Bash v. Textron Fin. Corp. - Comparing The Effect of Frauds On The Us and Australian Priority Rule For Security Interests

LAWS700206_2022_MAY | Banking and Secured Finance
ABSTRACT
There is confusion over the enforcement of anti-fraud protections for security interests in
personal property. Canada has made contentious rulings in matters involving fraud or bad faith.
While Canada like Australia lacks an equitable remedy, it does have a good faith weapon in the
form of priority rules that it can use to deal with the fraud. In Re: Fair Finance Company case
illustrates that the United States of America and Canada have very different approaches to the
availability of remedies for fraud in their respective jurisdiction. Australian courts have never
faced an issue comparable to that seen in American ones. Still, parallels to the United States and
Canada are hard to miss. Therefore, Australia can choose to either adopt equitable principles into
its legislation or rely on good faith to counteract the fraud.
1
Contents
ABSTRACT.................................................................................................................................... 2
I. INTRODUCTION....................................................................................................................4
II. BACKGROUND................................................................................................................. 6
A. Fraud and good faith............................................................................................................6
B. Concept of Priority Rule for Security Interests................................................................... 9
C. In Re: Fair Finance Company Case................................................................................... 10
III. REGULATORY FRAMEWORKS....................................................................................13
IV. PROBLEMS AND SOLUTIONS..................................................................................... 16
V. CONCLUSION................................................................................................................. 31
BIBLIOGRAPHY......................................................................................................................... 33
2
BASH V. TEXTRON FIN. CORP.1: COMPARING THE EFFECT OF FRAUDS ON THE

