Canada: Priority In Security Interests: Lessons For Secured Creditors

Last Updated: January 29 2015
Article by M. Sandra Appel

In the opening paragraph of his decision in CFI Trust v. Royal Bank of Canada 2013 BCSC 1715, Supreme Court Justice Elliot Myers drew a parallel to the dark comedy Fargo, but this case was no laughing matter to the two creditors involved, who were left fighting over the remains after the fraudulent use of funds by Vancouver's Totem Automotive Group Ford Lincoln Sales and Leasing Inc. ("Totem"), a large but now-defunct car dealership.

CFI Trust and CFI Leasing Limited (together "CFI") and the Royal Bank of Canada (the "Bank") were both lenders to Totem, which leased and sold new and used vehicles. Each had security agreements with the dealership and had effected registrations pursuant to the Personal Property Security Act of British Columbia (BCPPSA). (Although the registration by CFI was inadvertently discharged and re-registered, the validity of the registration did not really factor in the Court's decision.) CFI and the Bank also had entered into a priority agreement to determine which financial institution had priority over which assets of Totem.

Totem had its general operating account with the Bank. Proceeds from sales and leases of vehicles secured to the Bank were deposited into that account. The Bank deducted monies daily from the account to reduce the dealership's operating line or transferred funds to that account to enable Totem to operate.

When Totem finally closed, CFI discovered that proceeds from terminated lease agreements for 242 motor vehicles funded by CFI – and in which CFI had a security interest – had been paid into the dealership's account with the Bank. CFI then sued the Bank for these funds (the "misappropriated funds"), arguing that it had priority over the funds. CFI also argued that the Bank was liable as it had knowledge of the security interest of CFI in these CFI deposits. After a thorough analysis, the Court ruled in the Bank's favour. The decision is being appealed by CFI.

To understand the impact of the decision and what it means for secured creditors, it is necessary to consider the language of the priority agreement, the value of the provisions of the BCPPSA and Personal Property Security Act of Ontario (OPPSA) dealing with proceeds, and the concept of knowledge in these statutes.

The Priority Agreement

Section 40(1) of the BCPPSA and section 38 of the OPPSA are similar in their essential concept: a secured party may subordinate the secured party's interest to any other security interest and such subordination is effective according to its terms.

In the priority agreement, CFI granted the Bank priority over any security interests that CFI had or may acquire in the dealership assets secured to the Bank under the Bank's security (the "Bank's Assets") and postponed the CFI security to the Bank's security, save and except for certain assets that were not part of the Bank's Assets. This is set out in what the Court calls the "notwithstanding clause." This clause provided that notwithstanding the extensive description of the Bank's Assets, these did not include any motor vehicles that are the subject of leases or contracts that are the subject of the CFI security agreements (the "CFI Assets"; emphasis added). The Bank's Assets included

all present and after-acquired personal property in any form (including money, chattel paper, intangibles, goods, documents of title, instruments and securities) derived directly or indirectly from any dealing with any Collateral (as hereinafter defined) described in paragraphs (i) through (vii) above or any proceeds therefrom, including any payment that indemnifies or compensates for any Collateral that has been lost, destroyed or damaged or any proceeds therefrom1.

The Bank's Assets therefore specifically included proceeds whereas the notwithstanding clause did not.

CFI argued that both the Bank and CFI had security in all assets of the dealership and that the Bank had priority over the Bank Assets only while CFI had priority over all assets of the dealership except those over which it had agreed to grant priority to the Bank. CFI also argued that it should have priority over the funds related to the CFI lease portfolio to give business efficacy to the priority agreement.

The Court did not find that CFI had a security interest in the proceeds arising from its leases or contracts because the priority agreement did not specify proceeds. In considering the language of the priority agreement the Court stated:

Quite simply, the unambiguous wording of the priority agreement gives RBC priority over all of CFI's security interest, except what is dealt with in the notwithstanding clause, and that is only the vehicles that are the subject of CFI leases or contracts. The three required words missing in the notwithstanding clause to support CFI's position were: "... do not include any motor vehicles or their proceeds 2 ".

