Jason Bryk 

Phone: 204.956.3510

Fax: 204.957.0227

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-               Effective June 12, 2008, The Manitoba Personal Property Security Act (the "MPPSA") was altered by certain amendments (the "Investment Property Amendments") which, to a substantial extent, modify Manitoba's rules regarding the taking, perfecting and realization of security interests in most types of personal property usually thought of as investments.  That is, such things as stocks, bonds and other investments in businesses and business ventures, as well as rights and interests in or derived from same.

-               The Investment Property Amendments are contained in Part 7 of the new Manitoba Securities Transfer Act (the "MSTA"), the MSTA having been enacted to alter theManitoba rules dealing generally with purchases and sales of investments.  The Investment Property Amendments borrow heavily and incorporate definitions and concepts from the MSTA, so in order to understand the Investment Property Amendments, it is necessary to review and understand substantial portions of the MSTA.

-               Both the MSTA and the Investment Property Amendments:

(a)          reflect the modern reality of the existence of "intermediaries" in the investments marketplace, that is, that, at least for publically traded investments, most investors do not hold their investments directly from the issuers thereof, but rather hold interests (or undivided interests) in investments which are in turn acquired by one or more intermediaries from the original issuers (intermediaries being typically banks, trust companies, brokers, investment dealers, etc.);

(b)          bringManitoba's rules for dealings (including secured transactions) with investments substantially in line with the similar rules enacted in theU.S.and in (now) most Canadian provinces;

(c)           reflect the fact that, although sometimes (although less and less frequently), one's investments may be represented by a tangible (ie., paper) certificate, in essence, all investments covered by the MSTA and the Investment Property Amendments comprise one or more (typically a "bundle") of intangible rights and interests.  An investor may own 1,000 common type shares in ABC Widgets Ltd. which are represented by a share certificate, but the share certificate itself (a mere piece of paper) has no inherent value, rather, it is the rights to receive dividends and/or capital, to vote in the operation of the business being carried on by the issuing corporation etc. to which the investor is entitled by virtue of owning the shares that constitute the real value of the share certificate.  Even in the case of futures contracts, while the underlying subject matter of this type of arrangement may well be - and frequently is - some tangible goods/commodities, most futures contracts investors never intend to acquire, keep and then physically dispose of the underlying goods/commodities, rather, it is the (possible and hoped for) gain in a futures transaction which an investor values.

-               The MPPSA definition and concept of collateral which is "intangible" continues to exist, but with intangible personal property which falls within the category of "investment property" (as defined in the Investment Property Amendments) now being excluded from the formally defined category of "intangible" personal property.  Some investments may not in fact fall within the definition of "investment property" under the Investment Property Amendments, and in any such case, it is likely that such investment would fall within the MPPSA’s definition and category of "intangible" personal property.

2.         Some new concepts

-               The key to understanding the Investment Property Amendments and how they operate is to comprehend the meanings of a number of new definitions and concepts which have been introduced by the Investment Property Amendments.  In particular, note the following:

(a)          "investment property" is defined in the MPPSA (as amended) as a "security", or, a "security entitlement", or, a "securities account", or, a "futures contract", or, a "futures account";

(b)          each of the aforementioned components of the definition of "investment property" is further defined, either in the MPPSA (as amended) or in the MSTA.  Note in particular:

(i)            a "security" is defined to mean what we normally consider as an investment issued by an entity directly to the holder thereof, including debt type obligations and equity/participation shares or interests, whether represented by a (paper) certificate or merely recorded in the holder's name in the issuer's records;

(ii)            a "securities account" is defined to mean an arrangement in which one or more investments are placed for the benefit of an investor by someone else who, as or as part of their regular business, establishes and maintains "securities accounts". The person who establishes and maintains such an account is called (and defined as) a "securities intermediary".  Typically securities intermediaries are brokers, banks and trust companies. 

(iii)          A "security entitlement" is defined to mean the rights and interests which an investor has as against a securities intermediary as recorded in the securities intermediary's records pertaining to one or more investments (and perhaps other assets of value which are not strictly investments) maintained by the security intermediary in a securities account established for the investor.  Such investor is defined as an "entitlement holder";

(iv)          A futures contract is defined as an arrangement whereby an investor has the right to deal with (to buy, to sell or to have an option to buy or to sell) something of value in the future on specified terms (obviously in particular specifying the "price" or consideration involved/to be involved), where such arrangement is traded on or is subject to the rules of a futures exchange, is standardized (presumably pursuant to the rules or requirements of such futures exchange), and, where the investor's rights and interests under the contract are "carried on the books of a futures intermediary".  "Futures intermediary" is defined to be either a party dealing in futures who is permitted to trade, either as principal or as agent, under the securities or commodities futures laws of Canada, or, is a clearing house recognized or otherwise regulated by Canadian authority;

(v)           A “futures account” is defined to mean an arrangement in which one or more futures contracts are maintained by a futures intermediary for the benefit of an investor.

(c)           the MPPSA (as amended) defines "control" by reference to its definition in the MSTA.  "Control" describes the dominion over an investment which is granted to or taken by someone acquiring ownership of such investment, or, in the context of a secured transaction, the dominion which is granted to or taken by a secured party in an investment who acquires such dominion by virtue of acquiring a security interest in such investment.  In this regard, note:

(i)            different rules for how to obtain control of an investment apply depending on what type of investment property one is dealing with.  The methods of obtaining control range from the simple act of a secured party obtaining physical possession of a certificated security in bearer form from or under the authority of the debtor/owner of the security, to more complex arrangements existing between the secured party, the issuer of a security (or an "intermediary") and the debtor/owner of the investment, such arrangements typically involving the secured party having an overriding right to liquidate (or redeem) the investment, but with the debtor retaining, to a greater or lesser degree, the ability to exercise the rights which normally attach to ownership of the investment;

(ii)           the arrangements just referred to will be most typically utilized for investments which are not certificated securities. Although not specifically defined as such in the legislation, such arrangements have become known as "control agreements".  These agreements have been previously utilized in situations where an investor owns a "pool" of investments which are held for the investor by a broker, dealer or other person (who under the new legislation would now be called an "intermediary").  In connection with a "pooling" arrangement,  the investor wishes to grant security in its "pool" of investments, but at the same time wishes to continue to be able to (i) utilize the intermediary's judgement and advice in selecting and modifying investments in the "pool" from time to time, and (ii) have the intermediary acquire new investments to be added to the "pool", often with the intermediary extending credit, in whole or in part, to the investor to finance new acquisitions, and, (iii) itself buy and sell investments in the "pool", as well as exercise other rights attaching to the investments such as obtaining or dealing in options to acquire investments or further investments, redeem investments and exercise voting rights.  What is key here and what will make for interesting and perhaps creative drafting by counsel are "control agreement" provisions which balance the rights and obligations of each of the secured party, the investor/debtor and the intermediary, bearing in mind each of their sometimes conflicting interests;

(d)          The MSTA makes it clear that:

(i)            even though a control agreement permits the investor/debtor to retain certain rights to deal with the pledged collateral - thus taking away somewhat from the secured party's primary rights to sell or redeem the collateral - the secured party will nevertheless be deemed to remain "in control" of the pledged collateral;

(ii)           the issuer of an uncertificated security or a securities or futures intermediary will not be entitled to enter into a control agreement with a secured party unless the investor/debtor specifically consents to same.  Thus secured parties will need to ensure that such consent has been issued;

(iii)          even if the owner of an investment and its secured party agree upon the need for a control agreement to be entered into with the relevant intermediary or uncertificated security issuer, the intermediary or the issuer will not be obliged to enter into a control agreement unless it consents to do so.  Thus, where a proposed debtor suggests pledging investment property (involving an intermediary or the issuer of an uncertificated security) to its proposed secured party/creditor, the secured party/creditor should not waste too much time on the matter without first ascertaining whether or not the intermediary or issuer is prepared to enter into a reasonable control agreement;

