2003BCSC1105

Before: The Honourable Mr. Justice Hood

Reasons for Judgment

In Chambers

Counsel for Applicant User Friendly Media Inc.,	S. Bhalloo
Counsel for Trustee in Bankruptcy	R.J. Argue
Date and Place of Hearing:	July 4, 2003
	Vancouver, B.C.

[1] This is yet another case of a clearly inadequate time estimate, resulting in submissions being rushed so as to be completed within the time available; and Reasons being delivered within similar time constraints, on the court being advised by counsel for the applicant that the matter is urgent.

[2] By its notice of motion the applicant, User Friendly Media Inc., seeks an order that:

1. the security interest of the Applicant granted by way of a General Security Agreement from the Bankrupt perfected by way of a Financing Statement registered on behalf of the Applicant in the Personal Property Registry on September 12, 2002 as registration number 614265A is enforceable as against the Respondent, Trustee in Bankruptcy; and

2. costs to the Applicant.

THE FACTS

[3] The facts, if perhaps somewhat different or bizarre, do not appear to be in dispute.

[4] The applicant, User Friendly Media Inc., is a public company and, until March 21, 2001, was known as Vast Capital Pool Ltd.

[5] The bankrupt is a private company, and was until January 24, 2001, known as User Friendly Media Inc., which is now the name of the applicant; and it will be seen that this has caused some confusion.

[6] As of May 9, 2003, the bankrupt owed the applicant approximately $1.6 million. The obligation was secured by a general security agreement (GSA) granted by the bankrupt to the applicant on August 31, 2000. The applicant registered its security interest in the collateral of the bankrupt (described in the GSA) in the Personal Property Registry on September 6, 2000, under Base Registration Number 9058643 (the Original Financing Statement). The registration length of the Original Financing Statement was two years, expiring on September 6, 2002.

[7] The collateral described in the Original Financing Statement is:

ALL OF THE DEBTOR’S PRESENT AND AFTER-ACQUIRED PERSONAL PROPERTY AND AN UNCRYSTALIZED FLOATING CHARGE ON LAND.

[8] In September of 2002, the applicant became aware that the Original Financing Statement had or was about to expire. Instructions were then given to solicitors to re-register the applicant’s security interest in the Original Financing Statement. A legal assistant at the applicant’s solicitor’s office experienced some difficulties in this regard. And she contacted the Personal Property Registry and BC Online for assistance. The Registry referred her to the BC Online Helpdesk where she obtained help before re-registering the Original Financing Statement.

[9] In her affidavit the assistant deposes that:

9. Once I had completed the submission, I called the BC Online Help Desk back to specifically confirm that the re-registration was done correctly. The individual working the Help Desk at the time confirmed that the re-registration was correct.

She attaches to her affidavit a copy of the re-registration Financing Statement (the New Financing Statement) which has a Base Registry Number 614265A.

[10] The New Financing Statement is very brief. It discloses that the secured party is User Friendly Media Inc. and that the base debtor is UF Media Inc. Under the topic “General Collateral:” the following is stated:

THIS IS A RE-REGISTRATION UNDER SECTION 35(7) OF THE PPSA UNDER BASE REGISTRATION #9058643 ORIGINALLY REGISTERED ON SEPTEMBER 6, 2002.

There is also an amending document correcting the date of the original registration which was September 6, 2000.

[11] I will also deal at this point with the Original Financing Statement with the Base Registry Number 9058643. The secured party is identified as Vast Capital Pool Ltd. and the base debtor as User Friendly Media Inc. Under the topic “General Collateral:” the following appears:

ALL OF THE DEBTOR’S PRESENT AND AFTER-ACQUIRED PERSONAL PROPERTY AND AN UNCRYSTALIZED FLOATING CHARGE ON LAND.

This description of the collateral is not contained in the New Financing Statement which, as I have pointed out simply states under the topic “General Collateral:” that it is a re-registration under s. 35(7) of the Personal Property Security Act, R.S.B.C. 1996, c. 359, under the Base Registration Number 9058643 originally registered on September 6, 2000. And this brings me to the primary issue between the parties.