The Court did not appear to consider the remaining words in the notwithstanding clause: "motor vehicles that are the subject of leases or contracts that are the subject of the CFI agreements (emphasis added). It is likely that the CFI security agreements referred also to proceeds of those vehicles as throughout the earlier stages of the CFI relationship with Totem, CFI had been receiving proceeds from its contracts and leases. While it is unclear why the Court did not consider this additional language and the previous manner of handling of the proceeds, what is clear is that the Court, was specifically looking for these three words "or their proceeds."

This decision is contrasted with the Court of Queen's Bench of Alberta decision in Alberta Treasury Branches v. Macleod Dixon3. This was an appeal of the decision of a Master dealing with a postponement agreement.

The Court determined that the postponement agreement was a contract between the parties and should be given its plain meaning. The Court further determined that the phrase "all present and after-acquired personal property" included proceeds, without the need to specifically use the three words "or their proceeds."

The language in this postponement agreement is different from the language in the priority agreement between CFI and the Bank. However, if the CFI security agreements referred to proceeds from the vehicle contracts and leases, then to give plain meaning to the language in the notwithstanding clause, it can be argued that proceeds were included without the need to specifically use the three words. Some meaning should be given to the additional language "that are the subject of the CFI agreements" and the prior actions of the parties.

The Proceeds Provisions

Section 28 of the BCPPSA basically provides that if collateral is dealt with or otherwise gives rise to proceeds, the security interest extends to the proceeds. A security interest in proceeds is a continuously perfected security interest if the interest in the collateral was perfected when the proceeds arose. Proceeds mean identifiable or traceable personal property derived directly or indirectly from any dealing with collateral or the proceeds of the collateral.4 Section 25 of the OPPSA has similar language.

In Secured Transactions in Personal Property in Canada5, Richard H. McLaren establishes that "proceeds are included within the security interest regardless of whether the secured party authorized the dealing with the collateral, and arise as of right through the legislation irrespective of the contents of the security agreement."6

McLaren states:

even if this (i.e. the interest in proceeds) is not explicitly provided for in the security agreement, s. 28(1) of the Act indirectly creates a statutory extension of the security interest to proceeds where the original collateral is dealt with so as to give rise to them.7

Based upon the foregoing, the security interest of CFI in the CFI Assets should have continued in the proceeds from the dealing with those CFI Assets. Apparently that was how the parties dealt with their respective security interests during the normal operations of Totem. The Court did not apparently deal with the prior handling of these proceeds. Nor did it look at this section of the BCPPSA in discussing the language of the notwithstanding clause.

It is acknowledged that McLaren does state that section 38 (of the OPPSA; section 40 of the BCPPSA) allows for a secured party to subordinate the priority of its interest to that of one or more secured parties. The effect of such an agreement is to permit secured creditors to avoid the priority framework of the Act and permit secured creditors to have the freedom to agree to their particular agreed upon priority rules amongst themselves.8

The decision regarding the priority agreement may have remained the same because of the language in the notwithstanding clause; however, an argument could have been made about the additional language in that clause, the provisions that extend a security interest in collateral into proceeds, and that the three specific words are not always necessary. Nevertheless, for secured parties, when entering into priority agreements, if the intent is to provide for priority in specified collateral "and their proceeds", these three words should be included.

Purchaser for Value without Knowledge

Although the Court advised that it did not need to deal with section 31 of the BCPPSA as the language of the priority agreement was determinative of the action9, the Court did a thorough analysis of the Bank's argument that section 31 of the BCPPSA and in particular section 31(3) gave the Bank priority over the misappropriated funds.

Section 31 of the BCPPSA has a number of provisions that protect transferees of negotiable collateral. The first, under section 31(1), essentially provides that a holder of money has priority over a security interest in money perfected by registration if the holder acquired the money without knowledge that it was subject to a security interest or is a holder for value, whether or not the holder acquired the money with knowledge that it was subject to a security interest. There is no comparable provision in the OPPSA. Interestingly, although the Bank argued relying on this section, the Court determined that it was not relevant as the Bank did not receive money.

