CFI Trust v. Royal Bank of Canada

2013 BCSC 1715 CFI Trust v. Royal Bank of Canada

IN THE SUPREME COURT OF BRITISH COLUMBIA Citation: CFI Trust v. Royal Bank of Canada, 2013 BCSC 1715 Date: 20130918 Docket: S068328 Registry: Vancouver Between: Montreal Trust Company of Canada in its capacity as trustee of CFI Trust and CFI Leasing Limited Plaintiff And Royal Bank of Canada Defendant Before: The Honourable Mr. Justice Myers Reasons for Judgment Counsel for the Plaintiff: Robin McFee, Q.C. Robyn Jarvis Counsel for the Defendant: David A. Crerar Michelle T. Maniago Debbie R. Asirvatham Place and Date of Trial: Vancouver, B.C. April 15-19, 22-26, April 29-May 3, May 6-8 & June 17-20, 2013 Supplemental written submissions August 12, 2013 Place and Date of Judgment September 18, 2013 Table of Contents Paragraph I. INTRODUCTION [1] II. FACTUAL OVERVIEW [5] A. RBC's relationship with Totem [9] B. CFI's relationship with Totem [15] C. CFI and RBC's Relationship - the Priority Agreement [22] D. Other key events [25] III. THE PRIORITY AGREEMENT [34] A. The interpretation of the priority agreement [47] B. CFI's alternate argument based on s. 40(1) [57] C. Estoppel by convention? [62] IV. TOTEM'S CONDUCT AND THE KNOWLEDGE OF THE PARTIES [68] A. The anonymous fax alerts [72] 1. Faxes to CFI [72] 2. Fax to RBC [80] B. Fall 2004: the Prime Truck conversions and consequent fall-out for CFI and RBC [86] C. 2005: Totem's decision to close [95] D. April 2005: CFI alerted to 63

converted vehicles [97] E. April 2005 wind-down of RBC's loans to Totem [108] F. Summer 2005 [114] G. August to December, 2005 [124] H. 2006 - Action commenced [130] I. The lease-proceed deposits in context [131] J. Summary [136] 1. Knowledge of Totem's dishonest behaviour [136] a) CFI [136] b) RBC [142] 2. Knowledge of Totem's financial state and related issues [146] V. SHOULD, AS BETWEEN THE PARTIES, CFI'S PRE-DISCHARGE PRIORITY BE RESTORED? [152] A. PPSA section 63(2)(e) [157] B. Sections 68(1) and 70 [160] VI. DOES RBC HAVE PRIORITY PURSUANT TO S. 31 OF THE PPSA? [171] A. The Flexi-Coil decision [177] B. Was RBC a purchaser of the cheques? [187] C. Knowledge of RBC [200] D. The electronic funds transfers [212] E. Sections 31(1) and 31(2) [218] F. Conclusion with respect to s. 31 [219] VII. KNOWING RECEIPT [220] VIII. UNJUST ENRICHMENT [252] IX. THE ADP DATA AND THE QUANTUM OF THE CLAIM [256] X. TRACING [274] A. Bona fide purchaser for value without notice [275] B. Tracing method [279] XI. CONCLUSION [283] I. Introduction [1] To those who have seen the film Fargo, the factual underpinnings of this case might seem familiar; both involve vehicles that have been double-sold and financed by a dishonest car dealer. However, unless one views the law of secured transactions as akin to a black comedy, the similarity with Fargo ends there. This is a somewhat drier commercial dispute

between two secured lenders of the dealership. And the only things that may have been chopped up are 242 motor vehicles, which have disappeared without a trace. [2] The plaintiffs (I will collectively refer to them as CFI) provided financing for the vehicles to Totem Ford, a now closed dealership. Totem in turn leased the vehicles or sold them via conditional sales agreements. Totem accepted the 242 vehicles back when its customers terminated the agreements before their end-dates. The customers paid Totem early termination fees for that privilege. Under its contracts with CFI, Totem ought to have remitted those payments to CFI. Instead, it deposited all or part of the funds into its operating account at the Royal Bank of Canada (RBC) and used them as its own funds. RBC, under the terms of its loan agreements with Totem, debited the operating account in order to pay down an operating line of credit whenever that line was in a negative balance. [3] CFI claims against RBC on the basis that, as a secured creditor, it had priority over the funds. In the alternative, CFI argues that the funds were trust funds and claims in knowing receipt and unjust enrichment. On either analysis, CFI says that it can trace the funds into RBC's hands. The amount of CFI's claim is $5.97 million. [4] There are two critical factual elements to this action that make the case somewhat unusual: a) The

knowledge of CFI and what it did or did not do with that knowledge. (The knowledge of the bank is also critical, but that is so in all such claims.) b) The volume of transactions not related to CFI that were run through the relevant accounts. Because these elements are germane to multiple issues, there is no way to deal with them in this judgment without some degree of fragmentation. I will therefore set out the bulk of the facts with respect to the parties' knowledge and resulting conduct in a separate section and then return to it as I deal with each discrete issue. II. Factual overview [5] In this section, I set out a factual overview in order to give the reader an introduction to the parties, their relationship and the chronology of some key events. I will set out further factual details that are pertinent to the various issues as I deal with them in later sections. [6] CFI is in the business of providing financing to automobile dealers by securitising their leasing and conditional sales transactions. The dealers are referred to in the industry as "originators". [7] The dealer concerned in this action was Totem Automotive Group Ford Lincoln Sales and Leasing Inc., located on Marine Drive in Vancouver. It is not a party and is no longer in existence. Totem was one of CFI's largest originators and was a substantial concern. Its sales in 2003 and 2004 were in the hundreds of

millions of dollars and its total liabilities were similar. [8] Totem changed its name to Alkani Sales & Leasing Ltd. on September 12, 2005. I will refer to the company as Totem, irrespective of the relevant time period. The key people at Totem were Andy Papp and Jordan Welsh. Mr. Welsh dealt primarily with the leasing side of the business. A. RBC's relationship with Totem [9] In 1999 Mr. Papp, then an employee of Totem, requested that RBC fund his purchase of Totem from the then owner, Len Fabbro. Before that, Totem's banker was Scotiabank. RBC put together a financing package for Totem, which included an operating loan. Scotiabank initially continued to finance Totem's inventory of new and used vehicles, referred to in the industry as "floor plan" loans. [10] On August 30, 1999, RBC and Totem entered into a General Security Agreement. RBC registered its rights under that agreement in the personal property security registry (PPR). On October 22, 1999, Totem and RBC entered into a Financial Services Agreement. [11] In January 2000, RBC replaced Scotiabank in providing the Floor Plan loans. It also provided fleet financing, which was for bulk sales to rental companies. RBC entered into a Dealer Inventory Security Agreement with Totem, in which Totem agreed to give RBC a charge over the vehicles RBC was financing as well as other Totem assets. RBC registered a financing statement

against Totem. [12] With respect to the new and used Floor Plan financing, RBC advanced funds to Totem on a vehicle-by-vehicle basis and Totem was obliged to repay RBC upon the sale of the individual vehicle. Leases were treated as a sale. [13] At the time relevant to this claim, RBC had extended to Totem the following credit facilities: a) Revolving Demand New Vehicle Floor Plan Financing; b) Revolving Demand Used Vehicle Floor Plan Financing; c) Revolving Demand Fleet Vehicle Floor Plan Financing (cancelled in 2004); d) Revolving Demand Operating Loan; e) Purchase Loan (for purchasing the Totem dealership); f) Foreign Exchange Future Contracts; and g) Corporate VISA. [14] The person at RBC in charge of Totem's account was Andrew Vida, the Senior Manager of Automobile Finance. B. CFI's relationship with Totem [15] The arrangement between Totem and CFI was governed by three "programme agreements": a) the Master Concurrent Lease Agreement between Totem, CFI Trust and CFI Leasing Limited dated December 23, 1997; b) the Secured Loan Purchase Agreement between Totem, CFI Trust and CFI Leasing Limited dated December 23, 1997; and c) the Support Agreement between Totem and CFI Trust dated December 23, 1997. Apart from the issue of whether a trust was created with respect to the lease and conditional sales proceeds, the specific details of the contractual arrangements between Totem

and CFI are not material, nor are the specific roles played by the plaintiff companies. An overview as to the structure of the arrangement will suffice. [16] This no doubt oversimplifies what is a complex legal arrangement, but the thrust of the programme agreements was to assign to CFI most of the rights contained in the conditional sales contracts and leases that Totem entered into with its customers. In turn, CFI advanced to Totem the value of the cash flows, less a certain percentage kept as a reserve. Totem collected the payments from its customers and was obliged at the start of each month to remit to CFI the total amount of billings due from its customers, whether paid or not. The rights were assigned to CFI in tranches. CFI bundled them and issued commercial paper in the market. From the point of view of Totem's customers, CFI was invisible. [17] The difference between the leases and the conditional sales contracts are not material to this dispute and the agreements and business arrangement treated them in the same manner. For the purposes of simplicity, I will use the terms leases, lease payments, lease portfolio and other variants to encompass both legal arrangements. [18] CFI registered its security interest on December 23, 1997 under base registration number 7418268 in the PPR. The interest was registered against Totem and not against the individual vehicles. The

registration was discharged in error on several occasions, critically on November 21, 2006. [19] CFI conducted audits of its originators, including Totem, two to three times per year. There were two types: a) a "paper audit": CFI employees attended the originators' premises and randomly pulled what was said to be a statistically relevant sample of files, typically 25. It verified that all the necessary documentation was included in the file such as a copy of the ownership of the vehicle, the original lease, insurance and a copy of the driver's licence of the lessee. CFI would also ensure that the information in the file matched CFI's records, which required verifying the lease details, the term, the rent and the residual value. In addition, CFI typically conducted a random sample of 10 leases and conducted a comparison of the termination dates to ensure that the originator was reporting terminations to CFI within an acceptable timeframe after the lease was terminated with the originator; and b) a "systems audit": In 2005 CFI commenced regularly performing systems audits in which CFI employees accessed the electronic business records of the originator to confirm that leases still active on CFI's system were also still active on an originator's system. The person in charge of the audits for CFI was Ms. Patel. [20] Leases (and, once again, I mean to include conditional sales) were

often surrendered early on the payment by customers to Totem of early-termination fees, which essentially paid out the remaining capital value of the vehicles. Under the programme agreements with CFI, Totem was obliged to report the early terminations and remit the termination fees to CFI. Between March 2004 and November 2005, Totem failed to do so for approximately 242 vehicles. Instead, according to CFI, Totem deposited the funds, along with other Totem receipts, into its RBC operating account. RBC, under the terms of its loan agreements, debited the account in order to pay down its operating line of credit whenever that line was in a negative balance, and that is what gives rise to this claim. As mentioned, the amount of the proceeds claimed by CFI is $5.097 million. [21] The key people at CFI who were involved in the relevant events in this lawsuit were: a) Kevin Andrews, who became president in September 2001; b) John Burns, who joined CFI in 2004 as in-house counsel and eventually became the manager of the securitization department. He was formerly a partner at a large law firm which handled CFI's securitization work. c) Gordon Leonard, CFO and the manager of the securitization department from 2001until he retired in 2004, at which point Mr. Burns joined CFI and took over Mr. Leonard's position. d) Rozmin Patel, an employee with CFI since 2001. From 2001 to 2005, Ms.

