Nov 18, 2014

Summary of Carson Restaurants International v. A-1 United Restaurant Supply

Carson REstaurants International Ltd. v. A-1 United Restaurant Supply Ltd., 1988 CanLII 5019 (SK QB)

Dennis ran a restaurant. He had a group of companies structured, but it was all really one restaurant (A was parent company which owned B and C). Dennis was the sole shareholder of “A”. A restaurant supply company had a security interest against company A. BUT, they registered it in the wrong name. Dennis found out about this and he got companies B and C to take security interests in A’s assets, and he registered them properly. He then got A to default and he argued that B and C should have priority. Who has priority to A's assets? The original security agreement is valid.

Upholding this kind of behavior violates the principles of equity. The Court pierced the corporate veil and evoked s. 66(1) and (2). So even though Dennis technically had priority, the court said NO. Dennis' Counsel argued that the filing of a financing statement containing an incorrect debtor name is to render that security interest unperfected. At the time, the SK PPSA was understood not to be a complete, self-contained code. The Act draws upon the common law, the rules of equity and the law merchant as a source of rules to fill in the gaps in the system and provide a basic foundation for the relationships that the legislation deals with. In fact, s. 64 of that Act requires that all duties and obligations arising out of a security agreement shall be discharged in good faith. While the integrity of the registry system under the Act is typically promoted by the courts, in this circumstance, the integrity of the system ought to be subjugated to preventing an unjust result.

When a versions of the PPSA requires that parties act in good faith toward one another, the court is open to fill in the gaps of the Act with the laws of equity. It appears as though the behaviour that purported to defeat a defective financing statement needs to be bad faith in order to compel the court to act in this way.