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
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
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
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
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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The Canadian Office of the Superintendent of Financial Institutions ("OSFI") recently ruled that a bank cannot promote comprehensive credit insurance ("CCI") within its Canadian branches under the Insurance Business (Banks and Bank Holdings Companies) Regulations (the "Regulations").
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