Over the past 25 years or more, a flourishing industry has developed in North America among finance companies of making loans to corporate borrowers to enable them to pay the hefty premiums on their business or industrial insurance policies.[FN1] As security, the premium finance company obtains a power of attorney from the borrower entitling the company to cancel the insurance policy if the borrower defaults in making payments on the premium loan and to claim the unearned insurance premium from the insurance company arising on cancellation of the policy.
In Stelco Inc., Re,[FN2] CAFO, an insurance premium financer, brought a motion before Farley J. in Toronto for an order entitling CAFO to terminate an insurance policy the premium for which it had indirectly advanced to Stelco, a debtor company now being reorganized under theCompanies' Creditors Arrangement Act (CCAA),[FN3] and to have the unearned premium paid to CAFO pursuant to the parties' agreement and as authorized by s. 138 of the Ontario Insurance Act.[FN4] CAFO had not filed a financing statement under the Ontario Personal Property Security Act (OPPSA).[FN5] It argued that it was exempted from doing so by s. 4(1)(c) of the Ontario Act.
There were therefore two principal issues before Farley J. The first was whether s. 4(1)(c) applies to a security interest in unearned insurance premiums. The second was, assuming s. 4(1)(c) applies, whether the court should lift the stay of proceedings order issued in Stelco's favour at the beginning of the CCAA proceedings to enable CAFO to collect the unearned premium.[FN6]
Farley J. found against CAFO on both questions. He held, first, that s. 4(1)(c) of the OPPSA does not apply to premium financing contracts and, second, even if it did apply that the stay should not be lifted in CAFO's favour. In giving his answer to the first question, Farley J. essentially reiterated a scepticism against applying s. 4(1)(c) to security interests in insurance premiums that he had previously expressed obiter in Ivaco Inc., Re.[FN7] Ivaco also involved a security interest in an unearned insurance premium. However, Farley J. found the contract was governed by Quebec law, and not Ontario law, although the CCAA proceedings took place in Ontario. [FN8] In the writer's view, Farley J.'s judgment in Stelco was in error on both points and, unless reversed on appeal, [FN9] his decision could jeopardize the future viability of insurance premium financing in Canada.
1(a). -- Does OPPSA s. 4(1)(c) Apply to Security Interests in Unearned Insurance Premiums?
Section 4(1)(c) has been part of the Ontario Act from the beginning and was copied from s. 9-104(g) of the old Uniform Commercial Code (UCC).[FN10] Section 4(1)(c) also appears in substantially the same form in the other provincial PPSAs.[FN11] Section 4(1)(c) reads:
4(1). This Act does not apply
. . .
(c) to a transfer of an interest or claim in or under any policy of insurance or contract of annuity . . .
The corresponding language in UCC 9-104 (g) provides:
9-104. This Article does not apply
. . .
(g) to a transfer of an interest in a claim in or under any policy of insurance, except as provided with respect to proceeds (Section 9-306) and priorities in proceeds (Section 9- 312) . . .
In the US, there is an unbroken line of case law, cited in Farley J.'s judgment, starting with the Bankruptcy Court decision in Redfeather Fast Freight, Inc., Re[FN12] and ending with U.S. Repeating Arms Co., Re[FN13] holding that s. 9-104(g) applies to a security interest in unearned insurance premiums. A leading US Article 9 Commentary[FN14] supports the soundness of those decisions. Similarly, two Canadian texts cited in Farley J.'s judgment [FN15] also agree that s. 4(1)(c) applies to a security interest in or under an insurance policy or contract though admittedly neither text specifically addresses the characterization of a security interest in insurance premiums.
Given this formidable consensus, what was the basis of Farley J.'s departure from the accepted reading of s. 4(1)(c) and its US counterpart? His most important reason was that he was not satisfied that s. 4(1)(c) was intended to encompass the return of unearned insurance premiums.[FN16] Before addressing this issue, we should also summarize his other reasons. They seem to have been as follows:
1. Mr. Fred Catzman and the members of his Committee, who were responsible for the drafting of the original Ontario Act, and Grant Gilmore, the principal draftsman of original Article 9, were not in agreement about the rationale for excluding insurance interests from the scope of the legislation;[FN17]
2. The court was not provided with any evidence about the Ontario legislature's intention in adopting s. 4(1)(c);[FN18]
3. Section 4(1)(c) and UCC 9-104(g) are differently worded. The latter expressly excludes from its scope an insurance claim as proceeds whereas the former does not;
4. Some US states have adopted legislation, in addition to UCC 9-104(g), dispensing with the need for premium finance companies to file a financing statement under Article 9, thereby weakening the authority of some of the judgments relied on by CAFO; and
5. Section 4(1)(c) should be given a narrow reading because it is an undesirable exception to the basic postulate of the PPSA requiring public notice of a security interest by filing in a public registry.