US AND AUSTRALIAN PRIORITY RULE FOR SECURITY INTERESTS
I. INTRODUCTION
Australian Personal Property Securities Act 2009 (PPSA) came into force in 2012 repealing the
previous laws regarding creating security interest over property. This security interest follows
priority rules of the Personal Property Securities Act 2009 enumerated in various provisions. It is
general rule of priority that perfected security interest will prevail over unperfected security
interest (section 55 of PPSA). Moreover, Act also concedes that ‘the transferee acquires the
collateral without actual or constructive knowledge that the acquisition constitutes a breach of
the security agreement that provides for the transferor-granted interest’ (section 52, 68-70).
Article 9 was written to clarify the laws governing the formation, enforcement, and primacy of
security interests in tangible personal property, and to standardise the treatment of security
interests.2 While article 9 has made the law of secured transactions more predictable, it has also
given rise to inconsistencies with other statutes and left unanswered the settlement of these
inconsistencies.3 While the U.C.C. did help clarify some things and settle certain disputes, there
are still a lot of things we don't know about how the rules governing business deals are supposed
to be interpreted.4 This can be the case in several situations where it is not clear from the
provisions of the Act that what is the consequence of fraud or bad faith in revolving credit
facilities in Australia because US court in Re: Fair Finance Company case decided that “the
Trustee must prove with clear and definite evidence that the parties knew of, and consented to,
the extinguishment of the old debt and security interest and the creation of a new agreement.”
1
Bash v Textron Financial Corporation (In re Fair Finance Company), [2021] UNITED STATES COURT OF
APPEALS 6th Cir. 2021 WL 4127430
2
Gregory B. Wilcox and Frank B. Harty, 'Relative Priority of a Landlord's Lien and Article 9 Security Interest'
(1985) 35(1) Drake Law Review 27 [28]
3
Ibid
4
bid
3
According to Widdup and Mayne, the security interest resulting from New Zealand law is statutory
rather than legal or equitable.5 They note that the repeal of the laws governing common law and
equitable security interests shows that the PPSA's intention to do so was clear even before the first
edition of Ziegel and Denomme was published.6
Priority conflicts that are not explicitly addressed by the PPSA are resolved in accordance with
common law and equity standards.7 To do this, the nature of the PPSA security interest must be
determined as either legal or equitable.8
The bankruptcy trustee's attempts to have payments from Fair Finance to Textron avoided as
fraudulent transfers under Ohio's Uniform Fraudulent Transfer Act were upheld by the Sixth
Circuit Court of Appeals (OUFTA).9 The Court of Appeals found that the District Court did not
err by rejecting the trustee's bad-faith invalidation claim during summary judgement.10 Because
of its conduct, Textron's perfected interest is not effective against the holder of a judicial lien that
may have been obtained in a hypothetical UCC priority contest.11 As a result, Textron was in
possession of a legitimate lien under OUFTA.12 According to the court, the crucial differences
between typical priority issues and the OUFTA valid-lien test, as well as the structure of the
UCC's priority test, led to its decision.13 The court further ruled that the loan repayments that are
subject to the perfected 2002 security interest are not transfers under OUFTA, and hence cannot
be avoided as fraudulent transfers.14 The court rejected the trustee's argument that the jury made
a mistake in finding that the 2004 amendments did not constitute a novation and instead found
that any error in the jury instruction was harmless. 15 The court did not buy the trustee's new
counterargument.16
5
McCracken, Sheelagh, ‘The Personal Property Security Interest: Identifying Some Essential Attributes’ 146 [162]
<https://search.informit.org/doi/epdf/10.3316/informit.251853056131697>
6
Ibid
7
Roderick J. Wood, 'Supplementing PPSA Priorities: The Use and Abuse of Common Law and Equitable Principles'
(2014) 56 [70] Canadian Business Law Journal 3.
8
Ibid
9
Ibid
10
Ibid
11
Ibid
12
Ibid
13
Ibid
14
Ibid
15
Ibid
16
Ibid
4
But many lawyers and jurists of USA disagreed. This research will investigate this issue.
Therefore, I will demonstrate how fraud affects priority rule for security interests in revolving
credit facilities of Australia and USA. Based on secondary data, during this research, I will
consult journals, books, consultation, policy paper of Australian Attorney General office, ASIC.
During this research, qualitative research, based on secondary data regarding problems of fraud
with priority rules in Australia, Canada and USA.
This research will be explored in five parts. Part II will illustrate briefly concept security interest,
fraud, priority rules and BASH V. TEXTRON FIN. CORP. case, next part will investigate
regulatory framework of security interest, fraud, priority rules in Australia and USA. Most vital
part of the research will be explored in Part IV will make sort out the problems of fraud with
priority rules. Based on discussion, part V will conclude the research.
II. BACKGROUND
A. Fraud and good faith
Evidently, fraud has always been prevalent.17 But the Corporations Act of 2001 and the
Australian Securities and Investments Commission Act of 2001, two pieces of important
legislation in Australia that Australian Securities and Investments Commission (ASIC)
administers, neither contain a definition of fraud.18 Regulator thinks that ‘fraud means an
intentional act by one or more individuals among management, those charged with governance,
employees, or third parties, involving the use of deception to obtain an unjust or illegal
advantage.’19 Fraud is defined by the Australian Competition and Consumer Commission
(ACCC) as dishonestly getting an advantage or creating a loss by deception or other means.20
17
Nolan, Richard, ‘Equitable Security Interests: Their Creation and Priority’ (1995) 3(1) Journal of Financial Crime
65
18
‘Dealing with Fraud: A Regulator’s Perspective’
<https://download.asic.gov.au/media/3446717/speech-to-acfe-10-november-2015.pdf>
19
Ibid
20
Commission, Australian Competition and Consumer, ‘Fraud Prevention’, Australian Competition and Consumer
Commission (Text, 14 August 2014)
<https://www.accc.gov.au/about-us/australian-competition-consumer-commission/governance-accountability/fraud-p
revention>
5
Loss from either internal or external fraud is known as "fraud risk."21 These can be broken down
into two categories:22 a) internal fraud, which refers to losses caused by acts with at least one
internal party and an intent to defraud, misappropriate property, or circumvent regulations, the
law, or company policy (excluding diversity / discrimination events); and b) external fraud,
which refers to losses caused by acts of a third party with an intent to defraud, misappropriate
property, or circumvent the law.23
Section 111 of the PPSA refers reasonable manner but PPSA like UCC of USA does not refer
consequence of fraudulent transfer, transfer with good faith though PPSA refers with knowledge.
So, fraud is inextricably related to good faith. Therefore, this terminology also needs to be
clarified.
‘“Good faith” means honesty in fact and the observance of reasonable commercial standards of
fair dealing.’24
‘(b) Rights of good-faith transferee. A transferee that acts in good faith takes free of the rights
and interests described in subsection (a), even if the secured party fails to comply with this
article or the requirements of any judicial proceeding.’25
The PPSA's meaning of a security interest include common forms of security including
mortgages and charges, as well as retention of title clauses in contracts, leases, and bailments.26
Section 12 of the Personal Property Securities Act 2009 defines security interest - ‘A security
interest means an interest in personal property provided for by a transaction that, in substance,
secures payment or performance of an obligation (without regard to the form of the transaction
or the identity of the person who has title to the property).’27 In USA, the term "Security
21
‘Prudential Practice Guide SPG 223 – Fraud Risk Management’
<https://www.apra.gov.au/sites/default/files/prudential-practice-guide-spg-223-fraud-risk-management-june-2015_0.
pdf>
22
Ibid
23
Ibid
24
SECTION 9-102 (43) of Uniform Commercial Code (USA)
25
SECTION 9-617 of Uniform Commercial Code (USA)
26
‘Guide to Ensuring You Have a Valid Security Interest: Attachment & Perfection’
<https://www.becklegal.com.au/wp-content/uploads/2019/07/Attachment-Perfection.pdf>
27
‘PERSONAL PROPERTY SECURITIES ACT 2009 - SECT 12 Meaning of Security Interest’
<http://classic.austlii.edu.au/au/legis/cth/consol_act/ppsa2009356/s12.html>
6
Interests" refers to the security interests provided under Section 2 of UCC, as well as any other
security interests created or assigned pursuant to the terms of this Agreement to further secure
the Secured Obligations.28 The PPSA takes a pragmatic view of security interests in Canada.
Therefore, the regulation applies to any interest in personal property, regardless of its form or
who holds title to the collateral, that in substance ensures payment or fulfilment of an obligation
(i.e. the secured property).29 It has become clear that the concept of security interest' under PPS
legislation is very broad; however, experience in other jurisdictions with similar personal
property securities (PPS) legislation, such as Canada and New Zealand, suggests that debates
over specific arrangements are likely to continue beyond the lead period and to be tested in the
courts.30 To put it simply, a "Security Interest" is any type of mortgage, charge, pledge, lien, or
other security interest recognised by the laws of any jurisdiction, including but not limited to
anything that is similar to any of the preceding.31 A security interest, as the name suggests, is a
financial stake in a piece of real estate that ensures the payment of a debt or other obligation.32
An illustration of a security interest is when a lender or other secured party acquires a stake in
the borrower's (or grantor's) personal property as security for a loan or other obligation.33
The owner of the security interest has the right to reclaim the personal property if the secured
obligation is not performed (the collateral).34 A security interest cannot be created without the
consent of the grantor and the secured party.35 Through a few extra types of transactions, in
addition to the conventional security interests, a supposed security interest is also generated.36
Under the Personal Property Securities Act 2009 security interests applies to personal property
only but does not concede such interests in real estate property.37
28
‘U.S. Security Interest Definition’, Law Insider <https://www.lawinsider.com/dictionary/us-security-interest>
29
Section 12 of Canadian PPSA, see also Wappett, Craig, ‘The Personal Property Securities Act: Securities Law
Isn’t What It Used to Be!’ <https://law.uq.edu.au/files/23428/PPSA-paper-Craig-Wappett.pdf>
30
‘The Personal Property Security Interest: Identifying Some Essential Attributes’
<https://search.informit.org/doi/epdf/10.3316/informit.251853056131697>
31
32
33
‘Security Interest | Personal Property Securities Register’ <https://www.ppsr.gov.au/glossary/security-interest>
34
Ibid
35
Ibid
36
Ibid
37
Sections 8, 10 of the Personal Property Securities Act 2009
7
B. Concept of Priority Rule for Security Interests
The concept of "priority" is used to determine in what sequence certain parties are entitled to
receive either the assets themselves or the earnings from the sale of those assets.38 A Prior
Security Interest is a first priority security interest in the UCC Collateral and the Pledged
Collateral that is valid and enforceable under the Uniform Commercial Code, subject only to
Liens for taxes that are not yet due and payable to the extent that such prospective tax payments
are given priority by statute or Purchase Money Security Interests as permitted hereunder.39
Priority in payment is given to a secured party whose claim has the highest priority in the
collateral.40 All other secured creditors will be reimbursed only once the first priority secured
creditor has been repaid in full.41 After the top creditor is paid, the next in line gets their share,
and so on.42 If the debtor defaults on payments, the secured party's claim to payment will be
prioritised.43 If the debtor goes into default, the secured party can take possession of the
collateral.44 This means that party can liquidate the security, reclaim the funds, and use them to
settle the loan.45 However, things become more difficult when the debtor has numerous
