Re Lambert * **
[Indexed as: Lambert (Re)]
20 O.R. (3d) 108
[1994] O.J. No. 2151
Action No. C8364
Court of Appeal for Ontario,
Grange, Doherty and Weiler JJ.A.
September 29, 1994
* Motion for leave to appeal to the Supreme Court of Canada dismissed June 1, 1995 (L’Heureux-Dub, Sopinka and McLachlin JJ.).
** Note: Written submissions with regard to costs in the following judgment were considered by the Court of Appeal for Ontario (Grange, Doherty and Weiler JJ.A.). The reasons for judgment were amended with respect to the order of costs on April 15, 1995. See 22 O.R. (3d) 480 n in this database.
Personal property security — Security interests
— Perfection — Curative provision — Financing statement using debtor’s name differing from debtor’s name on birth certificate — Name searches not revealing registration
— Search using vehicle identification number would have revealed registration — Objective test for determining whether reasonable person is likely to be misled materially — Security interest effective against trustee in bankruptcy — Personal Property Security Act, R.S.O. 1990, c. P.10, s. 46(4).
After Mr. Lambert purchased a motor vehicle under a conditional sales contract, the vendor sold the contract to GMAC, which registered a financing statement under the Personal Property Security Act (“PPSA”). The financing statement referred to the debtor as Gilles J. Lambert, the name on the conditional sales contract, but his proper name as shown on his birth certificate was Joseph Phillipe Gilles Lambert. The financing statement correctly identified Mr. Lambert’s date of birth and correctly set out the Vehicle Identification Number (V.I.N.) of the vehicle, which was identified as “consumer goods”.
Subsequently, Mr. Lambert made an assignment into bankruptcy, and GMAC filed a claim as a secured creditor. Mr. Lambert’s trustee investigated GMAC’s claim by making inquiries using the computerized registration system established under the PPSA. An individual-specific debtor inquiry, which searches for a match of first name, middle initial, last name, and date of birth, was made without revealing a registration. An individual non- specific debtor name inquiry, which searches for a match of first and last name, was made without revealing a registration. However, a vehicle number inquiry, which searches for a match of the V.I.N., was not made; it would have revealed a registration.
The trustee successfully moved for a declaration that GMAC’s security interest was not perfected by registration and was not effective against the trustee. GMAC appealed, and the issue on the appeal concerned the application of the curative provisions of s. 46(4) of the PPSA.
Held, the appeal should be allowed.
GMAC’s financing statement was not in the prescribed form, and but for the application of s. 46(4) its security interest would not have been perfected nor effective against a trustee in bankruptcy. Section 46(3), however, applied. Pursuant to this subsection, an error does not invalidate a financing statement unless the party seeking to invalidate shows that “a reasonable person is likely to be misled materially by the error”. The subsection imposes an objective standard; it does not require evidence that the error actually misled or prejudiced any person.
The inquiry dictated by s. 46(4) cannot focus on a particular party, but must look to the broader class of persons who use the search facilities of the registration system. The formulation of a concrete test must consider the purpose of s. 46(4), which is to preserve the integrity of the system that provides information to prospective buyers and lenders who want to know whether there are prior claims on property. The integrity of the system must balance the interests of the two constituencies of those who register financing statements and those purchasers and lenders who search the system for prior registrations.
To assess the potential effect of an error in a financing statement one must assume that the property that is the subject of the flawed financing statement is the property targeted by a prospective purchaser or lender, who must be regarded as familiar with the facilities provided by the system. The standard is of a reasonably competent user of the system who would be aware of the various searches available under the system including the two discrete searches available to locate security interests in motor vehicles. Such a user could be expected to have the name and birth date of the vendor or borrower but would not necessarily have access to the names and birth dates of prior owners of the motor vehicle. Such a user would also obtain the V.I.N. and would realize its importance, and he or she, as a reasonable user, would conduct two searches of the registration system.
Bearing this reasonable person in mind, that person would not “likely be misled materially” by an error in a financing statement relating to the debtor’s name if the financing statement accurately set out the V.I.N. since that financing statement would come to the attention of the reasonable person through a V.I.N. search. The result, however, would be different and the reasonable person would be misled materially by an error in the debtor’s name if the financing statement did not contain the V.I.N. (And a reasonable user would be misled materially if the V.I.N. was incorrectly set out in the financing statement even if the immediate debtor’s name was correct because a search would not disclose certain prior registrations.)
In the immediate sense, the trustee did not establish that the error in the GMAC financing statement would probably have misled materially a reasonable person. The financing statement was therefore not invalidated, and GMAC’s security interest in the motor vehicle was perfected.
