The Car Dealer, Some Commingling and The PPSA

This scenario is based on facts from the following Canadian cases:

• Chrysler Credit Canada Ltd v the Royal Bank of Canada and Clarkson Gordon Ltd
• (1986) FPPSR ¶700-102; (1986) 6 PPSAC 153; 30 DLR (4th) 616; 50 Sask R 216; 1 ACWS (3d) 184; [1986] 6 WWR 338; [1986] SJ No 547 per Brownridge, Hall and Cameron JJA.
• Transamerica Commercial Finance Corporation, Canada v Royal Bank of Canada
• (1990) FPPSR ¶700-104; (1990) 1 PPSAC (2d) 61; 70 DLR (4th) 627; 84 Sask R 81; 79 CBR (NS) 127; 20 ACWS (3d) 1280; [1990] 4 WWR 673; [1990] SJ No 177

Normal Security Interest
The Car Dealership arranged a line of credit from the First Bank to assist in the running of its business. That financing arrangement was secured by a general security agreement over all of its real and personal property. The First Bank perfected its security interest by registration under the PPSA (See s.21(2) of the PPSA). The financing statement of the First Bank disclosed the normal security interest as covering:
“all goods now or hereafter owned or acquired by the debtor, including without limitation, all equipment … and vehicles … and … all proceeds, including but not limited to trade-ins”.

The First Bank was given a verification statement when it did so. The First Bank then gave the Car Dealership notice of that verification statement “in the approved form” (see ss.155-157 of the PPSA).

Purchase Money Security Interest
The Second Bank held a perfected purchase money security interest (PMSI) over the purchase by the Car Dealership of new cars from the Supplier. One of the conditions of the supply arrangement was that the Car Dealership would hold monies realised for the sale of inventory on trust for the Supplier. The financing statement was registered five (5) days after the registration by the First Bank and disclosed a PMSI covering:
“all inventory whether now owned or … hereafter acquired by the dealer supplied by the Supplier to the dealer, including but not limited to … new and used motor vehicles”, and in “all proceeds … including but not limited to trade-[ins]”.

The security agreement of the Second Bank stated that the PMSI security interest was taken in collateral to secure all obligations and indebtedness between itself and the Car Dealership. The Second Bank was invoiced for cars ordered by the Car Dealership from the Supplier and after paying the invoice, took an assignment of the conditional sales contract from the Supplier covering each vehicle. The Second Bank gave notice to the First Bank of its PMSI.

Commingled Funds
Contrary to the terms of the supply agreement, the Car Dealership did not hold the sale funds in trust and the monies were commingled with other monies in the general account held with the Second Bank.  The Car Dealership suffered financial difficulties and was placed into receivership by the First Bank.

The Receiver transferred the new vehicles in the possession of the Car Dealership to the Second Bank, but refused to transfer 44 used vehicles. The value of the vehicles was not sufficient to pay out both secured parties. The vehicles were identified as being either:

1     First trade-ins for new vehicles over vehicles that the Car Dealership had not repaid the Second Bank.

2     Trade-ins for new vehicles that the Car Dealership had repaid the Second Bank.

3     Vehicles that could not be linked to the sale of new cars.

All of the vehicles were sold with the agreement of the parties and the funds held on trust pending the decision of the court.

The Second Bank claimed priority over the normal security interest of the First Bank.

Applying The PPSA to These Facts

Category 1

• The PMSI priority of the Second Bank continued in the proceeds generated by the sale of new vehicles covered by its PMSI. (See s. 33 of the PPSA)
• This meant that the Second Bank had priority over cars in Category (1). (See 62(2) of the PPSA)

Category 2

• Vehicles in Category (2) involved credit that had been repaid; and
• while the Second Bank maintained a security interest in the vehicles as proceeds,
• The nature of that security interest should not have been that of a PMSI,
• Rather it was a normal security interest and was registered five (5) days after the registration of the normal security interest by the First Bank.
• Which meant the First Bank should have had priority. (See s.55(4) of the PPSA)

• However, the security agreement (which is effective according to its terms) provided that all of the inventory held by the Car Dealership was subject to the PMSI of the Second Bank; and
• the funding provided by the Second Bank enabled all of the inventory to be acquired.
• Accordingly the PMSI of the Second Bank had priority over the normal security of the First Bank. (See s.62(2) of the PPSA)

Category 3

• Vehicles in Category (3) could not be linked to the purchase of new vehicles.
• The PSMI of the Second Bank was extinguished by the sale and became a normal security interest.
• Accordingly the normal security interest of First Bank had priority over the normal security interest of the Second Bank. (See s.55(4) of the PPSA)

Commingled Funds

• There was no evidence to suggest that the money deposited in the Second Bank account was “received” by the Second Bank in payment of a debt owing to it.
• The money from the sale of the inventory subject to the PMSI comprised traceable proceeds.
• The underlying collateral in dispute was the “cash proceeds” and not the account in which they were held.
• There was no evidence that the monies were deposited outside the ordinary course of business of the Second Bank; and
• There was no new value extending from the First Bank. (See s.10 of the PPSA)
• The PMSI of the Second Bank prevailed as against the normal security interest of the First Bank (See s.62(2) of the PPSA)