Canada: Treatment Of Repair And Storage Liens In Insolvency Proceedings

The Repair and Storage Liens Act¹(the "RSLA") endeavors to protect the rights of persons that maintain or increase the value of collateral though repair and/or storage services. A successful RSLA lien claimant is granted a higher and better interest in repaired and/or stored collateral than all other parties claiming rights in such collateral. In an insolvency proceeding, understanding the use and limits of the RSLA is essential to further the recovery of your client as a creditor (either unsecured or secured), and to limit, where possible, the exposure of your client's interest or estate to priority RSLA lien claims.

Summary of RSLA lien rights in various insolvency contexts

1. RSLA vs. the Secured Creditor

An enforceable RSLA possessory lien right in an article will trump a secured creditor's interest in the same article, up to the amount required to satisfy the lien in full. Proceeds of sale of the liened article must be used to satisfy lien claims in priority to secured claims. A non-possessory lien right also trumps a secured creditor's interest but only if the non-possessory lien is registered prior to the secured creditor's interest.

2. RSLA vs. Receiver

Where appointed by a court for the purpose of selling a debtor's personal property, a receiver must respect the rights of possessory-lien claimants. However, depending on the provisions of its appointment order, a receiver may obtain possession of liened articles without prejudice to the lien claimant's possessory-lien rights and priority over sales proceeds, for the purpose of maintaining continuous control of the sale of the debtor's assets, and to reduce repetitive costs of enforcement arising from multiple sales processes. When distributing proceeds of sale, consideration must be given to all parties asserting lien rights, and to the priority scheme for distribution established under the RSLA. Where appropriate, non-possessory lien claimants may be required to file a proof of claim with the receiver. Care should be exercised when searching for non-possessory lien registrations for, among other things, the purpose of notice of sale. Where the articles liened are serial numbered goods, serial or VIN specific searches should be obtained.

3. RSLA vs. CCAA (or Part III of the BIA)

The stay provisions granted upon the commencement of restructuring proceedings under the CCAA or Part III of the BIA will prevent a lien claimant from taking steps to enforce its lien against an article. For both possessory and non-possessory lien claimants, this will include disposition of the article liened, and for non-possessory lien claimants, seizing or using other self-help remedies to reclaim possession of the article liened. The stay provisions will also stop the clock in respect of charges incurred by the lien claimant (i.e. storage charges) for the purpose of capping pre-filing debts.

4. RSLA vs. Trustee in Bankruptcy

The stay provisions granted upon bankruptcy will impact certain rights of RSLA lien claimants. Non-possessory lien claimants will be required to file a proof of claim in the bankruptcy, and generally speaking, without leave of the court, will be stayed from seizing or using other self-help remedies to reclaim possession of the article liened. Possessory lien claimants exercising, where appropriate, a right of disposition must account to the trustee for surplus proceeds. Similar to a court appointed receiver, where a trustee is conducting a sale of the debtor's assets, the trustee may wish to sell goods held by a possessory lien claimant as part of the primary sales process, to maximize value to the estate and reduce disposition costs.

RSLA Basics

The RSLA covers the repair and/or storage of "articles", broadly defined by the statute as an item of tangible personal property other than a fixture.² To 'repair' an article, there must have been an expenditure of money on, or the application of labour, skill or materials to, an article for the purpose of altering, improving or restoring its properties or maintaining its condition.³ Similarly, one is a "storer" of an article if one receives an article for storage or storage and repair on the understanding that the person will be paid for the storage or storage and repair.⁴ Interestingly, the RSLA does not define the act of "storage" itself.

The RSLA is divided into possessory lien and non-possessory liens.

A possessory lien is automatically created when a repairer or storer is granted possession of an article and commences an authorized repair or storage. However, this lien exists only as long as the repairer or storer maintains continuous possession. Where possession of the article is relinquished prior to receiving full payment for the repair or storage, the possessory lien is extinguished, and replaced by non-possessory lien rights.⁵

A possessory lien cannot be revived, even where possession is restored.⁶ Where an article which had been repaired or stored is returned to a non-possessory lien claimant for further repair or storage, such person may only claim a non-possessory lien for the amount of the first repair or storage, but can assert a possessory lien for the second repair or storage so long as continuous possession is maintained thereafter. Every independent act of repair or storage on an article is to be considered separately, as are the rights associated with each act.

