Older Uniform Acts

Report on Commercial Liens 1994


VII. SHOULD THE RELEVANT PPSA PROVISIONS BE INCORPORATED BY REFERENCE OR SHOULD THE PROVISIONS BE REPEATED AS THE ALBERTA REPORT RECOMMENDS?

The Alberta Report considered the option of incorporating the relevant PPSA provisions by reference at p. 64. It rejected this approach in favour of one which repeats the various provisions of the PPSA which would be applicable (other than the rule determining priority between secured creditors and lienholders). The reason given is that to incorporate by reference only would require the lien claimant to "sift through two statutes in order to determine the applicable law" and there are many provisions of the PPSA which are not applicable to liens. Accordingly, the Alberta Report opted for a mechanism that would precisely identify which provisions of the PPSA are intended to apply.

On balance, the Committee disagreed with the Alberta approach. Actual incorporation of the PPSA provisions will make the statute lengthy and when the PPSA is amended, failure to amend the Uniform Liens Act may result in a discrepancy between the two statutes. The primary matter with which a lienholder is concerned is registration and enforcement. The former would be governed by the PPSA in any event.

The Committee proposed that all provisions of the PPSA should be incorporated by reference by means of a schedule appended to the Uniform Lien Act. The schedule will identify the applicable provisions of the Uniform PPSA. Enacting jurisdictions will be invited to substitute the corresponding provisions of the local PPSA, but to maintain the concept of a schedule.

7. RECOMMENDATION:

The proposed Uniform Lien Act should incorporate the appropriate provisions of the PPSA by reference only and not repeat them.


VIII. WHETHER THE PRIORITY RULE BETWEEN LIEN CLAIMANTS AND SECURED PARTIES AS SELECTED BY THE ALBERTA REPORT IS THE APPROPRIATE ONE?

The existing priority rules for each of the identified liens are:

(a) Repairer's Lien:

A lien for the improvement of chattels in a PPSA jurisdiction (outside of Ontario) derives its priority from a section in the PPSA like s. 30 of the Uniform PPSA:

Where a person in the ordinary course of business furnishes materials or services with respect to goods that are subject to a security interest, any lien that he has in respect of those materials or services has priority over a perfected security interest unless an Act in force in the Province provides that the lien does not have priority.

For those jurisdictions with garagekeepers' legislation, the rule is that the lien takes priority over prior secured parties and subsequent secured parties who acquire their interest after the lien is registered. As soon as possession is relinquished, the lienor has 21 days to register and the lienor is subordinate to the interest of anyone whose interest arises after possession is given up but before the lienor's interest is registered. The lienholder may obtain an extension of time to register late and the priority of the lienholder continues throughout this extended time.

The rule in the Ontario Repairers' and Storers' Act is similar to that in the garagekeepers Acts.

(b) Storer's Lien:

As long as the warehouseman gives notice to the owner of the goods, which includes a conditional seller, a chattel mortgagee and a grantee under a bill of sale, the warehouseman would take priority over all such interests regardless when such interest may have arisen.

(c) Common carrier's lien:

At common law, the common carrier's interest was a possessory lien and would defeat the interest of secured parties.

The Alberta Report (at p. 89) recommended that the equivalent of section 30 in the various PPSAs (quoted above) should continue to govern the priority between secured creditors and lien claimants according to the Report. Thus, the Alberta Report intends that the PPSA would give the lien claimant priority over secured parties except insofar as the new Alberta Draft Act took priority away.

With the advent of the non-possessory lien, there is a greater likelihood of conflicts arising, i.e., it is more likely that a secured party will grant a security interest on chattels which have been returned to their owner. Hence the necessity of providing some form of public record for non-possessory interests to permit prospective lenders to discover such liens. One issue that arises is the length of the grace period and the priority during the grace period. The Alberta Draft Act allows the lienholder to register within 15 days, and, if registration occurs within this period, the lienholder has priority over prior creditors. The Alberta Draft Act removes priority against prior creditors if the lien claimant fails to register within the time provided. This marks a departure from the Repairers' and Storers' Liens Act which subordinates an unregistered lien only against third parties who acquire their interests after the lien arises. The Alberta Report states (at p. 89) that the approach taken in the Repairers' and Storers' Liens Act invites uncertainty, because it is unclear if prior secured creditors who make future advances are protected. It opts instead for a priority rule similar to that for creditors who take purchase-money security interests in the collateral. Purchase-money secured parties lose their super priority status against prior creditors if they fail to register in time.

Two issues arise out of the Alberta Report. One is of form and the other of substance. They are:

(i) should the new Lien Act continue to rely on the PPSA to state the priority between secured creditors and lienholders or should the rule be stated expressly in the Lien Act; and

(ii) should a lienholder lose priority as against prior creditors if the lienholder fails to register within the time provided.

With respect to the first point, the Uniform Liens Act should not rely on the PPSA to state the priority rule between secured creditors and lienholders. Section 32 is obscure and easily missed in determining the appropriate rule. The priority rule operative between lienholders and secured creditors should be stated expressly in the proposed new Act.

The second issue is more difficult. Imagine a scenario where a lender advanced $10,000 on a truck secured by a registered security interest. (The truck's value is $12,000.) The truck breaks down and requires $5,000 worth of repairs. If default under the security interest occurred before repairs are undertaken, there will be insufficient value to satisfy the secured obligation. Assuming that the repaired truck would again be worth more than $10,000, it is to the secured party's advantage to have the truck repaired. If the repairer loses its lien by failing to register within the time required (whether that will be 15 or 21 days has not yet been debated), the prior secured party will receive a windfall. This concern would seem to dictate that the Ontario approach is preferable to that proposed by the Alberta Report.

The Alberta Report is concerned for the secured creditor who makes future advances. Under s. 20(2) of the Uniform PPSA, a perfected security interest securing future advances will defeat the interests of secured creditors who seize the collateral and the interests of their representatives. Under s. 35(4) of the Uniform PPSA, if future advances are made while a security interest is perfected, the security interest has the same priority with respect to the future advances as it had with respect to the first advance.

It was the Committee's opinion, the special status to be conferred on lienholders by the proposed Uniform Liens Act justifies changing the priority given to future advance financiers by the PPSA. The lienholder is not an ordinary creditor. The lienholder enhances the value of the article. Moreover, future advance financing is not a factor in relation to collateral which would normally be subject to a lien. It plays a role with respect to inventory or accounts financing, but is rare with respect to a single item of collateral. A secured party making future advances in relation to inventory is not likely to be severely prejudiced by a lien that encumbers one of many items of collateral with respect to a future advance. Finally, the legislative choice in favour of lienholders in this situation has already been made in those jurisdictions which have garagekeepers' Acts and in the Ontario Repairers' and Storers' Liens Act.

8. RECOMMENDATION:

(1) The priority rule for liens should be stated expressly in the Act.

(2) A lien claimant should be required to register within a fixed number of days from when the work was completed or abandoned or from giving up possession (if the lien claimant had possession) in order to defeat subsequent buyers and creditors.

(3) A lienholder should take priority over a prior secured party even if the lienholder fails to register or allows the registration to lapse.


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