Cases referred to
656956 Ontario Ltd. v. General Electric Capital Equipment Finance Inc. (1992), 8 O.R. (3d) 481, 90 D.L.R. (4th) 76 (Div. Ct.); Adelaide Capital Corp. v. Integrated Transportation Finance Inc. (1994), 16 O.R. (3d) 414, 23 C.B.R. (3d) 289, 111 D.L.R. (4th) 493 (Gen. Div.); Armstrong, Thomson & Tubman Leasing Ltd. v. McGill Agency Inc. (Trustee of) (1993), 15 O.R. (3d) 292, 21 C.B.R. (3d) 295 (Gen. Div.); Bellini
Manufacturing & Importing Ltd. (Re) (1981), 32 O.R. (2d) 684, 37 C.B.R. (N.S.) 209, 122 D.L.R. (3d) 472, 14 B.L.R. 63, 1
P.P.S.A.C. 259 (C.A.); Canamsucco Road House Food Co. v. Lngas Ltd. (1991), 2 P.P.S.A.C. (2d) 203 (Ont. Gen. Div.); Charles (Re) (1990), 73 O.R. (2d) 245, 79 C.B.R. (N.S.) 92, 71 D.L.R. (4th) 181, 40 O.A.C. 114, 9 P.P.S.A.C. 280 (C.A.); Ford Credit Canada Ltd. v. Percival Mercury Sales Ltd. (No. 1) (1986), 50 Sask. R. 268, [1986] 6 W.W.R. 569 (C.A.); Fritz v. Ford Credit Canada Ltd. (1992), 15 C.B.R. (3d) 311 (Ont. Gen. Div.); General Motors Acceptance Corp. of Canada v. Stetsko (1992), 8 O.R. (3d) 537 (Gen. Div.); Ghilzon (Re) (1993), 21 C.B.R. (3d) 71 (Ont. Gen. Div.); Haasen (Re) (1992), 8 O.R. (3d) 489, 13 C.B.R. (3d) 94, 92 D.L.R. (4th) 204 (Gen. Div.), revd (1994), 20 O.R. (3d) 128 (C.A.); Kelln (Trustee of) v. Strasbourg Credit Union Ltd. (1992), 9 C.B.R. (3d) 144, 100 Sask. R. 164, 89 D.L.R. (4th) 427, [1992] 3 W.W.R. 310 (C.A.); Millman (Re) (1994), 17 O.R. (3d) 653, 24 C.B.R. (3d) 190 (Gen. Div.); Prenor Trust Co. of Canada v. 652729 Ontario Ltd. (1992), 4 P.P.S.A.C. (2d) 139 (Ont. Gen. Div.); Rose (Re) (1993), 16 O.R. (3d) 360, 23 C.B.R. (3d) 58, 110 D.L.R. (4th) 86 (Gen. Div.); Tanzer (Re), Ont. C.A., September 29, 1994; Weber (Re) (1990), 73 O.R. (2d) 238, 78 C.B.R. (N.S.) 224, 48 B.L.R. 1, 1 P.P.S.A.C. (2d) 36 (S.C.); Woolf (Re) (1992), 15 C.B.R. (3d) 292 (Ont. Gen. Div.), revd Ont. C.A., September 29, 1994
Statutes referred to
Personal Property Security Act, R.S.O. 1980, c. 375, s. 47(5) Personal Property Security Act, R.S.O. 1990, c. P.10, ss. 9(2), 19(b), 20(1)(b), 23, 28(1), 45, 46(2), (4), 47(5)
Personal Property Security Act, R.S.S. 1979-80, c. P-6.1, s. 66(1)
Rules and regulations referred to
R.R.O. 1990, Reg. 912 (Personal Property Security Act), ss. 3(7), (8), (9), 16
Authorities referred to
McLaren, Secured Transactions in Personal Property in Canada, 2nd ed. (1992), pp. 30-32, 30-18.2
Ontario, Report of the Minister’s Advisory Committee on the Personal Property Security Act (1984), pp. 13, 27-28
Ontario Ministry of Consumer and Commercial Relations, Personal Property Security Act Enquiry Guide (1993), pp. 70-71
Ziegel, “The New Provincial Chattel Security Law Regimes” (1991), 70 Can. Bar Rev. 681, pp. 715-16
Ziegel, “Personal Property Security Legislative Activity, 1986-88” (1989), 15 Can. Bus. L.J. 108, pp. 112-15
Ziegel, “Protecting the Integrity of The Ontario Personal Property Security Act” (1987-88), 13 Can. Bus. L.J. 359, p. 368
Ziegel and Denomme, The Ontario Personal Property Security Act: Commentary and Analysis (1994), pp. 361-62, 364-65
APPEAL from an order of the General Division (1991), 2
P.P.S.A.C. (2d) 160, 11 C.B.R. (3d) 165 (Farley J.), declaring a security interest ineffective as against a trustee in bankruptcy pursuant to s. 20(1)(b) of the Personal Property Security Act, R.S.O. 1990, c. P.10.
Edward M. Hyer, for appellant, General Motors Acceptance Corp. of Canada.
Rosemary Fisher-Cobb, for respondent trustee in bankruptcy. The judgment of the court was delivered by
DOHERTY J.A.: —
I The Issue*
When will an error in the contents of a financing statement render the statement invalid and the security interest it represents unperfected as against third parties? The answer depends on the reach of s. 46(4) of the Personal Property Security Act, R.S.O. 1990, c. P.10 (“P.P.S.A.”), which reads:
46(4) A financing statement or financing change statement is not invalidated nor is its effect impaired by reason only of an error or omission therein or in its execution or registration unless a reasonable person is likely to be misled materially by the error or omission.
* The same issue was raised in Re Woolf (File No. C13753); Re Tanzer (File No. C13690) and Re Haasen (File No. C12153) [now reported at p. 128 post]. The appeals were heard together and these reasons reflect the arguments advanced in all four cases. II The Facts
Mr. Lambert purchased a motor vehicle under the terms of a conditional sales contract. The vendor sold the contract to the appellant (GMAC). GMAC registered its security interest in the vehicle by filing a financing statement as provided in the
P.P.S.A. The financing statement referred to the debtor as Gilles J. Lambert. This was the name used by Mr. Lambert when he signed the conditional sales contract and was also the name used to identify the owner of the vehicle in the records of the Ministry of Transportation and Communication. Unfortunately, it is not Mr. Lambert’s proper name. His name, as shown on his birth certificate, is Joseph Phillipe Gilles Lambert. The financing statement correctly identified Mr. Lambert’s date of birth and correctly set out the Vehicle Identification Number
(the V.I.N.).
Subsequent to the registration, Mr. Lambert made an
assignment in bankruptcy and his trustee took possession of the motor vehicle. GMAC filed a proof of claim contending that it was a secured creditor with a security interest in the motor vehicle. At some point subsequent to the assignment in bankruptcy, the trustee acquired a copy of the GMAC financing statement. It identified the vehicle as “consumer goods”.