Patel was responsible for organizing the funding of lease portfolios and was responsible for the audits of Totem. She reported to Mr. Leonard. e) Wendy Henderson, Assistant VP of the CFI securitization group from November 2004 to January 2007. She had significant involvement in the audits of Totem during the wind-down of its business in the Summer of 2005. All but Mr. Leonard were called as witnesses. C. CFI and RBC's Relationship - the Priority Agreement [22] When Totem leased a vehicle subject to RBC's (or, before that, Scotiabank's) Floor Plan loans to a customer, Totem had to pay the amount loaned with respect to that vehicle back to the bank. When Totem was with Scotiabank, the bank, having a prior charge to CFI over the vehicles, provided Totem a release monthly, indicating that it had no interest in the vehicles that CFI funded. [23] RBC did not want to do that each month. Instead, as a condition of doing business with Totem, it required a priority agreement from CFI, which was signed on February 19, 2000. The interpretation of the priority agreement is a central issue in this case. [24] The knowledge of RBC with respect to the deposits made by Totem to its accounts is also a central issue in this case, in particular with respect to CFI's claim of knowing receipt and RBC's defence under s. 31 of the Personal Property Security Act, R.S.B.C. 1996, c. 359 (PPSA) which deals

with purchasers for value without notice. I will deal with the relevant facts later. D. Other key events [25] Problems started to occur with Totem in the fall of 2004. I will give a brief overview here and then provide further details later. [26] In October 2004, CFI learned that a Totem customer, Prime Truck, improperly sold a number of vehicles financed by it. Shortly afterwards, RBC separately learned that Prime Truck had done the same thing with some RBC-financed vehicles. [27] Totem defaulted on its payments to CFI in October, November and December 2004, blaming the situation on the Prime Truck fiasco. RBC extended the loan repayment time for its financing during this period. [28] In November 2004, CFI learned that Totem was presenting leases to it which overstated the true residual values for the vehicles. Since CFI provided funding based on the residual values, it was over-funding Totem. [29] In early April 2005, CFI learned that Totem did not remit early termination fees for 63 vehicles. [30] In early 2005, Mr. Papp advised both CFI and RBC that he had decided to take advantage of an incentive programme offered by Ford and close the dealership. RBC began to reduce Totem's credit facilities. [31] Mr. Welsh set up a new business with a partner, Bill Botham, and in August 2005, CFI signed a "heads of agreement" to transfer part its lease portfolio to that business, known

as JW Auto Group, which operated as a partnership. [32] In October 2005, RBC learned that Totem had sold RBC-funded vehicles but had not remitted the proceeds to RBC, as required. It also learned of further dishonest conduct on the part of Totem. On November 30, 2005, RBC called its loans to Totem, which stood at $3.6 million. RBC has recovered all but $576,000. [33] As stated above, CFI claims Totem converted 242 vehicles and the proceeds can be traced to deposits in the RBC account of approximately $5 million. III. The Priority Agreement [34] I will deal first with the interpretation of the February 19, 2000 priority agreement between the parties. (I set out the facts leading up to the agreement above at section II.C). [35] Section 40(1) of the PPSA provides: 40 (1) A secured party may, in a security agreement or otherwise, subordinate his or her security interest to any other interest and the subordination is effective according to its terms between the parties and may be enforced by a third party if the third party is the person or one of a class of persons for whose benefit the subordination was intended. [36] In the priority agreement CFI is defined as the Grantor. The main operative provision is clause 3(b), in which CFI gives RBC priority over any interests that CFI has in the Royal Assets by virtue of the Grantor Security. The clause reads: 3. The Grantor does

hereby: (b) grant to Royal priority over the interest which the Grantor has now or may at any time hereafter acquire in and to the Royal Assets under or by virtue of the Grantor Security and postpone the Grantor Security and the mortgages, charges and security interests, concurrent leases or interests in conditional sale contracts created thereby, and all right, title and interest of the Grantor thereunder or pursuant thereto in and to the Royal Assets to the Royal Security and the mortgages, charges and security interests created thereby in or upon the Royal Assets to the intent that all right, title and interest of the Grantor in and to the Royal Assets shall be subject to the right, title and interest which Royal has now or may at any time hereafter acquire in and to the Royal Assets under or by virtue of the Royal Security to the same extent as if the Royal Security and the mortgages, charges and security interests created thereby had been entered into, granted, executed, delivered, registered, attached and perfected and as if all moneys advanced or readvanced on the security thereof from time to time had been advanced prior to the entering into, granting, issuance, execution, delivery, registration, attachment and perfection of the Grantor Security and the mortgages, charges and security interests created thereby and prior to the advancement of any monies secured

thereby; [37] Grantor Security is defined broadly to include every instrument et cetera, which creates a security interest over any asset of Totem: "Grantor Security" means each and every document, instrument or security now or at any time in the future issued or granted to or held by the Grantor which constitutes or creates or purports to create a mortgage, charge, security interest, concurrent leases or interests in conditional sale contracts upon or in or with respect to all or any part of the property or assets of the Company, including without limiting the generality of the foregoing, the interests acquired and the security issued or granted to or held by the Grantor or which are the subject of or derive their priority from any registration as described in Schedule A hereto and any modification, extension, renewal or substitution thereof or therefor in effect from time to time; [38] Schedule A (referred to in the definition of Grantor Security) refers to CFI's security registration (above para. 18): Any and all security agreements from time to time which are the subject of or derive their priority from the financing statement registered in the British Columbia Personal Property Registry under base registration number 7418268, including the Master Concurrent Lease Agreement dated as of December 23, 1997 between the Company (formerly, Totem Mercury Sales Ltd.), CFI Trust

(formerly, CFI Lease Trust) and CFI Leasing Limited and the Secured Loan Purchase Agreement dated as of December 23, 1997 between the Company (formerly, Totem Mercury Sales Ltd.), CFI Trust (formerly, CFI Lease Trust) and CFI Leasing Limited. [39] Royal Security is similarly defined to include every instrument et cetera, creating a charge over the Royal Assets. By reference to Schedule B, this specifically includes what is covered in RBC's PPSA Financing Statement. [40] The Royal Assets are defined in Schedule C. Items (i) to (vii) of the schedule are defined as the "Collateral" and, broadly speaking, relate to the vehicle inventory financed by RBC. Item (viii) is not linked or limited to that inventory; it is more broadly drafted: (viii) all present and after-acquired personal property in any form (including money, chattel paper, intangibles, goods, documents of title, instruments and securities) derived directly or indirectly from any dealing with any of the Collateral (as hereinafter defined) described in paragraphs (i) through (vii) above or any proceeds therefrom, including any payment that indemnifies or compensates for any Collateral that has been lost, destroyed or damaged or the proceeds therefrom. [41] The final clause of Schedule C states what is not part of the Royal Assets or Collateral: Notwithstanding the foregoing, the Royal Assets and the Collateral do not

include any motor vehicles that are the subject of any leases or contracts (collectively, the "Contracts") entered into by the Company or that are entered into at any time in the future by the Company and are the subject of: (i) the Master Concurrent Lease Agreement dated as of December 23, 1997 between the Company (formerly, Totem Mercury Sales Ltd.), CFI Trust (formerly, CFI Lease Trust) and CFI Leasing Limited; and (ii) the Secured Loan Purchase Agreement dated as of December 23, 1997 between the Company (formerly, Totem Mercury Sales Ltd.), CFI Trust (formerly, CFI Lease Trust) and CFI leasing Limited. I will refer to this as the notwithstanding clause. [42] Somewhat out of sequence, clause 3(a) provides that CFI consents to Totem granting the Royal Security. Clause 4(a) provides that Royal consents to Totem granting the Grantor Security. Both are stated to be permitted notwithstanding the prohibition to do so in each other's security. [43] RBC argues that Schedule C covers all of Totem's assets except for what is specified in the notwithstanding clause, which only refers to motor vehicles. The notwithstanding clause does not refer to the proceeds of sale or any other intangible rights related to those vehicles; rather, those rights are encompassed in the Royal Assets. This leaves CFI with priority over only the vehicles themselves. [44] CFI's primary position is that the

priority agreement can and should be read as recognizing that each party's security interests are subordinate to the other. The priority agreement divides Totem's assets into two components: the Royal Assets, in respect of which CFI has agreed to grant priority to RBC (with the exception of the lease portfolio), and the Grantor Security (CFI's Security) over which RBC, either expressly or by implication, has agreed not to assert an interest in priority to CFI. [45] CFI's alternate position is that a term giving it priority over the funds related to the financed vehicles should be implied in order to give the priority agreement business efficacy. [46] In the further alternative, relying on Engel Canada Inc. v. TCE Capital Corp. (2002), 34 C.B.R. (4th) 169, 4 P.P.S.A.C. (3d) 124, and s. 40(1) of the PPSA, CFI says its priority may be proved with evidence apart from the Priority Agreement. A. The interpretation of the priority agreement [47] Our Court of Appeal recently reviewed the principles of contractual interpretation in Athwal v. Black Top Cabs Ltd., 2012 BCCA 107, 30 B.C.L.R. (5th) 17 (essentially reiterating what it had said in Water Street Pictures Ltd. v. Forefront Releasing Inc., 2006 BCCA 459, 57 B.C.L.R. (4th) 212). Smith J.A. summarised these principles: [46] Thus, evidence of the factual matrix or surrounding circumstances in which a contract is reached is