It will be helpful to briefly address these concerns of Farley J. before responding to his principal ground for refusing to apply s. 4(1)(c) to unearned insurance premiums. So far as the first concern is concerned, the Catzman Committee apparently relied on the industry argument that perfection under the PPS legislation was unnecessary because the insurance industry had a well established system of keeping a record of assignments of policies and entitlements to proceeds of which the insurer was notified.[FN19] Gilmore was somewhat more candid and admitted the exclusion in UCC 9-104(g) was due to successful lobbying by the insurance industry.[FN20] In the writer's view, there is no inherent contradiction between the two explanations and, in any event, it is suggested the rationale for the exclusion would only be relevant if there were a significant ambiguity about the language of s. 4(1)(c).
The same answer is apposite about Farley J.'s concern about the absence of a legislative record involving s. 4(1)(c). It is common knowledge among lawyers that it is very unusual for technical legislation to attract detailed attention in the provincial legislatures and this observation also applies to the OPPSA. In fact, the treatment accorded the Ontario bill of 1967 was better served than most bills since it was preceded, first, by a draft bill prepared by the Catzman Committee[FN21] and discussed at a public conference held at Osgoode Hall in May 1964 and, second, by two reports on the draft legislation issued by the then newly created Ontario Law Reform Commission.[FN22] Both reports were quite short and neither dealt with the rationale of s. 4(1)(c). The simple fact is that in 1967 chattel security lawyers were not exercised over the exclusion of interests in insurance policies because it was not regarded of sufficient importance to affect everyday commercial practice.
So far as Farley J.'s third point is concerned, it is also unpersuasive. Proceeds have not in fact been excluded from the scope of s. 4(1)(c) because the exclusion appears in the definition of "proceeds" in s. 1(1) of the Ontario Act.[FN23] There is therefore no difference on this point between the Ontario provision and its Article 9 counterpart. Farley J. is correct with respect to the fourth point -- some US states have indeed adopted separate legislation expressly dispensing with the need for premium finance companies to file a financing statement. However, in the writer's view, this belt and suspenders approach proves little except that the finance companies wanted to make doubly sure that security interests in insurance premiums were not subjected to Article 9. What is more salient is the fact that the courts in those jurisdictions that contained both provisions did not hold that s. 9- 104(g) was insufficient by itself.
This brings us to Farley J.'s final point that s. 4(1)(c) should be given a narrow reading because of its exclusionary character. The writer has no quarrel with this constructional rule but he fails to see how it helps in the present case. It would only be relevant if there were a genuine ambiguity about s. 4(1)(c). However, prior to Farley J.'s decision, no other court had found such ambiguity.
1(b). -- Are Premium Financing Agreements Excluded from s. 4(1)(c)?
Farley J. was clearly of the view that a financing agreement does not amount to the transfer of an interest or claim in or under any policy of insurance. He does not tell us what types of agreement are caught by s. 4(1)(c) but he offers his reasons for the non-inclusion of premium insurance financing agreements in the following passage:
With respect I do not see that the unearned premiums question is one which is covered by the exemption from registration under the PPSA by s. 4(1)(c). Allow me to illustrate this issue by changing the item of commerce to an agreement to buy carrots over time with either total payment up front or a large deposit, in each case refundable to the buyer as to the amount of carrots undelivered by fault of the vendor/producer. Would one say that the right to that refund was inherent in the nature of carrots, that is, intrinsic qua carrots? I think not; the refund has nothing to do with the "carrotness" of the contract. It would seem to me that one would need stronger and more specific language to reasonably conclude that the context of s. 4(1)(c) of the PPSA was intended to encompass the return of unearned premiums since what one is looking at is the enforcement of rights under a financing agreement -- and in theory, such a financing agreement could be used for any other item of commerce.[FN24]
Farley J.'s reasoning seems quite unpersuasive as is his example of a contract for the delivery of carrots where the buyer seeks to recover its prepayment because of the seller's non-performance. "Financing agreement" is merely a generic term describing an agreement with a particular function. A financing agreement may relate to any one of a number of different debtors and the collateral may fall into any one of the types of personal property identified in the Personal Property Security Act. Unearned insurance premiums fall into the category of intangibles. Farley J. offers no reasons for his assumption that a financing agreement involving insurance premiums does not also amount to the transfer of an interest or claim in or under a policy of insurance. The US cases have clearly so held[FN25] and were surely right to do so. Given what we know about s. 4(1)(c)'s purpose, it would have been illogical for the OPPSA and Article 9 drafters to exclude an important type of insurance contract from s. 4(1)(c) that was already well established in 1975. In the same vein, the answer to Farley J.'s example of the carrot contract is that the buyer's right to a refund for undelivered carrots does correctly implicate carrots because it helps to identify the particular contract giving rise to the buyer's right to a refund.