The trustee caused its solicitor to inquire into the claim of GMAC. To do so, she turned to the computerized registration system established under the P.P.S.A. That system made three inquiries available. A searcher could conduct an individual specific debtor name inquiry (a specific debtor inquiry), an individual non-specific debtor name inquiry (a non-specific debtor inquiry) and a vehicle number inquiry (a V.I.N. search). To conduct the specific debtor inquiry, a searcher must enter into the computer the debtor’s first name, middle initial, last name and date of birth. This search retrieves only financing statements in which the debtor’s first name, middle initial, last name and date of birth as set out in the financing statement exactly match the data entered by the searcher. The non-specific inquiry requires the searcher to enter the debtor’s first and last name. It reveals all financing statements where the debtor is described by that first and last name regardless of the middle initial, if any, or the date of birth shown in the financing statement. A V.I.N. search is made by entering the V.I.N. only and retrieves all financing statements in which the collateral is described by the same V.I.N. entered by the searcher regardless of the name of the debtor. [See Note 1 at end of document.] The
V.I.N. search is available only where the collateral is a motor vehicle. The V.I.N. must be recorded in the financing statement where the motor vehicle is classified as consumer goods. Where the motor vehicle is not so classified, the V.I.N. may be included in the financing statement.
The trustee’s solicitor, relying on the name on Lambert’s birth certificate, made individual specific inquiries using the names Joseph P. Lambert and Joseph G. Lambert and Lambert’s birth date. She also made an individual non-specific search using the name Joseph Lambert. None of these searches revealed the financing statement filed by GMAC since it referred to the debtor as Gilles J. Lambert. The solicitor did not conduct a V.I.N. search, although the trustee had access to that number. A V.I.N. search would have revealed the GMAC financing statement.
The trustee moved for a declaration that the GMAC security interest was not perfected and was, therefore, not effective against the trustee in bankruptcy. The trustee submitted that the errors in the recording of the debtor’s name in the financing statement were fatal to the perfection of that interest as against the trustee. GMAC maintained that the errors were cured by s. 46(4) of the P.P.S.A. since the trustee should have performed a V.I.N. search and had he done so, he would not have been misled by the errors in the debtor’s name. Farley J. found in favour of the trustee. His reasons are now reported at (1991), 2 P.P.S.A.C. (2d) 160, 11 C.B.R. (3d) 165
(Gen. Div.).
III Analysis
But for s. 46(4), there would be little difficulty applying the terms of the P.P.S.A. to this fact situation. Section 19(b) of the P.P.S.A. provides that a security interest is perfected when all steps required for perfection under the P.P.S.A. have been completed. Section 23 of the P.P.S.A. declares that registration perfects the security interest in all types of collateral. Perfection by registration requires the registering of a financing statement (s. 45). The financing statement must be in the prescribed form (s. 46(2)). The prescribed form is set out in O. Reg. 372/89 (now R.R.O. 1990, Reg. 912). Section 16 of that regulation provides:
16(1) The name of a debtor who is a natural person shall be set out in the financing statement to show the first given name, followed by the initial of the second given name, if any, followed by the surname. Sections 3(7), (8) and (9) of the same regulation are also relevant:
3(7) If the collateral includes a motor vehicle and the motor vehicle is classified as consumer goods, the motor vehicle shall be described on line 11 or 12 on the financing statement or in the appropriate place on a motor vehicle schedule.
(8) If the collateral includes a motor vehicle and the motor vehicle is not classified as consumer goods, the motor vehicle may be described on line 11 or 12 on the financing statement or in the appropriate place on a motor vehicle schedule.
(9) The description of the motor vehicle on line 11 or 12 or on a motor vehicle schedule shall include the vehicle identification number, the last two digits of the model year, if any, the model, if any, and the make or the name of the manufacturer.
GMAC’s financing statement complied with the relevant parts of s. 3 of the regulation, but did not comply with s. 16 in that it incorrectly stated both Lambert’s first name and his middle initial. Accordingly, GMAC’s financing statement was not in the prescribed form and but for the possible effect of s. 46(4) of the P.P.S.A., GMAC’s security interest in the vehicle was not perfected.
Section 20(1)(b) of the P.P.S.A. declares that an unperfected security interest in any collateral is not effective against a trustee in bankruptcy. Again, setting aside s. 46(4) of the P.P.S.A., it would follow that since GMAC’s security interest was not registered in accordance with the Act and hence not perfected, it was ineffective as against the trustee in bankruptcy. But for s. 46(4) of the P.P.S.A., the trustee was entitled to the declaration made by Farley J.
Does s. 46(4) of the P.P.S.A. alter this result? For convenience, I will repeat the section:
46(4) A financing statement or financing change statement is not invalidated nor is its effect impaired by reason only of an error or omission therein or in its execution or registration unless a reasonable person is likely to be misled materially by the error or omission.
Two features of s. 46(4) are non-controversial. First, it is potentially applicable to any error in a financing statement: Re Weber (1990), 78 C.B.R. (N.S.) 224 (Ont. S.C.) at p. 227.
Secondly, an error in a financing statement does not per se invalidate that statement or impair the security interest claimed by the statement. The validity of the financing statement is unaffected by the error unless the party seeking to invalidate the financing statement demonstrates that “a reasonable person is likely to be misled materially by the error”.
Interpreting s. 46(4) becomes more difficult once one ventures beyond these two propositions. Some trial courts in
this province have approached s. 46(4) by looking to the effect of the error in the financing statement on the party challenging the security. Cases taking that view include: Fritz v. Ford Credit Canada Ltd. (1992), 15 C.B.R. (3d) 311 (Ont. Gen. Div.) at p. 314; Prenor Trust Co. of Canada v. 652729 Ontario Ltd. (1992), 4 P.P.S.A.C. (2d) 139 (Ont. Gen. Div.) at pp. 141-42; Canamsucco Road House Food Co. v. Lngas Ltd. (1991), 2 P.P.S.A.C. (2d) 203 (Ont. Gen. Div.) at p. 208; General Motors Acceptance Corp. of Canada v. Stetsko (1992), 8 O.R. (3d) 537 (Gen. Div.) at pp. 541-42; Re Rose (1993), 16 O.R. (3d) 360, 23 C.B.R. (3d) 58 (Gen. Div.).
