Canada: A U-Turn On Priority Disputes Between Secured Creditors And Lienholders!

Last Updated: August 29 2017
Article by David Gerecke

National Bank of Canada v. KNC Holdings Ltd.  2017 SKCA 57

In 2016, the Saskatchewan Court of Queen's Bench rendered a decision on the priority of builder's liens filed against certain assets under The Builders' Lien Act (Saskatchewan)  (the "BLA"), relative to a security interest held by National Bank of Canada.

In that decision, the Chambers judge considered himself bound by Canada Trust Co. v Cenex Ltd. (1982), 131 DLR (3d) 479 (Sask CA) ("Cenex"), and held that the BLA gave the lienholders priority over National Bank concerning some assets.

On appeal, in a rare occurrence, the Saskatchewan Court of Appeal agreed to reconsider the correctness of its decision in Cenex, convening a panel of five judges to do so.  The Court concluded that Cenex should not be followed, and awarded priority to National Bank.

Factual Background

National Bank had extended credit to Coast Resources Ltd. ("Coast"), an oil and gas producer operating in Saskatchewan.  National Bank's security included a fixed and floating charge demand debenture.  It registered the debenture at the Saskatchewan Personal Property Registry in 2004, and with the Saskatchewan Ministry of the Economy and at Land Titles in February 2014.

In March 2014, National Bank successfully applied to have a Receiver appointed in respect of Coast.  The Receiver became aware of several additional liens registered against Coast's property.  While three of the liens had been registered before National Bank's security, several others were registered behind National Bank.  The issues before the Court related to the later-registered liens.

While Cenex was decided under older legislation, the Court determined that the language had not changed materially between the old and current legislation.

In Cenex, the court had concluded that the lienholders had priority over secured parties in relation to severed ore.  Section 12 of the since repealed The Mechanics' Lien Act (the legislative antecedent to section 22 of the BLA)  stated that liens attached "to all estates and interests in the mineral concerned" and the Cenex court considered this to include the equity of secured creditors in severed or extracted ore.

Section 22 in the BLA reads as follows:

22(1) A person who provides services or materials on or in respect of an improvement for an owner, contractor or subcontractor, has, except as otherwise provided in this Act, a lien on the estate or interest of the owner in the land occupied by the improvement, or enjoyed therewith, and on the materials provided to the improvement for as much of the price of the services or materials as remains owing to him.

(2) Where services or materials are provided:

(a) preparatory to;

(b) in connection with; or

(c) for an abandonment operation in connection with;

the recovery of a mineral, then, notwithstanding that a person holding a particular estate or interest in the mineral concerned has not requested the services or materials, the lien given by subsection (1) is also a lien on:

(d) all the estates or interests in the mineral concerned, other than the estate in fee simple in the mines and minerals, unless the person holding that fee simple has expressly requested the services or materials;

(e) the mineral when severed and recovered from the land while it is in the hands of the owner, and to the proceeds of the mineral and to the amounts to be paid in lieu of the proceeds of the mineral to the owner by a person that operates the mine, oil well or gas well;

(f) the interest of the owner in the fixtures, machinery, tools, appliances and other property in or on the mines, mining claim or land, oil or gas well and the appurtenances thereto;

but, in all other respects, this Act applies to the lien existing by virtue of this subsection notwithstanding that the lien extended by clauses (e) and (f) is a lien on an interest in personal property.

As the Court observed, both subsections 22(1) and 22(2) speak clearly to the "attachment" or existence of liens, but not to priorities.  The Court also noted that section 22 appears in Part III of the BLA, which outlines the nature and scope of liens, while priorities are dealt with in Part VI.  Section 71 of the BLA provides that "liens arising from an improvement have priority over mortgages ...registered after a claim of lien is registered", along with language about liens having priority over advances made after a written notice of lien is given or a claim of lien is registered.

The U-Turn

The Court of Appeal concluded that the Cenex court erred when it held that "all the estates and interests in the mineral concerned" included the equity of prior-registered secured creditors.  Rather, that language was intended to ensure that arrangements such as farm-ins and joint ownerships would not frustrate the builder's lien regime.

Further, there was no way to reconcile the Cenex court's finding that the lien priority would be restricted to severed ore – if lienholders would have priority over severed ore then the plain language would logically dictate that the priority would extend to ore in situ.  That result appeared to be unacceptable to the Court and not supported by any statutory language.

There was discussion of various commission reports and legislative history (the statutory language having been interpreted by the Cenex court and then re-enacted without changes), but, again, the Court ultimately decided that section 22 of the BLA should be interpreted as meaning what it says: "[it] should be read as clarifying the nature of assets to which builders' liens attach, not as establishing priorities between builders' liens and other kinds of security."

With that, the Saskatchewan Court of Appeal overturned a 35 year old precedent from the same court, and restored the expectations of secured creditors who lend to energy and resource producers.

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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David Gerecke
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