Another troubling feature about Farley J.'s judgment is his pronounced hostility to s. 4(1)(c). It is true that subs. 1(c) is an exception to the general PPSA rule that security interests in personal property are governed by the Act and must comply with the Act's perfection requirements. Nevertheless, s. 4(1)(c) is one of nine exclusions from the Act[FN26] and it has been there from the beginning. Significantly the Code's counterpart has also been retained in Revised Article 9;[FN27] and the exception only covers a narrow band of collateral. These factors ought to have weighed heavily in Farley J.'s judgment but apparently did not. So should the consistent ruling by US courts that s. 9-104(g) includes a security interest in unearned insurance premiums and the desirability of Canadian courts following US courts' interpretation of Article 9 provisions to ensure consistent treatment on both sides of the border where the language of a provision and its underlying rationale are the same. [FN28]
1(d). -- Was Farley J.'s decision on CAFO's position suis generis?
Farley J. concludes his judgment[FN29] on CAFO's argument that its security interest was excluded by s. 4(1)(c) by stressing that his conclusion was based on the record before him and that it might well be that a premium financer (including CAFO) in another case would be able to provide a better record enabling a future court to reach a different conclusion. It is difficult to know what to make of this observation. The terms of the contract between CAFO and Stelco were not in dispute, so presumably Farley J. was referring to the absence of a legislative record concerning the intended scope of s. 4(1)(c). The writer has suggested, however, that the statutory language is not ambiguous, has not been found so by the US courts in construing UCC 9-104(g), and is not in need of extrinsic evidence to clarify its meaning. It would be unfortunate, therefore, if the Ontario Court of Appeal were to refuse CAFO's leave to appeal Farley J.'s decision on the ground of the judge's own insistence that it was not meant to have precedential force.
2. -- Consequences of an Unperfected Security Interest in Unearned Insurance Premiums
All the parties in Stelco, as well as Farley J., seem to have assumed that Stelco was entitled to challenge CAFO's unperfected security interest, assuming the security interest was governed by the OPPSA. However, the assumption about Stelco's status is far from obvious. Section 20(1) of the OPPSA spells out the various types of person entitled to impeach an unperfected security interest. A debtor simpliciter is not among them.[FN30] The closest relevant class is a representative of creditors of the debtor, including an assignee for the benefit of creditors and a trustee in bankruptcy.[FN31] There is no reported authority for the proposition that a debtor in possession under the CCAA represents or has the powers of a lien creditor or trustee for the purpose of impeaching pre-PPSA transactions.[FN32] This distinguishes the CCAA position from a debtor's position under a commercial proposal governed by the Bankruptcy and Insolvency Act (BIA)[FN33] and the status of a debtor in possession under chapter 11 of the US Bankruptcy Code. [FN34]
However, the issue should not be treated as shut and closed, and there appear to be at least two grounds for arguing that a CCAA proceeding should be given the same effect as a BIA proceeding for the purpose of classifying secured and unsecured claims and determining the effect of unperfected secured claims. The first ground is that, but for the near-automatic section 11 stay orders, unsecured creditors and other interested parties would be able to enforce their claims outside the CCAA and disregard the unperfected security interest as provided in s. 20(1) of the OPPSA. The CCAA, it may be argued, could not have intended to put unsecured creditors in a worse position under the CCAA by freezing their enforcement rights while continuing to leave a secured creditor free to perfect its security interest after commencement of the CCAA proceedings.
The second ground, it is suggested, is that in classifying creditors under the CCAA for plan and voting purposes, the debtor is in a fiduciary position and must classify creditors as secured and unsecured according to the relevant legislation and not simply on how a secured claim would be classified against the debtor personally outside insolvency proceedings. In Stelco (assuming Farley J. was correct in holding that s. 4(1)(c) of the OPPSA does not apply to a security interest in unearned insurance premiums), this would mean that CAFO would be treated as an unsecured creditor for plan and voting purposes and should not be given leave to improve its position by filing a late financing statement.