In Fritz, supra, the debtor’s name had been incorrectly spelled on the financing statement, but the V.I.N. was accurately recorded. The trustee performed only a specific debtor inquiry. That inquiry did not retrieve the financing statement. A V.I.N. search would have located the financing statement. The trustee had been told by the debtor that the automobile in question was pledged to the creditor. Chadwick J. found that the mistake in the debtor’s name constituted an error in the financing statement. He then turned to s. 46(4) of the P.P.S.A. In holding that the creditor had a valid security interest, Chadwick J. said at p. 314:
The “reasonable person” that is referred to in considering subs. 46(4) is not an imaginary person but the person who is challenging the validity of the security agreement. In this case, the trustee in bankruptcy had actual notice of the interests of Ford Credit Canada Limited at the time of the assignment in bankruptcy. He was informed by the bankrupt that the 1989 Ford Tempo was fully secured by Ford Canada Limited. The name search under the P.P.S.A. by the trustee was only for the purpose of determining whether there were any errors in the registration of the documentation and not for the purpose of a bona fide purchaser.
It is obvious from the facts in this case that the trustee was not materially misled as a result of the incorrect registration.
In Stetsko, supra, a creditor placed the wrong birth date of the debtor in the financing statement. The trustee was told by the debtor of the creditor’s secured interest in the automobile, but he conducted only a specific debtor inquiry.
That inquiry did not retrieve the creditor’s financing statement because of the error in the birth date. In holding that the creditor’s interest remained perfected as against the trustee Maloney J. referred, with approval, to the analysis of s. 46(4) found in Canamsucco, and said at p. 542:
[I]n trying to determine whether the “reasonable person” is likely to be misled one can only look to: (1) who that person is, (2) what knowledge he may have had, and (3) how he may be affected by it.
On this view of s. 46(4), the error in the financing statement is of no consequence if the party challenging the statement had knowledge of the security interest, or if that party acting reasonably, given its knowledge, could have located the financing statement using the various searches available under the P.P.S.A. This approach has some attraction, especially in cases where the trustee in bankruptcy is seeking to take advantage of an error in the financing statement. In those cases, the trustee appears more as an opportunist pouncing on a windfall than as a vulnerable prospective creditor or purchaser seeking the protection of reliable registration system: Ziegel, “The New Provincial Chattel Security Law Regimes” (1991), 70 Can. Bar Rev. 681 at pp. 715-16. The subjective approach may be said to do “justice” in cases involving the trustee in bankruptcy in that it denies the trustee the windfall.
I cannot, however, agree with this interpretation of s. 46(4). By using the reasonable person standard, the legislature intended that the test provided in s. 46(4) should be an objective one. To limit the inquiry to the effect of the error on the party challenging the security is to impose a personal or subjective test peculiar to that party. Furthermore, this interpretation substitutes a test based on actual prejudice for the reasonable person standard set out in the section. As written, s. 46(4) does not require evidence that the error actually misled any person. The language of s. 46(4) may be usefully compared to that found in s. 9(2) of the P.P.S.A.:
9(2) A security agreement is not unenforceable against a third party by reason only of a defect, irregularity, omission or error therein or in the execution thereof unless the third party is actually misled by the defect, irregularity, omission or error.
Section 9(2) expressly declares that a security agreement is not unenforceable by virtue of an error in that agreement unless “the third party is actually misled by the . . . error”. The language of s. 46(4) which specifically targets financing statements stands in marked contrast to the subjective language of s. 9(2). The approach taken in Fritz, supra, Stetsko, supra, and similar cases is appropriate to the language of s. 9(2), but not to the very different language found in s. 46(4).
The statutory history of s. 46(4) is also informative on this point. I need not detail that history as it is fully chronicled elsewhere. [See Note 2 at end of document.] It is sufficient for my purposes to observe that s. 47(5) of the P.P.S.A., R.S.O.
1980, c. 375, the predecessor section of 46(4), set out an actual prejudice test as part of its scheme for distinguishing between errors in financing statements which invalidated the statement and those which did not: Re Charles (1990), 73 O.R. (2d) 245 at p. 249, 79 C.B.R. (N.S.) 92 (C.A.). In 1984, the Minister’s
Advisory Committee on the Personal Property Security Act (the Catzman Committee) recommended that the curative provisions in the Act be amended to provide for a reasonable person standard in evaluating the effect of errors in financing statements and security agreements: Ontario, Report of the Minister’s Advisory Committee on the Personal Property Security Act, 1984, at pp. 13, 27-28. A similar recommendation was made by the committee in 1986, although that recommendation was limited to financing statements. The recommendation of the committee was opposed by those who preferred a subjective, actual prejudice test. At first it appeared that the government of the day would support the subjective approach. An early draft of the proposed amendments to the P.P.S.A. included the following:
A financing statement . . . is not invalidated nor is its effect impaired by reason only of a defect, irregularity, omission or error therein or in the execution or registration thereof unless the defect, irregularity, omission or error has actually misled someone.; [See Note 3 at end of document.]
However, the bill as eventually introduced adopted the committee’s recommendation. That recommendation proposed a curative proviso in the same words as are now found in s. 46(4).
The genealogy of s. 46(4) is remarkably complete. There is no need to speculate about how the section ended up as it did. Two competing approaches were put forward and their respective merits debated over several years. In the end, a standard determined by reference to the probability of a reasonable person being materially misled won out over the subjective actual prejudice test favoured by others. With respect, the approach to s. 46(4) taken in Fritz, Stetsko and similar cases is closely aligned to the approach the legislature considered and rejected when it opted for the language of s. 46(4).
