Court Of Appeal Rejects Use Of Equity To Override PPSA Priority Rules

The BC Court of Appeal has ruled that equitable principles cannot be used to avoid the priority scheme contained in the PPSA.

In KBA, Inc. v. Supreme Graphics Limited, 2014 BCCA 117, the Court overturned a BC Supreme Court decision that altered the priority scheme under the Personal Property Security Act ("PPSA") by granting an "equitable priority" to a secured creditor, KBA, Inc. ("KBA").

KBA's financing statement in respect of its purchase money security interest in a printing press was discharged by a third party, without KBA's knowledge or consent. By the time KBA became aware of the discharge and re-registered a financing statement, it had lost priority over other perfected security interests, including a General Security Agreement registered in favour of Supreme Graphics Limited ("Supreme"). KBA applied to a judge of the Supreme Court to reinstate the priority of its security interest, relying upon PPSA sections 68 and 70, and the doctrine of unjust enrichment.

Sections 68 and 70 of the PPSA provide as follows:

Supplementary law

68 (1) The principles of the common law, equity and the law merchant, except insofar as they are inconsistent with the provisions of this Act, supplement this Act and continue to apply. (2) All rights, duties or obligations arising under a security agreement, this Act or any other law applicable to security agreements or security interests must be exercised or discharged in good faith and in a commercially reasonable manner. (3) A person does not act in bad faith merely because the person acts with knowledge of the interest of some other person.

Summary proceedings

70 On application of an interested person, a court may (a) make an order determining questions of priority or entitlement to collateral, or (b) direct an action to be brought or an issue to be tried.

The chambers judge found that the court had equitable jurisdiction to grant the relief sought, both under ss. 68 and 70 of the PPSA and the doctrine of unjust enrichment, and gave KBA's interest priority over the interests of two other creditors, including Supreme.

Supreme appealed, arguing that the priority scheme set out in s. 35(1) of the PPSA is a complete code, designed to provide necessary commercial certainty, and that it could not be altered by the application of equitable principles.

The BCCA agreed, observing that "...the overriding goal of the PPSA is to provide commercial certainty and predictability to personal property financing. The...

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