Nov 18, 2014

Summary of Wheatland Industries Ltd. v. Baschuk

Wheatland Industries (1990) Ltd. v. Baschuk, 1994 CanLII 5208 (SK QB)

Baschuk (debtor) owns a combine which was damaged by fire. The debtor did not have the money to fix it so he asked his employer, Wheatland, to loan him the money. Wheatland said that instead of loaning him the money, they would buy the combine from him for $32,000 and then sell it back to him for $58,000. Ford Credit Canad financed the difference and registered their purported PMSI. The debtor went bankrupt and Ford Credit claimed a PMSI super- priority on the combine on the basis that their arrangement was a PMSI. It argued that technically it sold the combine to the debtor on credit, so it shouldn’t make a difference whether the debtor had first sold it to them. Is this a valid PMSI? No.

“The priority of a purchase money security interest is based upon the theory that new assets are added to the debtor’s pool of assets by buying or leasing new equipment or goods. This new collateral was never part of any existing financier’s secured collateral base. Thus, it is sound commercial policy to give the new purchase-money financier the first priority in the collateral being added to the debtor’s total pool of assets.”

“When I consider the impugned transaction I come to the conclusion that in reality it did not create a purchase-money security interest, but merely created the appearance of same. There was no enhancement of the buyer’s asset pool. There was no acquisition of new collateral.”

The purpose of the transaction has to involve the acquisition of the asset in question for it to fall under (i) of the definition. (i) does NOT cover sale and buy back arrangements. Look to the substance of the transaction: Baschuk needed credit to repair the combine. He wasn't adding a new combine to his pool of assets. Therefore, this is not a PSMI under the Act.

In determining if a transaction creates a PSMI, look to the substance of the transaction. The debtor must be adding a new asset to his asset pool as a result of the credit. If a PSMI is found, then the creditor has first priority to that asset in the event the debtor defaults.