Whatever the merits of the arguments in favour of an actual prejudice test, those arguments were made before the appropriate forum and found wanting. They cannot be resurrected under the guise of statutory interpretation.
Support for the conclusion that the reasonable person referred to in s. 46(4) cannot be equated with a person in the position of the party seeking to invalidate the financing statements is found in Kelln (Trustee of) v. Strasbourg Credit Union Ltd. (1992), 89 D.L.R. (4th) 427, 9 C.B.R. (3d) 144 (Sask. C.A.). Section 66(1) of the Personal Property Security Act, S.S. 1979-80, c. P-6.1, provides:
66(1) The validity or effectiveness of a document to which this Act applies is not affected by reason of a defect, irregularity, omission or error therein or in the execution or registration thereof unless the defect, irregularity, omission or error is seriously misleading.
This section applies to financing statements registered under the Saskatchewan Act. If anything, the language of s. 66(1), which does not contain any specific reference to the reasonable person, is more susceptible to the subjective actual prejudice approach than in s. 46(4) of the P.P.S.A. Despite that arguable ambiguity, the Saskatchewan Court of Appeal unanimously held that s. 66(1) sets out a purely objective test. The court specifically rejected trial decisions in Saskatchewan which had considered the effect of the error from the vantage point of the party challenging the validity of the financing statement. Bayda C.J.S. at p. 430, speaking only for himself, held that the application of the curative proviso was to be determined by asking:
. . . whether a reasonable person using the registration and search systems put in place by the Act is apt by reason of the omission and the circumstances surrounding it to end up believing that something important is so when in fact it is not so.
Vancise J.A. at p. 442, writing for himself and Wakeling J.A., adopted the question posed by Professor Cumming as the appropriate approach:
Would the defect, irregularity, omission or error be seriously misleading to any reasonable person within the class of person for whose benefit registration or other methods of perfection are required.
Trial courts in this province, including Farley J. in this case, have also rejected the approach taken in Fritz and Stetsko in favour of one which looks to the hypothetical users of the search facilities provided by the registration system. These cases include: Armstrong, Thomson & Tubman Leasing Ltd.
v. McGill Agency Inc. (Trustee of) (1993), 15 O.R. (3d) 292 at pp. 297-98, 21 C.B.R. (3d) 295 (Gen. Div.); Re Haasen (1992), 8 O.R. (3d) 489 at p. 499, 13 C.B.R. (3d) 94 (Gen. Div.); Re Ghilzon (1993), 21 C.B.R. (3d) 71 (Ont. Gen. Div.) at pp.
73-74; Re Weber, supra, at p. 243; Re Woolf (1992), 15 C.B.R. (3d) 292 (Ont. Gen. Div.) at pp. 298-300; Adelaide Capital Corp. v. Integrated Transportation Finance Inc. (1994), 16 O.R. (3d) 414 at pp. 428-29, 23 C.B.R. (3d) 289 (Gen. Div.).
Weber was cited with approval by the Divisional Court in 656956 Ontario Ltd. v. General Electric Capital Equipment Finance Inc. (1992), 8 O.R. (3d) 481 at pp. 485-86, 90 D.L.R. (4th) 76.
Professor Ziegel and Mr. Denomme in their recent text, The Ontario Personal Property Security Act: Commentary and Analysis (1994), also favour the objective approach to s. 46(4).
After a comparison of the present section and its predecessor, they write at pp. 361-62:
As noted, s. 46(4) implements an objective test — would “a reasonable person” be “misled materially” by the error or omission? If the question is answered “yes”, it matters not whether the party attacking the erroneous statement, or indeed anyone else, was actually misled. The reason for the use of such a test is to maintain the integrity of the registration system and to avoid costly litigation; registrants must have such a test in mind and attempt always to complete registrations so that no reasonable person could be so misled. If they fail to do so, it will not matter that, fortuitously, no one can be found who actually reviewed and relied upon the erroneous portion of the statement. This will provide an incentive to registrants to ensure that registrations are correct and complete and will result in a more reliable and useful system.
A continuing problem in the jurisprudence in this area is the tendency to render fact-specific decisions which, while seeming to be more fair in the particular case, introduce uncertainties which serve to weaken the structure and purpose of the registration system. There is an understandable reluctance to deprive secured parties of perfected security interest for what seem like minor and technical errors in financing statements or financing change statements. This has led some courts to seek to do justice as between a registrant and a party challenging the registration by finding that the challenger has not been prejudiced by the error. It bears repeating that the plain words of s. 46(4) require an objective enquiry into whether “a reasonable person is likely to be misled materially” by the defect in question.
Later, after a consideration of Kelln, supra, and the conflicting authority in Ontario, the authors conclude at pp. 364-65:
With respect to registration errors, the initial question posed by the statute is “would a reasonable person have been misled materially by this error?” The answer to this question cannot depend on the facts of a particular case — to allow it to do so leads to random results. The registration process, insofar as it is under the control of the registrant, should be very carefully monitored for errors because it is not possible to predict, at the date of registration, who may later access the information or for what purpose. Therefore, to the extent an onus should be placed on anyone it should be placed on the registrant in order to preserve the reliability of the registration system.
Without adopting the ultimate conclusions reached in Kelln and the supporting Ontario authorities, or all of the reasons put forward by Ziegel and Denomme in support of their position, I do agree that s. 46(4) sets out an objective test. The inquiry dictated by s. 46(4) cannot focus on a particular party, but must look to the broader class of persons who may have cause to use the search facilities of the registration system. In looking to that broader class of persons, one must determine, not the existence of actual prejudice, but the probability of some member of that class of persons being materially misled by the error. As s. 46(4) lays down an objective test, a party challenging the security on the basis of errors in the financing statement need not demonstrate actual prejudice to that party or anyone else. The trustee in bankruptcy may rely on an error in a financing statement to invalidate a secured interest claimed in that statement if the trustee or other third party can show that the error in the financing statement was likely to materially mislead a reasonable person.