The essential difference between a non-possessory and a possessory lien is the strength of the remedy. A possessory lien holder has priority over the interests of all other persons in the article. ⁷A possessory lien holder can retain the article until the lien is satisfied in full, or can sell the article in adherence with the provisions of the RSLA. Assumedly, because possession rests with the lien claimant, the statute requires no documentary evidence as a precondition to enforce the lien.

In contrast, a non-possessory lien has priority against certain interests, but will always take behind possessory lien holders and other non-possessory lien holders with a better right to the article. ⁸ A non-possessory lien holder can, in adherence with certain statutory provisions,⁹ seize an article against which it holds a lien, and, similar to a possessory lien holder, sell the article to satisfy the indebtedness owing.

The most significant difference between the two is that a non-possessory lien is not enforceable unless the repairer or storer has obtained a signed 'acknowledgment of indebtedness', which acknowledgement may be on an invoice or other statement of account. ¹⁰ The RSLA provides no other parameters for what constitutes an acknowledgement of indebtedness. The Courts have held that a simple acknowledgement of an amount owing is sufficient to meet the statutory standards; an actual or specific monetary amount is not required. ¹¹ Further, the acknowledgment of indebtedness does not have to be signed by the owner of the article but may be signed by others on behalf of the owner. In Royal Tire Service Ltd. v. Shelleby Transportation,¹²

The case law has further stretched the possibilities of that which constitutes a signed acknowledgement of indebtedness. Actions by trustees and receivers can, for example, provide a non-possessory lien claimant with the means to enforce a lien claim. In 1538565 Ontario Ltd. v. Leggat Aviation Ltd., the equipment lessee, not the registered owner, executed the document relied upon as supporting the non-possessory lien. The Court held that persons in legal possession of the article have the authority to authorize repairs and/or storage as necessary, and the signature of such persons sufficiently met the required acknowledgment. ¹³

The RSLA does not require that a lien claimant register its lien before taking steps to enforce against the entity that authorized the repair or storage. However, a lien claimant cannot enforce its lien rights against a third party until it has registered. Moreover, the priority claim of a lien claimant is subordinated as against a third party, if it was not registered before the third party acquired and registered its right. This is true even where the lien claimant's interest arose prior to the interest of the third party. it was held that the inclusion of the lien claimant on a list of creditors, as part of the bankruptcy statement of affairs signed by the trustee, sufficiently met the requirement of a signed acknowledgment of indebtedness. The Court noted that the requirement is permissive in nature and refers to "indebtedness" rather than 'debt' or 'specific debt', and the RSLA should be liberally construed. ¹⁴ Third parties include secured parties: where a secured interest arises after the creation of a non-possessory lien but before registration of the lien, it has priority over the lien. ¹⁵

Interestingly, a failure to register has no impact in relation to non-possessory lien claimants. Priority amongst non-possessory lien claimants is to be determined in the reverse order to the order in which the lien claimants released possession of the article, such that the last person to store and/or repair an article will have first priority. ¹⁶

There is no prescribed time limit under the RSLA to register a non-possessory lien, although the statute does prohibit the tacking of liens. ¹⁷ A non-possessory lien claiment that chooses to register must register each lien arising from an individual repair or storage seperately.

One of the effects of the registration provisions of the RSLA is that a lien claimant can register a lien following the appointment of a receiver, or, as found in the case law, after an assignment in bankruptcy. A non-possessory lien claimant that chooses to register must register each lien arising from an individual repair or storage separately.

One of the effects of the registration provisions of the RSLA is that a lien claimant can register a lien following the appointment of a receiver, or, as found in the case law, after an assignment in bankruptcy. A non-possessory lien claimant that chooses to register must register each lien arising from an individual repair or storage separately. ¹⁸ Trustees and receivers may have rights in certain collateral, but they do not have registered interests akin to, for example, a Personal Property Security Act ¹⁹ secured creditor. Consequently, a lien claimant can enter receivership or bankruptcy proceedings already in progress, and still be able to assert a priority interest in an article which can trump all other interests, including that of the receiver or trustee.²⁰

What constitutes part of the lien?

The base lien amount, or the priority amount, for any RSLA claim is the commercially reasonably cost of the repair or storage. The cost of a repair or storage can be challenged on the grounds of commercial reasonableness even where an amount may have been previously agreed upon or assumed by the parties. The existence of a signed acknowledgement of indebtedness does not prejudice the right of an owner or any other person to dispute the quantum of the lien claimed.²¹

Parties with an interest in an article seeking to challenge RSLA repair liens should carefully consider the nature of the work done. Accessions and other topical additions to an article may be considered by some as an improvement, but will not meet the statutory definition of "repair". In GMAC Leaseco Ltd. v Tomax Credit Corp., ²² the Court, when reviewing repairs claimed against a car, disallowed the installation of a stereo system on the finding that it was an accession, but approved a security door locking system on the basis its installation improved the overall safety and security of the car.