(iv)          where an intermediary or the issuer of an uncertificated security has entered into a control agreement, it is not either entitled or obliged to provide details of same to third parties unless the investor/debtor has authorized the intermediary or issuer to do so.  Thus, it will be necessary for investor/debtors to ensure that their securities issuers or intermediaries are authorized (and indeed required) to provide at least some information to at least certain enquiring third parties regarding particulars of any existing control agreements.  Otherwise new potential creditor/secured parties to whom the debtor may wish to pledge the remaining equity in its investment(s) will be unable to obtain needed information pertaining to any existing control agreement arrangements;

(v)           as just noted, it may be appropriate (and commercially reasonable) for an investor holding one or more uncertificated securities and/or a "pool" of investments through an intermediary to be able to grant security in its investments to more than one creditor/secured party at the same time.  This would be the situation where there is or it is anticipated that there will be sufficient equity/value in the investor's investments to secure credit extended from two - or perhaps even more - creditors.  In any such case, in addition to each creditor/secured party having its own control agreement pertaining to its security, it would probably be appropriate for all of the creditor/secured parties (along with the investor/owner) to enter into an intercreditor agreement, or perhaps, one "master" control agreement involving all of the interested secured creditors.  Such arrangements would be intended to provide at least some assurance to each of the creditors that its (security) interest in the collateral would be protected and maintained.  These would no doubt deal with the situation where it became necessary for the pledged collateral to be liquidated for the benefit of all of the creditors involved.

(vi)          if an investor obtains credit from its intermediary (as noted above, this would typically occur where an investor adds to its "pool" of investments held/maintained by a broker, dealer, bank, etc. on credit extended by the broker, dealer, bank etc.) and thereupon grants a security interest in the investor's "pool" of investments to its intermediary, the mere granting of the security interest "automatically" gives the intermediary control of the "pool" of investments.  Other secured parties must both have the debtor enter into a security agreement and take the steps required in order to achieve control.  Thus intermediaries who enable their customers to acquire investments utilizing the intermediaries’ credit are given a favoured position under the legislation in comparison with other secured parties.  However, note that intermediaries in this position are no different from secured parties who obtain "purchase money security interests" who are already given a favoured position under the existing legislation.

3.         Perfection and attachment

-           These expressions are used in the legislation to describe the status of a security interest held by a secured party in relation to the secured party's right to enforce or realize upon its security interest in the collateral as against or in relation to :

(a)         the debtor; and

(b)         other persons having interests in the collateral, including, but not limited to, other secured parties.

             Part - although not all - of the requirements to achieve "attachment" for a security interest have to do with establishing the security interest as being enforceable by the secured party against the debtor only.  Part of one of the requirements for "attachment" and all of the requirements for "perfection" of a security interest have to do with the security interest being established as enforceable by the secured party against persons other than the debtor.

             "Perfected" status for a security interest cannot be achieved unless all of the requirements for attachment have also been achieved.   Having achieved "attached" status, in order to achieve perfected status, the secured party must, in most - although not all – cases, take one or more further steps or actions.  When a security interest has achieved "perfected" status, it then gives the secured party the highest and best "bundle" of rights with respect to the collateral against not only the debtor, but also against other persons with interests in the collateral (as noted, most typically, but not exclusively, against other secured parties).

-           The requirements for attachment remain essentially the same, namely that:

(a)          value must have been provided to the debtor; and

(b)          the debtor must have rights in the collateral (the Investment Property Amendments have added an alternative to this, namely that the debtor must be able to transfer rights in the collateral to the secured party); and

(c)          the security interest must have become enforceable against third parties pursuant to the requirements contained in Section 10 of the MPPSA (as amended).

             The Investment Property Amendments have altered Section 10 with respect to investment property - although the requirements of Section 10 remain unchanged for collateral other than investment property.  The investment property changes are as follows:

(a)         where the collateral is a certificated security in registered form, attachment will occur if the security certificate has been delivered to the secured party in accordance with the rules for "delivery", set forth in Section 68(1) of the MSTA; and

(b)         where the collateral is investment property generally, attachment will occur when the secured party acquires control of the collateral.

Attachment also requires the entering into of a security agreement, and note that if the security agreement contains a proper description of the collateral (as specified in Section 10 (1)(d) of the MPPSA (as amended)), then the existence of such signed security agreement with such proper description will itself satisfy the requirements of Section 10 (1).  The likely reason why a secured party would both want the debtor to enter into a security agreement with a proper description of the pledged collateral as well as wanting to obtain control of the pledged collateral would be because, in most instances, where a secured party has obtained control of investment property, that gives the secured party the highest and best perfection rights (as well as the achievement of “attachment”) for the secured party's security interest.

The Investment Property Amendments also specify that where a secured party's security interest attaches to a security account or to a futures account, same will also, respectively, constitute "automatic" attachment of the security interest to all of the security entitlements "carried in the security account", or, as the case may be, "automatic" attachment of the security...


You have been retained by a married or common-law cohabiting couple to act for them in connection with their acquisition of a residential property.  At the time your clients come to your office to be advised generally on the transaction and to "sign up" the required documents, including, in particular, the mortgage they intend to have registered against the property upon their acquisition thereof:

(i)            one (or both) of your clients have signed a binding purchase and sale agreement; and

(ii)           they have not yet commenced to occupy the property as their residence.

You place the mortgage documentation before your clients, explaining that they will have to sign and swear (or affirm) as to the fact that the property is their homestead under The Manitoba Homesteads Act (the "Act"), and where one only of your clients is to be on title, the "off-title" client must provide a Homesteads Act consent to the mortgaging which is to be acknowledged separate and apart from the "on-title" client.  This would be a scenario repeated time and again throughoutManitobain lawyers' offices.

But is this in fact a correct procedure?  At the time that the clients attend upon you to sign the mortgage - with its accompanying statements under the Act - given that your clients are not yet occupying the property as their residence, does the Act apply?  Would it be more appropriate for the Homesteads Act statement negativing the application of the Act to be made?

The writer has to credit Mr. Gordon Hoeschen of Hoeschen & Sloane in Morden for raising this question/problem, and the writer thanks Mr. Hoeschen for same.

Consider the following:

  1. The definition of "homestead" in Section I of the Act clearly refers to a residence being occupied by a couple. Section 4(a) of the Act, referring to the need for there to be a consent to a disposition, does not say (one way or the other) that when the consent is given, the person giving it (and his or her "on-title" spouse) have to then occupy the subject residence although it does refer to a consent to a disposition of a "homestead" (which as just noted, is defined on the basis of occupancy by a couple).
  2. Section 5(1) of the Act, referring to the mode of creation of "proof" as to the non-applicability of the Act, does appear to require that when the statements are made, they are to "speak" from the time when the statements are made, not as to what will or will not be the case at some future time. (In this regard, Section 194 of the Manitoba Real Property Act must be kept in mind, in that it deems a statement contained in a prescribed form - admittedly "prescribed" meaning prescribed under the Real Property Act, not the Homesteads Act - to be the equivalent of a statement made under oath or in an affidavit, affirmation or statutory declaration under the Manitoba Evidence Act, although it is logical to assume that the intent of the legislation was that the statement should/would "speak" from the time when it is made).
  3. The definition of "land" in the Manitoba Real Property Act, Section 1 refers to, inter alia "land, …of every kind and description, whatever the estate or interest therein, and whether legal or equitable…". Is this definition broad enough to include a future/prospective interest in land, for example, the homestead rights (and obligations) that an "off-title" spouse and his or her "on-title" spouse will acquire when they take up occupancy of the subject property?  Is there a more or less current, existing interest, at least in the person who intends to be "on-title", provided that he or she is a purchaser under a purchase and sale agreement, so that at the time the Homestead Act statements are made in a mortgage, at least the intended "on-title" spouse has at that time a sufficient equitable interest in the subject property by virtue of the purchase and sale agreement?
  4. Sections 63(2), 63(3) and 66(4) of the Manitoba Real Property Act provide, in effect, that an instrument (whether a mortgage or otherwise) only effectively performs its function when it is duly registered against title at the Land Titles Office. This appears to support an argument that the provision of Act evidence and the making of acknowledged consents to dispositions of a homestead "speak" or take effect prospectively, that is, only when the instrument is registered, notwithstanding that the language of the Act prescribed statements and the language of the Homestead Act consent (which appears in the prescribed forms of mortgage and transfer, etc.) appear to "speak" currently and not prospectively.