admissible for the purpose of determining the meaning of the words of the contract as they would be understood by an "objective reasonable bystander" in the circumstances of the parties. See G.H.L. Fridman, The Law of Contract in Canada, 5th ed. (Toronto: Thomson Canada Limited, 2006) at 15. Ambiguity is not a pre-condition to the admissibility of such evidence. However, the scope of the contextual evidence must not overwhelm the inquiry into the parties' objective contractual intention or no certainty would be achieved by reducing an agreement to writing. [47] If after the contextual inquiry into the circumstances in which the agreement was reached, the language of the contract remains ambiguous (that is the meaning of the words is vague, inconsistent or in conflict with other provisions of the contract, redundant, or overly general), extrinsic evidence of what was said, done or known by the parties when the contract was made, is admissible for the purpose of determining the parties' common intention. [48] There is a presumption against adding an unexpressed term to a contract by implication unless: (i) it is necessary to do so in order to give the contract business efficacy (this does not include a test of reasonableness for the contract); (ii) to correct an obvious oversight for which there is "no dispute" that the parties intended to include such a term in the contract

(i.e. the implied term "goes without saying"); (iii) the term can be clearly and precisely formulated; and (iv) the term will not conflict or be inconsistent with an express term of the contract. However, a term of a contract may only be implied where it is necessary to give legal effect to the parties' presumed intention, as expressed in the contract, and to give business efficacy to the contract. The onus is on the party seeking to establish an implied term of a contract. See Perin v. Shortreed Joint Venture Ltd., 2009 BCCA 478 at para. 27. [48] In support of its primary argument, CFI submits: The references to Grantor Security and Royal Security are of critical importance in interpreting this agreement. Pursuant to s. 3(b) is [sic], CFI is only granting priority to RBC in the Royal Assets that RBC has acquired by virtue of the Royal Security. The Royal Security is defined to the security agreement that creates a security interest in the Royal Assets. The security agreement is the DISA [Dealer Inventory Security Agreement] which is specifically referenced in that definition and is attached at Schedule "B." Looking at the PPR registration for the DISA, it lists exactly the items that are in Schedule "C." Importantly, the DISA excludes CFI's security registration. [49] CFI also points to clause 4(a), pursuant to which RBC consents to Totem creating the Grantor Security

notwithstanding any prohibition in the Royal Security. It says this provision ought to be interpreted as an express acknowledgment by RBC of CFI's priority. While CFI acknowledges that clause 4(a) does not use the words "grant priority", as found in clause 3, it argues that such wording is unnecessary to find an express acknowledgement of CFI's security Interest. Further, to interpret the agreement otherwise would not be commercially reasonable, since the evidence is that before signing the priority agreement, CFI wanted to ensure that it would be in no worse a position than it was before. [50] Looking at the priority agreement as a whole, I do not see any ambiguity. [51] CFI does not dispute that there is a juridical difference, both under the common law and the PPSA, between an asset over which security is taken and the proceeds realised from that asset. Proceeds are dealt with in several sections of Schedule C, but not referred to in the notwithstanding clause. As RBC pointed out, there are cases where the courts have interpreted priority agreements to include proceeds in the priority granted, and cases where the opposite conclusion has been reached. YMCF Inc. v. 406248 B.C. Ltd. (1998), 52 B.C.L.R. (3d) 359, 39 B.L.R. (2d) 130 (S.C.), is an example of the former and Hickman Equipment (1985) Ltd. (Re), 2006 NLTD 60 at para. 41, 257 Nfld. & P.E.I.R. 9, is an example of the

latter. [52] Accepting, as argued, that the phrase "under or by virtue of the Grantor Security" in clause 3(b) restricts the subject matter of the priority, I do not see how that assists CFI. In that clause, CFI grants RBC priority over the interest which CFI has in the Royal Assets by virtue of the Grantor Security. Grantor Security is defined broadly; in fact, CFI's PPSA registration 7418268 is specifically included through the reference to Schedule A. Nor does the reference to Royal Assets in clause 3(b) assist CFI because it includes all personal property in whatever form (Schedule C, item viii). [53] I also do not see how clause 4(a) (where Royal consents to Totem's giving CFI its security) can be construed as recognising CFI's priority. [54] Quite simply, the unambiguous wording of the priority agreement gives RBC priority over all of CFI's security interest, except for what is dealt with in the notwithstanding clause, and that is only the vehicles that are the subject of CFI leases or contracts. The three required words missing in the notwithstanding clause to support CFI's position are: " do not include any motor vehicles or their proceeds". [55] Those words are not necessary to add business efficacy to the contract. The contract does have efficacy if it applies to the vehicles only; the real problem is that it is more advantageous to RBC than CFI. But that does not

allow a court to subvert the unambiguous wording of a contract. The same comment applies to implying a term. [56] I also do not think the factual matrix or surrounding circumstances set out by CFI in its written argument can alter the wording of an unambiguous agreement. B. CFI's alternate argument based on s. 40(1) [57] CFI relies on the following underlined words in s. 40(1) of the PPSA (set out in full above): 40 (1) A secured party may, in a security agreement or otherwise, subordinate his or her security interest to any other interest Based on this, it argues that I can look at RBC's security documents with Totem which refer to CFI's pre-existing security interest. In conjunction with this, CFI relies on Engel, where the court found that a party had subordinated its interest in a general security agreement. Further, it seeks to rely on extrinsic evidence. [58] Section 40(1) merely recognises that a party may subordinate its interest by way of something other than a formal or specific subordination agreement. That does not allow the terms of a subordination agreement to be contradicted by behaviour or documents prior in time to the specific written agreement. [59] Engel is not applicable here. That case involved a security instrument which did not contain a subordination provision. Therefore, the court looked at other evidence to determine whether there was an agreement to

subordinate. [60] In any event, I do not think the parol evidence on which CFI relies is of assistance to it. There was no evidence of negotiations or discussions between the parties over the terms of the priority agreement. It was requested by RBC, Mr. Andrews approved it in principal and it was drafted by the lawyers. The evidence of Mr. Andrews that CFI relies on is an ex post facto opinion; he testified: Q From CFI's perspective what if anything did CFI require in return for considering entering into a priority agreement? A Well, we would have needed to ensure that we were no worse off or in no different position than we were before we entered the agreement since we had priority at that point. [61] While it is logical that CFI would not have wanted to give up something they already had, that is what the priority agreement does. In the absence of ambiguity, the intent of the parties must be taken from the document itself. All the words used in the priority agreement have a long-understood and technical meaning. In essence, CFI's interpretation arguments and the parol evidence mustered in their support amount to a claim for rectification by other means; in other words, a claim that the written document does not capture the intent of the parties as previously agreed to. Rectification was neither pleaded nor argued. C. Estoppel by convention? [62] CFI argued that its priority

position "should be maintained" on the basis of estoppel by convention. While not clear, it appears that argument was made only with respect to the discharge of CFI's registration. In the event that CFI meant to rely on estoppel by convention as an alternative or supplement to the priority agreement I will address the point briefly. [63] Estoppel by convention has three requirements: an understanding common to the parties; reliance of the plaintiff on the common understanding; and detriment to the plaintiff as a result of the reliance: Ryan v Moore, 2005 SCC 38, [2005] 2 S.C.R. 53. [64] Regarding common understanding, it is true that the evidence shows that both parties understood that CFI initially had a priority interest in the lease proceeds and RBC wanted that subordinated to its security interest. But up to the time the priority agreement was signed there is no evidence to show what the precise understanding was. More critically, after the priority agreement was signed, there is no evidence to show any common understanding on behalf of the parties, other than the wording of the agreement itself. There is no conduct by the parties to show the parties understood that CFI had priority over the lease proceeds. Even when Totem was in arrears to both CFI and RBC after the Prime Truck conversions (below, section IV.B), neither party sought to rely on their security interests.

Rather, they both negotiated payment terms with Totem. [65] For similar reasons, no reliance or detriment on the part of CFI can be shown. [66] Having reached that conclusion, I need not address the broader legal issue as to whether and under what circumstances estoppel by convention can be used to supplement or contradict a written contract. [67] My conclusion on the interpretation of the priority agreement is determinative of this action: CFI having agreed to give RBC priority over everything save the vehicles themselves, I do not see how it would be able to succeed in its other claims. However, in the event that my conclusion is incorrect, I will consider the other issues raised by the parties. Since their knowledge of Totem's misconduct is germane to all the remaining issues, I will begin with an analysis of the facts relating to that. IV. totem's conduct and the Knowledge of the parties [68] As I said above, the respective state of knowledge of the parties regarding Totem is relevant, in one manner or another, to the parties' arguments on all issues, with the exception of the interpretation of the priority agreement. There is no way to deal with it without some degree of fragmentation. In order to minimise this, I will deal with the facts with respect to the parties' knowledge and resulting conduct in this section and then return to it as necessary when I deal with the

remaining discrete issues. [69] The Totem scheme to convert vehicles is alleged to have run from March 2004 to November 2005. [70] Up until the spring of 2004, CFI had a good relationship with Totem. Although CFI's audits of Totem indicated from time to time that Totem was not reporting early terminations in as timely a fashion as required by the CFI agreements, having some "stragglers" for early terminations was not unusual amongst CFI's originators and was not a cause for concern. In CFI's experience, late reporting, within reason, of early terminations could happen for a variety of innocent reasons. [71] In March 2004, CFI performed an audit of 25 vehicles (out of a total of 30,000 in the CFI-Totem portfolio). The audit noted several late payments and that "many terminations are not being reported within the required one month". That did not appear to cause CFI any concern. A. The anonymous fax alerts 1. Faxes to CFI [72] On April 2, 2004, CFI received an anonymous fax, addressed to Kevin Andrews, alerting him to alleged fraud at Totem. The fax read (capital letters in original):