My conclusion that s. 46(4) creates an objective test which requires an assessment of the error’s impact on those persons who might use the search facilities of the registration system does not resolve this appeal. It remains to provide a concrete formulation of that test.
I begin with the purpose of s. 46(4). The section is designed to preserve the integrity of the registration system provided by the P.P.S.A. That system has two constituencies: those who register financing statements; and those who search the system for prior registrations. The integrity of the overall system must address the interests of both groups. Section 46(4) seeks to maintain the system’s integrity by distributing the impact of errors, no matter how unavoidable, made in financing statements between the two groups. An interpretation of s. 46(4) which is too forgiving of such errors places too much of the burden on prospective creditors and purchasers (searchers). An interpretation which is too unforgiving of those errors places too much of the burden on creditors (registrants). In either event, the integrity of the registration system suffers. Section 46(4) should be interpreted, to the extent that its language permits, so as to assign the burden of the error in a manner which best promotes the overall integrity of the system.
I turn next to the context in which s. 46(4) exists. Its reach and limitations can be understood only in the framework of the registration system established under the P.P.S.A. and the purposes for which that system is used. Professor McLaren, in his text, Secured Transactions in Personal Property in Canada, 2nd ed. (1992), at pp. 30-32 provides a succinct description of the purposes of the system:
The personal property security registration system provides the vehicle to permit registration of a security interest and a non-possessory repair or storage lien. It also provides information about the transaction and a means whereby a person who is intending to purchase personal property or to lend money on the security of personal property can determine whether the owner has granted a security interest in the property as security for a debt. This information function is accomplished by providing a mechanism by which a search of registrations under the Act may be made.
The purpose of the registration system is to provide enough information to enable a person searching the system to know whom to contact to obtain information regarding a secured transaction. It is for this reason that the registration system is referred to as a notice-filing system.
(Emphasis added)
The purpose underlying the search function of the registration system is particularly important to the interpretation of s. 46(4). As Professor McLaren properly points out, the inquiry or search function exists to provide information to prospective buyers and lenders who are purchasing property or taking property as collateral for a loan. The putative purchaser or lender wants to know whether there are any prior claims on the property which could affect the decision to buy the property or accept it as collateral.
In my view, the “reasonable person” in s. 46(4) is a person using the search facilities of the registration system for their intended purpose, that is, to find out whether personal property to be purchased or taken as collateral is subject to prior registered encumbrances. To assess the potential effect of an error in a financing statement one must assume that the property
which is the subject of the flawed financing statement is the property targeted by the inquiry made by the prospective purchaser or lender. In this case, therefore, the question becomes — would a potential purchaser of the motor vehicle referred to in the financing statement, or a person considering taking that motor vehicle as security, be materially misled by the error in a previously registered financing statement? [See Note 4 at end of document.] This articulation of the test accords with the purpose of the inquiry function of the system, and gives meaning to the requirement that the error be “likely to mislead materially”. Unless the effect of the error is addressed in the context of a potential purchase or loan involving the property specified in the financing statement, I am unable to see how an error in that financing statement could be “likely to materially mislead” a prospective purchaser or lender.
In so describing the purpose of the search function of the system, I am not unaware that it has other uses in the commercial world. Some potential creditors may do a P.P.S.A. search as part of their inquiry into the credit worthiness of a potential borrower. Those creditors will not be interested in the status of any particular property, but will be looking for any information that may assist in assessing the potential borrower’s overall debt situation and credit worthiness. In describing the reasonable person for the purposes of s. 46(4), I would distinguish between a use to which the P.P.S.A. system can be put and the purpose for which the system exists. The system was not designed as a credit inquiry service, although it can provide information which will assist in determining credit worthiness. That same incidental use exists with respect to information stored in various other data banks established for a myriad of other purposes.
The preservation of the integrity of the P.P.S.A. registration system requires that those who use the system for its intended purpose be protected from errors made by other users where those errors are likely to mislead materially. In my view, the same protection should not be extended to those who put the system to some different use which while commercially beneficial is not the purpose for the system. In my view, the reasonable person in s. 46(4) is not the person using the search facility as part of a general inquiry into a prospective borrower’s credit worthiness.
The “reasonable person” using the inquiry function of the registration system for the purpose described above must also be regarded as a person who is familiar with the search facilities provided by the system. That is not to say that the standard is that of the most sophisticated and skilled user.
The standard must be that of a reasonably competent user of the system: Re Millman (1994), 17 O.R. (3d) 653, 24 C.B.R. (3d) 190
(Gen. Div.). That reasonable user would be aware of the various searches available in the system and the product produced by each. Furthermore, the reasonable user must be taken to know that potential security interests in motor vehicles may be retrieved through two discrete searches of the system, one using the name of the debtor and the other the motor vehicle’s V.I.N.
Having identified the reasonable person in s. 46(4) as a potential purchaser or lender seeking to locate prior encumbrances on the targeted property, and as a reasonably competent user of the search function of the registration system, I turn now to the information which that reasonable person could be expected to have when making his or her inquiry. No one suggests that the reasonable person would not be able to get the name and birth date of the vendor or borrower through the relevant records. Clearly, he or she would be able to obtain that information: Re Haasen, supra, at p. 500. The reasonable person, as a potential purchaser or lender would not, however, necessarily have access to the names and birth dates of prior owners of the motor vehicle. These prior owners may have encumbered the vehicle. Financing statements giving notice of those encumbrances will be registered under the name of the prior owner and perhaps under the V.I.N.
