An auction of goods held over the Internet may be considered to be a public auction for the purposes of giving notice under the PPSA when a secured party is exercising a right of disposition. An Internet auction can have the “traditional” elements of a public auction, and if so, the time, date and place of the auction must be properly disclosed to all parties, including the debtor, entitled to receive notice of the intended sale.
The Case: CNH Capital Canada Ltd. v. Diamond 4 Holdings Ltd., 2012 BCSC 942
CNH Capital Canada Ltd. (“CNH”) sought judgment of $167,677.62 against Diamond 4 Holdings Ltd. (“Diamond”), being the deficiency amount owing by Diamond on a debt following CNH’s enforcement of its security rights in connection with the sale of two excavators (the “Equipment”). The Equipment was sold through an Internet auction service. After the sale, there remained a deficiency of $163,973.43 owing to CNH, for which it sued.
Diamond disputed the process by which the sales were completed and the price obtained for the Equipment. Diamond did not dispute that it was in default of its obligations to CNH, or that CNH had a right to seize and dispose of the Equipment.
Pursuant to its rights and obligations under the British Columbia’s Personal Property Security Act (“BCPPSA”), CNH delivered a notice of demand to Diamond before seizing the Equipment, then delivered to Diamond a notice of private sale (a notice of disposition). All of these steps were required by the BCPPSA and are similarly required under Ontario’s Personal Property Security Act (“OPPSA”).
The Equipment was marketed on two separate Internet sites, and ultimately sold through the “Iron Planet Auction” website. As part of its defence, Diamond argued that in selling the Equipment over the Internet, CNH failed to comply with Part 5 of the BCPPSA. Part 5 requires that a notice of disposition must include “the date, time and place of any sale by public auction”, which is the same requirement found in the OPPSA. Diamond argued that CNH failed to comply with its requirement to notify it of the public auction: the notice of disposition CNH delivered to Diamond provided that the equipment could be redeemed within 21 days of delivery of the notice, following which the Equipment would be “offered for private sale”. An Internet auction site, Diamond argued, is a public and not private forum for sale of goods.
Diamond argued that the sale price obtained was unreasonably low and because proper notice of the public sale was not provided to it, Diamond was prevented from protecting itself against the magnitude of the deficiency being claimed by CNH.
Neither the BCPPSA nor the OPPSA contains a definition of public sale or public auction. As noted by the Supreme Court of British Columbia, this is perhaps because the concept of “public auction” before the Internet was very simple. Members of the public would be made aware that an auction was to occur at a particular location, and they could attend and bid against each other with the “highest bid” winning the auction item. With the Internet, there is now the ability through a variety of sites to bring buyers and sellers together for the same purpose.
The purpose of notifying a debtor of a sale by public auction is to allow the debtor the option to encourage prospective purchasers to participate in the sale and/or ensure the sale process is conducted reasonably. In a private sale, a creditor drives the sale and is therefore more directly accountable for ensuring a reasonable price is obtained. In an auction, that control, or at least some of it, is lost.
The BC Court held that, for the purpose of the BCPPSA, it does not matter if that loss of control occurs in the context of a traditional public auction or via the Internet. There is no logical reason to distinguish between the two from the perspective of a debtor who is at risk in the sale process. In examining the characteristics of the Iron Planet Auction site, the BC Court concluded there was nothing to distinguish it from a “traditional” public auction that is relevant to the application of the provisions of the BCPPSA. However, the BC Court did note that other online auction sites may have characteristics that would support a different conclusion.
The BC Court held that CNH had failed to fulfill its obligations under the BCPPSA, and ruled on the evidence that the sale price obtained on one of the two pieces of Equipment was “unreasonable” and consequently reduced the deficiency claim of CNH accordingly.
This case is a caution to all secured lenders when sending notices of disposition in Ontario and elsewhere in Canada where the lender’s intent is to possibly sell secured goods over the Internet. Careful consideration of the characteristics of the Internet site chosen will have to be given in order to ensure compliance with provincial PPSA notice requirements.
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.