KEVIN ANDREWS URGENT & IMPORTANT IMMEDIATE FORENSIC AUDIT BE CONDUCTED ON TOTEM. EVIDENCE OF FRAUD, MISREPRESENTATION AND UNLAWFUL CONVERSIONS. Mr. Leonard forwarded a copy of the fax to Mr. Welsh at Totem. [73] On April 26, 2004, another similar fax was received by CFI. It said: Kevin Two weeks have passed since my last Fax, nothing has changed at Totem. Again I urge you to immediately conduct a Foresic [sic] audit to uncover the fraud, misrepresentation and unlawful conversion. Time is of the essence. Again, Mr. Leonard forwarded the fax to Mr. Welsh. [74] CFI discussed the faxes internally and also spoke to individuals at Totem, including Mr. Welsh and Mr. Papp. Totem explained that the faxes were most likely sent by a disgruntled ex-employee who had recently been fired by Totem. [75] In May 2004, a third, undated, fax was received by CFI. The fax stated: Kevin When two experienced thieves get together, Jordan and Andy, matters can be complicated. What your company needs to do is examine all rental companies, numbered companies and a list of repossessions (which could be well over 100 maybe closer to 200). Remember both Andy and Jordan are masters of deception. [76] As a result of the faxes, on May 18-19, 2004 Mr. Leonard and Ms. Patel conducted an audit of Totem. In the course of that audit, CFI learned from Mr. Welsh that Totem had knowingly leased vehicles to shell

companies created by Prime Truck, one of its short-term lease customers. The purpose of this was to circumvent a concentration limit in the agreements between CFI and Totem which prohibited any one lessee from exceeding 1.5 percent of the value of Totem's total lease portfolio. [77] CFI advised Totem it would not be funding any more short-term leases. The short-term leases that were currently funded would reach their expiration dates within 12 months and Totem's exposure would therefore return to being within the concentration limit within 12 months. [78] CFI continued to monitor the situation. Not long after the May audit, Mr. Leonard travelled to Prince George where Prime Truck Rentals was located and did a review of its operation and a physical audit of the vehicles. Following his review, Mr. Leonard advised Mr. Andrews that everything was in order. [79] In June 2004, Ms. Patel conducted a system audit of Totem's business in which she reviewed 230 of the 3,331 leases in the Lease Portfolio. Ms. Patel identified 17 vehicles that had been terminated on Totem's system which had not yet been reported to CFI. The terminations were explained to Ms. Patel's satisfaction. Totem reported most of them on its June termination sent to CFI in July, which, in CFI's view, was within a reasonable time. CFI was paid in full for all of these vehicles by the end of July 2004. Ms. Patel considered the June 2004 audit to be satisfactory, and accordingly did not bring it to Mr. Andrews' attention.

2. Fax to RBC [80] On July 14, 2004, RBC received an anonymous fax which read: It is urgent that a forensic audit be conducted on Totem Automotive Group Ford Lincoln Sales and Leasing Inc. Branch #3 Road and Cook, Richmond, BC. Recent audit by Corpfinance International Limited [CFI] has uncovered Fraud and Misrepresentation. 416-364-6191 (Kevin) Mr. Vida at RBC telephoned the number on the fax and reached Mr. Andrews. [81] Mr. Andrews told Mr. Vida that the fax had been sent by a disgruntled ex-employee of Totem and that CFI had received other similar faxes. Mr. Vida testified that Mr. Andrews said there had been no issue of recent audit problems with Totem, that he did not believe there was any validity to the accusation and that there was no need to do anything further. Mr. Vida testified that the conversation was fairly light-hearted by the end and "we both sort of laughed it off". Mr. Andrews testified that he told Mr. Vida "everything seemed to be fine from our side". [82] After the telephone call, Mr. Vida telephoned Mr. Papp and received a similar explanation for the fax to the one he had received from Mr. Andrews: namely, it had been sent by a disgruntled ex-employee and there was no basis for the allegation. No further faxes alleging fraud at Totem were received by RBC. [83] On July 16, 2004, Ms. Patel wrote to an employee of Totem expressing two concerns. First, she

noted that six leases which had been identified as early terminations in an earlier audit were not on Totem's June termination list. Ms. Patel ultimately asked that these vehicles be included on the following month's termination list, but Totem did not do so. [84] Second, Ms. Patel noted: the audit was conducted on a random sample of 230 leases of a fleet of 3,331 leases - and the [17] terminations that were found were all June terminations. That does not seem logical. Please advise. Ms. Patel was ultimately satisfied that this was a timing issue because when she looked back at the vehicles selected for the audit, the sample had a lot of older vehicles which tend to terminate near the end of the term. [85] During July, Ms. Patel and Gary McLean, Totem's controller at the time, exchanged emails about vehicles identified during the audit as missing by CFI, but had actually been terminated months earlier. Totem also sent lease numbers to CFI that were not on CFI's system. B. Fall 2004: the Prime Truck conversions and consequent fall-out for CFI and RBC [86] During the early fall of 2004, CFI learned from Mr. Papp and Mr. Welsh that Prime Truck improperly sold some of its leased vehicles in the United States. In the ordinary course, Totem would have had to treat these as early terminations and pay CFI the equivalent of the termination payments. Totem advised CFI it did not have the

funds to do that. CFI agreed to work with Totem to resolve the situation. [87] CFI and Totem together attempted to repossess other Prime Truck leased vehicles and 63 were brought back to Vancouver from Prince George. Totem planned to either sell or lease those vehicles and ultimately pay out CFI. Totem also advised that it would provide CFI with a mortgage over property owned by the parents of the principals of Prime Truck Rentals. That was done in April 2005. (Sometime after Totem went out of business, the property was sold and CFI received proceeds of $1.7 million.) [88] In October 2004, RBC noticed in one of its routine audits that 50 RBC-funded vehicles had not been on the lot for an extended time. Mr. Vida was told by Mr. Papp that Totem had delivered those vehicles to Prime Truck Rentals, and that Prime Truck had sold those vehicles in the United States but had not remitted the sales proceeds to Totem. Mr. Vida accepted that explanation, but found the fact that Totem had not volunteered the information troubling. From that point, Mr. Vida said RBC used "reasonable caution" in its dealings with Totem, although Mr. Vida could not give specifics. RBC provided Totem with an extended payment schedule with respect to the related Prime Truck vehicles. [89] Ultimately, insurance covered part of Totem's Prime Truck loss. RBC and CFI eventually reached a settlement with respect

their claims to the insurance proceeds under their security. [90] In February 2005, CFI registered its security interest against each of the 63 repossessed Prime Truck vehicles and, out of caution, a further 96 Prime Truck vehicles that had not been recovered. [91] Totem defaulted in payments to CFI in October, November, and December 2004. The total amount in default was approximately $5,600,000 and was the result of the Prime Truck sales. [92] Ms. Patel conducted an audit related of the Prime Truck vehicles on November 20, 2004. In the course of that audit, Ms. Patel learned that, in side-letters, Totem and Prime Truck agreed to a residual value approximately $5,700 lower than the value CFI indicated on the lease and upon which CFI had based its funding. In effect, Totem was getting CFI to provide more funding for the vehicles than it would have if it knew the agreed residual value. [93] Kevin Andrews called this discovery "upsetting" and a "surprise". John Burns was "outraged" by these letters and his reaction to this was one of "concern" since he thought that what Totem was doing was "fraud". However, from CFI's perspective it was not going to be an issue going forward because CFI had already stopped funding short-term leases. [94] In December 2004, RBC learned that CFI had also been a victim of the Prime Truck conversions, and that had resulted in Totem being approximately

$2.6 million dollars in arrears in its payments to CFI. He reported internally: Totem has had to repay Corpfinance [CFI] for lease units which have been sold. To support the level of exposure Totem had they had taken a collateral mortgage on some real estate owned by Prime Truck and the principal. They have obtained an updated appraisal on the property indicating that it has a value of $2.8 million. Foreclosure proceedings have been commenced. C. 2005: Totem's decision to close [95] Ford established an incentive programme to consolidate dealerships. In early 2005, Mr. Papp told both CFI and RBC that he had decided to take advantage of this and close Totem. [96] At this time, RBC met with Mr. Papp to determine the timeframe over which RBC could reduce Totem's credit line and loan balances. The relationship between RBC and both Mr. Papp and Totem was still good at this time. D. April 2005: CFI alerted to 63 converted vehicles [97] On April 2, 2005, Mr. Papp wrote CFI advising that the 63 Prime Truck vehicles that had been brought back from Prince George (above para. 87) had been sold between June and December 2004, i.e. before CFI registered its security interest against them. Mr. Papp proposed a possible solution and suggested the matter be discussed in a telephone call. His letter to CFI stated, in part: After Rozmin's [Ms. Patel's] audit and request to reconcile the

outstanding Prime units we found the following; 63 units (schedule A) have been sold between June and December 2004 and those terminations are yet to be paid out. This is in addition to our current cash flow situation and outstanding arrears is a major cause for concern and needs to be addressed immediately and be rectified in the quickest possible time frame. The total of cash receipts would be 9.8 million of which the Royal Bank would require 4.2 million to cover operating lines, 3.5 million to pay all accounts payable (which includes the current carry forward balance to CFI) leaving 2.1 million and the Prince George property as cash and equity for the new lease and used car operation. In order to best realize the value of the business of Totem we require your assistance. Although the situation is extremely challenging it is not insurmountable and can be managed to a mutually beneficial resolution with this proposal. Jordan and I have everything at stake here and we feel that this proposal will provide all parties with the best solution available. [98] Mr. Andrews thought the sale of the 63 units by Totem was "unbelievable"; he "hit the roof" over what he viewed as an admission by Mr. Papp that he had defrauded CFI. [99] Mr. Burns' reaction was similar. He understood what Totem had done was "tantamount to an admission of theft". He found it to be "totally brazen" and believed

that Mr. Papp and Mr. Welsh were stealing. He thought Mr. Papp's proposal was "saying I've stolen from you and now here's what else we're going to do." [100] As stated by both Mr. Andrews and Mr. Burns, at this point CFI had no interest in working further with Totem. If Totem had not already advised of their decision to sell the dealership, CFI would have terminated the relationship. However, CFI considered itself to be in "recovery mode" and it decided it had no choice but to proceed with Totem to wind down the dealership in order to recover CFI's losses as best as possible. [101] In response to the April 2, 2005 proposal, on 8 April 2005, Mr. Burns wrote to Mr. Papp. He expressed disapproval with the sale of the 63 CFI-funded vehicles, and threatened to place Totem under a "lockbox" arrangement to segregate bank deposits. Mr. Burns set out how CFI would wind down its business with Totem and what steps he expected Totem to take. He asked that Mr. Papp sign the letter on behalf of Totem, which Mr. Papp never did. [102] CFI ultimately determined that a lockbox arrangement would cause a "severe administration nightmare" for CFI, in part due to the small number of employees that CFI had in its lease administration department. Further, Mr. Burns reasoned that a lockbox account would not prevent a fraudster from simply depositing purloined funds into a completely different account.