This rationalization derives support from the result, if not the actual ground, of Farley J.'s decision of August 13, 2004, in the Air Canada CCAA reorganization. [FN35] The Goodyear Tire & Rubber Company held unperfected security interests governed by Ontario and Quebec law at the time of the Initial Order made following Air Canada's CCAA application on April 1, 2003. Goodyear subsequently obtained court orders permitting it to file financing statements and to take other steps to perfect its security interests in the two provinces. However, paragraph 3 of the second Goodyear Order provided that execution of the hypothec and registration thereof was not to constitute a waiver or release of Air Canada's rights to classify the prefiling claim of Goodyear in any future plan of arrangement nor was it to be treated as a waiver or release of Goodyear's right to contest or appeal any such classification. [FN36] Goodyear later moved before Farley J. for a declaration that Goodyear was not an affected unsecured creditor (as defined in Air Canada's consolidated plan) and granting all relief necessary to give effect to such a declaration. [FN37] Farley J. dismissed the motion. Apparently he delivered no written reasons but only wrote an endorsement dismissing Goodyear's motion. [FN38]
It is suggested however that Farley J.'s decision can be justified on the theory that a CCAA debtor is bound to classify creditors, including those asserting secured status, according to their status under the relevant legislation or common law doctrine as of the time of the initial CCAA application and that this obligation is part of a CCAA debtor's duty to treat its creditors evenly except where otherwise authorized by law. Assuming the plausibility of this line of reasoning, it also shows that a CCAA debtor is in a fiduciary position vis-à-vis its creditors for at least some purposes and that the absence of an explicit statutory statement is not fatal. It also seems consistent with principle to extend this reasoning to cases such as Stelco to prevent preferential treatment of an unperfected security interest because allowing the secured creditor to enforce its security interest would have the same effect as classifying the claim as a secured claim for plan purposes.
Relevance of Re PSINet Ltd.
Goodyear's counsel's factum in the leave application also relies on Farley J.'s earlier decision in PSINet Ltd.[FN39] In this case, the debtor filed for protection under the CCAA in May 2001. In December 2001, and before approval of any plan of arrangement by the debtor's creditors, the debtor's parent company ("Inc.") discovered that it held a general security interest in the debtor's assets to secure a debt to Inc. of some $200 million. Inc. had initially filed a financing statement under the OPPSA but the filing had expired in February 2001. Inc. moved before Farley J. to lift the section 11 stay to allow Inc. to reperfect its security interest. Farley J. granted the order, saying "I do not see that Inc. has put itself into a position whereby it should be prevented from re-registering."[FN40] He also noted that the debtor's existing creditors would not be prejudiced by his order because they held purchase money security interests and would therefore retain their priority even after Inc. had reperfected its security interest.
Arguably, Farley J.'s order in PSINet can be distinguished from his refusal to lift the stay in Goodyear on the ground that Inc.'s security interest was governed by the special provisions in s. 30(6) of the OPPSA.[FN41] Section 30(6) treats an originally perfected security interest as continuously perfected despite a break in the period of reperfection, except in respect of a person who acquired rights in the collateral during the period of unperfection.
Nevertheless, Farley J.'s decision in PSINet requires further consideration. One reason is that he overlooked Cameron J.'s decision in Frankel v. Canadian Imperial Bank of Commerce[FN42] In this case, Cameron J. refused the bank leave to reperfect its lapsed security interest although it was also governed by OPPSA s. 30(6).[FN43] Cameron J. relied in part on s. 20(1)(c) of the OPPSA and in part on the fact that if a secured party was allowed to reperfect its security interest after the debtor's bankruptcy, the trustee would never know where the estate stood with respect to the unperfected security interest. In the writer's view, this objection seems just as valid in the context of a secured party's application to reperfect a security interest governed by s. 30(6) since without such a restriction it would be open to the secured party to reperfect its security interest at any future time with all the complications this would create for the administration of the estate..
A second difficulty about Farley J.'s decision in PSINet is that he does not question whether unsecured creditors should be treated as acquiring collective rights in the debtor's unperfected collateral once CCAA proceedings have been initiated. For the reasons previously given, the writer believes the answer should be yes. As Farley J. noted in his judgment in PSINet, OPPSA s. 30(6) has many loose ends and this is one of them. If "rights" in s. 30(6) is given the same meaning as "legitimate expectations" and bearing in mind insolvency law's basic postulate of equal treatment of creditors except as otherwise provided, a secured creditor should not be allowed to reperfect a lapsed filing at the expense of unsecured creditors.[FN44]
3. -- Lifting the CCAA Stay of Proceedings
This is the second principal question Farley J. had to address in Stelco on the assumption that CAFO had an enforceable security interest. CAFO argued[FN45] that it did not need the court's consent to lift the stay against enforcement of its security interest because its right to do so was covered by s. 11.3 of the CCAA. Section 11.3 provides that no order made under s. 11 shall have the effect of prohibiting a person from requiring immediate payment for goods, services, use of leased or licensed property or other valuable consideration provided after the order is made, or of requiring the further advance of money or credit. CAFO seems to have assumed that its position was the same as that of an insurer which is entitled under the terms of the policy to cancel the policy for non-payment of the premium.
