Canada: Abuse Of The Repair And Storage Lien Act

Last Updated: March 12 2012
Article by Jonathan Fleisher and Eleonore Morris

Lawrence Gold recently presented on abuses of the Repair and Storage Liens Act (Ontario) ("RSLA") impacting commercial finance and insurance companies to the Ontario Personal Property Security Legislation Committee ("PPSL Committee"). As changes to the RSLA will likely not be implemented in the near future, concerns regarding abuse of lien claimant rights are of significant importance to the industry.

Concerns of abuse of the RSLA can affect many areas of recovery for a creditor. A primary concern is that commercial finance companies' collateral is being eroded by the storage and other like charges claimed by possessory lien claimants. Often, these fees are incurred and charged against liened collateral without the knowledge or agreement of the commercial finance company. Under the RSLA, costs for storage and other like charges can trump a security interest in liened collateral. Abuses arise where lien claimants (either directly or through use of a separate storage company) artificially create an extended storage situation or otherwise charge unreasonably high rates for storage of collateral (i.e. in excess of $150.00 per day for storing a vehicle). These fees quickly add up: for example, if the vehicle is stored for one month prior to the secured party receiving notice of the lien, the accumulated storage fee charged can be and is often greater than the value of the collateral. This can result in a secured party abandoning its collateral to repair or storage companies in situations where the lien costs exceed the market value of the vehicle. The most common abuses include:

  1. inflated towing and enforcement charges;
  2. delivery of goods by lien claimants to storage facilities charging higher then market value storage costs, for the purpose of inflating the lien amount (as set out above); and
  3. inflated or bogus repair charges on fleet vehicles.

One of the more interesting cases of abuse was set out in the recent Ally Credit Canada Limited v. All-Ontario Towing and Storage Inc. case, in which Gold was involved as an affiant. The facts involved a debtor company who, on the eve of insolvency, through an agreement with its bankruptcy consultants, directed the delivery of its assets to a third party company for storage. The secured party argued that the third party storage company was somehow affiliated with the bankruptcy consulting firm .

The secured party argued that the purported storage transaction was not a legitimate service, but an activity undertaken for the sole purpose of creating a lien claim, to the detriment of the secured creditor. As the transaction was completed on the eve of insolvency of the debtor company, it was highly prejudicial, and, as such, should be declared void as against the secured party.

The judge overruled the storage claim under the RSLA, and ordered the return of the stored vehicles. While there were no direct allegations of fraud, it was clear the court took a dim view of the storage situation that existed.

The RSLA does provide a secured or interested party the right to pay into court disputed amounts so that the collateral may be recovered, following which the parties have a platform to review the repair, storage and related costs charged. Practically speaking, the economics drive any decision to take action: costs of retaining counsel and enforcement in comparison to costs of settlement or abandonment will influence the course of action taken by creditors or other interested party. Quick reaction time is essential in limiting the overall cost of a lien claim.

Gold has discussed some of these concerns with the Government of Ontario's Auto Insurance Anti-Fraud Task Force, the PPSL Committee and Canadian banks' recovery agents. He advocates amending the RSLA to require storage companies to notify all parties with a registered interest in the liened collateral of their possession and storage within five days of receipt of the collateral. His submission to the PPSL Committee was that the cost of the search is relatively low balanced against the potential harm to secured creditors. By way of example, Gold pointed out that in the case of the storage of a motor vehicle, the due diligence that the storer be required to undertake would be as simple as having the storer obtaining a used Vehicle Information Package ("UVIP") that is readily available from the Ministry of Transportation at a cost of $20.00.

While notice provisions may assist in reducing harm to secured creditors, it will be a difficult task for the legislature to determine the appropriate parameters for sending notice. Certainly, it would be too onerous for storage shops to deliver notices for each item delivered for storage where the time the goods will be stored is relatively short. The PPSL Committee will have to consider questions of when and under what circumstances notice should be required, to evenly distribute the burden.

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.

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