CFI satisfied itself that a pre-authorized debit, drawn on money from Totem's account with RBC, would ensure CFI's payments in respect of the monies it was owed. [103] In April 2005, Mr. Burns told Mr. Papp that, unless Mr. Papp granted a mortgage to CFI, he would "make his life hell". He said to Mr. Papp that Mr. Burns' teenager daughters "lie more convincingly to me than you do". Mr. Burns also said if they had to get into litigation "it would be expensive for everybody". [104] Also in April 2005, Mr. Welsh approached CFI about moving the lease portfolio to another business he proposed starting with a new financial partner and backer, Bill Botham, through an eventual partnership called JW Auto Group. (CFI had previously advised Mr. Papp it had no interest in doing any further business with him.) [105] Jumping ahead of chronological sequence, from May to August 2005, CFI worked with Bill Botham and his counsel to finalize an agreement of purchase and sale and prepare schedules as to what JW Auto would be acquiring in terms of leases and conditional sales agreements. As part of that process, CFI and Botham engaged in reconciliations of all the 3,000 leases and conditional sale contracts in the Lease Portfolio funded by CFI. JW Auto wanted to review each vehicle contract to assess its financial viability. Although a "Heads of Agreement" was signed in August 2005, the

finalization of the schedules was not completed until February 2006. [106] At its simplest, the agreement segregated the vehicle contracts into two groups, an "A" list of the more viable contracts, and a "B" list. JW Auto took over the "A" list. With respect to the "B" list, JW Auto was to act only as CFI's collection agent. [107] In April 2005, CFI contemplated where the missing proceeds might have gone. Although Mr. Burns said he wasn't sure, he acknowledged that an obvious place was Totem's operating account at RBC. E. April 2005 wind-down of RBC's loans to Totem [108] In April 2005, Mr. Papp advised Mr. Vida that he was concerned that CFI funded vehicles which were about to come off lease and therefore go back into inventory would be more difficult to sell once Totem announced it was going to close. When the vehicles were to be returned, Totem would be obliged to pay CFI the residual amount of the lease. Therefore, Mr. Papp asked RBC to approve a credit increase to Totem's used floor plan loan to assist Totem with absorbing the lease termination units into inventory. [109] Mr. Vida prepared a Business Banking Transaction Request (BBTR) and forwarded it to Mr. Streda, to whom he reported. In an April 6, 2005 reply, Mr. Streda replied that the bank wished to exercise caution: Further to our BBTR dated 6th April, 2005, we at Group Risk Management have the following

thoughts. Going forward, this is unlikely to remain an RBC account given the uncertain business objectives of the client (used car operation/residual leasing activities). We therefore see little rationale in increasing our exposure as the client unwinds the dealership operation. While the bank does not wish to be overly draconian and potentially compromise the planned divestiture, we nonetheless require further clarification on several points. Please note that caution and increased scrutiny of the bank would be exercised with any client undergoing a planned exit. However, our concerns are somewhat amplified in this case given past issues surrounding this account, including · fleet financing/deferred billing. · allegations of fraudulent activities disclosed to senior bank executives. · obligations to Corpfinance resulting from vehicles sold out of trust by Prime Truck Rentals. Accordingly, Group Risk Management requires the benefit of the following before further considering your submitted BBTR. In the interim the BBTR shall be held in abeyance. [110] RBC did not approve Totem's request for additional financing. Mr. Vida testified that from that point RBC exercised increased scrutiny with Totem by increasing its audit frequency and spending more time reviewing the financial statements that came in and out every month. RBC also continued to monitor the Prime Truck

situation. [111] By June 2005, RBC was aware that Totem's financial situation was further deteriorating. Its sales were down and it had $1.3 million in bad debt on its year-end financial statement. RBC had downgraded Totem's risk rating as a borrower two levels from a 2-H to 2-L. [112] RBC incrementally reduced Totem's credit facilities. In July 2005, RBC reduced Totem's loan facilities by $3 million. By September 30, 2005, the facilities were reduced by $7 million. On September 1, 2005, the operating line was reduced to $500,000 and on October 31, 2005 was reduced to $300,000. On September 1, 2005, a $2,135,000 automatic payment was made from the operating account to the operating line. [113] Jumping ahead in chronological sequence, on November 30, 2005, RBC called its loan with Totem and demanded payment of $3,669,991. RBC recovered all but approximately $576,000 from Totem, which RBC wrote off. F. Summer 2005 [114] In June 2005, Ms. Patel conducted further audits and reviews of Totem. She initially determined that CFI had received approximately 400 early-terminations, the proceeds of which had not been remitted to CFI. By June 23, 2005, Ms. Patel valued the amounts not reported or remitted at $12.7 million. [115] The reviews continued and Ms. Patel also discovered that some units listed as inventory by Totem had been sold and the funds not remitted to CFI. Ms. Patel regarded

this as fraudulent activity and "escalated" the matter to her superiors, including Mr. Andrews. Ms. Patel advised her supervisors that as of July 7, 2005 Totem owed CFI $16.6 million (which included the $2.6 million owing for the Prime Truck Defaults). [116] During the summer of 2005, Mr. Burns asked Totem management to explain what was occurring. Totem assured him that CFI would be fully paid. Mr. Burns thought that Totem management: blew smoke. There was always, well, maybe they're somewhere else, or we'll find them, or you know, don't worry. But it became apparent that, you know, that house of cards was starting to fall. [117] CFI's June inquiries indicated a further problem with Totem - vehicles that had been double-funded in one of two different ways. Some vehicles had been funded twice by CFI. Other vehicles had been funded by both RBC and by CFI. [118] Ms. Patel described the double-funding as "inappropriate". Ms. Henderson described this as "fairly far outside the usual course of business, in fact, almost alarming". John Burns called it "outrageous". Although he said that CFI's protocol would be to terminate and bill the originator for double-funded units, as well as to terminate the originator, none of these double-funded vehicles were terminated by CFI and all were kept active on CFI's books. [119] By the summer of 2005, Mr. Andrew's level of trust in Totem was

"pretty well near zero" and in CFI was still in "recovery" mode. Being in a shortfall position in the millions of dollars, CFI attempted to realise as much as it could and encouraged Totem to sell as many of the CFI vehicles on its lot as possible. This included vehicles that were double-funded with RBC. [120] CFI needed the cooperation of Mr. Papp and Totem to carry out its investigation into the missing units. In return, Mr. Papp asked for a comfort letter, which CFI provided. The letter stated: Dear Andy You have asked that CFI Trust provide you with a comfort letter (e-mail) to the effect that you will not be pursued personally for the obligations of Totem to CFI Trust in what is considered the unlikely event of a shortfall. Accordingly, I hereby confirm on behalf of CFI Leasing Limited in its capacity as the Administrative Agent for CFI Trust ("CFI"), that provided no funds or assets have been improperly diverted form [sic] Totem by you and you continue to co-operate and act reasonably with a view to maximizing the value of the Totem assets and the proceeds accrue to the benefit of CFI, then in the event that CFI suffers an unanticipated shortfall, CFI will not pursue you personally. [121] Totem did cooperate in giving CFI access to records and later full access and authority to go through its electronic records. [122] During this same period - the summer of 2005 - CFI

monitored what RBC was owed by Totem and the amounts currently in RBC's bank accounts. CFI was also receiving "daily reports" from Totem which included banking information, information about all transactions occurring at Totem, and amounts owing by Totem to RBC (including both Floor Plan loans and the operating line). CFI's administrative group also created their own documents to set out the amounts owing by Totem to RBC. Ms. Henderson sent some of the information about the amounts owed by Totem to RBC to John Burns, emphasizing certain items such as RBC's operating loan. This carried on into October 2005. [123] Mr. Papp continued telling CFI throughout the summer of 2005 that both RBC and CFI would be made whole. G. August to December, 2005 [124] Totem closed on August 31, 2005. The dealership business was sold to Brown Brothers, and, as indicated above, the Totem leasing portfolio was transferred to JW Auto Group, a partnership indirectly owned by Jordan Welsh and Bill Botham. [125] Several days later, Mr. Burns went by the Totem premises - then abandoned - and noticed that computer equipment had been left. This included the ADP server (ADP was the financial software package that Totem was used). With the landlord's permission, Mr. Burns removed the server. Its data was offloaded and forms the basis for the tracing the receipts claimed by CFI, an issue I will deal with

