Seizure of Leased Trucks by Lessee’s Unsecured Creditor – When the Lease is Unregistered, Who has the Priority?
By: Benjamin David Gross and Étienne Brassard with the collaboration of Étienne Guertin
1. FACTS
Following the failure of 9192-0090 Quebec Inc. (the “Lessee”) to honor its financial
obligations, one of its unsecured creditors, Mr. Walter Fischer (the “Seizing Party”) brought an action in the Court of Quebec against the Lessee and obtained a writ of seizure before judgment against certain property in its possession. The seized property included the two trucks at issue in the litigation. This property was in fact held by the Lessee under a long-term lease concluded with 9089-3777 Quebec Inc. (the “Lessor”), a sister company of the Lessee.
2. JUDGMENT IN THE SUPERIOR COURT
Discovering that its two trucks had been seized, the Lessor intervened aggressively in the proceeding to object to the seizure before judgment and recover its vehicles. Although the judge of the Court of Quebec acknowledged the existence of a long-term lease, he dismissed the objection to the seizure before judgment based on the fact that the leases were not registered (i.e. “published”) at the RPMRR, as provided in article 1852 C.C.Q. This article states as follows:
1852. The rights resulting from the lease may be published.
Publication is required, however, in the case of rights under a lease with a term of
more than one year in respect of a road vehicle or other movable property determined by regulation, or of any movable property required for the service or operation of an enterprise, subject, in the latter case, to regulatory exclusions; effect of such rights against third persons operates from the date of the lease provided they are published within 15 days. […]
Thus, according to the Superior Court judge, where property included in one of the classes of property referred to in article 1852 C.C.Q. — including certain road vehicles, boats and aircraft — is leased under a long-term lease which is not registered by the lessor, the lessor’s right of ownership is unenforceable against a third party seizing the
property. In the case of 9061-5428 Quebec Inc. v. A.T.L. Air Tuteurs Ltée,2 the Court of Quebec previously decided that the lessor of an aircraft could not object to the seizure before judgment by the creditor of its lessee where the long-term leasing contract had not been registered. A few months later, the same court reaffirmed this position in the case of Stoughton Trailers Inc. v. Banque
Nationale du Canada.3
3. THE COURT OF APPEAL AND ENFORCEABILITY OF LESSOR’S RIGHT OF OWNERSHIP VERSUS PROTECTION OF BONA FIDE THIRD PARTIES
The Court of Appeal had to rule on and determine whether the owner of property leased under a long-term lease must register its lease at the RPMRR in the cases provided for in the C.C.Q. in order to be able to object to a seizure before judgment executed by an unsecured creditor of the lessee.
In this regard, one should be aware that the registration (i.e. “publication”) of rights resulting from the lease makes them enforceable against third parties, determines their rank, and, where the law so provides, gives them effect. As between the parties, these rights are effective even though they are not registered, unless otherwise provided by law.
Referring to this principle, the Court of Appeal stressed that the lessor runs a great risk when it fails to fulfill the registration (i.e. “publication”) requirements of a long-term lease:
[14] Therefore, the failure to publish under art. 1852 C.C.Q. only confirms to the third party in good faith transacting with a person who seems to be in full possession of a movable property, that he can assume said person is the owner of the property (art. 921 C.C.Q.), even if he is only in fact the holder of the property […].5
The court therefore concluded that the legislature’s aim was to protect third parties in good faith, whether it be a purchaser of the property or the holder of a conventional hypothec on the property granted by the person in possession to obtain a loan or some other benefit.
In this regard, according to the court, the obligation to register a long-term lease referred to in article 1852 C.C.Q., particularly with respect to property acquired for the service or operation of an enterprise, facilitates trade in movable property because bona fide third parties can rely on the information appearing in the RPMRR and thereby determine, with certainty, that the interest they are acquiring in the desired property will not eventually be contested by an as-yet unknown third party. It should be noted that the same is probably true, based on the same reasoning, of a bona fide third party transacting with the apparent holder of the right of ownership in a property held by way of an installment sale (1745 C.C.Q.), sale with right of redemption (1750 C.C.Q.) or leasing (1847 C.C.Q.), since rights not registered in the RPMRR are presumed not to exist vis-à-vis the third party (2941 and 2963 C.C.Q.).