[12] On the bankrupt filing for bankruptcy the applicant filed a Notice of Intention to Enforce Security with the trustee in bankruptcy. The trustee refused to acknowledge the validity of the applicant’s security interest on the basis that the New Financing Statement does not set out or contain a description of the collateral (found in the Original Financing Statement) as required by s. 4(g) of Part 2 of Division 1 of the Personal Property Security Regulations, B.C. Reg. 227/2002; that the Statement is “seriously misleading” within the provisions of s. 43(6) of the Act and its registration is therefore invalid. Hence, the application for an order of enforceability of the New Financing Statement as against the trustee.

[13] It is conceded that a search of the Personal Property Registry using the bankrupt’s new name, i.e., UF Media Inc., reveals the existence only of the New Financing Statement. An online search of Registration Number 9058643 will not produce anything, i.e., the registration of the Original Financing Statement, because it was allowed to lapse on September 6, 2002. Apparently had an application been made to extend or renew the registration prior to the expiration of the Original Financing Statement, the latter would have been disclosed on the search. However, since the registration was allowed to lapse a search does not disclose the existence of the Original Financing Statement. It would seem that the Registry can avoid this problem by simply preserving the Original Financing Statement for searchers for 30 days after the registration has lapsed.

[14] Under s. 35(7) of the Act, where the registration of the security interest lapses, the secured party can re-register the secured interest within 30 days after the lapse. If this is done the lapse does not affect the priority status of the security interest in relation to a competing perfected security interest that immediately before the lapse or discharge had a subordinate priority position, except to the extent that the competing security interest secures advances made or contracted for after the lapse and before the re-registration.

[15] The application to re-register then was brought under s. 35(7) of the Act and s. 59 of the Regulations to the Act. Perhaps I should set out both provisions at this point:

35(7) If registration of a security interest lapses as a result of failure to renew the registration ... and the secured party re-registers the security interest not later than 30 days after the lapse ... the lapse ... does not affect the priority status of the security interest in relation to a competing perfected security interest that immediately before the lapse ... had a subordinate priority position, except to the extent that the competing security interest secures advances made or contracted for after the lapse ... and before the re-registration.

59 A registering party who wishes to re-register a security interest under section 35 (7) of the Act must, within 30 days after the registration of the security interest lapses or is discharged, submit for registration, in accordance with Part 2, a new financing statement that includes

(a) an entry to the effect that the registration is a re-registration under section 35 (7) of the Act, and

(b) the registration number of the registration that lapsed or was discharged.

[16] It is conceded by Mr. Argue that the New Financing Statement in the present case meets the requirements of s. 59(a) and (b) of the Regulations. However, his complaint, as I have said, is that the Statement does not contain the description of the collateral contained in the original financing statement and is therefore seriously misleading, and ineffective as against the trustee.

THE POSITION OF THE PARTIES

[17] Mr. Argue says that the New Financing Statement registration is invalid. He relies on the decision of Burnyeat J., in In The Matter Of the Bankruptcy of Alda Wholesale Ltd. (2001), 26 C.B.R. (4th) 1 (B.C.S.C.), a case where it was found that the description of the collateral in the Financing Statement was seriously misleading, with the result that the statement was not valid as against subsequent creditors of the bankrupt who had taken the care to provide appropriate and accurate descriptions of the collateral charged. Mr. Argue relies in particular on para. 54 of the judgment wherein it is stated:

54 A complete failure to satisfy the description requirements must be considered to be seriously misleading otherwise the entire policy of the legislation would be undermined. In the circumstances, I find that the description in the VCSCU financing statement had a defect, irregularity, omission and error which was seriously misleading. I declare the VCSCU security interest was not perfected when registered on July 4, 1996 under Base Registration No. 6470690.

[18] Mr. Argue says that, in this case, a searcher could not find out what the Original Financing Statement was from the Registry. To find out he would have to take other steps, for example, go to the secured party. It is for the registering party to file accurately. If he does not do so Mr. Justice Burnyeat says that the statement is seriously misleading within the meaning of these words as used in s. 43(6) of the Act which provides as follows:

(6) The validity of the registration of a financing statement is not affected by a defect, irregularity, omission or error in the financing statement or in the registration of it unless the defect, irregularity, omission or error is seriously misleading. (My emphasis)

[19] I will pause for a moment and consider the matter of what may be considered to be seriously misleading. In this regard two other subsections of s. 43 should be considered. First, ss. (8) which provides that:

If it is alleged that a defect, irregularity, omission or error is seriously misleading, it is not necessary to prove that anyone was actually misled by it.