After considering this matter, I believe that those who argue that prior to occupancy, there are no homestead rights, are probably correct. However, I think that the timing problem could be alleviated - and solicitors dealing with the above-described situation can arrange for the provision of the Homestead Act statements or, as the case requires, acknowledged Homestead Act consents, at the time when the parties attend upon the solicitor.  This would be done by changing the wording of the Homestead Act statements and consent to disposition so that they either (ie., "pick one" as is (then) applicable) "speak" currently or, as the case requires, that they "speak" prospectively and contingently. The contingency here is simply that the parties who sign the documents subsequently take up occupancy. If that occupation occurs after the instrument is registered, the Homestead Act statements, or as the case may be, acknowledged consent, would validate the transaction previously effected by the registration of the instrument. If occupancy is taken up between when the document is signed and when registration occurs, then the Homestead Act statements, or, as the case may be, the acknowledged consent, would be deemed to take effect immediately or perhaps thereafter at the time of registration. If after the time of signing, the parties never take up occupancy (because they choose to live elsewhere) but the "on-title" spouse wishes to go through with the acquisition and mortgaging, then the Homestead Act statements, or as the case may be, the Homestead Act acknowledged consent would simply be deemed to not exist (or perhaps, the "on-title" spouse's Homestead Act statement would be deemed to be given at the time of registration and the statement "The within land is not the homestead of me within the meaning of the Manitoba Homesteads Act" would be deemed to have been made by the spouse taking title.

Examples of prospective statements might be:

"My co-mortgagor is my spouse (common-law partner) and (he/she) has Homestead Act rights in the within land by virtue of our occupancy of the within land as our home" ("We do not occupy the within land at the date of this statement, but we intend to so occupy same in the future, and when and if we so occupy, my co-mortgagor who is then my spouse or common-law partner will have Homestead Act rights in the within land upon our so commencing to so occupy the within land").

The writer appreciates that the foregoing described "solution" to the timing problem would require a statutory amendment to the Act.


In a typical construction project scenario, the property owner contracts with a "general contractor" who promises to construct, or cause to be constructed, the specific project desired by the owners, with completion promised (subject to unforeseen contingencies) by a specified deadline date, and for a consideration or price worked out and agreed to by the parties in advance.  If the contractor fails to do what it promised, the owner has the right to sue the general contractor for the owner's loss.  The general contractor will enter into a number of further contracts with others who are able to and typically "specialize" in providing the different goods and services required to complete the project.  This would typically include an excavation/ foundation firm, a framing firm, a drywall firm, a plumbing firm and an electrical firm.  Suppliers and installers of fixtures and equipment required to heat and light the completed project would also have to be engaged in order to provide the owner with what it has bargained for.  These other providers of "inputs" to the project, that is, providers other than the general contractor, will not have their own direct contracts with the owner, rather, their contracts will be with the general contractor.  Such other providers are usually referred to as "subcontractors" or "subtrades".  The general contractor and the subcontractors will typically engage a number of individual persons to do the actual work ("employees"), and additionally, some of the subcontractors will have to purchase materials from other firms who are in the business of selling such goods ("suppliers").  So what happens if, notwithstanding that the owner is able to and pays what it owes to the general contractor, the general contractor is unable to or otherwise fails to pay what it owes to its subcontractors, suppliers, the subcontractors' own suppliers and the employees of all of these other inputting parties?  The subcontractors can sue the general contractor (they have direct contractual relationships with the general contractor), but what if the general contractor has become insolvent?  They can't sue the owner because they don't have any direct contractual relationship with the owner.  To alleviate this problem, Manitoba - and indeed most other North American jurisdictions - have long ago enacted legislation giving protection to those persons who "improve" a property, but who have no direct contractual relationship with the owner of the property.  The Manitoba Builders' Liens Act (the "BL Act") is the current Manitoba version of that legislation. 

The BL Act, broadly speaking, provides for three legal "mechanisms" to protect persons "improving" real property, namely:

  1. a lien against the property, which, to some degree, provides the improving party with something akin to a real property mortgage (if the improving party isn't paid, it can liquidate the property so as to generate funds required to pay what is owed to it);

  1. the requirement that every time the property owner makes a payment to the general contractor on account of the general contract, 7½% of each such payment is to be held back from the general contractor and, in most construction projects, placed in a distinct trust account, with the funds to be released when the project is completed; and

  1. the imposition of a trust applicable to funds earmarked to be used to pay for the project, with the resulting imposition of trustee obligations on those persons receiving those funds. 

(I)         The Lien

(i)            The BL Act creates liens in favour of those improving real property which form a charge against the real property being improved, and, gives the lien holder the right to have the improved property sold for the purpose of raising funds to pay monies due to the lien holder.

(ii)           With respect to any particular real estate project, whether or not one or more Liens hold priority over a Lender’s duly registered mortgage security:

(1)          is not dependant on whether or not the BL Act holdbacks which are supposed to be made, are or are not made; and

(2)          is dependant on whether or not the Lender advances funds under its mortgage security at a time when one or more Liens have been registered against the title to the real property. If any such advance is made when one or more Liens are so registered, the Lender’s mortgage security, with respect to that advance, will be subordinate to the claims of the holders of the registered Lien or Liens.

(iii)          Where a particular  project is covered by one, or perhaps two or three, titles, it is relatively fast and inexpensive for the Lender to search the title or titles. All such searches should be conducted after 3:00 p.m. local time, when the Manitoba Land Titles Offices cease taking registrations, and, assuming no Lien or Liens have been registered, the funds should be released to the owner before 9:00 a.m. on the next following business day when the Land Titles Offices reopen to take registrations.

(iv)          The problem in effecting title searches arises where, with respect to a particular project, that project is covered by many titles.  For example, a project may comprise a large number of separately titled single family residential units, or a project has been condominiumized and there are a large number of separately titled condominium units. In these cases:

(1)          where the Lender is financing a project with many titles, only randomly selected titles be searched after 3:00 p.m. on the date of intended advancement (we recollect a situation where we acted for a lender providing advances to the owner of a 310 condominium unit building, and, given that it was impossible to conduct 310 after 3:00 p.m. title sub-searches, we searched, say, the titles for units 1, 25, 50, 75, 100, etc. For the next advance, we searched the titles to units 10, 40, 70, 100, etc.).  If the Lender is financing a project where all of the project's titles are in the name of the same owner, it is very unlikely that a Lien would be registered against only one title, and far more likely that if there was a Lien claimant, that claimant would have registered against all of the project’s titles;

(2)          generally however, where a particular project is a relatively large one and the Lender’s advances are in substantial amounts, and, provided that the project only has a few titles, it would be best to search all titles with respect to each advance.

(v)           From a “risk management” perspective, if the Lender searches only random titles (where a project has many titles), while it is possible that the Lender may make an advance whilst one or more Liens have been registered, on the next succeeding titles search by the Lender, such Lien(s) would be discovered, and no further advances would be made until the Lien(s) were removed. In this way, the Lender would tend to minimize its risk, without completely eliminating it.

(II)        Holdbacks

(i)            The BL Act obligates the owner of a property being improved to hold back from each progress invoice submitted to such owner by the project (general) contractor, 7.5% of that invoice, and, where the contract between the contractor and the owner is in excess of $200,000, the owner and contractor are required by the BL Act to open an interest-bearing builders' liens holdback account with a Manitoba chartered bank, trust company or credit union. Although somewhat simplified, in essence, the holdback monies are to be withheld from the contractor until 40 days after the first to occur of completion or abandonment of the project by the contractor. At that point in time, provided that no Lien or Liens have been registered against the project title, the monies in the holdback account may be released to the contractor.

