Nemo dat and Bank Act security

Bank of Montreal v. Innovation Credit Union, 2010 SCC 47, released today, deals with the interaction of Bank Act security and PPSA security.  Put briefly, the Court holds that nemo dat quod non habet (literally meaning "no one [can] give what he does not have") applies.

 

The focal point for resolving a priority dispute involving a Bank Act security and provincial interests, such as PPSA security interests, is the Bank Act itself.  The Bank Act security provisions are valid federal legislation which cannot be subject to the operation of provincially enacted priority provisions.  Where the Bank Act contains an express priority provision that is applicable to a particular priority dispute, that provision will govern.  Where the priority dispute is between a Bank Act security interest and a conflicting security interest acquired prior to the bank taking its security in the collateral, the priority rule set out in s. 428 does not assist in resolving the dispute.  In such cases, the provisions of the Bank Act nonetheless govern.  That said, the Bank Act security can only attach to the interest held by the debtor.

 

The Court writes:

 

 

[30]                          In determining what interest the debtor may have already conveyed to another creditor and, in such circumstances, what interest he or she had left to convey to the bank at the time of execution of the Bank Act security agreement, it becomes necessary to resort to the provincial property law, either at common law or under applicable provincial statutes.  It is at this point that resorting to the PPSA becomes relevant.  It is true that the internal priority rules of the PPSA cannot be invoked to resolve the dispute.  However, it does not follow that the provincial security interest created under the PPSA does not exist outside these priority rules.  Nor can the fundamental changes brought about by the PPSA be ignored in determining the nature of the prior competing interest.  Far from being irrelevant under the Bank Act, provincial property law plays a complementary role in defining the rights granted under the Bank Act:  see Agricultural Credit Corp.; R. C. C. Cuming and R. J. Wood, “Compatibility of Federal and Provincial Personal Property Security Law” (1986), 65 Can. Bar Rev. 267, at p. 274; R. C. C. Cuming, C. Walsh, and R. J. Wood, Personal Property Security Law (2005), at p. 589.

 

[31]                          While the provinces cannot legislate in order to oust the bank’s rights, they can alter the law as it relates to property and civil rights in the province.  This is what the common law provinces did when they enacted the PPSAs, and what Quebec did in 1994 when it adopted the Civil Code of Québec, Book Six.  Just as the prior rules of the Civil Code of Lower Canada relating to security interests no longer apply, the prior rules of the common law have been significantly altered by statute. Thus, in determining the nature of any competing provincial security interest, resort has to be made to the relevant provincial statute and the Bank Act has to be read in harmony with it.  This approach is reflected in the preamble to the Federal Law—Civil Law Harmonization Act, No. 1, S.C. 2001, c. 4 (“Harmonization Act”):

 

WHEREAS the harmonious interaction of federal legislation and provincial legislation is essential and lies in an interpretation of federal legislation that is compatible with the common law or civil law traditions, as the case may be;

 

. . .

 

WHEREAS the provincial law, in relation to property and civil rights, is the law that completes federal legislation when applied in a province, unless otherwise provided by law;

 

            . . .

 

Section 8.1 of the Interpretation Act, R.S.C. 1985, c. I-21, as amended by s. 8 of the Harmonization Act specifically provides for the application of the “rules, principles and concepts in force in the province at the time the enactment is being applied”.

 

 

[32]                          Indeed, the relationship between the Bank Act and provincial property law is in many ways analogous to the way in which this Court in Giffen (Re), [1998] 1 S.C.R. 91, at para. 64, characterized the relationship between federal bankruptcy law and provincial law:

 

Even though bankruptcy is clearly a federal matter, and even though it has been established that the federal Parliament alone can determine distribution priorities, the [Bankruptcy and Insolvency Act] is dependent on provincial property and civil rights legislation in order to inform the terms of the BIA and the rights of the parties involved in the bankruptcy.

 

In much the same way, the Bank Act is dependent on provincial property law in order to give content to its provisions and to identify precisely the rights of the parties in a priority dispute involving Bank Act security.

 

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