And the authorities show that the approach to the question of whether a defect etc. is “seriously misleading” is an objective one, the test being whether a reasonable person using the registration system in a reasonable manner would be misled.

[20] The second subsection is ss. (12) which provides as follows:

Despite anything in this Part, the registrar may reject a financing statement if, in the opinion of the registrar, it does not comply with this Act or the regulations or with any other Act or regulations under which registration of a financing statement is authorized.

I will return to this subsection in a moment as Mr. Bhalloo submits that it is an important factor in this case.

[21] What will constitute a seriously misleading defect, irregularity, omission, or error will depend to some extent on the peculiar facts of the case. However, there are some definitions which have been suggested in this court, and I will refer to two of them. In Re: Munro (1992), 77 B.C.L.R. (2d) 98, Master Patterson had reference to definitions in the Shorter Oxford Dictionary. At p. 102 he noted that:

Misleading is defined as being "led astray" or "led into error", and serious as "weighty, important or grave".

On applying these definitions he found that in the circumstances of the case before him no one would have been led seriously astray or into grave error by the asserted error. It is interesting to note also that he was of the opinion that since no one had in fact been misled that was a factor which he could consider in deciding that the errors before him were not seriously misleading.

[22] In Coates v. General Motors Acceptance Corporation of Canada,(1999), 69 B.C.L.R. (3d) 357, Grist J. of this court had this to say at para. 17:

A seriously misleading registration is one that,

(a) would prevent a reasonable search from disclosing the registration or,

(b) would cause a reasonable person to conclude that the search was not revealing the same chattel (in the case of a serial number search) or the same debtor (in the case of a name search). The obligation is on the searcher to review the similar registrations to make this determination. (My emphasis)

The case also perhaps illustrates the necessity of the searcher to conduct a further investigation of the search results where the existence of a filing is revealed despite faulty description or registration.

[23] Reference was also made to the most instructive decision of Madam Justice Newbury, speaking for the Court of Appeal, in Gold Key Pontiac Buick (1984) Ltd. v. 464750 B.C. Ltd., (2000), 77 B.C.L.R. (3d) 185. In that case the searcher had two avenues of search available, first by the name of the debtor and second by the serial number of the motor vehicle. The Financing Statement had properly set out the serial numbers of the collateral, but had mis-described the debtor’s name. And it was found that the searcher should have looked at both of them to find out who he was dealing with.

[24] Counsel pointed out that in the case at bar only one search was available, and that was a search in the name of the debtor. That search would disclose the New Financing Statement only. If the searcher attempted to search the Base Registration Number 9058643 nothing would appear. It would not turn up the Original Financing Statement because it had expired prior to the application to re-register being brought.

[25] The trustee relies on s. 20(b) of the Act which provides that a security interest in collateral is not effective against the trustee in bankruptcy, if the security interest is unperfected at the date of the bankruptcy. That is the present case says counsel. The test is an objective one. The statement is seriously misleading.

[26] Mr. Argue then referred to a Verification Statement which counsel for the applicant obtained from the Personal Property Registry after the search of Registration Number 9058643 failed to produce any results. The verification statements apparently are issued at the time of registration. It is, in effect, a copy of the Original Financing Statement which the Registry keeps in its historical database, but not in its computer. Counsel pointed out that the document itself is misleading in that it shows the secured party as Vast Capital Pool Ltd. and the base debtor, User Friendly Media Inc., the present name of the applicant. The document, counsel says, does not make sense.

[27] I observe at this point that the question is whether the failure to describe the collateral in the New Financing Statement was seriously misleading. However, the Verification Statement does refer to the Base Registration Number 9058643 and it does set out the collateral, i.e.,

ALL OF THE DEBTOR’S PRESENT AND AFTER-ACQUIRED PERSONAL PROPERTY AND AN UNCRYSTALIZED FLOATING CHARGE ON LAND.