Adopting the comments of the Supreme Court of Canada in the case of Lefebvre (Trustee of), the Court of Appeal reiterated that the registration of a lease in the RPMRR does not give rise to the lessor’s right of ownership in the leased property: this right exists in advance of the lease and independently of the registration thereof. Registration only signals the precariousness of the lessee’s possession of the property to the bona fide third party, enabling the lessor to assert its right of ownership against any person attempting to acquire “an interest” in the leased property.
In the present case, it was clear that the Seizing Party was a bona fide third party. However, the court indicated that a seizure before judgment did not confer on the Seizing Party “an interest” in the leased property, nor did it dispossess the Lessee or Lessor: the purpose of the procedure is to prevent the disappearance of the property by placing it in the hands of the court. Thus, the court concluded that the Lessor was able to defeat the seizure before judgment by asserting its right of ownership against the Seizing Party, despite its good faith and the Lessor’s failure to register the lease.
According to the Court of Appeal, the judgment at first instance had the effect of ascribing to the Lessor the status of a real guarantor of the Lessee’s debts, thereby enabling an unsecured creditor to sell the property of a third party, to wit the Lessor, to satisfy the debts of the Lessee solely on the basis that the long-term lease through which the Lessee held the property had not been registered.
4. COMMENTS
With respect to companies in the business of equipment leasing and other lessors of movable property which fail to register their leases, the decision in 9089-3777 Quebec Inc. v. Walter strengthens their rights of ownership and the enforceability thereof against third parties. Similarly to the teachings of the Supreme Court of Canada in the case of Lefebvre (Trustee of), which permitted the lessor to recover property from the trustee in bankruptcy of the lessee despite the lessor’s failure to register the lease (on grounds that since the trustee had seisin of the lessee’s property, it had no greater rights thereto than the lessee), this case will henceforth permit a lessor to recover leased property which has been seized before judgment by an unsecured creditor of the lessee.
We have not yet seen an end to the debate on the ambiguity in article 1852 C.C.Q.,
particularly regarding the effect of the lack of registration, or even registration occurring after the fifteen-day time limit referred to in this article. On this point, it is still not completely clear to this day whether this refers to a mandatory time limit or a grace period.6 In this regard, the lack of consistency between the rules applicable to leases, leasings, and installment sales is unfortunate.
In the context of this case, we note that the Court of Appeal rendered its decision, among other things, on the basis that no “interest” in the leased property had been acquired by a third party “in good faith”.
4.1. The notion of interest
The court gave two illustrations of what an “interest” might be, namely, the right of ownership and a hypothec. Could there be others, for example, the interest of a subsequent lessee (where the initial lessee leases the property)? Could the subsequent lessee continue to enjoy the rights under its lease if the initial lease was registered?
4.2. The criterion of good faith
As for the criterion of good faith, it creates two categories of “third person” for purposes of article 1852 C.C.Q. (although this distinction is not made on the face of article 1852). It also has the effect of limiting the scope of article 2964 C.C.Q., which provides that any interested person may assert the lack of registration against any person, and article 2963 C.C.Q, which provides that giving notice or acquiring knowledge of an unregistered right never cures the failure to register. This is of considerable importance to several types of creditors, whether hypothecary or otherwise, who often acquire financial information about their debtors which can apprise them of, or at the very least tip them off to, the existence of a lease. Obviously, the Court of Appeal did not express an opinion on such a context, and it is difficult to conclude, ipso facto, that the effect of this decision is to cause hypothecary creditors to lose their rights in the charged property in the event that the existence of a lease is referred to, for example, in the debtor’s financial statements. In such a case, there would have to be a substantial discussion on the effects of such a solution on articles 2963 and 2964 C.C.Q. But, this has henceforth become an open question. We will below return to this criterion, which we will refer to as the “criterion of knowledge”.
4.3. Other potential solutions not discussed in the case
In light of this decision, past case law, and the solutions which exist under other similar regimes in the C.C.Q. (for example, under article 1749 C.C.Q. on installment sales), we will consider other potential solutions that a court might be warranted in applying in the event of a dispute between two creditors as a result of the late registration of the rights resulting from a lease.
Let us thus consider three hypothetical scenarios involving three persons, an equipment lessor, a lessee, and a hypothecary creditor of the lessee (note that we could substitute any other third party under article 1852 C.C.Q., including a bona fide purchaser). In each scenario, (i) the lessor has registered its long-term lease entered into with the lessee, but has failed to do so within the prescribed time period, and (ii) the hypothecary creditor has granted the lessee a credit facility in return for which it has acquired a movable hypothec on all of the business’s present and future property (note that we could substitute any other type of hypothec here which charges the leased property). In the first scenario, the hypothecary creditor has registered its hypothec even before the lease existed. In the second scenario, the hypothecary creditor has registered its hypothec after the start of the lease, but prior to the late registration thereof. In the third scenario, the hypothecary creditor has registered its hypothec after the late registration of the lease.