(ii)           Payment of each contractor invoice to the extent of 92.5% of the invoiced amount by the owner to the contractor will reduce the project Lien claimants' (including the general contractor's) Liens to the extent of and in proportion to that 92.5% payment portion, provided that when the owner makes payment, it does so “in good faith” and before the registration of any Liens against the owner’s title. We take “in good faith” to mean that the owner, when making payment, should have no reason to believe that the general contractor who he pays will fail to make payment to those who are in turn engaged by the general contractor to assist it in fulfilling its duties under its contract with the owner.

(iii)          As previously stated, whether or not BL Act holdbacks are made does not affect the priority of the Lender’s mortgage security against the property being improved. Further, the BL Act does not specify that there is any obligation on an owner’s financier to make or to ensure that the holdbacks are made, and where required, be put into an interest bearing holdback account. Nevertheless there are some advantages to a project financier if the holdbacks are made and kept available during the course of construction.  Consider the situation where, before completion of the project, there is a failure to finish due to insolvency of the general contractor or a major sub-contractor.  In this situation the actual setting aside of holdback monies means that there are funds which can be paid into Court, for the purpose of having the Court order the discharge of all of the registered Liens (Section 55(2) of the BL Act). It has been our experience that where this has occurred, and provided that the owner is able to find a replacement general contractor (or major sub-contractor), the removal of the Liens enables the project financier to recommence making project advances, so that the project can be completed, at which time, the financier then has a completed project subject to its security.

(III)       The Trust

(i)            The BL Act imposes trust obligations on project owners, contractors and sub-contractors with respect to monies received by each of them in connection with construction projects. In essence, the trusts are established for the benefit of the persons whom the recipient or holder of project monies has contracted with in order to effect the construction, including contractors, sub-contractors, and certain other beneficiaries such as employees, and The Manitoba Workers Compensation Board. As a general rule, trust monies are not to be used for any purpose other than satisfying the claims of beneficiaries of the trust.

(ii)           A major advantage which accrues to the beneficiary of a trust is that the beneficiary can “trace” trust funds or property which the trustee has parted with in breach of the trust, provided that the trust monies or property can be “identified” in the form of some other property, or in a bank account.  It is possible that a Lender could be liable to a beneficiary that was a victim of a breach of trust committed by the owner, if that beneficiary is able to assert a tracing claim against the "misappropriated" trust money (and such tracing leads to funds that are in an owner's account with the Lender).  Tracing allows a beneficiary to access the specific trust funds it is entitled to, even if those funds are in the hands of third parties (such as a Lender), and even though the third parties themselves may not be guilty of breach of trust.  However:

(1)          tracing is only applicable if the trust property is "identifiable".  The comingling of other funds in an owner's account where the Lender and the owner have established a multi-account "set-off" arrangement, may reduce the likelihood that the particular beneficiaries' trust monies remain "identifiable";

(2)          other funds that may be present in an owner’s deposit account should not be available to a beneficiary who obtains a Court tracing order.  That is because tracing is a proprietary remedy, which means it attaches only to funds from a particular project.  The beneficiary would not be entitled to the owner’s other funds which may be held by the Lender if these other funds do not relate to the beneficiary's particular project; and

(3)          in the Supreme Court of Canada decision in Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805, La Forest J. stated that the tracing remedy is subject to certain equitable defences.  Some of these defences may be available to a Lender to allow it to resist a tracing claim.  In particular, as the Manitoba Court of Appeal held in Glenko Enterprises Ltd. v. Keller, 2000 MBCA 7, a tracing claim will be denied where trust funds come into the hands of a third party that gave consideration for the property and who had no notice that it was trust property or, if the third party did have notice that it was trust property, the third party did not have knowledge that an application of such trust property against the trustee's indebtedness constituted a breach of trust.  The court in that case suggested this defence may be available to banks in circumstances that are similar to the present issue.

(iii)          The BL Act does not specifically impose its trusts upon an owner’s financier. Pursuant to the Bank Act (Canada), banks (as depository financial institutions) are in most cases not obliged to determine whether or not funds placed with the depository institution are - or are not - trust funds and whether or not such funds are used in breach of trust obligations by those having control of such funds.

(iv)          However, under the Bank Act, notwithstanding the aforementioned “general” rule, a depository financial institution may be held directly liable to the beneficiaries of a trust in essentially two situations, namely:

(1)          where the institution knows that the trust is or may be breached and nevertheless applies trust monies on account of indebtedness owed by the trustee to the institution (“knowing receipt”);

(2)          where the institution facilitates or assists a trustee in effecting a breach of trust without the institution applying trust monies on account of the trustee’s indebtedness owed to the institution (“knowing assistance”).

(v)           Nevertheless, and in any event, for a Lender/depository financial institution to be liable to BL Act trust beneficiaries, it is not enough for a beneficiary to merely prove that the institution knew of the fact that there are or were trust monies standing to the credit of a trustee’s account with the institution.

In the ManitobaCourt of Queen's Bench decision in Glenko Enterprises v. Ernie Keller Contractors Ltd. (1994), 98 Man. R(2d) 141 (the "Glenko Case"), Beard J. synthesized the relevant case law into the following summary (which was expressly adopted by the Manitoba Court of Appeal and in several other Manitoba cases).

"11       In summary, the case law states that the following inquiries must be made to determine whether a bank which has applied trust funds received from a building contractor to reduce an account overdraft has participated in a breach of trust and must therefore account to the beneficiaries of that trust for those funds:

1.         Did the bank know that the monies being deposited by the customer were trust funds subject to statutory trust conditions?  (Most depository institutions would know this or, because the BL Act trust is a statutorily created trust, the institution would be deemed to know this.)

2.         Did the bank have actual knowledge of the fact that there were trust beneficiaries whose accounts were unpaid?  (This is a question of fact in each case, but certainly, there are probably many situations where the depository institution has no such knowledge.)

3.         If the bank did not have actual notice of unpaid trust beneficiaries, did it have knowledge of facts and circumstances sufficient to put it on inquiry? If so, did it make reasonable inquiries?  (Again, this would be a question of fact in each case, but there are certainly going to be situations where a bank does not have knowledge, and, even where it has, makes reasonable inquiries without ascertaining a breach of trust.)

4.         Did the bank receive and apply the funds in the ordinary course of business without knowledge of any unusual circumstances?  (In amplification of this the Court noted that:  "… the bank is not liable for the builder's breach of trust if the bank, in the ordinary course of business, accepts the deposits and allow cheques to be written thereon, - or for that matter if it applied to funds on overdraft - unless it had or clearly should have had knowledge of the breach of trust by the contractors or of facts to put it on notice".)"

In order for liability to attach to the institution, it would be necessary for a beneficiary to establish that the institution not only knew that it held trust monies, but also that it knew - or from the perspective of a reasonable party should have known - that beneficiaries had not been paid what was due to them when due or that there was a reasonable likelihood that such beneficiaries would not be paid what was then due to them


 September, 2012

A seller ("S") enters into an agreement with a purchaser ("P") will sell to P, S's residential real estate (the "Property").  The sale and purchase agreement (the "Agreement") requires P to pay S a total of $100,000.00 for the Property, with P having to pay "upfront" a deposit of $5,000.00 (the "Deposit").  Before closing, P reneges and the transaction is aborted.  S takes the Deposit and subsequently resells the Property.

Two likely scenarios may occur here:

(i)            in reselling the Property, S sells for an amount less than the price stipulated in the (original) Agreement, say, for only $90,000.00 (the "Loss Scenario"); or

(ii)           in reselling the Property, S is able to obtain a sale price in excess of that stipulated in that (original) Agreement, say, $110,000.00 (the "Windfall Scenario").

What are S's rights (and obligations) in relation to the Deposit?  Both the Manitoba Court of Appeal 25 years ago and the British Columbia Supreme Court in a recent case (judgment issued February 9, 2012, hereinafter, the "Tang Case") have held that the parties' rights (and obligations) with respect to a deposit in this situation depends on the precise wording of the sale and purchase agreement.