It is debatable whether this fact pattern is covered by s. 11.3. In any event, as Farley J. pointed out, this was not CAFO's situation. CAFO had actually paid the premium for or on behalf of Stelco and the payment obligation was no longer executory. We are not told what the actual terms were of the initial CCAA order issued by Farley J. but presumably they were cast in the usual broad language found in CCAA orders and encompassed the exercise of rights on Stelco's behalf as well as restraining the enforcement of rights against Stelco.
For all these reasons, Farley J. was not persuaded by counsel's argument and rejected CAFO's request to lift the stay in the same forthright language he had used in rejecting a similar request in Ivaco.[FN46] This was that:
Ivaco needs the insurance coverage during this period in order to carry on operations. On the other hand, it does not appear that a lift of the stay as requested would serve any advantage to CAFO. Indeed, to carry through with the objective of CAFO -- to obtain the unearned premiums -- would be to have this unsecured creditor given an inappropriate leg up on the other unsecured creditors, not to mention a leg up over secured creditors with priority. I see no merit to lifting the stay.
Farley J.'s citation of this passage is puzzling since it is based on the premise that CAFO was only an unsecured creditor. It is also puzzling in the Ivaco context since it is difficult to believe that CAFO was asking for preferred treatment over other unsecured creditors in the face of insolvency law's historic policy of equal treatment of unsecured creditors. It is equally clear that Farley J. did not make this assumption in his introductory sentence to the quotation from the Ivaco judgment. What he said was:
In any event, for the reasons which I expressed in Ivaco, I do not see that it is appropriate to lift the stay under the initial Stelco CCAA order to permit Cafo, even if I had found that it need not register under the PPSA, to cancel the insurance. See Ivaco at para.7.[FN47]
So it seems clear that Farley J. rejected the lift stay application on the assumption that CAFO held an enforceable security interest.
Nevertheless, in the writer's opinion, Farley J. mischaracterized the situation. This was not the case of a secured party seeking to enforce its security interest in collateral with a stable value, such as a security interest in real estate. Rather, what CAFO held was a security interest in collateral with a rapidly declining value -- so much so that the collateral would disappear completely on the anniversary date of the insurance policy! In other words, in rejecting CAFO's request, Farley J. was actually ensuring the extinction of CAFO's rights as a secured creditor.
This is in stark contrast with the secured creditor's position under the US Bankruptcy Code. As is well known, § 362(d)(1) obliges the court, on request of a party in interest, to grant relief from a § 362(a) stay for cause "including lack of adequate protection of interest in property of such party in interest". [FN48] § 362 then proceeds to define what amounts to adequate protection. [FN49] US courts regularly make protection orders in favour of secured creditors, including those holding a security interest in unearned insurance premiums.[FN50]
(a) -- Stay Lift Applications under Section 11
Section 11 of the CCAA contains no counterpart to § 362(d) of the Code; the closest analogue is s. 69.4 of the BIA entitling the court, inter alia, to lift the automatic stay following the filing of a notice of intention or filing of a Commercial Proposal under Part III.1 of the BIA on the ground that the creditor is likely to be materially prejudiced by the continued operation of those provisions; or that it is equitable on other grounds to make such a declaration. However, this benchmark only applies to BIA proceedings, though there is no obvious reason why it could not be applied analogically to CCAA lift stay applications.
The CCAA jurisprudence shows that courts have applied a variety of tests in determining whether a s. 11 stay should be lifted. The tests range all the way from (a) the court's assessment whether the debtor is likely to be able to file a plan with a reasonable prospect of acceptance to (b) the court's appreciation of the character of the collateral (whether it has a stable value or is likely to depreciate quickly), and (c) the court's concern to strike a balance between the interest of the secured creditor and the interests of the debtor's other constituencies and the collateral's importance in helping the debtor to structure a viable plan. In an excellent analysis of the jurisprudence under the BIA and the CCAA,[FN51] David Baird, Q.C. of Toronto has concluded that the CCAA's remedial purposes will be given priority by Canadian courts at the expense of strict regard for secured creditors' rights.
Be that as it may, it is difficult to conceive of an acceptable theory of balancing of rights in the design of a CCAA plan that can justify the destruction of a secured creditor's right as would happen in the present case as the result of Farley J.'s refusal to lift the stay in CAFO's favour. It is greatly to be hoped, therefore, that the Ontario Court of Appeal will grant CAFO's application for leave to appeal so that this aspect of Farley J.'s judgment, as well as his interpretation of s. 4(1)(c), will receive the thorough review that both deserve.