4.3.1 Absolute right of ownership
If the argument of Justice Benoît Morin in Transport International Pool inc. v. St-Georges, Hébert Inc.7
4.3.2 The temporal criterion
To resolve a potential dispute between the lessor and the hypothecary creditor over leased property, one approach might be to analyze the situation using a temporal criterion.
In the first scenario, the lessee was not yet in possession of the leased property, since the lease did not yet exist. Thus, the hypothecary creditor had no means for taking the existence of the leased property into consideration, and therefore agreed to grant the financing based on factors other than the value of the leased property. Here, the hypothecary creditor suffers no prejudice from the late registration of the lease.8 Therefore, it would be unfair for the hypothecary creditor to be able to plead the late registration of the lease to render it invalid against it.
In the second scenario, the lessee had certain equipment under a lease in its possession at the time the hypothecary creditor agreed to finance the lessee. Thus, it is possible that the hypothecary creditor factored in the existence or value of the said leased property in evaluating the total assets of the lessee for purposes of providing the financing. Indeed, since the lease was not yet registered, a search in the RPMRR would have disclosed nothing. In this scenario, the hypothecary creditor could be prejudiced by the late registration of the lease and, therefore, said lease should not be enforceable against it.9
In the third scenario, although the lease was registered late, the hypothecary creditor could acquire knowledge of the lease through a simple search at the RPMRR. It could not therefore claim to be prejudiced by the late registration of the lease. Consequently, the lease, despite being registered late, should be effective against the hypothecary creditor. This solution would, moreover, be similar to that adopted under article 1749 for installment sales, pursuant to which the 15-day time limit is not regarded as mandatory.
4.3.3 The criterion of knowledge
We previously noted that the acquired or presumed knowledge of the existence of a lease could potentially have some effect on the bona fides of a third party claiming an interest in leased property. While such knowledge would not affect the solutions suggested in the first and third scenarios if we were to accept the analysis with the temporal criterion, the second scenario would need to be reconsidered in greater depth in light of this additional factor.
Thus, if the lessor is able to show that the hypothecary creditor had knowledge of the lease, or ought to have known of its existence, despite the late registration thereof, it would be difficult to claim the hypothecary creditor was in good faith. In other words, it would be difficult to accept the claim that the hypothecary creditor agreed to finance the lessee on the basis that the lease of the property, which it had knowledge of, had not been registered within the prescribed time period. Thus, by adding the criterion of knowledge to the temporal criterion, one could potentially claim that, while a lease which is registered late should generally be unenforceable against the hypothecary creditor, it might nevertheless be effective against the hypothecary creditor where it knew or ought to have known of its existence.
4.4. Concluding Remarks
Be that as it may, it is clear that the Court of Appeal’s decision serves as a reminder to lessors and underscores once more the importance of registering leases of the kinds of property contemplated in article 1852 C.C.Q. in the RPMRR, and within the specified time limit, to avoid any debate on the enforceability of the lessor’s right of ownership against third parties, whether bona fide or not.
For any questions or comments regarding this text, please contact Benjamin David Gross (514-877-2983), Étienne Brassard (514-877-2904) or Étienne Guertin (514-877-2940).
1. 2012 QCCA 29.
2. 2005 CanLII 26176 (QC CQ).
3. 2005 CanLII 14235 (QC CQ).
4. C.C.Q., art. 2941.
5. Lefebvre (Syndic de), [2003] R.J.Q. 819 (C.A.), para. 74.
6. See on this point: John Deere Ltd. v. Ferme Fillion et Mercier, s.e.n.c., 2006 QCCS 4659,par 15.
7. 2005 QCCA 28.
8. We note that this would no longer necessarily be the case where a subsequent disbursement occurs after the lessee has taken possession of the leased property, but prior to the late registration of the lease.
9. Note that if solely the notion of interest were used here, a hypothecary creditor may obtain the same results however, an unsecured creditor would not. Even if the temporal criterion was the primary criterion of analysis, would the law wish us to combine the temporal criterion with the notion of interest in order to exclude unsecured creditors of the lessee from obtaining rights to the leased property in scenario 2?
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