creditors.46 When several parties claim an interest in the same asset, the situation becomes
tangled.47 Priority problems become more important when the earnings of enforcing a security
are insufficient to pay all competing secured creditors in full and the corporation has no other
assets to employ to satisfy the debts owed to the creditors.48 As such, it pays off to be a creditor
with a higher priority.49
38
‘Priority (Security Interest) - Explained’, The Business Professor, LLC (12 August 2022)
<https://thebusinessprofessor.com/122296-law-transactions-amp-risk-management-commercial-law-contract-payme
nts-security-interests-amp-bankruptcy/what-is-priority-of-a-security-interest>
39
40
<https://thebusinessprofessor.com/122296-law-transactions-amp-risk-management-commercial-law-contract-payme
nts-security-interests-amp-bankruptcy/what-is-priority-of-a-security-interest>
41
Ibid
42
Ibid
43
Ibid
44
Ibid
45
Ibid
46
Ibid
47
Ibid
48
‘Priority of Security—Overview - Lexis®PSL, Practical Guidance for Lawy...’
<https://www.lexisnexis.com/uk/lexispsl/bankingandfinance/document/391289/55KB-65S1-F185-X251-00000-00/P
riority_of_security_overview>
49
Ibid
8
C. In Re: Fair Finance Company Case50
Issue of the case is can payments made in conjunction with a perfected security interest in Ohio
be considered fraudulent transfers if the party receiving the payments later acts in bad faith?51
In 2002, Fair Finance Company and Textron Financial Corporation and another bank engaged
into a revolving credit deal for a total of $22 million.52 With this arrangement in place, Textron
has a perfected security interest in all of Fair Finance's assets.53 About the same time, a new set
of proprietors (who were later convicted of fraud) bought Fair Finance and ran it into the ground
by exploiting it to further a Ponzi scheme.54 Concerns regarding Fair Finance were first raised
internally at Textron in 2003. Textron and Fair Finance renewed and extended the revolver when
it was about to expire in 2004, but they included safeguards to preserve Textron's interests.55
However, the second bank pulled out, and the remaining parties negotiated a number of changes,
including a reduction of the revolver ceiling to $17.5 million.56 Textron was paid in full at the
conclusion of the loan transaction in 2007.57 Fair Finance, as was to be expected, filed for
involuntary bankruptcy in 2010.58 Additionally, its owners were ultimately accused and
convicted of crimes related to the Ponzi scheme by the federal authorities.59 Under Ohio's
Uniform Fraudulent Transfer Act, Ohio Rev. Code 1336.01 et seq. ("OUFTA"), the bankruptcy
trustee is attempting to avoid payments from Fair Finance to Textron as fraudulent transfers.60
The trustee's bid to reverse the transactions was shot down by the district court.61 The trustee
contends on appeal that the district court erred when it denied its motion for summary judgement
and again when it gave the jury improper instructions during the trial of a related claim.62 United
States Court of Appeals reaffirm.63
50
51
Ibid
52
Ibid
53
Ibid
54
Ibid
55
Ibid
56
Ibid
57
Ibid
58
Ibid
59
Ibid
60
Ibid
61
Ibid
62
Ibid
63
Ibid
9
By reading UFTA in light of the facts before it, the court arrived to the conclusion that Fair
Finance's receipt of loan repayments due to a "legitimate lien" were not "transfers" of estate
assets that may be avoided.64 This decision was based on the court's interpretation of UFTA.65
Because a "valid lien," according to UFTA's definition, is one that is "effective against the holder
of a judicial lien subsequently obtained," the inquiry of the court was centred on determining
whether or not Textron held such a lien in accordance with the combined terms of UFTA and the
UCC. 66 In accordance with UFTA, money paid would not be regarded an "asset" since it would
be subject to a "valid lien" in the event that Textron's 2002 security interest was in fact
effective.67 Since "assets" are the only kind of property that can be transferred in accordance with
UFTA, the payments in question would not qualify as transfers and it would be impossible to
recuperate them as fraudulent expenditures.68
According to the Court, the answer to this question can be found in the UCC, which establishes
priority rules for ranking competing security interests and imposes an overarching duty of good
faith.69 These rules include a rule that dictates whether a security interest take priority over a
competing lien creditor's claim to collateral and a rule that dictates whether a security interest
take priority over a competing lien creditor's claim to collateral.70 The interest of a lien creditor
will be given the same weight as any other perfected interest, which means that it will be given
the same weight as any other interest in the order of priority established by the UCC.71 If a
judgement lien is filed later than Textron's perfected claim, the judgement lien will take second
position in the order of precedence.72 The trustee argued that the judgement lien would take
precedent over the security interest in the event that Textron behaved in bad faith after it had
64
‘Bash v. Textron Financial Corporation (In Re Fair Finance Company), 2021 WL 4127430 (6th Cir. September 10,
2021) – California Lawyers Association’
<https://calawyers.org/business-law/bash-v-textron-financial-corporation-in-re-fair-finance-company-2021-wl-4127
430-6th-cir-september-10-2021/>
See also Bash v Textron Financial Corporation (In re Fair Finance Company), [2021] UNITED STATES COURT
OF APPEALS 6th Cir. 2021 WL 4127430
65
Ibid
66
Ibid
67
Ibid
68
Ibid
69
Ibid
70
Ibid
71
Ibid
72
Ibid
10
perfected its security interest.73 Given that the UCC does impose an "obligation of good faith"
and that the parties have presumed, for the purposes of this appellate argument, that Textron
behaved unlawfully by purposefully propping up the Ponzi scheme, the Court must evaluate
whether or not this creates a difference in priority.74 The court came to the conclusion that in the
hypothetical UCC priority contest, the question wasn't whether or not Textron was a bad actor;
rather, the question was whether or not Textron's activities rendered its perfected claim
"ineffective against the holder of a judicial lien afterwards obtained." 75
The judge ruled that this question could not be answered in the affirmative.76 The reasoning for
the decision made by the court was that the result was inevitable due to the unambiguous nature
of the priority test included under the UCC, which establishes the preferred order of competing
creditors.77 The result does not indicate whether the senior lien is legitimate or not; rather, it
determines whether the priorities should be reshuffled with the junior lien leapfrogging over the
senior lien.78 In other words, the result does not determine whether the senior lien is invalid or
not.79 As a consequence of this, a reordering based on bad faith will only occur as a consequence
of activity conducted by senior creditors directed against junior creditors.80 The court determined
that a priority dispute could not arise between Textron and the trustee because the UCC requires
that there be two actual competing interests in order for there to be such a dispute.81 The UCC
reordering cannot take place due to the fact that the senior lienholder, Textron, is unable to have
a relationship with or direct its bad faith toward a non-existent corporation.82 This is the basis of
the UFTA analysis, rather than two competing actual creditors. 83 Therefore, there is no room for
subordination in this world.84 As a result, Textron's lien continues to hold priority, there was no
transfer of ownership, and the trustee was unsuccessful.85
73
Ibid
74
Ibid
75
Ibid
76
Ibid
77
Ibid
78
Ibid
79
Ibid
80
Ibid
81
Ibid
82
Ibid
83
Ibid
84
Ibid
85
Ibid
11
III. REGULATORY FRAMEWORKS
Commercial law consists essentially of accommodating the rules, usages, and documents
developed by the business world, thereby removing obstacles to the lawful growth of
businesses.86 This is accomplished not by impromptu solutions to specific issues, but rather by
formulating generalizable ideas inside a robust theoretical framework.87 Principles of good faith,
agreement validity, trade use as a basis for contractual rights, and a reasonable balance between
vested rights and the interests of third parties are at the heart of commercial law.88
Priority is established under the PPSA regime based on the concepts of attachment and
perfection, as well as the time of filing of financial statements.89 To better safeguard their
security interests in personal property, secured parties now have access to a new framework
thanks to the Personal Property Securities Act (2009) Cth (PPSA).90 In most cases, this is
accomplished by filing a notice of the security interest with the Personal Property Securities
Register.91 However, perfection of a security interest does not always necessitate registration on
the PPSR; rather, perfection may be achieved by ownership or control.92
The PPS Act specifies the default norms of priority for security interests, which are as follows:93
An interest that is fully perfected takes precedence over one that is not.94 In the event of several
perfected interests, the earliest registration time will take precedence.95
86
Buckwold, Tamara M, ‘The Conceptual Structure of Commercial Law’ (2020) 57(4) Alberta Law Review 899
<https://www.canlii.org/en/commentary/doc/2020CanLIIDocs2030?zoupio-debug#!fragment//(hash:(chunk:(anchor
Text:''),notesQuery:'',scrollChunk:!n,searchQuery:'',searchSortBy:RELEVANCE,tab:search))> See also Ewan
McKendrick, ed, Goode on Commercial Law, 4th ed (London, UK: LexisNexis, 2009).
87
Ibid
88
Ibid
89
Waldman, Adam, ‘Resolving Priority Competitions Between PPSA Security Interests and Non-PPS Interests’
(2021) 44 39
<https://www.unswlawjournal.unsw.edu.au/wp-content/uploads/2021/06/Issue-442-PDF-12-Waldman.pdf>
90
McKnight, Jill, ‘How to Perfect a Security Interest by Control’, LegalVision (7 October 2015)
<https://legalvision.com.au/how-to-perfect-a-security-interest-by-control/>
91
Ibid
92
Ibid
93
‘Which Security Interest Has Priority? | Personal Property Securities Register’
<https://www.ppsr.gov.au/managing-and-maintaining/enforce-your-registration/which-security-interest-has-priority>
94
Ibid
95
Ibid
12
If more than one unperfected interest exists, the earliest attachment[?] time will take precedence
over the latest.96
In the event of a conflict between two perfected security interests, the PMSI[?] will always take
precedence.97 To find out if your registration is a PMSI, check out Is My Registration a PMS if
you're interested in learning more.98
A perfection of a security interest in collateral gives that interest priority over an unperfection of
an interest in the same collateral.99 This holds true no matter when the security interest is
attached.100 Priority of Lien Creditors over Secured Party Priority of Lien Creditors over Secured
Party occurs when a person becomes a lien creditor prior to the perfection of a security interest
by a secured party. 101 In many cases, if the security interest is not perfected, the buyer who offers
value and takes possession of the collateral will be able to do so without being encumbered by
the security interest.102 It's important to keep in mind that the purchase must be unaware of the
security interest and the assigned value for the interest to be perfected.103
The priority rules. Under the UCC, “conflicting perfected security interests . . . rank according to
priority in time of … perfection.” Ohio Rev. Code § 1309.322(A)(1). “A perfected security
interest . . . has priority over a conflicting unperfected security interest . . . .” Id. §
1309.322(A)(2). And between two unperfected interests, the “first security interest . . . to attach .
. . has priority.” Id. § 1309.322(A)(3).104
Rights and duties to be exercised honestly and in a commercially reasonable manner
(1) All rights, duties and obligations that arise under this Chapter must be exercised or
discharged:
(a) honestly; and
(b) in a commercially reasonable manner.
96
Ibid
97
Ibid
98
Ibid
99
Ibid
100
Ibid
101
Ibid
102
Ibid
103
Ibid
104
‘Bash v. Textron Financial Corporation (In Re Fair Finance Company), 2021 WL 4127430 (6th Cir. September
10, 2021) Page 6
13
(2) A person does not act dishonestly merely because the person acts with actual
knowledge of the interest of some other person.105
In Sections 20(b), 30(3), and 30(6), removing the "without knowledge" requirement would not
encourage dishonest behaviour.106 As a general rule, all rights arising under the Act must be
exercised in good faith and in a commercially reasonable manner, which prevents a transferee
who acquires their interest in bad faith with knowledge of a security interest from asserting
priority.107
Without a contrary provision, if a registration lapses or is discharged due to mistake or fraud, a