Since the preparation of this article, the writer has been able to secure the wording of Farley J.'s endorsement in the Air Canada CCAA reorganization dismissing the Goodyear Tire & Rubber Co.'s motion. The endorsement reads:
"The motion is dismissed. Goodyear in my view confuses pre-filing claim with the post-filing security. See AC factum as to which I am in accord. The CCAA process is one which requires the creditors to be treated on an equitable basis. The context of this in relation to the definition section must be factored in. It would be inequitable to grant Goodyear the relief it seeks.
J. Farley."
FN*. Professor of law emeritus, University of Toronto. This Comment may also be published in the Canadian Business Law Journal. Grateful appreciation to Ryan Lavallee, Jt. MBA-JD student University of Toronto Faculty of Law, for excellent research assistance.
FN1. These may run to several hundred thousand dollars or more a year for a large business enterprise. According to the A.M. Best Company, gross premiums written in the property/casualty industry of the United States were in excess of $230 billion. Current estimates show that approximately 10% of all property/casualty premiums are financed by insurance premium finance companies. The largest concentration of premium dollars financed by state, in order of importance, are California, Texas and Florida, in each of which the financed premium dollars exceeded US$1 billion. See further http:// www.input1.com/i1web/overview/indovr.html (last visited Sept. 12, 2004). In recent years, premium finance companies have been utilized more frequently due to the skyrocketing cost of insurance and premium financing is viewed as an integral part of the insurance process. See further Phil Duncan, "Premium Financing's Place in the Hard Market" Insurance Journal, West Edition, November 3, 2003 and http:// www.insurancejournal.com/magazine/west/2003/11/03/features/33862.htm (last visited Sept. 12, 2004).
FN2. (2004), 49 C.B.R. (4th) 283, [2004] O.J. No. 1915 (Ont. S.C.J. [Commercial List]).
FN3. R.S.C. 1985, c. C-36, as am.
FN4. R.S.O. 1990, c. I.8, as am., s. 138(1) reads: "Where an insured assigns the right to refund of premium that may accrue by reason of the cancellation or termination of a contract of insurance under the terms thereof and notice of the assignment is given by the assignee to the insurer, the insurer shall pay any such refund to the assignee, notwithstanding any condition in the contract, whether prescribed under this Act or not, requiring the refund to be paid to the insured or to accompany any notice of cancellation or termination to the insured."
FN5. R.S.O. 1990, c. P.10, as am.
FN6. Farley J. also considered a third issue. This was whether Stelco could recover a payment it had made to CAFO after issuance of the initial order on account of its prefiling obligations under the premium financing agreement. Farley J. held that the payment had been made under a mistake of fact and that CAFO was obliged to repay it. See judgment, supra, footnote 2, paras. 22-24. The issue is not germane to this comment and is ignored hereafter.
FN7. (2003), 2003 CarswellOnt 6097 (Ont. S.C.J. [Commercial List]).
FN8. Farley J. applied Quebec law because he found that Quebec law was the proper law of the contract but this approach is open to question. The conflict of laws provisions in the OPPSA provide that the validity, perfection and effect of perfection of a security interest in an intangible are governed by the law of the jurisdiction where the debtor is located at the time the security interest attaches; see s. 7(1). However, the result would have been the same under both tests since apparently Ivaco's executive offices were located in Quebec.
FN9. Leave to appeal granted Stelco Inc., Re (2004), 2004 CarswellOnt 3864 (Ont. C.A.).
FN10. "Old UCC" here refers to the Article 9 version before its replacement by the new Article 9 in 1999. Section 9-104(g) appears as s. 9-109(d)(8) in new Article 9.
FN11. See, for example, the Saskatchewan Personal Property Security Act, 1993, S.S. 1993, c. P-6.2, as am., s. 4(b), which reads: "Except as otherwise provided in this Act or the regulations, this Act does not apply to: . . . (b) the creation or transfer of an interest or claim in or pursuant to a contract of annuity or policy of insurance except the transfer of a right to money or other value that is payable pursuant to a policy of insurance as indemnity or compensation for loss of or damage to collateral . . . ". For a list of the other provincial sections, see Ronald C.C. Cuming and Roderick J. Wood, Saskatchewan and Manitoba Personal Property Security Acts Handbook, 4th ed. (Toronto, Carswell, 1994), pp. 65-6.
The second half of the Saskatchewan definition, dealing with insurance claims as proceeds, is picked up in the Ontario Act, s. 1(1), definition of "proceeds". See further, text accompanying infra, footnote 23.
FN12. 1 B.R. 446 (U.S. Bankr. D. Neb., 1979).