The situation dealt with in the Tang Case is an example of the Windfall Scenario.  In that case, the Court compared the wording of the contract in the Tang Case with the wording in the contracts considered in two earlier B.C. cases and noted that:

(i)            in the Williamson Pacific Developments case, the deposit was stated to be "non-refundable", and the use of that word, together with the deposit forfeiture language in the contract, convinced the Court to hold that the deposit was forfeited to the aggrieved seller without the proof of actual damages; and

(ii)           in the Agosti case, the word "non-refundable" was not present, and the relevant language specified that where the buyer reneged, the deposit was "absolutely forfeited to the seller…on account of damages".  The Court concluded that this language meant that in order to actually claim the deposit monies, the seller would have to prove damages.  As the Agosti case was an example of the Loss Scenario, the aggrieved seller was entitled to damages, but the point here was that such entitlement only flowed from the fact that the seller did suffer a loss (in reselling the property).

The wording in the contract considered by the Manitoba Court of Appeal was also significant in that the Court held that when the buyer reneged and the seller took the buyer's deposit, that act also terminated the contract and all rights of the seller arising out of the buyer's default.  Consequently, when the seller resold the property at a loss (an example of the Loss Scenario), the aggrieved seller was not able claim against the buyer for the deficiency.  As a result, the wording in the standard Manitoba form of residential property offer to purchase mandated for use by realtors was changed so that an aggrieved seller would be able to claim the deposit while still maintaining the seller's right to claim further compensation from the buyer where the seller subsequently sold the property at a loss.

The aforementioned Manitoba standard form contract wording dealing with what happens to a deposit is as follows:

"Where the defaulting party is the Buyer, the Seller shall be entitled to retain the deposit as the Seller's own property, but whether or not the Seller has then terminated or thereafter terminates the Seller's right and obligation to sell and the Buyer's right and obligation to purchase under this agreement by virtue of the Buyer's default, such retainer of the deposit shall not itself constitute a termination of this agreement and shall not restrict the Seller from exercising any other remedies which the Seller may have by virtue of the Buyer's default, including the right to claim damages from the Buyer which the Seller sustains in excess of the deposit".

The question the writer poses in this paper is whether or not the above Manitoba language is sufficient to enable an aggrieved seller to keep a defaulting buyer's deposit without the need for the seller to suffer, and then if necessary, prove to a Court that the seller has suffered a loss?  The writer's belief is that the wording is sufficient for this purpose.  The word "non-refundable" does not appear in the wording, but it is clearly stated that the aggrieved seller "shall be entitled to retain the deposit as the Seller's own property".  This language - in the writer's view - is equivalent to the use of the word "non-refundable".  If the deposit is kept by the aggrieved seller and becomes the seller's "own property", then by the very nature of things, the deposit can't be "refundable".

The Tang Case also deals with an attempt by the buyer to have the sale agreement invalidated on the basis that the seller failed to provide the buyer with a title search.  Not surprisingly, the Court took the position that notwithstanding that the seller had promised to provide a title search to the buyer, the failure of the seller to do so was not "a condition precedent entitling (the buyer) to terminate the contract".  In so holding, the Court noted that the promise to provide a title search was not indicated to be a promise for "the sole benefit" of the buyer.  In the aforementioned Manitoba form of standardized offer to purchase residential real estate, there is a differentiation between conditions which "benefit the buyer" and conditions which "benefit the seller".  All of the conditions stated to "benefit the buyer" are prefaced with the words: "This agreement is terminated unless the following conditions for the benefit of the buyer are fulfilled or waived".  What would happen in Manitoba, if a buyer was able to have included under the heading "CONDITIONS BENEFITTING THE BUYER" a promise by the seller to produce a title search?  It is this writer's opinion that it would be inequitable to allow a buyer to terminate simply because no title search was produced, but that view would run contrary to the plain meaning of the language if such a condition was included in the place suggested.  Perhaps consideration should be given to amending the standard form offer so as to differentiate between conditions which benefit the seller, the non-fulfillment of which, would entitle the buyer to terminate, and other conditions which would not permit the buyer to terminate on non-fulfillment, but would be more in the nature of warranties.

The Tang Case does not deal with the question of whether not an aggrieved seller, who would otherwise be entitled to keep the defaulting buyer's deposit, would be prohibited in law from doing so by virtue of the fact that a Court adjudicating the matter concluded that the amount of the deposit, in relation to the total sale and purchase price, was excessive.  That is, where the Court holds that forfeiture of the deposit constitutes the seller obtaining an unfair or inequitable penalty imposed on the buyer.  The creation of an unfair penalty must be kept in mind by those persons who prepare agreements providing for the disposition and acquisition of interests in real estate.


May, 2008

Presumably it is human nature that leads persons who suffer financial set backs to blame their banker for their misfortune, even where the banker cannot be reasonably held to have been responsible for the loss.  This may be due to the feeling amongst a broad segment of the population that banks are "big, bad" commercial enterprises who treat their customers, or at least their "smaller" customers, more or less onerously. Possibly, it is because of the perception that banks have "deep pockets" and can easily afford to compensate persons who are in fact the victims of their own carelessness or lack of business foresight.  Maybe, it is because in recent years, the Courts have on occasion held banks to be in a fiduciary position vis-à-vis some of their customers.

However, it is important to understand that where the Courts have held that a bank has a trustee type duty to its customer, this has almost always been in the situation where the customer is peculiarly vulnerable to being affected by the bank's conduct and where the customer has placed substantial reliance on the bank in conducting the customer's financial and/or business affairs. 

In the recent judgment in the Baldwin case (rendered September 27, 2006, hereinafter the "Baldwin Case"), the Ontario Court of Appeal held that in lending funds to customers which the customers then placed in certain investments, acting on the advice of financial advisors (the financial advisors not being connected to the bank), the customers were not entitled to hold the bank responsible for losses sustained in connection with their investments.  The customers attempted to claim compensation from the bank both on the basis of the bank's negligence and on the basis that the bank owed a fiduciary duty to the customers (which it breached) to advise them as to the risks inherent in investments and their obtaining of the loans from the bank.

Although not related to each other, the investment advisors and the bank did work together to facilitate a customer's borrowing from the bank and to effect the customer's investments utilizing the bank borrowings.  A customer would complete a loan application with the assistance of the financial advisor and the advisor would then submit the application to the bank.  Where the bank approved the loan for a particular customer, the bank would (presumably with the authorization of the customer) advance the loan proceeds directly to the customer's advisor who would then utilize same to make the customer's investments.  The customers pledged their investments to the bank to secure their loans and consequently, all of the loans had "margin requirements".  Thus if a customer's investments fell in value, the bank would require the customer to pay down the loan so as to take into account the then lower value of the bank's security.

Having had to have repaid their loans in whole or substantially in part, the customers claimed variously that:

(i)            the bank did not explain the "margin requirement" terms of the loans;

(ii)           the customers did not understand the loan documents (the documents having in fact contained clear advice/information as to the "margin requirement" terms);

(iii)          the bank had the same duty of care to advise the customers of the risks involved as did their financial advisors (whom the customers also sued); and

(iv)          the bank owed the customers a fiduciary duty of care (in addition to any obligation the bank might have had not to be negligent vis-à-vis the customers), presumably, on the basis that the customers were vulnerable and that the bank was in a position to adversely affect the customers by making (and later demanding repayment of) the loans to the customers.

