Alteration Without Authorization? The Issues of Electronic Registration in KBA v Supreme Graphics
The British Columbia Court of Appeal (“BCCA”) case KBA Canada, Inc v Supreme Graphics Limited, 2014 BCCA 117, was released this past March. The judgment reversed the decision of the lower court, with part of the courts’ analysis revealing contrasting opinions on the role of equity in determining the priority of a security interest that has been discharged from the registry in error. In a more practical sense, the case suggests the possibility of future issues with electronic registration under the provincial Personal Property Security Act registration schemes.
The plaintiff, KBA Canada, Inc. (“KBA”), had a registered security interest in an offset printing press in the possession of 3S Printers Inc. (“3S”). This interest was validly assigned to KBA by Wells Fargo Equipment Financial Corporation (“Wells Fargo”) in the form of a “purchase money security interest” (PMSI). This PMSI had priority over the general security agreements of Supreme Graphics Ltd. (“Supreme Graphics”) and CIT Financial Ltd. (“CIT”), also creditors to 3S.
The dispute arose when Wells Fargo mistakenly filed a financing change statement, discharging KBA’s registration without their authorization. The British Columbia Personal Property Security Act, RSBC 1996, c 359 [PPSA], has a limited curative provision in section 35(7) that allows for an unauthorized discharge of a registration be re-registered within 30 days without affecting its priority status. However, by the time KBA became aware of the discharge 30 days had already passed. It re-registered its interest, but lost priority under the PPSA scheme. 3S became insolvent, and KBA commenced proceedings seeking equitable relief in order to restore the priority of its interest in the printing press. Their claim was opposed by two of the other creditors with registered security interests, Supreme Graphics and CIT.
The question was whether the court could exercise its equitable jurisdiction to adjust the priority regime set out in section 35 (s. 30 of the Ontario Personal Property Security Act, RSO 1990, c P.10) in order to correct the error made and to ensure a fair outcome. The plaintiff’s argument can be divided into two points:
- The PPSA allowed the court to utilize equitable principles to override the section 35 priority scheme through section 68 (s. 72 of the Ontario PPSA); and
- Even if it did not, the doctrine of unjust enrichment could nonetheless be applied to grant them relief.
The defendants, Supreme Graphics and CIT, argued that the PPSA was a complete and comprehensive code with regard to the priority scheme, supplanting the previous common law and equitable rules. While the judge at the British Columbia Supreme Court (“BCSC”) supported the plaintiff’s argument, the BCCA reversed the decision to side with the defendants.
The BCSC Decision
Equitable Relief through the PPSA
Section 68(1) of the PPSA states that, “The principles of the common law, equity and the law merchant, except insofar as they are inconsistent with the provisions of this Act, supplement this Act and continue to apply.”
In his opinion, Kelleher J. noted the absence of any requirement in the PPSA for effective notice to be granted to a creditor whose security interest has been discharged. Equity should thereby intervene to correct this shortcoming and ensure no windfall benefit comes to CIT and Supreme Graphics.
Kelleher J. emphasized that the present case’s unique facts create a specific exception to the general assumption that the PPSA’s goal of certainty and predictability requires a comprehensive statutory scheme. In such narrow circumstances, using equitable principles through section 68 “does not offend the Act’s policy by imposing fairness over certainty and predictability. Certainty and predictability are furthered by an order …that prevents a creditor from losing its priority position due to an innocent mistake where there is no prejudice to other creditors” (para 82).
Relief through Unjust Enrichment
The doctrine of unjust enrichment requires that three elements are present: (1) an enrichment, (2) a corresponding deprivation, and (3) the absence of any juristic reason for the enrichment (Peter v Beblow,  1 SCR 980, 987). Kelleher J. noted that the first two requirements are easily satisfied: CIT and Supreme Graphics have been enriched by their improved priority positions and KBS has lost its priority. The question was whether the existence of a statutory scheme – in this case, the PPSA – provided a juristic reason for the enrichment.
The judge relied on a statement made in Central Guaranty Trust Co v Dixdale Mortgage Investment Corp (1994), 24 OR (3d) 506 (CA) [Central Guaranty], that “in an appropriate case a court may give effect to the principle of unjust enrichment despite the terms of a statute” (61). The legitimate expectations of the secured parties regarding their priority “may prevail over statutory priority rules in claims of unjust enrichment” (95). CIT and Supreme Graphics were always aware of KBA’s superior priority and neither of their rights would be unfairly abrogated were a remedy to unjust enrichment be granted.
Furthermore, confirming their windfall benefit at the expense of KBA’s innocent error could not on principle be found to constitute a valid juristic reason. In order to fulfil the PPSA’s goals and to increase the availability of secured financing, “[c]reditors should be able to rely on a system that does not allow mistaken discharges without notice” (97). The judge therefore found in favour of KBA.
The BCCA Decision
Equitable Relief through the PPSA
Groberman J. at the BCCA disagreed with the expansive role given to equity by the chambers judge. He reasoned that if section 68 were used to give priority to security interests through principles of equity and the common law, the “statutory purpose of replacing those complex and convoluted principles with simple rules that provide certainty and predictability would be undermined” (para 24). Therefore, the judge read section 68 as allowing non-statutory principles “only to fill interstices in the statute, or to cover areas that are beyond the scope of the legislation. It does not allow the court to apply such principles instead of the clear statutory principles” (para 26).
He further added that it is unlikely that such non-statutory principles would ever be applicable to a priorities dispute, as the PPSA was designed to deal with such issues comprehensively. Groberman J. pointed to the scarcity of previous judgements interpreting either section 68 or the corresponding sections of other provinces as sanctioning judicial discretion to depart from the statutory priorities scheme.
Relief through Unjust Enrichment
Like the chambers judge, the BCCA found that the first two requirements to claim unjust enrichment (an enrichment and a corresponding deprivation) were easily satisfied. The courts disagreed, however, in determining whether the statutory priorities scheme represented a juristic reason for the enrichment. While the BCSC looked to Central Guaranty to hold that the existence of a statutory scheme did not preclude a claim for unjust enrichment, the BCCA distinguished it on the nature of the relevant statutory scheme:
Where a statute addresses issues of enrichment only obliquely, there may be room for interpretation as to whether it constitutes a “juristic reason” for that enrichment…Such is not the case, however, with the PPSA, which is directly and centrally concerned with priorities among security interests. (para 40)
Groberman J. thereby concluded that the PPSA’s priority scheme did constitute a juristic reason for CIT and Supreme Graphic’s enrichment, and denied KBA’s unjust enrichment claim.
The progression of this case demonstrates considerably differing opinions on the compatibility of equity with an area of law expansively covered by statute. Both courts agreed that the PPSA’s purpose is to advance commercial certainty and predictability in secured transactions, but had differing opinions on how principles of equity should be employed to further that goal. While the BCSC focused on the innocence of KBA and on the lack of any prejudice towards CIT and Supreme Graphics, the BCCA kept a strict interpretation of the Act as a complete and exhaustive code. The Court not only decided against the use of equitable principles in this case, but theorized that it was unlikely that any situation could arise that would justify their use in priority disputes.
What may be of an even greater concern, and something that is only briefly mentioned by the court, is how predictability and certainty can be maintained when electronic registration can apparently be altered without the authorization of the secured party. While the registry office generally sends a verification of discharge by mail, not receiving such a notice will not be an excuse for missing the statutory 30-day grace period to revive the registration. While the BCCA stated that it is “surprising” that the PPSA seems to allow anyone to file a financing change statement discharging a registered security interest, the Court does not offer any respite to those who are placed in such a hazardous position through no fault of their own.