discretely. [126] In October 2005, Mr. Vida discovered through an audit that vehicles financed through RBC's Floor Plan loans were missing and Totem had failed to remit the sales proceeds to RBC. Upon being confronted with that, Mr. Papp acknowledged that he used the funds to pay out leases with CFI that did not have sufficient equity in them. Mr. Vida accepted the explanation, and did not turn his mind to contacting CFI. [127] At around the same time, Mr. Vida also discovered that Mr. Papp had falsely utilized purchase invoices from RBC financed units that he had already sold to obtain further advances from RBC. [128] Mr. Vida testified that neither of these two incidents made him question whether Totem had converted the proceeds of vehicles sales that were subject to CFI security. Nevertheless he acknowledged that he was alive to that possibility; however he was primarily concerned with looking after RBC's interests. [129] Throughout 2005 and early 2006, CFI gathered evidence about the missing vehicles and the deposits of the proceeds received from sale of the early terminated vehicles. Mr. Burns was aware that one possibility would be to try to recover those funds from wherever the money ended up and that litigation was a possibility. CFI knew that the person that would be sued would be the one who received the money, and that one of the distinct possibilities was that the

money wound up in the Totem operating account at RBC. H. 2006 - Action commenced [130] CFI commenced this action in December 2006. In addition to RBC it named, amongst others, Mr. Papp and his company, Alkani Sales. CFI eventually settled with those defendants in 2008 for $50,000 and an agreement from them to cooperate in the ongoing litigation. Mr. Papp was not called as a witness. I. The lease-proceed deposits in context [131] A factor emphasized by RBC is the amount of the alleged CFI lease-proceed deposits in relation to the total volume of transactions that were run through Totem's operating account. [132] During the relevant period (2004 and 2005), there were tens of thousands of transactions totalling hundreds of millions of dollars. In addition to deposits related to CFI-funded vehicles, cheques from new sales, used sales, parts sales and other monies unconnected to CFI leases were deposited into the operating account. During any given month, millions of dollars flowed through Totem's bank account in the ordinary course of business. The following table shows the inputs and outflows of the account: Date Debit Amount (outgoing funds) Credit Amount (incoming funds) Jan 04 $50,387,177.08 $50,943,560.86 Feb 04 $36,485,982.49 $38,224,348.45 Mar 04 $47,433,206.48 $43,935,618.41 Apr 04 $31,133,161.15 $32,712,273.64 May 04 $62,604,638.97 $65,337,898.13 June

04 $92,958,358.80 $87,933,106.15 July 04 $170,734,676.39 $171,909,835.67 Aug 04 $44,010,796.70 $44,139,404.56 Sep 04 $31,853,414.35 $30,519,033.16 Oct 04 $24,275,947.63 $24,531,757.34 Nov 04 $20,020,189.35 $20,462,854.06 Dec 04 $17,559,649.06 $16,909,102.90 Total 2004 $629,457,198.45 $627,558,793.33 Jan 05 $23,625,059.58 $24,387,801.76 Feb 05 $21,531,434.67 $22,288,375.98 Mar 05 $18,813,394.50 $18,166,784.44 Apr 05 $14,810,816.99 $14,984,708.30 May 05 $17,017,923.04 $16,673,329.11 Jun 05 $12,379,410.36 $12,658,656.70 July 05 $10,322,441.30 $10,294,151.68 Aug 05 $11,736,225.38 $14,273,280.28 Sept 05 $10,326,259.45 $8,222,635.39 Oct 05 $3,646,535.29 $3,353,967.54 Nov 05 $1,302,182.78 $1,323,740.23 Dec 05 $536,161.88 $559,852.87 Total 2005 $146,047,845.22 $147,187,284.28 Total 2005 & 2006 $775,505,043.67 $774,746,077.61 [133] Totem regularly deposited into its operating the lease payments it received from customers, totalling approximately $1.1 million dollars a month. Totem regularly paid CFI approximately $1.1 million dollars a month from the account. [134] On any one day when a CFI-claimed lease deposit was made by Totem, there were other deposits that, in the aggregate, were substantially larger than the deposits related to CFI-leased vehicles. As an example, I will take two days selected at random. On April 4, 2005 CFI claims for a deposited termination fee of approximately

$8,000 for a single vehicle. The total deposits for the day were over $500,000. On December 1, 2004 the claimed deposit is $28,500 and the total deposits for the day were $605,000. (These amounts do not include advances from the RBC lines of credits or payments made to them.) [135] The roughly $5 million claimed by CFI represents approximately 0.6% of all the money flowing into or out of the account. J. Summary 1. Knowledge of Totem's dishonest behaviour a) CFI [136] CFI's first possible warning of problems with Totem was the April 2, 2004 anonymous fraud alert. CFI accepted Totem's explanation that they had no substance and were from a disgruntled employee. [137] In May 2004, when CFI conducted an audit after the third (and more specific) fraud alert, it learned of the shell companies set up for Prime Truck to allow Totem to circumvent the portfolio concentration limits in the agreements between Totem and CFI. That was not only in breach of the CFI-Totem agreements, but it was also dishonest behaviour. [138] Ms. Patel was initially suspicious of the July 16, 2004 audit results, but she convinced herself that this was an anomaly caused by the termination of older leases. [139] In November 2004, CFI learned that Totem had provided it with a concocted residual value of some Prime Truck leases. Once again, that was dishonest conduct by Totem. [140] In April 2005, CFI learned that

Totem had improperly sold the 63 repossessed Prime Truck vehicles before CFI's security interest was registered against them. CFI regarded this as tantamount to theft. [141] By June 2005, CFI learned that leases had been terminated but the proceeds not remitted to it. It also learned of the double-funding with RBC. Once again, this was in breach of Totem's agreements with CFI. b) RBC [142] Turning to RBC, the anonymous fax Mr. Vida received in July 2004 specifically referred to CFI. When he called Mr. Andrews, he was assured that CFI had no problems with Totem. Mr. Andrews did not advise RBC of the Prime Truck shell companies. [143] In October 2004, Totem gave RBC the same explanation it had given CFI regarding the Prime Truck vehicle sales in the U.S; namely, it was Prime Truck that was the villain. However, it is true that RBC had to discover the Prime Truck sales for itself in an audit. [144] It was not until October 2005 that RBC learned of dishonest conduct on the part of Totem. This was when Mr. Vida learned that Totem did not remit to RBC the proceeds from sold vehicles and that Totem presented some invoices twice in order to obtain double-funding. [145] CFI did not advise RBC, nor did RBC learn elsewhere, of any of Totem's dishonest conduct in its relationship with CFI. In fact, the first time that RBC learned of CFI's concerns regarding converted vehicles, and the proceeds being deposited into the RBC account, was in an October 2006 affidavit of Mr. Burns, which was filed in respect of the insurance dispute between RBC and CFI relating to the Prime Truck conversions.

2. Knowledge of Totem's financial state and related issues [146] Regarding the state of Totem's financial health, RBC's and CFI's knowledge essentially moved in tandem. [147] As noted above, Totem defaulted in its payments to CFI in October, November and December 2004. RBC became aware of that in December and was aware of the mortgage that CFI had obtained. RBC had to extend Totem's payment terms. Both parties attributed the default to the misconduct of Prime Truck. [148] Both CFI and Totem were aware at the same time of Totem's decision to sell to Brown Brothers. [149] RBC's decision to refuse the requested credit increase for Totem in April 2005 (above, para. 109) was based on facts known to CFI. It was a decision made in the ordinary course of business, primarily on the basis that Totem was ceasing business. [150] Until this lawsuit, RBC was only aware of the $2.6 million arrears between Totem and CFI, attributable to the Prime Truck situation, which was accepted by both parties to be Prime Trucks's wrongdoing. This paralleled RBC's experience. Beyond this, RBC was not aware of any facts which would have been a breach of Totem's agreements with CFI. On the other hand, CFI was aware of several such breaches. [151] The issue of Totem selling CFI-funded vehicles and not remitting the proceeds of sales to CFI was identified in late June 2005. CFI knew that the proceeds of the

sales might have been deposited into Totem's RBC bank account. CFI did not alert RBC to its knowledge or suspicions. V. Should, as between the parties, CFI's pre-discharge priority be restored? [152] On November 21, 2005, Northland Dodge Chrysler discharged CFI's PPSA security interest. While no one from Northland was called to give evidence, it appears this was done accidentally and it had no authorization from CFI to do so. [153] The Acting Deputy Registrar of the Personal Property Security Registry, Deborah Turner, testified at the trial. She noted that there is no process to verify that an application for discharge has been authorized by the holder of the registered security interest. Further, where the party submitting the discharge is the same as the holder of the charge, the PPR does not mail a notice to the holder. Rather, notice is posted to the submitting party's BC Online account. In this case, Northland showed CFI as the party submitting the discharge (the same as the holder of the charge). Therefore the PPR did not mail CFI a notice of discharge. [154] Mr. Burns testified that he learned of the discharge through discussions with RBC about the Prime Truck insurance proceeds in August 2006. Until that time, no one at CFI was aware of it. CFI re-registered in the same month against Totem Mercury Sales Ltd. It should have registered it against Totem's new corporate

name, Alkani Sales and Leasing Limited. [155] Section 35(7) of the PPSA allows for the re-registration of a security interest if it has been discharged in error, but it must be done within 30 days of the discharge, which was not done here. Nevertheless, invoking sections 63(2)(e), 68(1) and 70 of the PPSA, CFI argues that I can, and should, declare that CFI's security ranks in the order it did before the discharge, at least insofar as RBC is concerned. [156] Given my interpretation of the priority agreement, even if CFI's security registration is considered to rank ahead of RBC's, it would not avail CFI because the priority agreement would still govern. What I say here is therefore only relevant if I am wrong in the interpretation of the priority agreement. A. PPSA section 63(2)(e) [157] Section 63 of the PPSA provides: Supervisory jurisdiction of court 63 (1) In this section, "secured party" includes a receiver. (2) Subject to subsection (3), on application of a debtor, a creditor of a debtor, a secured party, a sheriff or a person with an interest in the collateral, a court may make one or more of the following orders: (a) an order, including a binding declaration of right and injunctive relief, that is necessary to ensure compliance with this Part or section 17, 36, 37 or 38; (b) an order giving directions to a person with respect to the exercise of the person's rights or

the discharge of the person's obligations under this Part or section 17, 36, 37 or 38; (c) an order relieving a person from compliance with the requirements of this Part or section 17, 36, 37 or 38, but only on terms that are just and reasonable to all parties affected; (d) an order staying enforcement of rights provided in this Part or section 17, 36, 37 or 38; (e) an order necessary to ensure protection of the interest of any person in the collateral. (3) Nothing in subsection (2) (c) and (d) affects the application of sections 58 (3) to (5) and 67. [158] CFI relies on ss. (e). The sole authority which CFI relies on to illustrate the operation of this section is Poplar Properties Ltd. v. Cranewood Financial Corp., 2002 BCSC 1433, 38 C.B.R. (4th) 43, aff'd 2002 BCCA 670, 8 B.C.L.R. (4th) 277. In that case a tenant deposited shares in a privately held company as security for a lease. Part way through the lease, and after protracted litigation, the landlord offered to substitute cash as security in place of the shares and invoked s.