FN13. 67 B.R. 990 (U.S. Bankr. D. Conn., 1986). See also RBS Industries, Inc., Re, 67 B.R. 946 (U.S. Bankr. D. Conn., 1986); In Air Vermont., Re, 40 B.R. 335 (U.S. Bankr. D. Vt., 1984); In Auto-Train Corp., Re, 9 B.R. 159 (U.S. Bankr. Dist. Col., 1981); and Matter of Maplewood Poultry Co., Re, 2 B.R. 550 (U.S. Bankr. D. Me., 1980).
FN14. Barkley Clark, The Law of Secured Transactions under the Uniform Commercial Code, revd. ed. (Arlington, VA, A.S. Pratt, c1999-), vol. 1, at 1- 214 to 1-220.
FN15. The two texts are: Jacob Ziegel and David Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2nd ed. (Markham, ON, Butterworths, 2000), § 4.4 and cases cited, at p. 82-3; and Stikeman Elliott, 2003 Ontario PPSA and Commentary (Markham, ON, Butterworths, 2003), at p. 8.
FN16. Supra, footnote 2, at para. 17.
FN17. Ibid., at paras. 4, 10.
FN18. Ibid., at para. 18.
FN19. See F. Catzman et al., Personal Property Security Law (1976), p. 35, as cited in judgment, ibid., at para. 4.
FN20. Grant Gilmore, Security Interests in Personal Property, § 10.7, at 315 (1965), as cited in judgment, ibid., at para. 10. The Official Comment to UCC 9-104(1)(g) states that insurance transactions "are quite special, do not fit easily under a general commercial statute and are adequately covered by the existing law." Ibid., at para. 10.
FN21. J.S. Ziegel, "The Draft Ontario Personal Property Security Act" (1966) 44 Can. Bar Rev. 104, 107.
FN22. Ibid., 109, and Ontario Law Reform Commission, Report No. 3 of the Ontario Law Reform Commission on Personal Property Security Legislation (Toronto, Dept. of the Attorney General, May 28, 1965) and Ontario Law Reform Commission, Personal Property Security Legislation -- Report No. 3A of the Ontario Law Reform Commission (Toronto, Dept. of the Attorney General, May 18, 1966).
FN23. See further Ziegel & Denomme, supra, footnote 15, p. 82.
FN24. Supra, footnote 2 at para. 17.
FN25. See, for example, U.S. Repeating Arms Co., Re, 67 B.R. 990 (U.S. Bankr. D. Conn., 1986); RBS Industries, Inc., Re, 67 B.R. 946 (U.S. Bankr. D. Conn., 1986); Air Vermont., Re, 40 B.R. 335 (U.S. Bankr. D. Vt., 1984); Auto-Train Corp., Re (1981), 9 B.R. 159 (U.S. Bankr. Dist. Col., 1981); Matter of Maplewood Poultry Co., Re, 2 B.R. 550 (U.S. Bankr. D. Me., 1980); Redfeather Fast Freight, Inc., Re, 1 B.R. 446 (U.S. Bankr. D. Neb., 1979); Ettinger v. Central Penn National Bank, 2 B.R. 385 (U.S. E.D. Pa., 1979); reversed on other grounds 634 F.2d 120 (U.S. 3d Cir., 1980); Paskow v. Calvert Fire Insurance Co., 579 F.2d 949 (U.S. 5th Cir., 1978); Baker & Co. v. Preferred Mutual Insurance Co., 569 F.2d 1347 (U.S. 5th Cir., 1978); and PPG Industries, Inc. v. The Hartford Fire Insurance Co. (1976), 531 F.2d 58 (U.S. 2d Cir., 1976). Note in particular the court's observations in Matter of Maplewood Poultry Co., Re, 2 B.R. 550 (U.S. Bankr. D. Me., 1980), at 555: "While the section 9-104(g) exclusion should be construed narrowly so as to give Article 9 the broadest possible application, the parties have neither suggested nor demonstrated any sound basis upon which the court might consider the grant of a security interest in unearned insurance premiums as anything other than 'a transfer of an interest or claim in or under [a] policy of insurance.' Although there appears to be no reported New Jersey or Maine case law construing UCC § 9- 104(g), even the narrowest reading would seem to require the exclusion from Article 9 coverage of transfers of interests inseparable from insurance policies, such as unearned premiums."
FN26. An even more important exception appearing in Article 9 prior to the 1999 revision was the exclusion in UCC 9-105 of security interests in bank deposits.
FN27. Rev. UCC 9-109(d)(8).