The Courts (at trial and on appeal) noted:

  1. The loan documents contained "various provisions by which the borrowers (acknowledged) responsibility for the borrowing and investment decisions, and (disclaimed) any responsibility on part the of the lender";
  2. "There was nothing to suggest to the (bank) that (the bank) ought to (have inferred) that, contrary to what the signed documents said, the (borrowers) had not read the documents;
  3. While it is true that the losses sustained by the customers would not have occurred if the bank had not made the loans to them, "…the making of (the loans) requires the consents of two parties (in the case of each loan) the lender and the borrower, (and) the lender cannot impose the loan on the borrower";
  4. The customers "went to the (bank), not for advice, but for loans";
  5. The customers'financial advisors "…knew the intended investment programs of (the customers) and (the financial advisors) were in a position under the applicable regulatory requirements to develop and recommend and implement those investment programs for (the customers) and to monitor them over time, (and) the bank was not in this position"; and
  6. While the bank did "promote" the concept of its making loans available to the customers so that they could purchase their investments through the financial advisors, such promotional activity by the bank was made towards the financial advisors, not towards the customers.

Based on the foregoing, the appeal Court held that the bank had no obligation to any of its customers for their investment losses.

Reading the decision in the Baldwin Case, one might ask the question as to what would happen in a similar situation where the bank chooses to conduct "due diligence" as to the viability of the proposed investments to be made by its customers utilizing the funds to be borrowed from the bank, and such "due diligence" reveals one or more substantial "weaknesses" in the contemplated investments?  Common sense would suggest that, to protect itself, the bank should not make the loans (or perhaps reduce the size of the loans it was originally asked to make) because the viability of its security (a pledge of the customers'investments) would be in doubt.  Additionally, the bank might incur liability to its customers in this situation by failing to warn them of the "weaknesses" which the bank's research has revealed.  However, in a situation where the bank did not intend to rely on its security, and instead intended to rely essentially on a customer's promise to repay the loan (no doubt due to the customer's strong creditworthiness), the bank would probably be able to extricate itself from liability by having the customer sign a written acknowledgement in which the bank set forth the results of its "due diligence" and contained a signed acknowledgement by the customer that, notwithstanding the specified "weaknesses" in the contemplated investments, the customer wished to go ahead and make the investments and thus borrow the required funds for same from the bank.


April, 2018

Persons and businesses extending credit at a cost and their counsel have for a long time been - or should have been - aware of the requirements of Section 4 of the Interest Act (Canada) (the "Act").  Section 4 requires that where a person (the "Lender") extends credit to another person (the "Borrower"), and the Borrower is required to pay value to the Lender in exchange for such credit (such value being typically what is commonly considered to be "interest"), in order to get anything more than a return of 5% per annum on the outstanding credit (owed from time to time), the Lender must ensure that the documentation entered into by the Borrower with the Lender specifies what the consideration is on an annualized basis.  The usual situations in which an annualized specification is required is where the interest payable on the credit extended is:

(i)            described as being calculated on a basis of a "yearly" period of less than 365 days (or less than 366 days in a leap year), with the "yearly period" being frequently defined as 360 days; and

(ii)           described as a percentage of the credit extended calculated and payable (and compounded if not paid) on a monthly basis (ie, 2% per month).

In both these cases, the Lender must disclose the annualized version of these rates.  Traditionally, lenders have responded to this requirement by either making a relatively simple mathematical calculation to obtain the annualized equivalent rate and then specifying the precise equivalent rate, or by specifying a formula pursuant to which the Borrower may (with relative ease) make its own mathematical calculation to arrive at the required annualized rate.

Section 4 applies where the credit extended by the Lender is secured by personalty, or not secured at all.  It does not apply where the credit is secured by real estate.

The matter of what a Lender must do to comply with Section 4 was dealt with - and expanded upon - by the Ontario Superior Court of Justice in its recent (January 10, 2018) decision in the Solar Power Network Inc. v. ClearFlow Energy Finance Corp. case (hereinafter, the "Solar Case").  As stated in paragraph (1) of the judgement, Solar Power Network Inc. and related entities were renewable energy companies specializing in installing solar panels in commercial, institutional and industrial rooftops.  The respondent ClearFlow Energy Finance Corp. was a project finance company that provided financing to the solar energy and clean technology sector.  And that was precisely the relationship between ClearFlow (as "Lender") and Solar Power Network (as "Borrower").  The Lender provided a number of separate loans (or financings) to the Borrower to enable it to obtain and install solar power equipment.  The loans were initially intended - by both parties - to be of a short term nature, with the Borrower arranging for longer term more "conventional" financing in due course.  The loans were documented in various ways, including loan agreements and promissory notes, but, as observed by the Court, regardless of the form of the documentation, each loan provided for three different "components" of remuneration payable by the Borrower in connection with the making of the loans, namely:

(i)            An interest rate which was usually set at 12% per annum, compounded and calculated monthly, and, 24% per annum following default (the "Base Interest").

(ii)           An administration fee charged at the outset of the loan transaction calculated as a percentage of the principal amount of the loan advanced.  If a loan was not repaid on time, then the initial administrative fee was tacked on to the principal balance of the loan and carried forward as an extended loan, with a new administrative fee being charged on the total amount of the extended loan.  These fees are referred to herein as the "Administration Fees"; and

(iii)          A discount of 0.003% of the outstanding principal balance of a loan, calculated on a daily basis for each day that the loan was outstanding.  If the discount fee had not been paid when the initial term of the loan had expired, the outstanding balance of the discount fee applicable to the loan during its initial term would be added on to the loan and carried forward to form part of the principal amount of the extended loan, to which a further discount fee would be applicable.  These discount fees are referred to herein as the "Discount Fees".

The Court observed that the Administration Fees were calculated over 90 or 180 day periods, while the Discount Fees were calculated daily.

There were a number of issues between the parties which the Court had to consider.  Two of those issues related to the proper categorization of the Administration Fees and the Discount Fees for the purpose of applying Section 4 of the Act to these charges.  The first issue relating to Section 4 was whether or not the Administration Fees and the Discount Fees were "interest" within the meaning of Section 4.  A second question relating to Section 4 was whether or not, if either one or both of the Administration Fees and the Discount Fees were to be considered as interest within the meaning of Section 4, did Section 4 operate to limit the Lender's entitlement to interest - including the Base Interest - to a "mere" 5% per annum.

The Court's review and analysis of the aforementioned fees is enlightening and brings some clarification to the meaning of Section 4 (which was previously absent in the case law).  This is of critical importance for lenders and their counsel in devising the appropriate wording for the payment of the consideration to be provided in exchange for the extension of credit.  In particular, the questions dealt with were:

  1. Are the Administration Fees "interest" within the meaning of Section 4?

The Court held that the Administration Fees were not interest.  In coming to this conclusion, the Court took note of several aspects of the relationship between the parties, some of which were arguably "fact specific" to the Solar Case.  In particular:

(a)          the Administration Fees were compensation for the Lender's "administrative work in setting up and administering the loans";

(b)          the Borrower's applications to obtain the loans and the loan documents themselves required negotiation and were "document intensive";

(c)           on the average, 35 invoices from 15 separate suppliers were required with respect to the subject matter of each loan;

(d)          additional administrative work was required once the Lender ascertained that the Borrower was having financial difficulties; and

(e)          the Administration Fees were charged on a one-time basis only, and would only be charged if a loan was not repaid within its term.

  1. Were the Discount Fees interest within the meaning of Section 4?

The Court held that the Discount Fees were a form of interest, and did so, notwithstanding that the Lender argued that these fees were an additional consideration for its administration of the financings, and, notwithstanding that the Borrower did not present any evidence to the contrary.  The Court stated that when looking at the "substance" of the Discount Fees, the following matters indicated that these fees should be considered interest (ie, essentially, consideration for the use of money over a period of time, with the consideration being determined with reference to the principal amount of the credit extended and the length of time that the credit is outstanding):

(a)          the Discount Fees were not connected to the creation of a new loan or a renewal of an existing loan, or the documentation pertaining thereto;

(b)          unlike the Administration Fees which varied depending on the "risk and resulting work undertaken by the Lender", the Discount Fees were the same for all types of loans and loan documentation (Editorial comment: in deciding whether or not to charge interest, and in particular, the rate of interest, a creditor usually does take into account the riskiness of the loan transaction);

(c)           while the Administration Fees were charged at the beginning of the loan term (or upon a renewal of an existing loan) the Discount Fees varied, and in particular, increased, over the period of a loan's term;

(d)          in cross-examination, a representative of a Lender acknowledged that the Borrower's obligation to pay the Discount Fees "incentivized" the Borrower "to make earlier payout of the loans".  The fact that the Discount Fees were designed to "encourage the hastening of the pay down of the loans" savours of interest, not a fee for the time and efforts required to administer the loans.