63. Garson J. (as she then was) acceded to the motion. [159] The order for the substitution of cash as security is a far cry from an order re-jigging the priority of charges. Moreover, Garson J. stated that the discretion under s. 63(2) should also be exercised in conjunction with s. 68(2), something that is not engaged here. Further, and more fundamentally, I do not think that re-ordering priorities in this case falls within the meaning of "an order necessary to ensure protection of the interest of any person in the collateral". Rather, any such reordering must be based on a substantive right found elsewhere. B. Sections 68(1) and 70 [160] CFI alternatively relies on a combination of sections 68(1) and 70, as well as KBA Canada, Inc. v. 3S Printers Inc., 2012 BCSC 1078, 93 C.B.R. (5th) 263. [161] Section 68(1) of the PPSA provides: Supplementary law 68 (1) The principles of the common law, equity and the law merchant, except insofar as they are inconsistent with the provisions of this Act, supplement this Act and continue to apply. [162] Section 70 of the PPSA provides: Summary proceedings 70 On application of an interested person, a court may (a) make an order determining questions of priority or entitlement to collateral, or (b) direct an action to be brought or an issue to be tried. [163] KBA is a case very similar to the case at bar. KBA had registered a purchase money

security interest which was accidentally discharged by another security holder. KBA did not receive notice of the discharge and only learned of it three months later. KBA took the position that ss. 68 and 70 of the PPSA permitted the court to correct the error, or, alternatively that it should succeed on the basis of unjust enrichment. Kelleher J. allowed the application on both grounds. [164] With respect to the first ground, Kelleher J. concluded: [80] In these limited circumstances: 1. Existence of a prior security interest perfected by registration; 2. A mistaken discharge by innocent mistake and without notice to the security holder; 3. No reliance by any competing security holder; I am of the view that an order under ss. 68 and 70 determining priorities is appropriate. [81] Making an order under s. 70 giving KBA/Canada a priority interest on the principle that equity does not suffer a wrong to be without a remedy is not inconsistent with the provisions of the PPSA. Section 35(1) expressly allows that other provisions apply to determining priority. Section 35(7) does not address the consequences of failing to re-register within 30 days. Section 70 similarly does not include any language indicating that the discretion afforded to the courts to make orders determining priority is always subject to other priority provisions. [165] Since this will be sufficient to dispose of

the issue, I do not need to deal with the unjust enrichment analysis of Kelleher J. [166] RBC points out that KBA has been the subject of academic criticism and is under appeal. Nevertheless, neither party suggested that judgment on this case should be deferred pending the Court of Appeal's decision and I am bound to follow a decision of this court and not academic comment. [167] Apart from the greater lapse in time in the case at bar, I find it difficult to distinguish KBA. In fact, in some ways this case is stronger than KBA because of the subordination agreement. Putting aside the disputed interpretation of that agreement, which I dealt with elsewhere, it did recognise that CFI had a pre-existing registered interest. [168] Turning to the time between the discharge (November 21, 2005) and the re-registration, (August 2006), RBC says this should weigh against allowing the restoration of the priority; CFI should have been checking the state of its registrations. I do not see that to be a significant fact, given that RBC can point to no prejudice as a result of the delay. I think the same reasoning would apply to CFI's error in not re-registering in the name of Alkani Sales and Leasing Limited, to which Totem had changed its name in September 2005. [169] There is one final matter to consider. That is CFI's dilatory conduct in not alerting RBC to Totem's dishonest conduct. I

dealt with the facts relating to that (section IV above) and I reach conclusions with respect to it below (beginning at para. 237), in the context of knowing receipt. Should that prevent the restoration of CFI's priority, given that equitable considerations are involved? I conclude it should not, since that delay is unrelated to the re-registration. [170] I therefore conclude that as against RBC, CFI is entitled to have its security registration treated as reinstated retroactive to the date of discharge. Nevertheless, it would still be subject to the priority agreement. VI. Does RBC have priority pursuant to s. 31 of the PPSA? [171] RBC argues that s. 31 of the PPSA gives it priority over the lease funds. While it referred to all subsections in its argument, its main focus was on s. 31(3). [172] The relevant subsections of s. 31 provide: Protection of transferees of negotiable and quasi-negotiable collateral 31 (1) A holder of money has priority over a security interest in money perfected under section 25, or temporarily perfected under section 28 (3), if the holder (a) acquired the money without knowledge that it was subject to a security interest, or (b) is a holder for value whether or not the holder acquired the money with knowledge that it was subject to a security interest. (2) A creditor who receives an instrument drawn or made by a debtor and delivered in payment of a

debt owing to the creditor by that debtor has priority over a security interest in the instrument whether or not the creditor has knowledge of the security interest at the time of delivery. (3) A purchaser of an instrument has priority over a security interest in the instrument perfected under section 25 or temporarily perfected under section 26 or 28 (3) if (a) the purchaser gave value for the instrument, (b) the purchaser acquired the instrument without knowledge that it was subject to a security interest, and (c) the purchaser took possession of the instrument. (5) For the purposes of subsections (3) and (4), (a) a purchaser of an instrument, or (b) a holder of a negotiable document of title, who acquired his or her interest under a transaction entered into in the ordinary course of the transferor's business has knowledge only if he or she acquired the interest with knowledge that the transaction violates the terms of the security agreement creating or providing for the security interest. [173] Subsection 31(1) applies to a holder of money and subsection 3 applies to a holder of an instrument. Those two terms are defined in s. 1(1) as: "instrument" means (a) a bill of exchange, note or cheque within the meaning of the Bills of Exchange Act (Canada), (b) any other writing that evidences a right to payment of money and is of a type that in the ordinary course of business is

transferred by delivery with any necessary endorsement or assignment, or (c) a letter of credit or an advice of credit if the letter of credit or advice of credit states on it that it must be surrendered on claiming payment under it, but does not include (d) chattel paper, a document of title or investment property, or (e) a bond, debenture or similar document evidencing an obligation secured, in whole or in part, by a mortgage of an interest in land unless the interest being mortgaged is, itself, a mortgage of land; "money" means a medium of exchange (a) authorized by the Parliament of Canada, or (b) authorized or adopted by a foreign government as part of its currency; [174] Purchaser is not defined, but in s. 1(1) purchase is defined as: "purchase" means taking by sale, lease, discount, assignment, negotiation, mortgage, pledge, lien, issue, reissue, gift or any other consensual transaction creating an interest in property; [175] Finally, value is defined in s. 1(1) as: "value" means any consideration sufficient to support a simple contract, and includes an antecedent debt or liability. [176] I will elaborate on the parties' positions but, in summary, CFI says that RBC cannot rely on subsection (1) because RBC is not a holder of money. Further, RBC cannot rely on either subsection because it did not receive the lease proceeds without the requisite of knowledge contemplated by the subsections. Finally, RBC cannot rely on either sub-section because Totem's account was never in a debit balance: therefore RBC was not a purchaser. A. The Flexi-Coil decision [177] RBC relied heavily on the Saskatchewan Court of Appeal's decision in Flexi-Coil Ltd. v. Kindersley District Credit Union Ltd. (1993), 107 D.L.R. (4th) 129, 113 Sask. R.

298. I will therefore begin with a detailed analysis of that decision. [178] The appellant Flexi-Coil supplied inventory to Churchill, a farm equipment dealer. They entered into a security agreement covering the equipment and its proceeds which was registered under The Personal Property Security Act, 1993, S.S. 1993, c. P-6.2. Churchill had a revolving bank account with the respondent credit union, attached to a $175,000 operating line of credit. The credit union's loan was unsecured. [179] The chequing account was allowed to operate in negative balance up to the amount of the $175,000 loan. When a deposit was made into the account it would be credited against the outstanding loan balance. The account was never in a positive balance. The funds in dispute were deposited into the account both by way of cheque and electronic funds transfer. The credit union had no knowledge of Flexi-Coil's security interest. [180] The credit union argued that Flexi-Coil could not trace the secured funds (namely the funds which were deposited as a result of the sale by Churchill of Flexi-Coil inventory) because tracing is an equitable remedy and in equity, funds could not be traced into the hands of a bona fide purchaser for value. The credit union itself did not raise the issue of s. 31; rather, that appears to have been done by the Court of Appeal as part of its analysis regarding this argument,

and its focus was on s. 31(3) of the Saskatchewan PPSA. [181] Section 31(3) of the Saskatchewan PPSA is the same as the B.C. PPSA. The definitions of purchase and value are the same. Purchaser was defined in the Saskatchewan statute as "a person who takes by purchase". As I stated above, the B.C. statute does not define purchaser but it is clear that it must be someone who takes by purchase. The definition of instrument (not set out in the judgment) was in essence the same as the B.C. statute. [182] The court held that the deposited cheques were instruments. I do not think there is any debate about that here. [183] The court then turned to the issue of whether the credit union was a purchaser and said, at 140 - 141: It is not necessary to determine the credit union's exact status as a holder or collecting bank. It is only necessary to determine whether it acquired an interest to bring it within ss. 2(ff) and 2(hh) of the PPSA. When Churchill presented a cheque, accompanied by a deposit slip, to the Credit Union, one must infer Churchill gave the cheque to the Credit Union in order to reduce the balance: see Kimmel v. Bean et al., 75 P. 1118 (S.C. Kan., 1904) at 1121; and Agard v. Peoples Nat. Bank, Shakopee, et al. , 211 N.W. 825 (S.C. Minn., 1927). Conceptually, it cannot be otherwise. The value of a cheque could not create a positive balance in the account as the credit union