The contract between the repairer or storer and the owner or authorized controller of the article will be an important factor when assessing what additional amounts may appropriately be included in the base lien amount. For example, financing and interest costs may be built into the base lien for repair contracts to be paid over a period of time.

The contract may also provide for a lien right over amounts incurred by the repairer or storer in the event payment of the base lien is not paid as agreed. However, the provisions of the RSLA and the case law will limit what amounts will be claimable as part of the base lien in priority to other persons having an interest in the article.

Charges for the towing of an article cannot be included in the base lien amount unless the towing was incidental to the repair.²³For example, a repairer hired to repair a car may claim the cost of towing the car to its repair shop to begin repairs as part of its lien. Towing costs which are incidental to the repair should be distinguished from towing costs incurred through enforcement of lien rights.

In Ontario, the Highway Traffic Act ²⁴ provides that a police officer may order the removal and storage of a vehicle, cargo or debris that are impeding or blocking the normal and reasonable movement of traffic on a highway, or to prevent injury or damage to persons or property. The costs and charges for the removal and storage of the vehicle, cargo or debris removed are a debt due by the owner, operator and driver of the vehicle, recoverable as a lien on the vehicle which may be enforced under the RSLA.²⁵In these cases, the signed acknowledgement need only be via the signed order of the police officer making the order for removal.

This sort of lien arises most commonly when towing services are engaged by police officers after a highway traffic accident.

When representing clients facing a lien created by way of Highway Traffic Act, care should be taken to evaluate the costs included as part of the lien. Often, towing companies may be required to wait before a tow can be completed, and may be asked to assist in cleaning debris from an accident or other like site. Many towing alliances have established pricing regulations, which should be checked to ensure proper pricing.

A fast reaction time is important for any owner or counsel acting for an owner: even regulated, storage costs incurring at, for example, $100 per day, can rapidly increase the cost of a lien payable, particularly if the vehicle is left at the towing premises for any extended period. On top of storage, additional costs claimed as part of the towing and storage of vehicles from accident sites, which costs would generally form part of the lien, can quickly add up.

Where the vehicle towed has been damaged beyond repair, often the cost of the towing will exceed (usually by a large margin) the scrap value of the vehicle. In such situations, an owner's insurance company will generally be the paying party, directly dealing with the towing company in respect of payment of the lien and removal of the wrecked vehicle from the towing premises.

A recent development within the towing industry is the frequent engagement of RSLA section 24 dispute resolution proceedings in respect of wrecked vehicles with little to no remaining value. Insurance companies disputing the towing costs involved will offer a reduced payment in settlement of the lien amount, following which, if such settlement is approved, pay into court the full amount claimed, together with their settlement offer. The onus under the RSLA then shifts to the lien claimant to exercise their rights under section 23 or commence an action for recovery of the amount paid into court under section ²⁴.

Often, the cost (and time) of taking action will prove too burdensome on the RSLA lien claimant, and the offer of settlement will be (albeit reluctantly) accepted, with the balance of funds paid into court returned (with accrued interest) to the insurance company.

When acting for lien claimants or parties against whom a lien is asserted, strategic thought should be given as to the potential use of sections 23 and 24 of the RSLA. The logistics of these sections and how they may benefit your clients are discussed in detail below.

Costs claimable as part of the priority lien amount

Certain costs of enforcement may be challenged by an owner or interested party in an article when such costs are asserted as part of the amount required to satisfy a lien. This is particularly relevant to the claims of non-possessory lien holders.

Where a lien claimant has seized and sold an article, subsection 28(2) of the RSLA allows for the recovery of reasonable expenses incurred in the custody, preservation and sale process. The lien claimant may include such amounts as part of the total amount required to satisfy the lien. However, subsection 28(2) does not expressly state such amounts are to form part of the base lien itself, to be given priority over other parties with an interest in the article. In a bankruptcy or receivership, or in any situation where | 8 the proceeds of sale of an article are insufficient to satisfy all claims against it, it is imperative that priority be given to the lien claimant for only those amounts which may rightly be claimed as part of the base lien.