FN28. In the cross-border insolvency sphere, Farley J. has usually shown a strong spirit of comity in recognizing and enforcing US insolvency orders in Canada. See, for example, Re Babcock & Wilcox Canada Ltd. (2000), 11 C.B.R. (4th) 262 (Ont.). It is not clear why a different standard should be applied in determining the precedential value of Article 9 decisions in Canada where the language and history of the Canadian and US provisions is substantially identical.
FN29. Supra, footnote 2, at para. 19.
FN30. The reason for the debtor's exclusion is that the debtor is not deemed to be prejudiced by the lack of perfection.
FN31. See s. 20(1)(b).
FN32. Cf. PSINet Ltd., Re (2002), 30 C.B.R. (4th) 226 (Ont. S.C.J. [Commercial List]) ("PSINet"), at para. 12, where Farley J. rejected Prof. McLaren's suggestion that a monitor represents the interests of creditors for the purpose of invoking s. 20(1)(b) of the OPPSA to impeach an unperfected security interest.
FN33. See BIA, R.S.C. 1985, c. B-3, as am., at ss. 66(1) and 101(1), and L.W. Houlden & G.B. Morawetz, The 2003 Annotated Bankruptcy & Insolvency Act (Toronto, Carswell, 2002), F§ 119, at 481. This interpretation of the status of a debtor in possession under the CCAA is also supported by the cases where the courts have granted a creditor leave to initiate bankruptcy proceedings or to bring an action against a director or other related parties to the debtor, or against another creditor, to set aside a preferential payment or voidable transfer of property. See J.S. Ziegel and D.E. Baird (eds.), Case Studies in Recent Canadian Insolvency Reorganizations (Scarborough, Carswell, 1997), pp. 166-67. The application would not have been necessary if the CCAA debtor were qualified to bring the action itself.
FN34. US Bankruptcy Code, § § 1107(a), 544(a)(2) and 544(a)(1).
FN35. See The Goodyear Tire & Rubber Company, Notice of Motion for Leave to Appeal Order Of Mr Justice Farley of August 13, 2004, OCA Court File No. 03-CL-4932.
FN36. Ibid., para. 9.
FN37. Ibid., para. 10.a.
FN38. The endorsement is not reproduced in the writer's copy of Goodyear's leave application to the Court of Appeal or in counsel's factum in support of the application. However, see the appendix to this article.
FN39. Supra, footnote 32.
FN40. Ibid., para. 14. However, he also imposed conditions on the permission to reperfect to compensate the debtor's other secured creditors for the expense and trouble to which they had been put as a result of Inc.'s negligence.
FN41. Section 30(6) reads:
Where security interest that is perfected by registration becomes unperfected and is again perfected by registration, the security interest shall be deemed to have been continuously perfected from the time of the first perfection except that if a person acquired rights in all or part of the collateral during the period when the security interest was unperfected, the registration shall not be effective as against the person who acquired the rights during such period.
FN42. (1997), 12 P.P.S.A.C. (2d) 306, 47 C.B.R. (3d) 244 (Ont. Gen. Div. [Commercial List]).
FN43. However, Cameron J. does not mention this fact.
FN44. A difficult question is whether denial of leave to file a new financing statement after insolvency should enure for the benefit of secured creditors as well as unsecured creditors. It has been held that existing secured creditors do not acquire rights under s. 30(6) when an existing filing lapses since they have done nothing in reliance on the lapsed filing. See Heidelberg Canada Graphic Equipment Ltd. v. Arthur Andersen Inc. (1992), 7 B.L.R. (2d) 236 (Ont. Bktcy.) and Ziegel & Denomme, op. cit., § 30.5. If the reasoning is taken to its logical conclusion, the same result should follow on the debtor's insolvency. However, this argument proves too much and could equally be applied to deny unsecured creditors the right to impeach a non-reperfected security interest.
FN45. Supra, footnote 2, para. 15.
FN46. Supra, footnote 7, at para. 7.
FN47. Supra, footnote 2, at para. 20.
FN48. Supra, footnote 34, at § 362(d)(1).
FN49. "Upon request of a party in interest, the court, with or without a hearing, shall grant such relief from the stay provided under subsection (a) of this section as is necessary to prevent irreparable damage to the interest of an entity in property, if such interest will suffer such damage before there is an opportunity for notice and a hearing under subsection (d) or (e) of this section." Ibid, at § 362(f).
FN50. See, for example, Matter of Maplewood Poultry Co., Re, supra, footnote 25, Order Lifting Stay, paras. 14-15.
FN51. David E. Baird, Q.C., "IS YOUR SECURITY REALLY SECURE? The impact on secured creditors of recent developments under the Companies' Creditors Arrangement Act and the proposal provisions of the Bankruptcy and Insolvency Act", Federated Press, Financial Executives Conference, Toronto, December 6 and 7, 1995.