previously perfected security interest will no longer be valid and the priority that accrued as of
the registration date will be lost.108 The PPSA, however, includes a rule that shields the secured
party from some of the potential repercussions of lapse or discharge.109 Priority of the security
interest is reinstated as against a security interest that was subordinate at the date of lapse or
discharge if the secured party re-registers within 30 days, except to the extent of advances made
by the holder of the subordinate interest prior to the re-registration being effected.110
USE OR DISPOSITION OF COLLATERAL PERMISSIBLE.

(a) A security interest is not invalid or fraudulent against creditors solely because:
(1) the debtor has the right or ability to:
(A) use, commingle, or dispose of all or part of the collateral, including returned or repossessed
goods;
(B) collect, compromise, enforce, or otherwise deal with collateral;
(C) accept the return of collateral or make repossessions; or
105
SECT 111 of Australian PERSONAL PROPERTY SECURITIES ACT 2009
106
Institute, Alberta Law Reform, ‘Personal Property Security Law’
<https://www.canlii.org/en/commentary/doc/2021CanLIIDocs2353?zoupio-debug#!fragment/zoupio-_Tocpdf_bk_1/
(hash:(chunk:(anchorText:zoupio-_Tocpdf_bk_1),notesQuery:'',scrollChunk:!n,searchQuery:'',searchSortBy:RELEV
ANCE,tab:search))>
See also
<https://www.canlii.org/en/commentary/doc/2020CanLIIDocs3241?zoupio-debug#!fragment/zoupio-_Tocpdf_bk_1/
(hash:(chunk:(anchorText:zoupio-_Tocpdf_bk_1),notesQuery:'',scrollChunk:!n,searchQuery:'',searchSortBy:RELEV
ANCE,tab:search))>
107
Ibid
108
Ibid
109
Ibid
110
Ibid
14
(D) use, commingle, or dispose of proceeds; or

