On November 5, 2010, the SCC released its decisions in the companion cases of Bank of Montreal v. Innovation Credit Union (Innovation) and Royal Bank of Canada v. Radius Credit Union Ltd. (Radius). These decisions clarify the interaction between the security schemes in the federal Bank Act and Saskatchewan PPSA, 1993 and the method for determining priorities as between them. After considering the nature of the security interests at issue, the SCC concluded that a first-in-time unperfected PPSA security interest takes priority over a subsequently registered Bank Act security interest.
Both Innovation and Radius involved a priority dispute between the credit union's prior unregistered security interest taken under the PPSA and the bank's subsequent security interest taken and registered under the federal Bank Act. In Innovation, the security interests were taken in collateral owned by the debtor at the time that the security agreements were executed, while in Radius, the dispute was in respect of the debtor's after-acquired property.
The SCC held that the focal point for resolving a priority dispute involving Bank Act security and security taken under a provincial statute is the Bank Act itself. Where the Bank Act does not specifically address the priorities in question, the court must consider whether, on the basis of applicable principles of property law, the proprietary rights granted to the bank under the Bank Act have priority over competing PPSA security interests.
Pursuant to sections 427(2) and 435(2) of the Bank Act, the bank can acquire no greater interest to the asset in question than the debtor himself had at the time of execution and delivery of the security interest. Therefore, when analyzing the nature of the proprietary rights granted to the bank, the SCC found that it was necessary to determine whether the credit union acquired any interest under its prior security agreement that derogated from the debtor's title to the asset in question.
In each case, the SCC held that pursuant to the PPSA, the credit union acquired a statutory and therefore legally cognizable interest in the assigned property at the time of execution of its security agreement. In Innovation, the statutory interest was correlative to a proprietary right at common law in the nature of a fixed charge. In Radius, the statutory interest was correlative to an inchoate proprietary interest in the nature of a fixed charge over the debtor's assigned after-acquired property. The nature and validity of these interests were not affected by the concepts of "attachment" or "perfection" in the PPSA, since the internal priorities of the PPSA have no bearing on determining a priority dispute between Bank Act and PPSA security interests. Since pursuant to the Bank Act, the bank could only take a security interest in respect of the debtor's equity of redemption in the collateral, the SCC held that in both cases, the bank's security interest was subject to the credit union's first-in-time, yet unperfected, PPSA security interest.
The SCC's decisions in the companion cases of Innovation and Radius are important since they clarify the method for determining priority disputes between security interests taken under the Bank Act and provincial personal property security statutes. In general, where the Bank Act is silent on the dispute in question, priority will be given to the first to execute a security agreement. One should note that while clarity in the law is vital, the law as it now stands may expose banks to unreasonable commercial risk. Banks may find that their Bank Act security interests are subject to undisclosed and unregistered PPSA security interests whose existence they had no way of discovering. While the SCC acknowledged that this is a real concern, it concluded that any changes in priorities must stem from legislative reform. In the meantime, banks in Ontario would be well advised to always take PPSA security in addition to Bank Act security to protect against this risk.
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