In KBA Canada, Inc v Supreme Graphics Limited (2014 BCCA 117), the British Columbia Court of Appeal (the “BCCA”) prevented equitable considerations from overriding the statutory ranking of security interests in the Personal Property Security Act (British Columbia) (the “PPSA”).
The plaintiff, KBA Canada, Inc. (“KBA”), had registered a security interest in an offset printing press in the possession of 3S Printers Inc. (“3S”). KBA’s security interest had priority over two other secured creditors of 3S: Supreme Graphics Ltd. (“Supreme”) and CIT Financial Ltd. (“CIT”). KBA’s registration was inadvertently discharged by a third party without KBA’s authorization. Surprisingly, the PPSA allows anyone to file a financing change statement to discharge a security interest.
If a security interest discharged without authorization is re-registered within 30 days of the discharge, pursuant to section 35(7) of the PPSA, the priority of such security interest is unaffected. Thus, if KBA had re-registered its security interest within 30 days of the discharge, it would have maintained its priority over Supreme and CIT. KBA, however, re-registered its security interest 73 days after the discharge. Thus, KBA could not rely on section 35(7) of the PPSA, and lost its priority over Supreme and CIT because as between two perfected security interests, the first security interest to be registered has priority.
The British Columbia Supreme Court (the “BCSC”) restored KBA’s priority over Supreme and CIT by relying on section 68 of the PPSA which recognizes the continued operation of the principles of common law and equity to the extent they are consistent with the PPSA. The BCSC relied on this section to override the priority rules in the PPSA to restore KBA’s priority because the inadvertent discharge of KBA’s security interest was an innocent mistake. Further, restoring KBA’s priority would not prejudice Supreme or CIT because KBA had priority over them before the accidental discharge. The BCSC also held that Supreme and CIT would be unjustly enriched if KBA’s priority was not restored.
The BCCA overturned the BCSC decision, and held that Supreme and CIT had priority over KBA. The BCCA highlighted that the overriding goal of the PPSA is to provide commercial certainty and predictability. Thus, the statutory priority rules in the PPSA, which gave priority to Supreme and CIT, could not be circumvented through the use of extra-statutory principles of common law or equity.
The BCCA criticised the BCSC decision for undermining the PPSA’s purpose of replacing the complex principles of priority at common law and equity with clear statutory rules. The principles of common law and equity continue to apply to the extent they are consistent with the PPSA; however, the BCCA held it is difficult to conceive of a situation where principles of common law and equity would apply to a priorities dispute because the PPSA deals comprehensively with priorities of security interests.
The BCCA also rejected the argument that Supreme and CIT had been unjustly enriched from the accidental discharge of KBA’s registration. For a claim in unjust enrichment to succeed, three elements must be satisfied: enrichment of the defendant, a corresponding deprivation of the plaintiff, and an absence of juristic reason for the defendant’s enrichment. The first two elements were satisfied in this case. KBA lost its priority over Supreme and CIT due to the inadvertent discharge of its registration. Thus, Supreme and CIT had been enriched from the accidental discharge of KBA’s registration, and KBA had been correspondingly deprived. The unjust enrichment claim failed, however, because there was a clear juristic reason for the enrichment of Supreme and CIT: the statutory priority rules in the PPSA which gave priority to Supreme and CIT over KBA.
The approach taken by the BCCA, therefore, leads to commercial certainty and predictability in personal property financing, and prevents fairness concerns to override the priority of security interests pursuant to the express and comprehensive priority rules in the PPSA.