(2) the secured party fails to require the debtor to account for proceeds or replace collateral. (b)
This section does not relax the requirements of possession if attachment, perfection, or
enforcement of a security interest depends upon possession of the collateral by the secured
party111
IV. PROBLEMS AND SOLUTIONS
It is commonly held that all necessary priority provisions are included in the PPSA.112 It is
critical that you fully grasp the meaning of this.113 There were several questions about the priority
of the specific security device that were left unanswered by the earlier Acts.114 There is a lot of
detail in the rules for priority.115 If the Act does not specify a method for determining priority
amongst security interests, the residual or default priority rule will be used to do so.116 When a
priority issue arises and no other rule in the law applies to it, the default rule takes effect as a
kind of catch-all provision.117 Therefore, all priority issues between security interests subject to
the Act will be resolved in accordance with the Act's rules.118 Since the application of equitable
principles cannot occur simultaneously with the operation of the Act, there is no opportunity for
the application of equitable principles to overrule the application of the application of statutory
priority.119 Commentators in Canada are in agreement that common law and equity cannot be
used to change legislative priorities, even when doing so would prevent an injustice or provide a
windfall.120 In KBA Canada, Inc v Supreme Graphics Limited,121 a case decided by the British
111
Section 9-205 of Uniform Commercial Code (USA)
112
Roderick J. Wood, 'Supplementing PPSA Priorities: The Use and Abuse of Common Law and Equitable
Principles' (2014) 56 [34] Canadian Business Law Journal 31.
113
Ibid
114
Ibid
115
Widdup, Linda, ‘The Personal Property Securities Act 2009 (Cth) - Where Is the Fraud Exception?’ 22 [26-27]
<https://search.informit.org/doi/epdf/10.3316/ielapa.982142358779658> See also
http://www.nzlii.org/nz/journals/CanterLawRw/2016/3.pdf and
https://espace.curtin.edu.au/bitstream/handle/20.500.11937/56577/255767.pdf?sequence=2
116
Ibid
117
Ibid
118
Ibid
119
Ibid
120
Ibid
121
KBA Canada, Inc v Supreme Graphics Limited [2014] BCCA 117. Retrieve from Widdup, Linda, ‘The Personal
Property Securities Act 2009 (Cth) - Where Is the Fraud Exception?’ 22 [26-27]
15
Columbia Court of Appeal in 2014, a registration was mistakenly removed from the register.122
One creditor was disadvantaged while another benefited as a result of the Act's priority
criteria.123 It was argued in court that the additional provision allowed the court to use equitable
principles to reverse priorities in order to shield the plaintiff from an honest mistake when the
other parties were not harmed.124 The Court of Appeal did not accept that there was no bias
present.125 According to the Court, the supplemental provision cannot be read as establishing a
different procedure for ranking securities interests.126 The Court of Appeal went on to say that as
the [Act] deals with priorities in such detail, it is hard to imagine a situation in which principles
of common law, equity, or the law merchant will be applicable to a priorities dispute. According
to the Court's analysis, the supplemental provision provides no basis for favouring equitable
principles over the priority standards established by the Act. Mistakes in registration, like the one
in KBA Canada, might cost an entity its priority and give another an unfair "statutory
advantage." This outcome is consistent with the goals of PPS law since it promotes commercial
certainty by making the register trustworthy to outside parties. The Acts require that a flaw in a
registration will render the registration ineffective only if it is seriously misleading, striking a
balance between the interests of innocent third parties searching the register and a registrant who
made an error.127 This means that not all mistakes will cause a registration to be invalid and cause
a loss of priority. 128
We can see similar situation In In re Fair Finance Company case129 because court has to strictly
follow the priority rule. But Courts in the United States and Canada have decided that a secured
party that knowingly misleads another will not be entitled to take advantage of a priority rule in
122
123
Ibid
124
Ibid
125
Ibid
126
Ibid
127
Ibid
128
Ibid
129
16
its favour, even if the secured party has actual knowledge of the facts.130 This comes from the
fact that parties to a security agreement are required by law to behave in good faith.131 As such, it
has been used to signify "actual honesty." In most cases, you need to establish that the defendant
acted in bad faith by intentionally misleading the other party or failing to disclose material
information.132
Some courts attempted to include a knowledge requirement in the priority rule.133 It was decided
that it is fraud to purchase an interest while being aware of an already existing, unregistered
interest.134 The Supreme Court of Canada concurred with this evaluation of the Ontario land titles
system in Dominion Stores Ltd. v. United Trust Co.135 Under the Ontario Act, but not under the
majority of provincial statutes, knowledge of an unregistered interest should not be construed as
fraud.136 This difference was used by the court to determine that actual notice continued to
apply.137 In decisions regarding the PPSA, certain Ontario courts have applied this line of
reasoning.138 Even though it was the first to register or perfect its interest, a later perfected
secured party that acquired its interest knowing there was an unperfected security interest does
not gain priority as a result because the legislative priority provision did not expressly state that
such acquisition was not to be attributed as constructive or equitable fraud.139
Later judgements in Ontario140, Alberta141, and New Brunswick142 all disregarded this
perspective.143 They decided that the PPSA already contains all the rules necessary to resolve
competitions between secured parties, and that the Act should not be interpreted to impose any
further requirements as to knowledge.144 The PPSA's supplemental provision helped strengthen
130
131
Ibid
132
Ibid
133
Ibid
134
Ibid
135
1976 CanLII 33 (SCC), [1977] 2 SCR 915, Ibid
136
Ibid
137
Ibid
138
Ibid
139
Ibid
140
B.M.P. & Daughters Investment Corp. v. 941242 Ontario Ltd. (1992), II O.R. (3d) 81 (Ont. Gen. Div.).
141
Canadian Imperial Bank of Commerce v. A.K. Construction (1988) Ltd., [1995] 8 W.W.R. 120 (Alta. Q.B.).
142
Hongkong Bank of Canada v. H.E. Carson & Sons Ltd. (1999), 217 N.B.R. (2d) 73 (N.B. Q.B.), affirmed 2000
CarswellNB 268 (N.B. C.A.).
143
Principles' (2014) 56 [47-48] Canadian Business Law Journal 3.
144
Ibid
17
this. To the extent that they are not in conflict with the Act, common law and equitable principles
will continue to apply.145 Adding the notion of knowing would be at odds with the standard
priority rule, which assigns precedence to interests in accordance with the dates on which they
were first registered or perfected.146 It states that someone is not acting in bad faith if they take
action while keeping the interests of others in mind. Priority rules can work in a secured party's
favour if the other party is unaware of the rule's existence, but courts in the United States and
Canada have ruled that a secured party that will fully misleads another will not be entitled to take
advantage of the rule.147 This comes from the fact that parties to a security agreement are
required by law to behave in good faith.148 The term "honesty" has been applied to this
situation.149 In most cases, you need to establish that the defendant acted in bad faith by
intentionally misleading the other party or failing to disclose material information.150 The case
Carson Restaurants International Ltd. v. A-1 United Restaurant Supply Ltd. in Canada151
exemplified this notion. The shareholder loan was secured by a security interest provided by the
debtor corporation to the only director of the corporation. 152 For this deal, the director did not file
a finance declaration.153 Subsequently, the supplier registered a security interest in the products it
had sold to the company, but a mistake rendered the registration null and void.154 Even though
the director had assured the supplier that the corporation would fulfil its responsibility to pay, the
corporation ultimately failed to do so.155 After conducting a registry check, the director learned
that the vendor's security interest was not yet finalised.156 Based on the PPSA's ordinary first to
register or perfect priority rule, he filed a security interest registration and asserted priority over
the supplier.157 The director was found to have acted in bad faith by the court because he had
deliberately delayed payment to the supplier.158
145
Ibid
146
Ibid
147
Ibid
148
Ibid
149
Ibid
150
Ibid
151
(1988), [19891 1 W.W.R. 266 (Sask. Q.B.).
152
Principles' (2014) 56 [47-48] Canadian Business Law Journal 3.