The second argument the Court considered was in respect of section 31(3) of the BCPPSA, dealing with the purchaser of an instrument. The purchaser of an instrument has priority over a security interest in the instrument perfected by registration if the purchaser gave value for the instrument, the purchaser acquired the instrument without knowledge that it was subject to a security interest and the purchaser took possession of the instrument. This is similar to section 28(4) of the OPPSA. Section 31 (5) of the BCPPSA goes on to provide that for the purpose of section 31(3), a purchaser of an instrument who acquired his or her interest under a transaction in the ordinary course of the transferor's business has knowledge only if he or she acquired the interest with knowledge that the transaction violates the terms of the security agreement creating or providing for the security interest. There is no comparable provision to section 31(5) in the OPPSA.

In considering what the Bank knew, the Court also noted that because the amount of misappropriated funds was so small in comparison to the monies being deposited into the account, the Bank would not have noticed this de minimis amount.

The Court referred to the Flexi-Coil decision10 to establish a number of points. Firstly, it determined that the cheques were instruments deposited into the account at the Bank. Secondly, it decided that the Bank was a purchaser of the cheques since, in the aggregate, Totem's accounts were in a negative balance at the time of deposit. The most important question, however, was the knowledge of the Bank and whether the Bank knew that the transaction violated the terms of the security agreements (of CFI).

The Court reviewed case law on the question, summarized the knowledge of the Bank and determined that the Bank needed to have actual knowledge of the security agreement of CFI being violated. The Court decided that the Bank did not have the knowledge that the cheques were deposited in violation of the CFI security agreements. In reaching this conclusion, the Court commented that CFI had more knowledge than the Bank, and that if CFI did not take action to stop the misappropriated monies from being deposited into the Totem account at the Bank, then how could CFI expect the Bank to take action? With respect, neither of these factors is relevant to this section of the BCPPSA and the actual knowledge of the Bank. The Bank should have known what was in the CFI security agreements as the Bank and CFI had entered into the priority agreement. The priority agreement gave CFI priority over the vehicles subject to the CFI leases and (arguably) proceeds therefrom. The two financial institutions had operated for years dividing the pie on these dealership vehicles and proceeds. The Bank had actual knowledge that the dealership was in financial difficulty. The Bank had actual knowledge that the dealership had previously converted vehicles and funds. So what is really necessary for actual knowledge?

The Court then determined, in contrast to Flexi-Coil, that the electronic funds transferred into the account at the Bank were not instruments, and accordingly not protected by section 31(3). It is apparent that the Court did not address this issue further, as the Court had determined that the issues in this case were determined by the language of the priority agreement.

Implications for Secured Parties

Dealing with proceeds is always a challenge. It is apparent from this decision of the Supreme Court of BC that if a secured party entering into a priority agreement wishes to maintain its interest in proceeds in respect of certain assets, then the interest in these proceeds must be provided for in the terms of the priority agreement. A subordination is effective according to its terms. The proceeds language in Section 28 of the BCPPSA is apparently not relevant when dealing with priority agreements.

In addition, if a secured creditor wants to maintain its security interest in the proceeds from the disposition of assets secured to it, and the debtor also has provided security to an operator of an account, the secured creditor should require that its proceeds be deposited into an account at a different financial institution than the account operator. This may be one way to try and ensure that the account operator financial institution need not argue that it is a purchaser for value without knowledge and the secured creditor can better monitor its proceeds.

The author wishes to thank Robert Groves for his assistance with this


1. 2013 BCSC 1715, paragraph 40.

2. Ibid, paragraph 54.

3. 1 P.P.S.A.C. (3d) 235; reversed 2 P.P.S.A.C. (3d) 258 (Alta. Q. B.)

4. Section 1(1) BCPPSA; Section 1(1) OPPSA

5. Richard H. McLaren, 2013 Thomson Canada Limited, Third Edition,

6. Ibid at page 5-98

7. Ibid at page 6-13

8. Ibid at page 7-65

9. Supra, paragraph 67

10. Flexi-Coil Ltd. v .Kindersley Credit Union (1993), 107 D.L.R., 129

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.