Apr 11, 2014

Secured Lenders Risk Loss From Unauthorized Discharge of Financing Statements

KBA Canada, Inc. v. Supreme Graphics Limited, 2014 BCCA 117 (CanLII)
A recent decision of the British Columbia Court of Appeal highlights the precarious nature of personal property registry system. Under the electronic registration systems in place in most provinces, anyone with a user account can discharge any financing statement registered on the system without authorization from the secured creditor.
A secured creditor whose financing statement is discharged without authorization may register a new financing statement within 30 days of the date of discharge and that financing statement will have the same priority as the financing statement that was discharged, except to the extent that holders of competing financing statements made advances between the date of the unauthorized discharge and the date of the new financing statement.
When a financing statement is discharged, the registry office sends a verification statement by mail to the address of the secured party shown on the financing statement. However, if the secured party does not receive the notice or does not act on it in time, it will lose its priority position.
This was the fate of the secured party in KBA Canada, Inc. v. Supreme Graphics Limited, 2014 BCCA 117 (CanLII) . The plaintiff KBA Canada Inc. had a general security agreement over all present and after acquired property of Supreme Graphics Limited, including a printing press. The plaintiff had registered a financing statement which gave it a first priority position over the printing press but it was discharged in error. The plaintiff had no record of receiving a verification statement and was not able to take advantage of the 30 day curative provision.By the time the plaintiff became aware of the discharge, a number of other parties had registered financing statements which claimed security interests in the printing press.
The plaintiff claimed priority over the printing press on two grounds. First, it argued that it was entitled to equitable relief against the discharge of its security by mistake. Secondly, it claimed relief on the basis of unjust enrichment. The Plaintiff was successful at trial but the Court of Appeal allowed the appeal and dismissed the claim.
On the equitable relief argument, the Court of Appeal held that there was no scope for applying equitable principles in this case.The plaintiff argued that Section 68 of the Personal Property Security Act did permit the court to apply the rules of common law and equity to the extent that they were not inconsistent with the Act. However, the Court of Appeal found that the Act provided a complete code for the determination of priority questions and that the court could not apply equitable principles to override the specific provisions of the Act.
The unjust enrichment argument was that the competing security holders had received a windfall benefit by the mistaken discharge of the plaintiff’s security interest and that it would be unjust to allow them to retain this benefit.The Court of Appeal found that in order for there to be unjust enrichment, there must be no juristic agreement for the enrichment. In this case the statutory priority scheme of the Personal Property Security Act provided a juristic reason for the enrichment.
The case highlights the fact that the tradeoff for the convenience of electronic registration systems is a fairly significant risk of error for secured parties. There are a number of steps that secured parties can take to reduce this risk.

  • Do regular reviews of security files, including Personal Property Registry searches to confirm that financing statements are still in place.

  • Ensure that the secured party address on each financing statement is kept up to date so that verification statements are not lost in the mail.

  • Put in place a system to track verification statements received from the Personal Property Registry so that when a notice of a discharge of a financing statement is received it is routed to someone who is able to review it and take appropriate action.