153
Ibid
154
Ibid
155
Ibid
156
Ibid
157
Ibid
158
Ibid
18
In addition, the trustee claimed that the 2004 amendments to the LOC constituted a novation, or
new agreement that superseded the prior one (and could invalidate its lien).159 The trustee
appealed the verdict, claiming the jury was given bad instructions when they found there was no
novation after a trial in district court.160 For the purposes of this case, the jury was instructed that
a novation occurs when one party knowingly and intentionally cancels another's contractual
obligations in favour of a new agreement.161 The instruction also indicated that a renewal (rather
than a novation) should be presumed and that there should be "clear and definite" proof that the
parties intended to extinguish the previous obligation and create a new one.162 The trustee
claimed that the jury's renewal assumption instruction was improper.163 The Sixth Circuit did not
rule on whether Ohio's renewal assumption was still in effect but found that giving an instruction
on the issue was harmless deviation from the law.164 This is so because the essential need of clear
and definite evidence to prove an intent to produce novation was not altered by language about
the assumption, and the substance of the instruction correctly said as much. 165
The parties should make clear in the amended and restated security agreement that the parties do
not intend for the agreement to be a novation of the security interest and liens granted in the
collateral under the original security agreement. 166 The court's decision in this case could have
been different with this language.167
Analysis of In re Fair Finance Company
The Sixth Circuit's reasoning for determining that this was a matter of fact for trial was flimsy at
best. At the outset, the papers from 2004 stated that they were "the entire agreement of [the]
159
cspataro, ‘Fraudulent Transfers and Liens’ (22 September 2021)
<https://www.dlgfirm.com/blog/2021/09/fraudulent-transfers-and-liens/>
160
Ibid
161
Ibid
162
Ibid
163
Ibid
164
Ibid
165
Ibid
166
‘In Re: Fair Finance Company: Amended and Restated Loan & Security Agreement Was a Novation’, Practical
Law <http://uk.practicallaw.thomsonreuters.com/w-004-0682?transitionType=Default&contextData=(sc.Default)>
167
Ibid
19
parties relative to subject matter hereof."168 This provision is a standard measure to prevent the
agreements from being undermined by parol evidence, and as such, it cannot be used to prove
that the 2002 documents have been terminated.169 Next, instead of using the 2002 paperwork as a
basis, the parties involved created new promissory notes and personal guarantees for 2004.170
However, this appears to be an instance of careful, albeit redundant, documentation that was
undertaken to forestall any ambiguities that might have arisen regarding the note's and
guarantees' continued validity after 2002.171 Third, the court speculated that the fact that the 2004
documents were signed on the same day that the 2002 ones lapsed might be evidence of
novation.172 Though this seems to lend more credence to the idea that the parties intended to
amend rather than novate, rather than simply letting the 2002 documents expire as per their
terms.173
The Sixth Circuit also found fault with Textron's attorneys for, in effect, not wearing a belt and
suspenders. The district court's decision below relied in part on a Florida case, In re TOUSA,
Inc., 2011 WL 1627129 (S.D. Fla. March 4, 2011), in which the parties' intent to maintain the
lien created by earlier documents was recited in later documents.174 However, the Sixth Circuit
noted that there was no such clause in the 2004 documents at issue.175 It's concerning that the
court misunderstood the clauses that were carefully included in the documentation, but found
fault with the absence of a single clause that, granted, would have been helpful to include.176 To
get back to basics, there's a reason why avoidance-of-doubt clauses like TOUSA's are often
referred to as "belt and suspenders": just like a belt, the extra clause is there to make sure that the
pants stay up even if the primary clause fails to do so.177
168
Ibid
169
‘Spotlight on In Re Fair Finance Co., 834 F.3d 651 (6th Cir. 2016)’, Business Law Today from ABA (15 January
2018) <https://businesslawtoday.org/2018/01/spotlight-on-in-re-fair-finance-co-834-f-3d-651-6th-cir-2016/>
170
Ibid
171
Ibid
172
Ibid
173
Ibid
174
Ibid
175
Ibid
176
Ibid
177
Ibid
20
Novation is used to replace one party with another.178 An obligee may consent to a novation in
which the original obligor is released and a delegate agrees to perform in place of the original
obligor.179 Textron, which had access to competent legal counsel and thus would have understood
the significance of maintaining a valid security interest, had no apparent reason to intend to
novate rather than amend in this bilateral context.180 Further, as a matter of sound jurisprudence,
the distinction between novation and amendment should probably be ignored altogether on facts
like these; after all, even if it is conceivable that a moment of time elapsed between the discharge
of one security interest and the attachment of the second, that is no reason for judicially
triggering momentous substantive consequences.181 Other viable causes of action, such as civil
conspiracy and equitable subordination, would have been much more appropriate vehicles for
imposing losses on Textron in this case.182 The Sixth Circuit may have wanted to prevent an
arguably tainted lender from propping up a Ponzi scheme and then walking away from all the
losses.183 This Sixth Circuit precedent will cast an unnecessary shadow over future perfectly
sound transactions, even if the district court on remand maintains its initial finding that the
parties intended to amend rather than novate.184
The decision from the Sixth Circuit contains language that cannot be disregarded.185 The lower
court should be cautious before disregarding language indicating that the parties intended to
"replace and extinguish" the 2002 Agreement when the Sixth Circuit cites documents
incorporated in the Trustee's first amended complaint and indicates that there is "extensive
evidence" to support the Trustee's contention.186 Of course, the Sixth Circuit's comment was
made in the context of a Rule 12 (b) (6) motion to dismiss.187 Still, the "extensive evidence"
remained. 188 Textron has not argued that the 2004 Agreement nullifies the valid 2002 lien; rather,
178
Ibid
179
Ibid
180
Ibid
181
Ibid
182
Ibid
183
Ibid
184
Ibid
185
‘Trustee Survives Judgment in Fraudulent-Conveyance Action Based on Novation Argument’, Womble Bond
Dickinson
<https://www.womblebonddickinson.com/us/insights/articles-and-briefings/trustee-survives-judgment-fraudulent-co
nveyance-action-based>
186
Ibid
187
Ibid
188
Ibid
21
it has merely brought to the court's attention other evidence to that effect.189 The jury must
decide if the additional evidence presented is more convincing than the "extensive evidence"
identified by the Sixth Circuit.190
The bankruptcy court seems to have placed too much weight on the attorney's opinion letter that
the amended and restated credit agreement did not affect the validity of the liens.191 Borrower's
attorney's opinion letter, which was included in the loan documents, is not evidence of the
parties' agreement or intent. Neither party signed it explicitly.192
The Sixth Circuit's reliance on ambiguous language to infer novation intent raises serious
concerns.193 The Sixth Circuit's cited language can be found in nearly all rewritten contracts.194
Any such conclusion would require lawyers to start over when drafting new versions of amended
and restated contracts.195 These rulings make it abundantly clear that all agreements undergoing
amendment or restatement, as well as forbearance agreements, must contain a provision stating
that the parties agree that the amendment or restatement is not a novation and that all pre-existing
security interests remain in full force and effect. 196
Some other cases regarding good faith may extend the hands of solutions. A number of cases in
this regard will be discussed below. Cases will highlight that good faith and equitable principle
as an instrument can solve the problem what has been raised in above case.
A. The Bank of Nova Scotia v Royal Bank of Canada197
189
Ibid
190
Ibid
191
Ibid
192
Ibid
193
Ibid
194
Ibid
195
Ibid
196
Ibid
197
Te Bank of Nova Scotia v Royal Bank of Canada (1998) 14 PPSAC (2d) 10 (British Columbia Supreme Court).
Quoted from Widdup, Linda, ‘The Personal Property Securities Act 2009 (Cth) - Where Is the Fraud Exception?’ 22
[37-38] <https://search.informit.org/doi/epdf/10.3316/ielapa.982142358779658> See also
22
Royal Bank of Canada has completed its perfection of a security interest in Mr. Le's truck.198
Royal had no idea that Le had sold his truck to Mr. Burd, who had gotten a loan from the Bank
of Nova Scotia (BNS).199 Royal's perfected security interest in the truck survives the transfer to