Costs arising from and relating to seizure may be challenged by other parties with an interest in an article seeking to limit exposure of lien claims. Section 14 of the RSLA allows a registered non-possessory lien claimant, or a lien claimant exercising a contractual right or a right otherwise provided by law, to seize the article as part of its enforcement rights. Prior to 2006, the case law allowed, as part of the amount required to satisfy the lien, costs for seizure and storage incurred under subsection 14(3), where the repair and/or storage contract specifically provided for the recovery of such amounts by the lien claimant.

In 2006, the RSLA was amended to include the following provision:

Subsection 14(3.1) expressly excludes costs relating to or arising from seizure from the base lien amount. Such costs should not automatically be given priority over the interests of other persons to the article, and may be excluded from the priority lien amount.

In addition to costs of seizure, the case law specifically excludes the recovery of bailiff costs as part of the base lien amount, on the ground that section 12 of the RSLA does not require that bailiff costs be paid prior to the discharge of a lien.²⁶Payment of a bailiff's fees and disbursements cannot properly be made a condition precedent to the discharge of a non-possessory lien, and therefore should not be given priority over persons with competing interests in the article.

Storage costs cannot be included in a base lien unless the article was delivered for storage pursuant to section 4 of the RSLA. Further, in the absence of a contractual agreement to the contrary, there is no lien for the storage of an article on which a repair is made, even where it is necessary for the lien claimant to pay for the storage of the article while enforcing its base lien rights. ²⁷

This is not to say that a repairer or storer is denied all recourse to seek costs of enforcement. Rather, the amendments to the RSLA and the case law limit the right of a lien claimant to assert a priority claim over certain costs of enforcement which trumps the rights of all other interested parties in an article. This is particularly significant in insolvency proceedings, when multiple parties, certain of which will be secured parties, will be competing for the first and best right to the article or the proceeds derived therefrom.

Footnotes

^{1 R.S.O. 1990, c. R.25.}

^{Section 1(1) of the RSLA, definition of 'article'.}

^{3 Section 1(1) of the RSLA, definition of 'repair'.}

^{4 Section 1(1) of the RSLA, definition of 'storer'.}

^{5 Section 5 of the RSLA.}

^{6 Ibid.}

^{7 Section 6 of the RSLA.}

^{8 Section 16 of the RSLA.}

^{9 See section 14 of the RSLA for procedural direction of seizure and limits of same.}

^{10 Section 7(5) of the RSLA.}

^{11 Altruck Transportation Services (c.o.b. Kirby International Trucks Ltd.) v. Barry Humphrey Enterprises Ltd., [1993] O.J. No. 964 (Gen. Div.); Alexandrov v. 1030999 Ontario Ltd., [1994] O.J. No. 2338 (Gen. Div.) ["Alexandrov"].}

^{12 [1999] O.J. No. 3288 (C.A.).}

^{13 2004 CarswellOnt 4755 (S.C.J.); see also Fountain Tire Corp. v. Sturgeon Timber Ltd. (Receiver of), [2007] O.J. No. 2424 (S.C.J.); 2004 CarswellOnt 4755 ["Fountain Tire"]}

^{14 See section 16 of the RSLA for priority rules (as relating to distribution of proceeds of sale); see also Canadian Imperial Bank of Commerce v. Kawartha Feed Mills Inc., 1998 CarswellOnt 2918 ["Kawartha Feed Mills"] for an excellent discussion on determining priority between non-possessory lien holders.}

^{15 General Electric Capital Canada Inc. v. Interlink Freight Systems Inc. (1998), 42 O.R. (3d) 348 (Gen. Div.) ["Interlink Freight"]}

^{16 Kawartha Feed Mills, supra, note 14, at paras. 10-12.}

^{17 Section 26(2) of the RSLA; see also Kawartha Feed Mills, supra, note 14, at para. 8.}

^{18 Interlink Freight, supra, note 15}

^{19 R.S.O. 1990, c. P.10}

^{20 Fountain Tire, supra, note 13, at para. 38}

^{21 Section 7(6) of the RSLA.}

^{22 2001 CarswellOnt 2600.}

^{23 858579 Ontario Inc. v. QAP Parking Enforcement Ltd., 1994 CarswellOnt 442; additional reasons at 1994 CarswellOnt 775.}

^{24 R.S.O. 1990, Chapter H. 8}

^{25 See section134.1 of the Highway Traffic Act.}

^{26 Riordan Leasing Inc. v. Veer Transportation Services Inc., 2002 Carswell Ont. 2719; additional reasons at (2002), 2002 CarswellOnt 2963 (Ont. S.C.J.).}

^{27 Alexandrov, supra, note 11; see also Busby v. Winchester (1889), 16 S.C.R. 336 (S.C.C.).}

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