And while the description of the parties may be a bit confusing, further investigation, perhaps simply a phone call, would straighten that out.

[28] I point out also that it seems to me that verification statements still play some role in the registry system. See for examples ss. 43(14) and (15). I say this because I have some concern with the fact that the applicant’s problems stem not only from its error, but also from the fact that during the 30 days grace period provided for in s. 35(7) of the Act the search of the Original Financing Statement will not produce the statement. At the same time, the New Financing Statement is required by s. 59 of the Regulations to the Act to contain an entry to the effect that the registration is a re-registration and the registration number of the registration that lapsed, which number when searched will not produce the Original Financing Statement.

[29] It may be argued then that the registry anticipated, in the circumstances of this case, that counsel would do exactly as applicant’s counsel did, that is, obtain a copy of the verification statement in order to verify the original financing statement or, in this case, to obtain the missing information. The Act speaks of “re-registration” which suggests that this is done by re-registering the original financing statement. However, s. 59 of the Regulations makes it clear that re-registration is done by filing a new financing statement which must include advice that it is a re-registration, the registration number of the registration that has lapsed and a description of the collateral, here, pursuant to Division 3, s. 11(1)(b). And in any event, the new financing statement does provide some protection to the searcher if the verification statement is available in place of the original financing statement.

[30] It will be seen that I am unable to agree with Mr. Argue’s able submissions. It might be different if we were dealing with an Original Financing Statement which did not have the required description of the general collateral in it, i.e.:

ALL OF THE DEBTOR’S PRESENT AND AFTER-ACQUIRED PERSONAL PROPERTY AND AN UNCRYSTALIZED FLOATING CHARGE ON LAND

And in such circumstances, Alda Wholesale Ltd., supra, would be difficult to distinguish. However, in my view the fact that we are dealing with a New Financing Statement seems to me to bring in to play further considerations pertaining to the narrow issue before me, as stated by Newbury J., in Gold Key Pontiac Buick, supra, whether a reasonable person using the registration system in a reasonable manner would have been misled. It will be seen that in my view in the circumstances of this case, the New Financing Statement provided sufficient information that a reasonable searcher, having perused it, would have then gone on to ascertain the collateral involved, probably by doing exactly what counsel did. The searcher would certainly not have been seriously misled.

[31] I turn briefly to Mr. Bhalloo’s submissions. He said that there was no dispute as to the facts. The Original Financing Statement was properly registered, but had expired at the time that re-registration took place. There is no doubt that an error was made because the collateral was not described in the New Financing Statement as required by the Act. However, he says that this error or defect was not misleading and would not have been misleading to a reasonable registry searcher, who would have discovered that there was collateral which had originally been perfected by the Original Financing Statement, and would have ascertained what it was.

[32] He said that the purpose of s. 35(7) of the Act is to protect a secured party who fails to renew the Original Financing Statement in time. If he re-registers it within 30 days after the expiry date, he will not lose his priority status of the security interest in relation to a competing perfected security that had a subordinate priority position immediately before the lapse. We are concerned here with a re-registration of a previously existing Financing Statement that was not renewed during its operational period.

[33] With regard to the New Financing Statement Mr. Bhalloo said that it was noteworthy that we are not dealing with “a competing perfected security interest”, which is referred to in s. 35(7). In the case at bar, no one else has been granted security or the security interest by the bankrupt and which was registered previously. It is, he says, a matter, between the applicant and the unsecured creditors represented by the trustee. He suggests it is “an easier situation” because the court is not dealing with a secured creditor who has been prejudiced.

[34] Mr. Argue would not agree with this submission. He said that the trustee has a “competing perfected security interest” by virtue of s. 20(b)(i) which provides that a security interest in collateral is not effective against a trustee in bankruptcy if the security interest is unperfected at the date of the bankruptcy.