Mr. Burd in accordance with the Act.200 BNS ran a search for the truck in question, but because
the serial number was entered incorrectly, Royal's security interest was not revealed.201 After
financing Burd's truck purchase, BNS also completed a security interest in the vehicle for
itself.202 The completed security interest held by Royal was later uncovered by BNS. The priority
rules provide that Royal would have priority over BNS because Royal was the first to establish
its security interest.203 Because of Le's default on the debt, Royal went looking for the vehicle in
204
an attempt to repossess it, but he never found it. The security interest held by BNS was
uncovered through a search of the register.205
According to the ruling, BNS did not follow the law in good faith. BNS acted while in
conversations with Royal about settling the case without seizing the truck, notwithstanding the
Act's statement that a person does not act in bad faith simply because the person acts with
awareness of the interest of another person.206 The evident conclusion from the discussions
between the Royal and BNS account managers was that Royal would not detain the vehicle
while waiting to hear from BNS. 207 Following the precedent set in Carson, the Court concluded
that BNS had improperly utilised the Act to defeat Royal's claim and that the integrity of the
system must be sacrificed to avoid an unjust outcome. 208
B. Strathcona Brewing Co v Eldee Investment Corp209
198
199
Ibid
200
Ibid
201
Ibid
202
Ibid
203
Ibid
204
Ibid
205
Ibid
206
Ibid
207
Ibid
208
Ibid
209
Strathcona Brewing Co v Eldee Investment Corp (1994) 17 Alta LR (3d) 405. Widdup, Linda, ‘The Personal
Property Securities Act 2009 (Cth) - Where Is the Fraud Exception?’ 22 [34-35]
23
Strathcona Brewing Co.'s assets are now subject to a perfected security interest held by Eldee
Investment Corp. Later on, Mr. and Mrs. Chappell agreed to lend Strathcona further money in
exchange for a security interest in the company's assets.210 They wired money to their attorney
with the stipulation that Eldee's security interest be released. Since this lawyer also represented
Eldee in the Strathcona transaction, he or she was able to cancel Eldee's registration without
informing or obtaining permission from Eldee. 211 As a result, Eldee's security interest lapsed.212
As a result of Strathcona's insolvency, the Chappells claimed priority over the company's assets
on the grounds that their perfected security interest was superior to Eldee's unperfected security
interest.213 Eldee claimed that the Chappells should have known that Eldee had a prior security
interest when they took their own security interest and hence its security interest should be
reinstated with its original priority position even though it was no longer perfected.214 The Court
acknowledged that the law makes it clear that an individual's awareness of the interests of
another does not constitute a violation of the good faith requirement. 215 There was no proof that
the Chappells behaved in bad faith, so subordinating their security interest and reinstating Eldee's
priority position was not necessary despite the solicitor's negligence causing Eldee's loss.216
Unlike in the Carson case, the Chappells here did not wilfully deceive Eldee, the rival secured
party.217
C. Furmanek v Community Futures Development Corp of Howe Sound218
210
211
Ibid
212
Ibid
213
Ibid
214
Ibid
215
Ibid
216
Ibid
217
Ibid
218
Furmanek v. Community Futures Development Corp. of Howe Sound, (1998) 110 B.C.A.C. 212 (CA)’, vLex
<https://ca.vlex.com/vid/furmanek-v-com-futures-681760237>
24
Both the plaintiff and the defendant in this case were creditors of the defendant. 219 They were all
holders of a registered security interest in the assets of the corporation. The firm was late in
fulfilling its obligations to both parties. 220 It was at this time that the plaintiff made their attempt
to seize the goods.221 The debtor's security was realised by a receiver appointed by the defendant,
but nobody bothered to figure out whose interests were more important.222 A judge in chambers,
applying rule 65, ranked the plaintiff's security interest below that of the defendant.223 A motion
for reconsideration was filed by the plaintiff.224 Even though Development registered before
plaintiff Furmanek, the company made a mistake by not including the purchaser's goods in its
financing statement.225 When the buyer fell behind on its payments, a dispute emerged between
the seller and Development over who had first dibs on the goods in question.226
According to Furmanek's interpretation of the Personal Property Security Act (PPSA), a secured
party cannot be considered to have completed its security interest (i.e., to have priority as against
Furmanek's valid registration) unless and until it complies with all applicable registration rules.227
The judgement reached by the Court took into account factors beyond simple fairness or
unfairness. As for the specifics, the Court ruled as follows: 228
a) generally speaking, registration of a security interest with knowledge of a prior unregistered
security interest will not, in and of itself, constitute bad faith or operate as an estoppel against the
registering party (reaffirming the third principle referred to above); 229
b) Nonetheless, "beyond mere knowledge of the fact that [Development] was asserting a prior
interest," as the court put it, the facts in this case went "far beyond that." 230
219
Ibid
220
Ibid
221
Ibid
222
Ibid
223
Ibid
224
‘Furmanek v. Community Futures Development Corp. of Howe Sound, (1998) 110 B.C.A.C. 212 (CA)’, vLex
<https://ca.vlex.com/vid/furmanek-v-com-futures-681760237>
225
Darcy L. MacPherson and Edward D. Brown, 'Fraud and Knowledge of a Pre-Existing Security Interest under the
Personal Property Security Act: Guidance from Other Jurisdictions for Manitoba Courts and Practitioners' (2011)
35(1) Manitoba Law Journal 201 [209]
226
Ibid
227
Ibid
228
Ibid
229
Ibid
230
Ibid
25
c) Under these circumstances, the use of equitable principles may be used to decide PPSA
priorities. 231
d) The court ruled that the seller's security interest in the buyer's inventory was appropriately
subordinated to Development's interest because the seller had acted unfairly. 232 The Court's
reasoning implies that the equities wouldn't have favoured Development if the vendor hadn't
known about Development's prior security interest (or hadn't led Development to assume it
would have first priority position). 233
e) If an innocent third party had been involved, Development would not have been shielded
against a claim by the vendor due to the vendor's knowledge and unfair behaviour. 234 If the
Vendor had assigned its debt claim and security interest to a legitimate assignee, the assignee
would almost probably have priority over Development.235
When one secured creditor has intentionally misled another secured creditor "down the garden
path" through fraud or similar means, the statutory priority scheme will be disregarded to foil the
fraudulent intent of the misleading creditor. 236 This is true even if both creditors knew of the
existence of the security interest.237 Courts will not let a creditor to operate in bad faith if they
determine that the creditor's actions led another individual to become a debtor. 238
D. Canada v. Canada North Group Inc.
In Canada v. Canada North Group Inc., 2019 ABCA 314 (Canada North), the Alberta Court of
Appeal ruled, by a majority, that priming charges awarded in a CCAA Initial Order can have
priority over the Crown's deemed trust for unremitted source deductions.239
231
Ibid
232
Ibid
233
Ibid
234
Ibid
235
Ibid
236
Ibid
237
Ibid
238
Ibid
239
Mosselaer, Randal Van de and Emily Paplawski, ‘Deemed Trusts and Priming Charges: The Alberta Court of
Appeal Affirms the Priority of CCAA Charges over Crown Deemed Trusts in Canada North Group’, Osler, Hoskin
& Harcourt LLP
26
Almost 12 years ago, in Minister of National Revenue v. Temple City Housing Inc., 2008 ABCA
1 (Temple City), the Alberta Court of Appeal rejected the Crown's plea for leave to appeal the
decision of the Honourable Justice Romaine on the same subject.240 Thus, for the first time in
Canada, an appellate court has expressed an opinion on whether priming charges granted by a
court under the CCAA can have priority over statutory deemed trusts for unremitted source
deductions which arise pursuant to various federal statutes (including the Income Tax Act, RSC
1985, c 1 (5th Supp.) (ITA), the Employment Insurance Act, SC 1996, c 23, and the Canada
Pension Plan, RSC 1985, c C-8 (together, the Fiscal Statute.241
Consequences of the ruling for the capacity of insolvent corporations to reorganise under the
CCAA are significant. Two judges dissented, but the majority ruled that the Crown's considered
trust for unremitted source deductions is a "security interest" under the ITA and established case
law.242 According to the majority, the court has the authority to "prime" (i.e., take priority over)