In my opinion, the potential purchaser or lender acting reasonably would also obtain the V.I.N. of the motor vehicle. He or she would be in a position to require access to the motor vehicle as a condition of the purchase or loan. Access to the motor vehicle means access to the V.I.N. since it is found on a plate attached to the vehicle’s dashboard. Furthermore, a reasonably prudent purchaser or lender familiar with the registration system would appreciate that the V.I.N. could be used to search for prior encumbrances on the vehicle, particularly those registered against prior owners of the vehicle whose identity was unknown to the potential purchaser or lender. Fixed with this knowledge, the reasonable person would realize the importance of the V.I.N. and would take advantage of his or her position as a purchaser or lender to require access to the V.I.N.
Would the reasonable person, having access to the seller or borrower’s name (and birth date) and the V.I.N. of the motor vehicle, use both sources of information to conduct two searches of the registration system? With respect to the contrary view, I have no doubt that a reasonable person in possession of the information needed to conduct the two searches would in fact conduct both searches. The reasonable person would want to know about any prior encumbrances registered against the motor vehicle and would take all reasonable steps to locate notice of any prior encumbrance in the system. As a reasonable user of the registration system, he or she would know that prior encumbrances for motor vehicles could be registered under the debtor’s name, the V.I.N., or both. A name search might not locate all prior encumbrances. A V.I.N. search might not locate all prior encumbrances if the motor vehicle was not classified as consumer goods for the purposes of a prior transaction. By performing the two searches, the reasonable user would increase the probability of recovering all prior encumbrances. The added protection would come at minimal cost. [See Note 5 at end of document.] Any reasonable user would spend the few dollars required for the added information and comfort provided by two independent searches of the registration system.
Those who have held that the reasonable person in s. 46(4) would conduct only a specific debtor name search have emphasized the importance to the registration system of using the debtor’s correct name in the financing statement. For example, Donnelly J. in Re Ghilzon, supra, said at p. 74: “The integrity of the registration system is name-dependent.” No doubt this observation is accurate with regard to personal property other than motor vehicles. But where motor vehicles are involved, the integrity of the registration system does not depend only on accurately recording the debtor’s name in the financing statement. Indeed, the V.I.N. search function exists specifically because a name-dependent system for motor vehicles would be inadequate and would leave potential purchasers and lenders vulnerable to encumbrances placed on the motor vehicle by prior owners of the motor vehicle. In the case of motor vehicles, the registration system is not name-dependent.
Rather, it provides for identification of prior registrations by the combined access to the system afforded by name and V.I.N. searches.
An approach to s. 46(4) which excludes errors in the debtor’s name from those which are curable by s. 46(4) harks back to the language of the former curative proviso (s. 47(5)) which declared that only clerical errors or errors in immaterial or non-essential parts of the financing statement were curable under that provision: Re Weber, supra, at pp. 228-29. The debtor’s name is clearly a material and essential part of the financing statement: Re Bellini Manufacturing & Importing Ltd. (1981), 32 O.R. (2d) 684 at pp. 692-93, 37 C.B.R. (N.S.) 209 (C.A.). The present curative proviso does not, however, fix on the part of the financing statement in which the error occurred, but instead looks to the effect of the error on the reasonable person. The present provision may cure any error no matter where it occurs in the financing statement, if that error is not likely to mislead materially a reasonable person. An error may occur in a material part of the financing statement, but may not, in light of additional information, found in the same financing statement and available to the reasonable person, materially mislead that person. Case law under the prior provision identifying the materiality of the debtor’s name to the financing statement does not assist in deciding whether the reasonable person referred to in the current section would conduct more than a specific debtor search.
Proponents of the single-search approach also rely on the absence of any requirement in the P.P.S.A. that more than one search be done: Re Weber, supra, at p. 228. The P.P.S.A. does not require that any search be done. A search for prior registered interests is triggered by self-interest, not by any statutory obligation. The nature of the search to be expected from a reasonable person reflects the extent to which a reasonable person would go to protect his or her interests. The absence of any statutory provision requiring one or more searches is of no consequence.
In summary, the reasonable person in s. 46(4) has the following attributes:
;dc He or she is a reasonably prudent prospective purchaser or lender who looks to the registration system of the P.P.S.A. to provide notice of any prior registered claims against the property he or she is proposing to buy or take as collateral for a loan.
;dc He or she is conversant with the search facilities provided by the registration system and is a reasonably competent user of those facilities.
;dc Where the property to be bought or taken as collateral is a motor vehicle, the reasonable person will obtain the name and birth date of the seller/borrower as well as the V.I.N. of the motor vehicle.
;dc Where the property is a motor vehicle, the reasonable person will conduct both a specific debtor name search and a V.I.N. search.
Bearing this reasonable person in mind I move to the final question. Is that reasonable person “likely to be misled materially” by a financing statement which contained an error in the debtor’s name, but accurately set out the V.I.N.? The purpose for which the reasonable person uses the search function of the registration system provides the key to determining when it can be said that the reasonable person would be materially misled by an error in a financing statement. The reasonable person uses the system to find prior registered secured interests in the property in question. If the error in the financing statement results in the reasonable person not retrieving that financing statement from the system, then the reasonable person will probably be misled materially. If despite the error, the reasonable person as defined above will still retrieve the flawed financing statement from the system, then the error in the financing statement is not likely to mislead materially.
A reasonable person would not likely be misled materially by an error in a financing statement relating to the debtor’s name if that same financing statement accurately set out the V.I.N. That financing statement would come to the attention of the reasonable person through a V.I.N. search despite the error in the name. The reasonable person would, therefore, be put on notice of the security interest referred to in the financing statement and could proceed accordingly. This conclusion accords with that reached in Ford Credit Canada Ltd. v.
Percival Mercury Sales Ltd. (No. 1), [1986] 6 W.W.R. 569, 50 Sask. R. 268 (C.A.).