[35] It seems to me that it is not necessary that I decide whether the trustee, by virtue of s. 20(b)(i) is in the same position as a person holding a competing perfected security interest under the provisions of s. 35(7). Clearly, this section gives the trustee priority over a security interest in collateral which is unperfected at the date of bankruptcy. In this regard, Madam Justice Newbury had this to say in Gold Key Pontiac at para. 10:

While courts have differed on the exact formulation of the question as to what would be seriously misleading to a reasonable person searching the registry – to which matter I will return below, the question of whether anyone was in fact misled is therefore largely irrelevant. I say “largely” because counsel for Gold Key argued in this case that where (as here) a trustee in bankruptcy or other creditor has not been “misled” in any sense of the word by relying on a clear search of the registry, but simply cites an error in registration to defeat a security interest, the court should consider that the trustee or creditor would essentially receive a “windfall” if successful, and that the party in Gold Key’s position would suffer an injustice, albeit due to an error on his own part.

I am not sure that the word “windfall” is descriptive. It seems to me that whenever a creditor’s security interest is found to have been unperfected at a particular time, some other creditor or a trustee receives priority benefits which he never would have received had the security interest been perfected.

[36] Counsel also points out that Justice Newbury perhaps introduced another element of subjectivity in her analysis by looking at the nature of the searching party and its purpose in using the Personal Property Registry. Here, he says, the searching party is the trustee. While it may well be that some subjective considerations are factors to be considered in these cases, I do not find it necessary to decide the issue in this case. Her Ladyship seems to have left the question for another day, and I will do so as well.

[37] Mr. Bhalloo then referred to Section 43(12) noting that the registrar has a discretion to reject a Financing Statement if, in his opinion, it does not comply with the Act or the Regulations. Counsel emphasized that the legal assistant was referred to the BC Online Helpdesk for assistance, she followed instructions and was subsequently told that the registration she did was perfectly correct. He emphasized also that if the Helpdesk had told her otherwise, she would have likely corrected any errors in the re-registration. Again, I do not find it necessary to decide the importance of the involvement of the Helpdesk person in the perpetuation of the error already made by the applicant.

[38] I turn briefly to Mr. Bhalloo’s submission on the primary issue of whether or not the New Financial Statement was seriously misleading, with the result that the applicant’s security interest was unperfected at the date of the bankruptcy, giving the trustee priority. In this regard, he stated in his written submission:

In the case in question here, a business debtor name search, using the name of the bankrupt, reveals the existence of the registration of the New Financing Statement, therefore it could not be said that the error prevents a search from disclosing the registration. The search also reveals the existence of the Original Financing Statement in the description of the collateral. The searcher would know that some collateral of the debtor was the subject of the New Financing Statement. Again, the searcher would not be misled by the description, it would merely be put on notice that further inquiry was required. One phone call to the personal property registry would have revealed the description of the collateral.

And:

In this case, the new registration statement reveals the proper name of the debtor and the creditor. While it does not specifically describe the collateral, it refers to a lapsed document which does so describe it. Any person searching the debtors name would find the New Financing Statement. The searcher would know that the applicant had registered a Financing Statement against some collateral of the debtor on September 12, 2002. The searcher would not be misled, but would realize it needed to make one further inquiry of the PPR in order to obtain the Original Financing Statement.

[39] Counsel relies generally on Gold Key Pontiac as supporting his client’s case. He distinguishes Alda relying on para. 40 therein as follows:

The defects and errors in the AFC Financing Statement were not ones that could have been ascertained on any other search of the registry that could have been undertaken. The principles of certainty and predictability must predominate. In the case at bar, the description is so seriously misleading that it should not be valid against subsequent parties who have taken the care to provide the appropriate and accurate descriptions of the collateral charged.

In the case at bar, says counsel, the defect or error could have easily been ascertained by a search of the registry. Further, the historical documents database at the Personal Property Registry contains the Original Financing Statements which properly describes the collateral. The defect in the New Financing Statement would not mislead a reasonable searching party to conclude that the collateral covered was something other than what it actually was. The defect in the New Financing Statement would lead a reasonable searching party to make one further inquiry of the registry. The Coates, Gold Key, and Alda cases support the proposition that if the information is available in the registry, a reasonable searching party has an obligation to make that further inquiry, and a failure to do so does not render the Financing Statement in question seriously misleading. It will be seen that I am in basic agreement with these submissions.