the Crown's claim for unremitted source deductions since the CCAA states that "[t]he court may
order that the security or charge rank in priority over the claim of any secured creditor of the
corporation."243
After reviewing the Bonnyville asset purchase by 726 in 2014, the Alberta Court of Queen's
Bench ruled that CWB's security interests were not terminated.244 To determine whether or not
knowledge exists, Canadian law on the security of personal property uses an objective criteria.245
The question is whether the later claimant learned of the preceding claim in circumstances where
a reasonable person would have known about it.246 As part of the pre-purchase due diligence
process, 726 had sought and received consolidated financial statements from CNC, which is at
the centre of the case.247 These bank records unequivocally showed that CWB lent money to
<http://www.osler.com/en/resources/regulations/2019/deemed-trusts-and-priming-charges-the-alberta-court-of-appea
l-affirms-the-priority-of-ccaa-charges>
240
Ibid
241
Ibid
242
Ibid
243
Ibid
244
Khimji, Mohamed F, ‘The Role of Knowledge in Secured Financing Priority Disputes - Three Recent Cases’
(2021) 36(3) Banking & Finance Law Review 517
245
Ibid
246
Ibid
247
Ibid
27
CNC.248 That the financial statements didn't reveal whether or not CWB had a security interest in
Bonnyville's assets was disregarded by the court as immaterial.249 Instead, 726 was presumed to
be familiar with CWB's security interests since a prudent individual in 726's position, armed with
the financial records, would have done additional research into the breadth of CWB's GSAs.250
31 Given the seriousness of the deal and the presence of lawyers, 726's failure to do a PPR
search and get in touch with CWB falls short of the necessary level of due diligence.251 Due to
726's constructive knowledge of CWB's security interests, the absence of serial numbers in
CWB's funding statement was found to be inconsequential.252
The previously enumerated case laws that it is challenging to justify discrepancies in the
influence of knowledge in the application of various priority rules.253 Financial statements that
were made public in Canada North implied that the following claimant was aware of the
preceding claim since they mentioned the prior claimant's provision of financing to the debtor
without naming the party.254 Based on its knowledge that accessions acquired from another asset
had been included into the collateral, the succeeding claimant in Third Eye Capital was held to
have knowledge.255 In both circumstances, the succeeding claimants needed to look into the title
situation further than just doing a proper register check due to the clear reference to knowledge
in the applicable priority rules.256 Please recall that in Canada North, the financial statements did
not reveal explicitly that the prior claimant has interest in the particular collateral, and in Third
Eye Capital, the inspection reports did not reveal explicitly that the accession subject to a prior
claim had been incorporated into the particular collateral.257 In the case of Accel Canada, the
secondary claimant knew that the primary claimant had a security interest in all of the debtor's
existing and subsequently acquired real and personal property because of a notice filed in the
PPR.258 However, since the priority rule that applied did not specifically include knowledge, the
248
Ibid
249
Ibid
250
Ibid
251
Ibid
252
Ibid
253
Ibid
254
Ibid
255
Ibid
256
Ibid
257
Ibid
258
Ibid
28
succeeding claimant was not obligated to do anything more than a search at Alberta Energy to
determine whether or not they were entitled to the mineral leases. 259
Acts in Canada and New Zealand include such a provision. All rights, duties, and obligations
arising under a security agreement, the Act or any other applicable law must be "exercised or
discharged in good faith and in a commercially reasonable manner," as is required by the
majority of Canadian statutes.260 All rights, duties, or obligations that arise under a security
agreement or this Act must be "exercised or discharged in good faith and in accordance with
reasonable standards of commercial practise," according to the New Zealand Act's good faith
standard.261 Certain situations where a secured party's actions give rise to claims that it is not
entitled to the priority rule have been considered by Canadian courts. Canadian courts have
looked to this "good faith" provision to determine whether, in appropriate circumstances, the
Act's priority rules can be altered on the basis that the secured party's conduct breached the
general standard of good faith conduct when applying the Act, since common law and equitable
principles cannot be used to alter statutory priorities.262 Australia's Act is noticeably lacking in
this general standard of good faith conduct, instead requiring only that "all rights, duties, and
obligations" arising under the enforcement chapter of the Act be exercised "honestly and in a
commercially reasonable manner."263 Due to its narrow scope, Australian courts cannot use this
provision to shift statutory priorities264
The principles of common law and justice come into play and provide the guidelines for the
determination of a priority competition in situations where the PPSA does not offer a priority
rule.265
259
Ibid
260
Widdup, Linda, ‘The Personal Property Securities Act 2009 (Cth) - Where Is the Fraud Exception?’ 22 [31]
261
Ibid
262
Ibid
263
Ibid
264
Ibid
265
29
V. CONCLUSION
It is argued that Australia's Act ought to incorporate a general good faith conduct standard, just
like their Canadian and New Zealand analogues.266 Going back to the example given earlier, the
Supplier may contend that the Enterprises have not acted in good faith.267 Business would not
violate the good faith requirement just because it was aware of the Supplier's imperfect security
268
interest. However, if the decisions of the Canadian courts are applied, Enterprises has not
acted in good faith by demanding the loan from Manufacturing, which has resulted in
Manufacturing failing to repay the loan and appointing a receiver to claim priority for
Enterprises, which happens to be Manufacturing's parent company.269 A good faith provision
would not "drive a horse and buggy through" the personal property securities legislative
framework if Australian courts followed the same approach as Canadian courts to the application
of good faith in situations where a party dishonestly takes advantage of the priority rules.270
The findings of this research indicate that the safeguards against fraud in the areas of personal
property security interests are in a state of disarray. Some of the decisions that Canada has made
in cases involving fraud or bad faith have been deemed contentious by international observers.
Due to the fact that Canada is unable to make use of the equitable remedy and must instead rely
on the statutory remedy of priority rules, the nation is in possession of a good faith instrument
with which to deal with the deception. In the In Re: Fair Finance Company case, the United
States of America imposes limitations on the availability of remedies for fraud, whereas Canada
does not nearly adhere to the same standards as the United States does. In contrast, the legal
system in Australia has never faced anything remotely similar to the challenges faced by courts
266
267
Ibid
268
269
270
30
in the United States. Nevertheless, the circumstance is quite analogous to what one would find in
the United States and Canada. As a consequence of this, Australia is in a position in which it has
the option of either incorporating equitable principles into its legislation or relying on good faith
in order to combat the fraud.
31
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34

Bash v. Textron Fin. Corp. - Comparing The Effect of Frauds On The Us and Australian Priority Rule For Security Interests

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Bash v. Textron Fin. Corp. - Comparing The Effect of Frauds On The Us and Australian Priority Rule For Security Interests

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LAWS700206_2022_MAY | Banking and Secured Finance

BASH V. TEXTRON FIN. CORP.1: COMPARING THE EFFECT OF FRAUDS ON THE

A. Fraud and good faith

B. Concept of Priority Rule for Security Interests

C. In Re: Fair Finance Company Case50

III. REGULATORY FRAMEWORKS

Without a contrary provision, if a registration lapses or is discharged due to mistake or fraud, a

USE OR DISPOSITION OF COLLATERAL PERMISSIBLE.

(D) use, commingle, or dispose of proceeds; or

IV. PROBLEMS AND SOLUTIONS

Analysis of In re Fair Finance Company

A. The Bank of Nova Scotia v Royal Bank of Canada197

B. Strathcona Brewing Co v Eldee Investment Corp209

C. Furmanek v Community Futures Development Corp of Howe Sound218

D. Canada v. Canada North Group Inc.

‘Prudential Practice Guide SPG 223 – Fraud Risk Management’

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