Canada: Floor Plan Financing With An Interesting Result

Last Updated: September 12 2013
Article by Jonathan Fleisher and Kerian Wallace

Floor plan financing is a common method used by car dealerships to finance their inventory. Typically, a lender takes security over the inventory of the dealer and while the dealer remains in possession of the goods the lender allows for the sale of inventory in the ordinary course. The most common method of structuring floor plan financings requires that once a car is sold the proceeds from the sale are used to pay down the loan against the inventory provided, which is known in industry parlance as the 'cash-interest based management system'. In addition, there are often curtailments which require the dealer to pay down a certain percentage each month that a car remains in the dealer's inventory.

In Ally Credit Canada Ltd. v. Almadi ("Almadi"), Ally Credit Canada Ltd. ("Ally") financed the inventory of a car dealership and used the cash-interest-based management system to account for the financed inventory. Once Ally applied enough funds such that the balance owing on the vehicle was nil, that vehicle was recorded as "paid". As the vehicle had been "paid" for through this accounting method, regardless of whether the funds were received directly from the sale of that vehicle, the vehicle would no longer form part of the collateral. Ally made a claim that, notwithstanding the cars were recorded as paid, since the cars were not sold in this case in the "ordinary course of business", the sale did not release the collateral. The court accepted this argument, even though Ally's past practice was different.

The facts surrounding the sale likely influenced the decision. The sale of two motor vehicles by the dealership were to the owner's wife and the manager of the car dealerships daughter and only occurred after a Notice of Intention to Enforce Security was delivered. Ally did not believe this was in the ordinary course of business under the Personal Property Security Act (Ontario) ("PPSA"), therefore they viewed this circumstance to be an exception to their accounting policies. The dealership argued that as Ally's records showed these particular vehicles as "paid", Ally's security was discharged. In this circumstance, the court ruled in favour of Ally.

The court found that the purchaser failed to establish that the sale occurred in the ordinary course. This was based on the lack of evidence, conflicting stories between the purchaser and the seller, and the timing of the sales. The reasons infer that the sales occurred for the purpose of defeating Ally's enforcement.

There is a concern that the court may not have focused on the correct matter. The question of whether or not a sale is in the ordinary course of business is only relevant if the motor vehicles in question form part of the collateral. If Ally's records stated that the vehicles had been paid for then Ally should lose its security interest in those vehicles. Instead, this fact was dismissed as just an accounting method and, as such, did not bind Ally.

The PPSA protects a purchaser of collateral where the good is acquired in the ordinary course of business. This is both practical and necessary, as innocent third parties should not be affected by the relationship of the borrower and lender. At the same time, this protection should only be afforded where the purchaser is in fact a third party and there is no intention to frustrate the enforcement of the lender's security interest. It seems the court's sensitivity to the latter lead to the incomplete reasoning in Almaldi, yet this fails to recognize that a borrower may allocate payment to certain goods, and if the lender expresses that a good has been paid for in full then the lender no longer has an interest in that good. Accounting methods are used to inform the borrower and the lender of the status of outstanding accounts and should be binding upon a lender to ensure accurate information is being provided to the borrower.

The circumstances of the sale seem to outweigh any reasoning that could have worked in favour of the debtor. Were it not for the suspicious timing of the sales, the court may have determined the motor vehicles did not form part of the collateral. If payments of the dealer had been allocated to the two motor vehicles in question such that these assets had been paid in full then Ally would have no right of enforcement and therefore has no legal standing regarding whether the sale was in the ordinary course. This case is an example of the old adage "bad facts lead to bad law".

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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Jonathan Fleisher
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