  1. If the Discount Fees were interest, does Section 4 require that only the Discount Fees be reduced to 5% per annum, or is the Lender additionally limited to collecting 5% per annum with respect to the Base Interest?

As the Court held that the Administration Fees were not interest, Section 4 did not apply to these fees in the sense of requiring the disclosure of an annualized rate.  However, the parties disagreed as to whether or not Section 4 should, in addition to applying to the Discount Fees, also apply to the Base Interest Rate.  The Base Interest Rate, taken by itself, did not breach the requirements of Section 4.  That rate was stipulated to be 12% per annum, compounded and calculated monthly, 24% per annum after default*.  The Court held that the meaning (and Parliament's intent) of/for Section 4 was to limit the Lender to 5% per annum even though part of the interest stipulated did not breach the Section 4 requirements, but another part (or parts) thereof did so.  In other words, if a creditor obligates its debtor to pay two or more "types" of interest, and one of those "types" is worded so as to breach Section 4, that breach "taints" all other interest obligations, even though the other types(s) of interest comply with Section 4 (ie, even though they are specified to be calculated on an annual basis).  The Court observed that "the case law has repeatedly recognized that Section 4 of the Act should be applied equally to sophisticated and unsophisticated parties".  Thus the fact that the Lender and the Borrower in the Solar Case were "sophisticated" (ie, financially experienced business parties, and that each had their own counsel) did not relieve the Lender of its Section 4 obligations.  Additionally, the Court stated that "As draconian as it may seem to limit all of the interest to 5% where the offending Discount Fees are only a small portion of the overall interest obligation, the result is in keeping with the consumer protection purpose of this legislation".

  1. Did the fact that the loan documents contained a formula for calculating the annual rate of interest for the Discount Fees satisfy the requirements of Section 4?

The Lender argued that, assuming that Section 4 did apply to the Discount Fees, it had complied with Section 4 because it had included a formula which should have enabled the Borrower to easily calculate the annualized rate that the Discount Fees represented.  This formula is very similar to the formula that lenders and their counsel frequently use.  In essence, it provides that where an amount of interest, fees or other charge is stated to be applicable at a rate based on a period comprising less than 365 days (or less than 366 days in a leap year), the "equivalent yearly rate" is determined by dividing the specified rate by the number of days in the period and then multiplying that result by the actual number of days in the calendar year.  The Solar Case Discount Fees rate was stated to be 0.003, and the Lender's position was that all that the Borrower needed to do (to determine the annual equivalent) was to multiply 0.003 by 365 (or 366 in a leap year).  Notwithstanding the apparent simplicity of this formula, the Court held that "a formula does not necessarily allow for (a) clear understanding to occur.  Formulas can be confusing and even misleading".  Interest was required to be paid on outstanding interest when a loan rolled over, thus the Court declared that it was "…not accurate to say that by simply multiplying 0.003% times 365 that the Discount Fees annualized rate would be…clearly understood (by the Borrower".  Unless and until the Solar Case decision is overturned or legislatively altered, lenders and their counsel should no longer rely on the efficacy of an "equivalent rate formula" to satisfy Section 4's requirements, and precise statements of equivalent rates per 365 (or 366 in a leap year) day periods should be included in loan documentation.

  1. How are lenders and their counsel to calculate annualized interest rates?

In considering whether or not an "equivalent rate formula" would - or would not - satisfy Section 4's requirements, the Court observed that there were "two potential methods of expressing the equivalent rate of interest".  These are:

(a)          simply multiplying the stated interest rate by the number of compounding periods (or interest payment intervals) in the year (ie, 2% per month times 12 months is "equivalent" to 24% per annum").  This is called the "nominal interest rate";

(b)          where a calculation is made in which takes into account the value that a lender gets when it doesn't  have wait until the end of the year to obtain the benefit of the interest it is entitled to. This is called the "effective annual rate".  It factors in the "effect that compounding has on the overall interest rate (ie, 2% per month, when factoring in the monthly compounding, is "equivalent" to 26.8% per annum)".  Although not expressly stated, this writer assumes that the Court is referring here to the concept of the value or benefit that a creditor receives when it obtains interest - primarily determined with respect to a period of one year - at intervals more frequent than yearly.  This is sometimes referred to as the "re-investment of interest theory".

The Court concluded that the more accurate method of calculation of the annualized rate required by Section 4 is the "effective annual rate".**

Some other conclusions and observations of the Court in the Solar Case worth noting are:

(I)            The Lender argued that it received legal opinions from the Borrower's counsel which stated that the loan documents were "enforceable".  The Lender argued that these legal opinion letters supported its position that the Borrower "knew the fees were in fact fees and not interest".  The Court held that since the opinion letters included the (usual) stipulation that the enforceability opinions were limited by "laws affecting creditors' rights generally", and since Section 4 affects creditors' rights generally, the Lender was not entitled to rely on the Borrower's counsel's legal opinions.  Had those opinions not included the usual limitation statement, might the Court have come to a different conclusion in the Solar Case?  We'll probably never know, but it does emphasize the significance of the need for lawyers to include (reasonable) limitations and qualifications to enforceability opinions.

(II)          The Lender also argued that after the Borrower encountered financial difficulties and it entered into several "forbearance agreements", those agreements provided a defense for the Lender due to the presence of a provision to the effect that the indebtedness owed by the Borrower, together with interest, fees, costs, etc. "(were) unconditionally owing by the Borrower to the Lender without offset, defense or counterclaim of any kind, nature or description whatsoever" (underlining here for emphasis purposes).  The Court disposed of this argument because a more recent forbearance agreement (four had been entered into) qualified the above provision by concluding with "except as may be otherwise required by law".  The Court held that that exception did permit the Borrower to challenge the Lender's entitlement to interest under the loan documents.

* Interestingly, if the loan indebtedness had been secured by a charge on real estate, Section 8 of the Act would have prohibited the Lender from charging and collecting interest at any rate per annum in excess of the rate per annum stipulated as being applicable before default.

** Section 6 of the Act has often been considered to require disclosure of what amounts to the effective annual interest rate, but only for indebtedness secured by real property mortgages and only where there are periodic "blended" payments of principal and interest called for under the terms of the payment/repayment of the secured debt.


January, 2011

Security interests, unlike diamonds, do not necessarily last forever or lose their lustre ("priority").  Two common situations in which a secured party can lose its security interest or the priority thereof are:

(i)            under Section 20 of the Manitoba Personal Property Security Act (the "MPPSA") - where a secured party fails to properly perfect its interest.  In this situation, the security interest doesn't entirely disappear, but it become unenforceable against most third party claimants, including the debtor's bankruptcy trustee; and

(ii)           Section 30(2) of the MPPSA - where the secured party holds a security interest in the debtor's inventory and the debtor sells items of its inventory to a buyer or buyers in the ordinary course of the debtor's business.  In this situation, the secured party's security interest is completely terminated insofar as the sold inventory is concerned, although the secured party is entitled to have its interest continue as against ("traceable") proceeds generated from the debtor's sale or sales (if there are any traceable proceeds).

The generally accepted rationale for the existence of Section 30(2) is that if "ordinary course" buyers couldn't purchase items of the debtor's inventory without having to search the registry to see if the debtor has given a security interest to its financier and then have to get the financier to release its security interest as against the particular item or items purchased, commerce would grind to a halt.