The result would be very different if the financing statement incorrectly set out the debtor’s name and did not contain the V.I.N., as could be the case if the motor vehicle had not been classified as consumer goods for the purposes of the transaction giving rise to the financing statement. In that situation, the error in the debtor’s name would be fatal since the reasonable person conducting both a specific debtor search and a V.I.N. search could not locate the financing statement. That is, however, not this case. This financing statement did include the V.I.N., and the impact of the error in the debtor’s name must be assessed in that light. It supports the purpose behind the registration system to hold that a creditor who includes information in the financing statement which potentially permits a subsequent searcher to locate the financing statement through two independent means is in a better position than a creditor who chooses to limit itself to the bare essentials required by the regulations.
My conclusion would also be different if the V.I.N. was improperly recorded in the financing statement and the debtor’s name was accurately set out. In that situation, a reasonable person could well be materially misled by the error in the financing statement. Consider this example. P. agrees to purchase a car from V. The car had been previously owned by X. who pledged it to Y. Y. registered a financing statement correctly identifying X. as the debtor, but incorrectly setting out the V.I.N. of the motor vehicle. P., proceeding as I have held a reasonable purchaser would, conducts a specific debtor search in the name of V. (his vendor) and a V.I.N. search using the proper V.I.N. The two searches conducted by P. would not reveal Y.’s financing statement, because of the error made by
Y. with respect to the V.I.N. This error would, therefore, probably materially mislead P. since it would leave him unaware of Y.’s claim to a prior security interest in the motor vehicle. My conclusion that an error in the V.I.N. even when coupled with a correct identification of the debtor would not be curable under s. 46(4) is consistent with the result in Kelln, supra.
Further reference to Kelln is necessary. In that case, the V.I.N. was improperly recorded in the relevant financing statement, but the debtor’s name was accurately recorded. The court held that the error could not be cured by the Saskatchewan equivalent of s. 46(4) of the P.P.S.A. As indicated above, I agree with that result. Vancise J.A. went on to hold that an error in the debtor’s name where the V.I.N. was properly recorded would be equally fatal. In doing so, he appears to have rejected the same court’s holding in Ford Credit Canada Ltd., supra. Vancise J.A. and I part company at this point.
Vancise J.A. observes at p. 443 that an error in a financing statement is not curable if that error would result in “the failure to properly register or retrieve the information from the register concerning the collateral”. I agree with this comment, except I would limit the concern to the proper retrieval of the information.
Vancise J.A. goes on at pp. 443-44 to hold:
Thus the conclusion is that the failure to include both of the mandatory registration-search criterion where it is required will result in the registration being seriously misleading and render the security interest unperfected.
As noted, the reason for such objective interpretation is to provide a consistent approach to the registration and perfection of security interests.
The failure to include the debtor’s name on a financing statement where there is already a serial number which correctly describes the collateral should render the security interest unperfected. In other words, when there is a requirement for both criterion the failure to include one is seriously misleading and the failure to comply renders the registration invalid. If one or both of the mandatory registration-search criteria contain errors which do not prevent the proper identification or retrieval of the financing statement, the error is not seriously misleading and the security interest should be perfected.
This analysis proceeds on the basis that only a single search need be performed by the prospective purchaser or lender.
Consequently, an error in either the name or the V.I.N. which prevented a person conducting either, but not both of those searches from locating the financing statement would be materially misleading.
I reach a different result than Vancise J.A. because, for the reasons I have already set out, I proceed on the premise that the prospective purchaser or lender would have access to both the seller/borrower’s name and the V.I.N., and would conduct both searches. An error in a financing statement would probably be materially misleading only if the error caused the financing statement to escape the net cast by the combined reach of both searches.
Vancise J.A. quite properly supports his approach on the basis of the certainty and predictability it achieves. My approach borrows from his, save for the different assessment of the searches a reasonable person would conduct, and achieves the same consistency and predictability. In my estimation, it also more effectively preserves the integrity of the registration system by more fairly balancing the interests of secured creditors and prospective purchasers and lenders. A creditor’s secured interest should not fail as against third parties by virtue of an error in the financing statement, if that error would not preclude retrieval of the financing statement by a prospective purchaser or lender taking reasonable steps to protect his or her interest and making reasonable use of the search facilities provided by the registration system.
I would hold that the trustee has not established that the error in the GMAC financing statement would probably have misled materially a reasonable person. The financing statement is therefore not invalidated and GMAC’s security interest in the motor vehicle is perfected.
IV The Order
GMAC did not commence its appeal within the time period permitted by the statute. It was, however, out of time by only a few days and had formed the intention to appeal within the specified time period. The trustee does not allege any prejudice arising from the delay. I would grant the necessary extension of time for the service and filing of the notice of appeal. I would also allow the appeal, set aside the order of Farley J. and substitute an order declaring that, as against the trustee, GMAC has a perfected security interest in the motor vehicle.
GMAC is entitled to its costs both in this court and in proceedings before Farley J. Costs before Farley J. should be in the amount fixed by him.
Appeal allowed.
Note 1: The searcher may also request additional registrations containing similar V.I.N. numbers: Personal Property Security Act Enquiry Guide: Ministry of Consumer and Commercial Relations (1993) at pp. 70-71.
Note 2: Ziegel, “Protecting the Integrity of The Ontario Personal Property Security Act” (1987-88), 13 Can. Bus. L.J. 359;
Ziegel, “Personal Property Security Legislative Activity, 1986-88” (1989), 15 Can. Bus. L.J. 108 at pp. 112-15.
Note 3: Reproduced in Ziegel, “Protecting The Integrity of The Ontario Personal Property Security Act”, supra, n. 2 at p. 368.
Note 4: Apart from the protection afforded by the registration system, purchasers who buy from dealers are protected by s. 28(1) of the P.P.S.A.; see McLaren, supra, at p. 30-18.2.
Note 5: We were informed by counsel that each additional search costs $10.00.