A recent decision of the Court of Queen’s Bench of Alberta1 has raised some questions about the proceeds of the Purchase Price Collateral (“PMSI”) and the cross-collateralization of assets secured by these types of collateral. sureties. It has been suggested that this decision is unique and establishes that the use of a PMSI as collateral for other debts of the debtor is dangerous. But is this decision really that radical?
The receiver of Ramco Sales Inc. (“Ramco”), an equipment supplier, requested a declaration that it was entitled to the equity remaining after selling four pieces of equipment for which the Canadian Western Bank (“CWB” ) had a PMSI. The four pieces of equipment had been purchased by the insolvent Ramco with funds provided by the CWB under a loan agreement and guarantee. The security was in the elements specified in Annex “A” and in subsequent annexes. 13 annexes were attached to the framework agreement. The equipment involved was listed in Annexes 1, 6, 7 and 8 and the annexes were spread over approximately 15 months. CWB was also liable for money for other equipment. Royal Bank of Canada (“Royal Bank”) had previously entered into a Registered General Guarantee Agreement (“CGS”).
The main issue addressed by the Court was who was entitled to the remaining net worth of the four pieces of equipment after the sale of each piece. The CWB argued that any surplus after the disposition of each piece of equipment should be used to pay off any remaining debt on the other three, with the balance going towards its general borrowing. The Royal Bank and the receiver argued that every piece of equipment was discreet. If there was a surplus after the sale of this item, the surplus should go to escrow.
The Court Considered Section 61 of Alberta Personal Property Security Act (“PPSA”) (similar to section 64 of the Ontario Act Security of personal property Act). He looked at each piece of equipment as collateral for the loan and determined that section 61 provides that if there is a surplus after the collateral has been assigned, it goes first to the party with subordinate security. PMSI. In this case, it was the Royal Bank with its GSA registered previously.
The Court then considered why a PMSI takes precedence over a prior secured creditor who has a “post-acquisition ownership clause” and commented on a major feature of a PMSI; that it be limited to loans granted which can be attributed to identifiable discrete assets. “The purpose of the PPSA is to provide an orderly regime to facilitate trade in a balanced manner for a debtor and its creditors. Allowing a PMSI creditor to use excess funds from an identifiable existing asset to repay debt on other identifiable existing assets or any deficit on assets that are no longer available would upset the balance… ”and the“ creditor of PMSI would usurp the priority of the previous secured creditor ”.
In the circumstances, the decision is reasonable. While the decision itself doesn’t state a lot of facts, we know that each of the four pieces of equipment was described in a separate schedule, so we can extrapolate that each had a separate payment schedule. Each piece of equipment was sold separately. Thus, the receiver could determine the amount of the deficit after the sale of each piece of equipment. Compare this with a guarantee contract in which four pieces of equipment are described in a single annex, with mixed payment and the same right to apply payments to the debt in the way that the guaranteed party determines at its discretion, such as the CWB could regarding Ramco. When these four items of equipment are sold, either individually or as a batch, the surplus would always rightly go to the previous pledgee holding a general security contract. This is the concept granted to PMSI by law.
While it has been suggested to avoid this type of situation, with collateral that is cross-secured and PMSI, that secured creditors get a waiver from existing prior secured creditors, it may not be appropriate, or in fact feasible, to have a previous secured creditor, such as a bank, agree to relinquish its surety over the surplus or accept that any surplus relating to equipment secured by a PMSI may be allocated to the deficit relating to other assets guaranteed by PMSI or to the balance of a loan (later guaranteed). After all, the definition of a PMSI is “a security interest taken or set aside as security, other than investment property, to secure payment of all or part of its (highlighting mine) price ”.
The Alberta Court noted that lawyers arguing the Ramco case agreed that there was no case law on this issue of priorities. There are, however, two previous Ontario decisions that have addressed the issue of surplus when a PMSI asset has been sold. The first one, Superior Coatings Canada Ltd. vs. Peat Marwick Thorne Inc.2 was first determined by the Ontario Court of Justice (General Division). The lower court did not specifically address the surplus issue, but determined that the receiver or trustee could withhold from funds realized on the sale of the debtor’s assets and payable to a PMSI creditor, the expenses of the debtor. receiver or trustee and does not need to account for a surplus to subordinated secured creditors. The Court of Appeal3 allowed the appeal of the second secured creditor. In short, the Court of Appeal determined that the receiver was the agent of the first secured creditor in effecting the sale and holds the surplus as agent. The PPSA required that excess funds from a sale by a secured creditor be paid to the next secured creditor. Therefore, although the issue of priority was not specifically addressed with respect to a creditor of PMSI, the general concept had been considered, with the PPSA providing for orderly distribution of the proceeds.
A similar decision was rendered by the Court of Appeal when it reconsidered Canadian Imperial Bank of Commerce v. International Harvester Credit Corporation of Canada Ltd.4 In this case, the previous secured creditor held a perfect security interest in leased vehicles, the Bank subsequently, with a fixed and floating charge on a debenture. The lower court5 determined that the lessor had priority over the Bank because the Bank’s debenture contained a subordination clause allowing the debtor to look after the vehicles. In addition, at the Supreme Court of Ontario, the judge ruled that the landlord should receive all of the proceeds from the sale of a particular vehicle, even if that proceeds were more than the amount owed and owed on the vehicle. . The Court of Appeal, reversing this decision, ruled that the landlord’s priority was limited to the amount owed on the loan in respect of the vehicle in question, the excess being part of the funds owed to the Bank under the debenture.
While these two Ontario decisions considered other issues besides the surplus issue, both reached a conclusion similar to Ramco’s when a specific item of collateral was sold. Any excess after payment for the specific discrete item must be paid to the next secured creditor.
Therefore, although the Ramco decision deals specifically with PMSI proceeds and the surplus resulting from the sale of discrete equipment, it only strengthens the PPSA arrangements and priority system for systematic distribution of the product.