But what about a debtor who gives a security interest in its inventory to a financier, but who then leases - as opposed to selling - inventory items to one or more lessees?  Section 30(2) of the MPPSA provides that in this situation, the lessee "takes free of any perfected or unperfected security interest given by the lessor…whether or not the lessee knows of it (i.e., the security interest given to the lessor's financier) unless the lessee also knows that the lease constitutes a breach of the security agreement under which the security interest was created".  It would be rare indeed for an "ordinary course" lessee to know both of the existence of a security interest given to the lessor's financier and of the fact that the lease was contrary to the terms of the financier's security agreement with the lessor.

But what does Section 30(2) actually mean to the lessee and those claiming under and through the lessee, such as others to whom the lessee might attempt to sell or re-lease the goods, others to whom the lessee might attempt to mortgage the goods, and, the lessee's trustee in bankruptcy where the lessee becomes bankrupt?  Three cases form the 1990s and a B.C. case decided in November of 2010 give guidance to those involved in goods leasing transactions.  The most recent case is the Perimeter/Century/GE case (the “GE Case", British Columbia Court of Appeal).  The 1990s cases were reviewed by the Court in the GE Case. Before considering the facts and reasoning in the GE Case, it is instructive to consider the Court’s analysis of the aforementioned three previous cases. The following is a summary of these cases:

  1. The Car-Ant Investments Ltd. case, Saskatchewan Court of Queen's Bench, 1990 (the "Car-Ant Case").  "D" acquired ownership of some trailers and then leased them to "B", the lease including options to purchase.  "D" failed to properly register its lease interest in the Personal Property Registry.  Subsequently, "D" granted a security interest in the trailers (and the leases) to GMAC.  GMAC did duly register its security interest in the Personal Property Registry, against both the trailers and the leases.  Subsequently, "B" became bankrupt.  The Court noted that "D" was in the finance business, not the business of dealing in trailers.  "B's" bankruptcy trustee argued that in order for GMAC to have priority over the trustee with respect to the trailers, GMAC not only had to duly register against the trailers, but that it also should have ensured that "D" had duly registered its lease interest against the trailers.  The Court disagreed, stating that it was not necessary for a financier in GMAC's position to have to ensure "double" perfection against the leased goods.  The Court also held that GMAC's right to proceed against the trailers arose immediately, and that it was not necessary for GMAC to honour the lease.  This was because "D" was not leasing the trailers to "B" in "D's" ordinary course of business, with the result that the Saskatchewan equivalent of the above-quoted rule (i.e., the Saskatchewan equivalent to Section 30(2)) did not apply.
  2. The David Morris Fine Cars Ltd. case, Alberta Court of Queen's Bench, 1994 (the "Morris Case").  "M", being in the business of leasing and selling vehicles, leased a vehicle to "B".  "M" failed to register its lease interest in the Personal Property Registry.  Subsequently, "M" mortgaged its interest in the vehicle (and the lease) to BMO.  BMO duly registered its interest against the vehicle (and the lease) in the Personal Property Registry.  Subsequently, "B" became bankrupt.  A contest arose over who was entitled to the vehicle (or the proceeds of sale thereof), "B's" bankruptcy trustee or BMO.  The trustee argued that because BMO had taken its security interest in the vehicle after "M" had leased it to "B", BMO took its security subject to the "weakness" in "M's" legal position (i.e., "M's" failure to register notice of its lease rights in the vehicle in the Personal Property Registry), so that BMO's position was subordinate to the trustee's position.  Although not stated explicitly, there is a suggestion here that had "M" first granted security in the vehicle to BMO, with BMO duly registering its interest in the Personal Property Registry, a subsequent leasing of the vehicle to "B" might have given BMO priority over "B’s” bankruptcy trustee notwithstanding the failure by "M" to register its lease interest in the Personal Property Registry.  The Court also appears to have taken the view that with "M" having leased the vehicle to "B" in the ordinary course of the carrying on of "M's" business, unlike the situation in the Car-Ant Case, the Alberta equivalent of Manitoba Section 30(2) applied and, contrary to what was held in the Car-Ant Case, the affect of the legislation was to exterminate BMO's security interest.  As it turned out, BMO appealed the trial Court's decision, but for whatever reason, that appeal was never heard.
  3. The Re Giffen case, Supreme Court of Canada, 1998 (the "Giffen Case").  Here TLC, which was in the business of leasing and dealing in motor vehicles, leased a vehicle to "T".  Thereafter, "T" subleased the vehicle to "B".  Neither of TLC or "T" duly registered their lease and sublease interests in the Personal Property Registry.  Subsequently, "B" became bankrupt, and a contest arose between "B’s” bankruptcy trustee and TLC as to who was entitled to priority in the vehicle (or the sale proceeds thereof).  The Court noted that while TLC was in the business of leasing vehicles, "T" was not.  The contest was between the bankruptcy trustee and TLC (not “T”) as to who had priority over the vehicle or the proceeds of sale thereof.  The trustee argued that the effect of the British Columbia equivalent to Manitoba Section 20(b)(i) was to subordinate (or extinguish) TLC's rights in the vehicle in favour of the trustee's rights.  On an initial appeal, TLC argued that on the basis of Section 71(2) of the Canada Bankruptcy and Insolvency Act (the "BIA"), the bankruptcy trustee only succeeded to whatever were the property rights of the bankrupt on bankruptcy and that at the time of its bankruptcy, "B" was merely a lessee and not an owner of the vehicle.  This appeal initially succeeded, but the Supreme Court of Canada disagreed. It held that in considering the application of the Personal Property Security Act to this situation, it is not appropriate to focus on such concepts as proprietary rights, title and ownership.  Personal Property Security legislation ignores the concepts of title and ownership, and instead, focuses on the priority of competing rights and interests, and that is the correct way to resolve these disputes.  Thus "B’s” trustee was entitled to enforce its rights under the BIA (for the benefit of "B’s” creditors generally) in priority to the rights of either TLC or ("T") because neither of TLC or "T" had properly perfected their lease and sublease interests in the PPR.  In effect, the trustee could and did get a better "title" to the vehicle than TLC and "T".

In the GE Case, “L”, being the owner of three buses, leased those buses to “B” but “L” failed to properly register its lease interest in the British Columbia PPR. Subsequently, “L” granted a security interest in the buses and in its rights under the leases to GE.  GE did properly register its security interest against the buses as well as against “L’s” rights under the leases. Subsequently, “B” became bankrupt and a contest arose between “B’s” bankruptcy trustee and GE as to who had priority with respect to the buses and/or the proceeds of sale thereof. The Court noted that in leasing the buses to “B”, “L” was doing so in the course of the ordinary carrying on of “L’s” business. Taking into account the reasoning in the aforementioned cases (the Car-Ant Case and the Giffen Case in particular) and the British Columbia equivalent of the above cited PPR rules, the Court held in favour of GE. The Court emphasized that when someone like “L” leases goods in the ordinary course of its business, the effect of the legislation is that a security interest in the goods granted by the lessor to its financier, will, as between the financier and the lessee, becomes “abridged”, but that that security interest will "spring back to life" (and thus enable the financier to realize its security) upon termination of the lease. The lessee does not acquire ownership of the goods, but instead can assert its lease rights (essentially possession of the leased goods) in priority to the financier’s security rights but only until the lease ends. In the GE Case, “B’s” trustee did not make any of the rental payments due under the leases, the buses were returned to “L”/GE and consequently, the leases were at an end.

What does the GE Case and the earlier cases considered by the Court in the GE Case suggest for those in the leasing business and those financing such business? I suggest the following:

(i)            the need for lessors and their secured creditors to make proper registrations in the Personal Property Registry;

(ii)           a lessor’s financier does not - for its own sake alone - have to ensure that the lessor properly registers its lease interest as long as the financier has properly registered its security interest (although, for their own benefit, lessors should duly register their lease interests); and

(iii)          where a lessor has leased goods to a lessee in the ordinary course of the lessor’s business, and, prior or subsequent to such leasing, the lessor grants a security interest in the goods to the lessor’s financier, the financier’s security interest is not capable of being enforced by the financier as against the lessee’s possessory rights under its lease unless and until the lease ends.