Disposition

[40] In my opinion, in the circumstances of this case, the New Financing Statement, while containing a serious error, cannot be said to be seriously misleading to a reasonable registry searcher, and therefore not curable under s. 43(6) of the Act, and which would result in the registration of the New Financial Statement being invalid and not effective as against a trustee. My decision is based on the decision of Madam Justice Newbury in Gold Key Pontiac and on the decision of Doherty J.A., speaking for the Ontario Court of Appeal in Re. Lambert (1994), 119 D.L.R. (4th) 93 (Ont. C.A.) which Her Ladyship cited with approval and followed. These cases provide insight and guidance with respect to the purpose of and approach to the Act and Regulations, what must be done to meet their requirements and what is to be expected of the reasonable searcher.

[41] The question to be answered, by a straight-forward application of the objective approach mandated by the curative provision, is would a reasonable person using the registration system in a reasonable manner be seriously misled? The answer in the case at bar is in the negative. In my opinion, a reasonable person using the search facilities of the registry in order to find out whether personal property to be purchased or taken as collateral was subject to prior encumbrances, at the least would have done what was done in this case, and which would have revealed that all of the bankrupt’s present and after acquired personal property was encumbered and as well that there was an uncrystalized floating charge on its land.

[42] It seems to me, as was said in Lambert, that a reasonable person would take advantage of his or her position as a purchaser or lender to require access to information even from the vendor or borrower, in a given case, where the information available from the registry is not complete; that is to say, in a case where the error does not preclude retrieval of the Financing Statement, although some further investigation of the information provided is necessary and is reasonably done.

[43] In the case at bar this perhaps may be a slight extension of the position stated by Doherty J.A. in Lambert where he said at p. 112:

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.

[44] In the case at bar the immediate search would have disclosed the New Financing Statement. The searcher would know immediately that the secured party was User Friendly Media Inc. and that the base debtor was UF Media Inc., and most importantly, that the document was a re-registration under s. 35(7) of the Act under base registration number 9058643 which had originally been registered on September 6, 2000. The searcher then would search the number 9058643 in an attempt to obtain a copy of the Original Financing Statement which would disclose the encumbrance information which is being sought.

[45] To this point the searcher would not be misled. Nor would he be misled when nothing “comes up” on the number search. He still knows that there has been a re-registration of an Original Financing Statement containing particulars of the encumbrance information; that he has to obtain an official copy of that document to obtain the information, and an inquiry at the Personal Property Registry would result in the production of the microfiche copy of the verification statement containing particulars of the Original Financing Statement and, most importantly, the collateral information sought.

[46] It is true, as Mr. Argue pointed out, that there would be some confusion because of the fact that in the verification statement the secured party is said to be Vast Capital Pool Ltd. and the base debtor is said to be User Friendly Media Inc., which is now the name of the creditor. That situation can be quickly straightened out, for example, by checking for certificates of changes of names with the Registrar of Companies or by direct communication with the vendor or person putting up the collateral. In any event, regardless of the perceived problem created by the name changes, the verification statement provides the information sought, the missing information, that is, that all of the bankrupts present and after acquired personal property was encumbered and that there was an uncrystalized floating charge on land, which of course crystallized on the bankruptcy.

[47] In sum, in my opinion, a reasonable searcher would not have been seriously misled by the failure to describe the collateral in the New Financing Statement. That statement, in effect, gave the searcher direction on where to find the encumbrance information which was being sought. The searcher would not have been led to believe that something important was so when it was not so, for example, that UF Media Inc.’s personal property was not encumbered. A reasonable searcher would not have felt safe to end the search when the search of the base registration number 9058643 did not turn anything up, but would have investigated further and obtained a copy of the verification statement or of the original financing statement. The error did not preclude retrieval of the Original Financing Statement, or the equivalent verification statement, containing the information required by the statute and the searcher.

[48] For these reasons then, the order sought is granted with costs.

“S.W. Hood, J.”
The Honourable Mr. Justice S.W. Hood

Citation:	*In the Matter of the Bankruptcy of UF Media Inc.*
	2003 BCSC 1105