ABCs vs VINs: Which governs Security Registration Errors?
*This article appeared on the CFLA Weekly Round Up. It also appeared in the September 2014 issue of Aird & Berlis LLP Collateral Matters and is written by Brett Kenworthy.
The underlying purpose of each provincial Personal Property Security Registration System is to provide notice to subsequent creditors of existing security interests. Financing statements that are registered by creditors should provide accurate information in the required format. However, what happens when a creditor registers against a motor vehicle and provides an incorrect debtor name, but the proper vehicle identification number ("VIN")? Can this registration serve to perfect a security interest? The Newfoundland Supreme Court Trial Division’s (the "Court") decision in Hoskins, Re ("Re Hoskins") underlines the challenge to strictly apply registration requirements, while also sustaining the spirit of the law and purpose of the notification process.
Re Hoskins
Edgar Thomas Geoffrey Hoskins, as indicated on his birth certificate, signed a conditional sales agreement (the "Agreement") to buy a Honda Civic in 2010. The Agreement showed his name to be Thomas Edgar Hoskins, as provided by Mr. Hoskins’ inaccurate government-issued driver’s licence. The Agreement was assigned from an undisclosed dealership to Honda Canada Finance Inc. ("Honda"), the financing corporation associated with the dealership, which registered a financing statement using this incorrect name, along with Mr. Hoskins’ date of birth and the VIN.
Three years later, Mr. Hoskins filed an assignment in bankruptcy, pursuant to which the court-appointed trustee-in-bankruptcy (the "Trustee") performed a search of the Newfoundland and Labrador Personal Property Registry in Mr. Hoskins’ true name. The Trustee’s search did not reveal Honda’s registration made against the inaccurate name provided by Mr. Hoskins’ driver’s licence; however, the Trustee also performed a search against the VIN of Mr. Hoskins’ Honda Civic and it located the registration against the incorrect name of "Thomas E. Hoskins." The Trustee nevertheless disallowed Honda’s security interest claim in the Honda Civic, instead allowing Honda’s claim as an unsecured claim.
At paragraph 12 of its decision, the Court noted the Trustee’s position that, while it was aware of the security interest, the security in the immediate case was "unperfected according to the legislation, and…therefore ineffective as against the trustee." The Court agreed, holding at paragraph 32, that "…the personal property security regime promotes clarity and certainty and moves away from concepts such as constructive notice and unfairness. The rules are precise. Accuracy is expected. Those relying on the registration system to search for prior security interests are entitled to expect that those filing financing statements will respect the prescribed rules."
Ontario requirements for VIN Registrations
This case would have likely had a different result in Ontario, as its Personal Property Security Act (the "PPSA") differs from its counterpart in Newfoundland and Labrador. Pursuant to subsection 46(1) of the PPSA, "[a] financing statement or financing change statement that is to be registered shall contain the required information presented in a required format." However, flexibility is provided through a cure provision at subsection 46(4) of the PPSA, as "[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." As will be described below, the Ontario courts have found that a reasonable person is not likely to be materially misled by an error in the debtor’s name if the VIN is accurately set out in that same financing statement.
Re Lambert
A leading Ontario case on the application of subsection 46(4) of the PPSA with respect to a security registration made against an incorrect debtor name, but containing an accurate VIN, is the decision of the Ontario Court of Appeal (the "Court of Appeal") in Lambert, Re ("Re Lambert"). In this matter, a registration of a security interest in a motor vehicle contained inaccuracies with a debtor’s first given name and the initial of the second given name, but included the correct VIN. In this case, the trustee did not have actual knowledge of the security interest and the search of the debtor’s name did not disclose the security interest. A VIN search was not performed, but had a VIN search been conducted, it would have revealed the security interest. The court at first instance held that subsection 46(4) of the PPSA did not serve to cure the error in the debtor’s name. However, the Court of Appeal allowed the appeal and inferred that the legislature intended an objective test, pursuant to its inclusion of a reasonable person standard. In the case of motor vehicle registrations, the Court of Appeal held:
"…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."
The Court of Appeal concluded that where the property is a motor vehicle, the reasonable person will conduct both a specific debtor name search and a VIN search. Accordingly, 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 provided the VIN.
Conclusion
As can be seen, provincial Personal Property Security Registration Systems can vary with respect to the latitude provided for inadvertent errors. Adhering to the letter of the law is of paramount importance to ensure that the intended security registration is properly perfected. Clearly, the best practice is to register accurate information in the required format. Accordingly, before registering, creditors should double-check that all information included in the registration is accurate and should both conduct and review post-registration searches to confirm that registrations contain accurate information.