the leases were terminated by the time the receivership occurred, such that they were not available for sale by the Receiver.

Gator Frac did not register a financing statement for the Units at the PPR until August 10, 2015. Wells Fargo had added Gator Frac as an additional debtor and specifically added the registration of the Units' serial numbers under Wells Fargo's security interest on August 7, 2105.

The Court confirmed the application of the relevant provisions of the PPSA as reflected in the case law, and, in particular, followed the case of Re Giffen, [1998] 1 SCR 91 where the Supreme Court of Canada held that applicable legislation reflects the policy choice of the legislature that the "true owner" of chattels may lose title, when faced with a competing interest, if he or she failed to register the interest as required.

Gator Frac admitted that it did not register a financing statement listing the Units' serial number goods at the PPR, however, it argued that the termination of the leases took the Units out of the priority and enforcement provisions contained in the PPSA. Gator Frac asserted that, upon termination, Big Eagle no longer had any interest of any kind in the Units such that they were no longer capable of being sold pursuant to the Receivership Order. Gator Frac cited a number of cases in support of its position.

The Court disagreed with Gator Frac. In reliance on the PPSA as interpreted by the case law, the Court held that the leases must not only be terminated, but the Units must have also been re-possessed by Gator Frac and it must have completed enforcement proceedings in respect of the Units. Because Big Eagle still had possession of the collateral at the time the Receivership Order was granted, the Units were subject to the general security interest of Wells Fargo.

Gator Frac further argued that because the Units were serial number goods, Wells Fargo was required to specifically register the goods by serial number in the PPR prior to termination of the leases. Because it failed to do so, Gator Frac asserted that Wells Fargo failed to perfect its security interest over the Units.

The Court took a different view. It held that the registered general security interest of Wells Fargo was sufficient to obtain priority over the Units. The Court further found that because Gator Frac did not register the Units prior to the Receivership Order, there was no "competition" between the two security claims. As Wells Fargo was the only party that had perfected its security, its interest took priority to that of Gator Frac's.

The Court considered what would have occurred had Gator Frac registered the Units in the PPR before the Receivership Order. The Court cited legal literature that suggested that where there are competing security interests over personal property, the party that fails to describe the equipment by serial numbers risks subordination to a competing secured party that has described the equipment by serial number. However, because Gator Frac failed to register any security interest, there was no question that Wells Fargo had priority.

The Court concluded that the Receiver was entitled to sell the Units and distribute the proceeds to the benefit of Wells Fargo.

While the Court appeared to have some sympathy for Gator Frac's position, it found that Gator Frac could have effectively registered a purchase money security interest in the Units, which would have given Gator Frac priority, or it could have entered into a priority and postponement agreement with Wills Fargo in order to protect Gator Frac's interest in the Units.

The Wells Fargo decision highlights the importance of perfecting a security interest in leased personal property, even where, as in this case, "title" is reserved by the lessor, by registering it at the PPR and identifying serial numbers wherever possible. But more than that, the decision offers helpful insight as to other steps that can be taken to enhance, or maintain, the priority of one's security interest in an equipment lease. Such steps include effectively registering a purchase money security interest where circumstances permit, or entering into a priority and postponement agreement with another creditor.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.