Secured creditors’ rights will not be extinguished by recharacterizing collateral after default
Written by Ty Schmidt
As is well-known in the realm of Canada’s secured transaction law, both the secured party and the debtor are entitled to a number of rights and also owe certain obligations to the other party, pursuant to contract and statute. Such rights and obligations are in place for the objectives of fairness, transparency and commercial certainty, among others. The recent decision of Merchant Growth Asset Financing Ltd. v. Pyke,[1] , shows that sometimes one party (in this case, the defaulting debtor) may attempt to diminish the rights and remedies available to the other party by erroneously asserting their own rights under the statute. Horsman J. of the Supreme Court of British Columbia was quick to shut down such an assertion in her summary judgment in favour of the plaintiff and, in doing so, created a precedent for a case that addresses the operation of creditors’ rights when the debtor attempts to recharacterize the nature of collateral after default.
The defendants in this case, Daryl Pyke and Inez Pyke, are siblings who are parties to a rental agreement and security agreement with the plaintiff Merchant Growth Asset Financing Ltd. (“Merchant”). The rental agreement was for the rental of a logging truck, which Daryl used for his personal trucking business, and the security agreement provided a list of personal property that would be put up as collateral for the performance of their obligations under the rental agreement – including a motorcycle. The defendants defaulted on their rental payments, resulting in Merchant seizing the motorcycle.
After the default, the defendants asserted that the motorcycle was a consumer good (since it was acquired solely for personal use), despite the fact that it was not listed as such in the security agreement. Their rationale for doing so was likely a strategic move using the “seize or sue” provision in section 67 of the BC Personal Property Security Act,[2] where if the secured party decides to seize property instead of sue for the deficiency, all of the debtor’s unperformed obligations are extinguished. However, this only applies if the debtor is in default under a security agreement that provides for a security interest in consumer goods. The crux of both parties’ submissions revolved around whether the motorcycle could be defined as a consumer good.
In coming to her decision, Horsman J. opined that the relevant question is slightly different from what the parties had argued. Rather than focusing on the motorcycle itself, the question became whether the defendants were in default under a security agreement that provides for a security interest in consumer goods. The answer to this question was to be arrived at through both contractual and statutory interpretation. The judgment points out that clause 2.1 of the security agreement defines the term “goods” specifically to exclude all consumer goods.[3] To add to that, another clause states that “[t]he Debtor has agreed to provide additional and continuing security in the goods described in Schedule “A” attached hereto”.[4] The motorcycle was among the items listed in Schedule A. Therefore, it cannot be said that the security agreement provided for a security interest in consumer goods, and instead “it was objectively reasonable in the circumstances for Merchant to require the defendants to provide Collateral that was not consumer goods so that Merchant was not restricted in its remedies in case of default.”[5]
Accordingly, the plaintiff’s rights and remedies were not limited by section 67 of the BC PPSA, meaning that the defendants were liable for the arrears owing under their rental agreement, as well as for costs and interests as specified in the rental agreement. Just because the motorcycle would literally fit the definition of a consumer good, the fact that it was listed in an agreement that specifically excluded consumer goods meant it could not be considered as such. While in some senses this may appear unfair for the debtor, it provides important protection for a secured creditor for instances where a debtor attempts to recharacterize the nature of collateral for the purpose of shirking their obligations. As put by Horsman J., “[t]he statutory scheme would be undermined if, after default, a debtor was permitted to change the description of collateral in a security agreement that is not, on its express terms, and agreement that provides for a security interest in consumer goods.”[6]
The case does not consider several points that might be relevant. First, the definition of “consumer goods” is a statutory one. Therefore, if in fact, at the relevant time, the use of the motorcycle by the defendant met that statutory definition, on what basis do the parties effectively alter that definition? Also, Justice Horsman does not consider the timing requirements of the categorization of the goods as either “consumer goods”, “inventory” or “equipment”. Subsection 1(4) of the PPSA in British Columbia provides as follows:[7] “Unless otherwise provided in this Act, the determination whether goods are consumer goods, inventory or equipment must be made as of the time the security interest in the goods attaches.”
If at the date of attachment, the use of the motorcycle was not for personal, household, or family purposes by the defendant,[8] then one would apply the statutory definition of “consumer goods” in the PPSA, and find that it does not apply. In other words, there is potentially a more convincing way to achieve the same result.
[1] 2022 BCSC 696 [Merchant]
[2] Personal Property Security Act, RSBC 1996, c 359.The relevant provision reads as follows: “67(1) Subject to section 58(3) [a subsection prohibiting seizure of consumer goods where two-thirds of the total amount secured has been paid], if a debtor is in default under a security agreement that provides for a security interest in consumer goods, the secured party may (a) exercise his or her rights as provided in section 58 [including a right of seizure], (b) proceed as provided in section 61 [the section deals with the procedural steps in foreclosure], (c) accept surrender of the goods by the debtor, or (d) subject to the terms of the agreement, bring action to recover a judgment or take proceedings to obtain a certificate under the Creditor Assistance Act against the debtor. (2) If the secured party proceeds under subsection (1) (a), (b) or (c) with respect to consumer goods, (a) the debtor’s unperformed obligations under (i) the security agreement, or (ii) a related agreement, other than a mortgage on land executed before July 1, 1973, and (b) the unperformed obligations of a guarantor of, or indemnitor respecting the obligations, are extinguished.”
There does not appear to be a directly equivalent provision in a number of PPSAs in other provinces (including Manitoba). Nonetheless, the general point of the case remains a legitimate question: Should a debtor be allowed to claim the advantages of characterizing goods as “consumer goods” under the statute when the agreement shows that the secured party was not intending to accept consumer goods as collateral?
[3] Merchant, supra note 1at para 8
[4] Ibid at para 49.
[5] Ibid at para 53.
[6] Ibid at para 57.
[7] Supra note 2. The Personal Property Security Act, CCSM, c P35, s-s 2(2) and the Personal Property Security Act, RSA 2000, c P-7, s-s 1(5) and the Personal Property Security Act, 1993, SS 1993, c P=6.2, s-s 1(3), is each identical in effect to its British Columbia counterpart.
[8] The definition of “consumer goods” in the British Columbia PPSA, supra note 2, provides as follows: “’consumer goods’ means goods that are used or acquired for use primarily for personal, family or household purposes”. See s-s 1(1), sv “consumer goods”. The PPSAs of Manitoba (ibid, s-s 1(1), sv “consumer goods”), Saskatchewan (ibid,para 2(1)(i)) and Alberta (ibid,para 1(1)(i)) have identical definitions
The views and opinions expressed in the blogs and case reporter are the views of their authors, and do not represent the views of the Desautels Centre for Private Enterprise and the Law, the Faculty of Law, or the University of Manitoba. Academic Members of the University of Manitoba are entitled to academic freedom in the context of a respectful working and learning environment.