waited for some further direction, from Churchill, to credit the account while at the same time interest continued to accrue on the outstanding balance on the line of credit. After reducing the overdraft, immediate credit was given. That the credit could be reversed is irrelevant. Based on the above statements which describe a collecting bank's rights and status, the credit union's reduction of Churchill's debt and the grant of further credit gave the credit union a sufficient interest in each cheque to make it a purchaser for the purpose of s. 31(3). As indicated, when the cheques were deposited, the account was immediately credited and Churchill was able to write cheques on the account equivalent to the amount of the cheques deposited, subject to the $175,000 limit. Based on the definition of value, value was given in exchange for the cheques when the amount owing on the line of credit was reduced and, of course, when the right to draw additional funds was made available. Thus, the credit union took the cheques free and clear of the interest of Flexi-Coil when the cheques were deposited by virtue of s. 31(3). [184] Next, the Court of Appeal dealt with the issue of whether, for the purposes of the claimed tracing remedy, second generation proceeds were created. The credit union had argued that no proceeds within the meaning of the PPSA were created after the cheques were

deposited. While not stated by the court, this analysis must have been in the alternative, since it had already concluded that the credit union took the cheques (and, as later concluded, the electronic funds transfers) free and clear. [185] Once again, the Court focussed on the issue of the account being in a negative balance. The Court reasoned that when a cheque is deposited into an account in positive balance, the account is the proceeds of dealing with the cheque, because the bank is in a debtor relationship to the account holder. On the other hand, the Court held, at 144, that when an account is in overdraft, no property right arises because the customer is the debtor of the bank. The Court stated (again at 144): Following the making of a deposit, Churchill could not have sued the credit union and recovered the deposit. The credit union's obligation to credit the account is not an intangible to which a security interest can attach to permit recovery by forcing a payment from the credit union to Flexi-Coil. Churchill's only right after making the deposit was to have the account balance credited. If Flexi-Coil attached this right, it could be in no better position than Churchill. [186] Having gone through the Flexi-Coil decision, I will now turn to the discrete elements of s. 31(3) as they apply to the case at bar. As I have said, I do not think there is any dispute that the

cheques which Totem deposited were instruments, or that RBC took possession of them. I will analyse the remaining requirements (whether RBC was a purchaser and its knowledge) with respect to the cheques and then deal with the electronic funds transfer issue. B. Was RBC a purchaser of the cheques? [187] At para. 13, I set out the loan facilities that RBC provided to Totem at the relevant time. The key facility for the issue I am now considering is the revolving demand operating loan. Apart from a U.S. dollar account, which is not relevant, Totem had only one bank account, the operating account. Because of the RBC system, the account was never in a negative balance and would never be in a negative balance unless Totem impermissibly attempted to exceed its loan limits. CFI relies on this to distinguish Flexi-Coil, in which there was only one account for which the bank provided an overdraft facility. [188] I will now set out the relevant details of the loan agreements. For the sake of completeness, I will include provisions dealing with the floor plan loans as well as the operating loan. [189] The loans were collectively dealt with in one agreement, which was amended several times. The first version relevant to the period of the claim is dated November 26, 2002. The maximum loan amounts were increased several times after that. On December 1, 2004 there were some more significant

changes made and a new agreement was signed. [190] The 2002 credit agreement set out a maximum amount for each of the credit segments, as they were referred to. The agreement set out required aggregate margins and there was a requirement that the total advances of all segments was not to exceed $46,500,000. Totem could, with the bank's permission, vary the amounts of the segments as long as the total did not exceed the aggregate limit. This limit was echoed in the attached "Standard Terms and Conditions" pursuant to which Totem covenanted not to make use of any available credit if it exceeded the permitted maximum. The 2004 agreement did not refer to Totem's ability to vary the loan limits within an aggregate limit, but it did have the same covenant not to exceed the credit limits in the Standard Terms and Conditions. Both the 2002 and 2004 agreements provided that the right of Totem to obtain advances was subject to it not being in default of the agreements. [191] The operating loan system, revolving in multiples of $10,000, automatically determined whether the current account needed funds to be in a positive balance at the end of the business day or whether there were excess funds that could be extracted to pay down the operating loan. Because of the automatic transfers the account was never in a negative balance at the end of a business day. The 2002 loan agreement did not

refer to the operating account; the 2004 loan agreement specifically referred to it as a mechanism by which the operating loan could be drawn on and repaid. [192] New and used vehicles were financed under the floor plan loans by way of an advance request made by Totem, supported by the invoice for the purchase of the vehicle. The floor plan loans were to be repaid when the relevant vehicle was sold. [193] The credit agreements (both 2002 and 2004) used the phrase "borrow, repay and reborrow" to describe the revolving nature of the all the credit facilities. Clause 8 provided that the credit facilities are established "at the pleasure of the Bank and that the Bank reserves the right to demand repayment at any time." The clause concluded by stating that " the obligation of the Bank to make additional Advances may be terminated or reduced at any time by the Bank, acting reasonably." The Standard Conditions, which formed part of the credit agreements, provided that the Bank had a right of set-off against all deposits if repayment was accelerated. Clause 10 of the Standard Conditions provided: Unless otherwise directed by the appropriate party, all disbursements to a Borrower shall be made into the Designated Account of such Borrower at the Branch and all payments to the Bank shall be made by depositing funds (whether by wire transfer or otherwise) in the appropriate currency into

the applicable account at the Branch for value on the due date. The Borrower authorizes and directs the Bank to automatically debit, by mechanical, electronic or manual means, any of its bank accounts for all amounts payable under this Agreement, including but not limited to, the repayment of principal and the payment of interest, fees and all charges for the keeping of such bank account. The currency of account of all payments contemplated hereunder shall be of the essence in this Agreement. [194] Does the fact that the operating account was never in a negative balance prevent the bank being a purchaser for value on the days when the operating loan was in a negative balance? I do not think it does. [195] The fundamental consideration in Flexi-Coil was whether the customer and the bank were in a debtor-creditor relationship when the funds were deposited. In Flexi-Coil, there was no separate operating loan account and the loan facility was provided by way of an overdraft. Here there was a separate loan account, but that is a difference without a distinction. The two were linked; the way the loan was accessed was through the draws on the operating account and repayments were made by deposits to the operating account. The fact that there were two separate accounts does not detract from the fact that on the days when the operating loan was in a negative balance, Totem was a

creditor of the bank. Deposits to the account on those days were treated as repayments of the operating loan under the 2004 credit agreement. Before that time, that is the way the parties treated them. [196] Finally, I note that there is some academic support for this proposition. In British Columbia Personal Property Security Act Handbook, 2008 (Toronto: Thomson Canada Limited, 2008), Professor Richard McLaren states, at 291 - 292: If the depositor has several accounts with a financial institution, some of which are in overdraft, it is likely that one must add up all of the accounts and determine the net position as being either positive or negative. [197] Although the parties did not deal with repayments of the floor plan loans, RBC would also be a purchaser for value of repayments made of them, whether made through debits from the operating account or otherwise. As mentioned above, those loans were to be re-paid when a vehicle was sold. Even if Totem did not designate that a repayment was being made for a sold vehicle, RBC would, under clause 10 of the Standard Conditions, have the right to debit the operating account for payments that ought to have been remitted upon a vehicle sale. (I do not have daily reports of the floor plan loans but on a monthly basis they were always in a negative balance.) [198] On a different point regarding the interpretation of Flexi-Coil, CFI

argues that the comments in Flexi-Coil at 139 - 141 only address whether the credit union took the cheques (the first generation proceeds) free and clear and not the transfers to the loan account, which CFI argues are second generation proceeds. From this CFI argues that Flexi-Coil only stands for the proposition that CFI cannot attach the cheques once they are deposited with the bank. However, CFI argues it is not trying to obtain the cheques; it is seeking the second or third generation proceeds that were created after the cheques were deposited. [199] I do not agree with this. First, as set out above, the court's analysis in Flexi-Coil regarding the issue of second generation proceeds was in the alternative to its first line of analysis. Second, if CFI did not have a right to claim against the cheques, I do not see how the right to trace can be brought back to life when second generation proceeds are created from them. C. Knowledge of RBC [200] As set out above, in order to avail itself of s. 31(3), RBC must show that it acquired the instrument without knowledge that it was subject to a security interest. Section 31 contains its own definition of knowledge for the purposes of ss. (3) and (4), which I will set out again: (5) For the purposes of subsections (3) and (4), (a) a purchaser of an instrument, or (b) a holder of a negotiable document of title, who acquired his or her

interest under a transaction entered into in the ordinary course of the transferor's business has knowledge only if he or she acquired the interest with knowledge that the transaction violates the terms of the security agreement creating or providing for the security interest. [201] The PPSA also contains a deeming for provision for knowledge of corporations: 1(2) For the purposes of this Act (c) a corporation knows or has knowledge when information has come to the attention of (i) a managing director or officer of the corporation, or (ii) a senior employee of the corporation with responsibility for matters to which the information relates, under circumstances in which a reasonable person would take cognizance of it or when the information in writing has been delivered to the corporation's registered office or attorney for service, [202] The parties dispute the precise nature of the knowledge that is required under these provisions. RBC relies on Belarus Equipment of Canada Ltd. v. C & M Equipment (Brooks) Ltd. (Receiver-Manager of) (1994), 24 Alta. L.R. (3d) 125, [1995] 1 W.W.R. 429(Q.B.), a decision of Master Funduk. [203] In Belarus, the applicant claimed that a notice sent by it to the financial institution put the financial institution on sufficient notice such as to negate the s. 31(3) protection. The court found that s. 31(3) still allowed the financial institution to

take the cheque free and clear of the security interest, on the basis that the financial institution did not have knowledge of the transactions giving rise to the two specific cheques. Master Funduck stated: 114 Subsection (4.1) eliminates any vexing problem of whether constructive knowledge is knowledge within cl. (b). Actual knowledge by the banker is required before cl. (b) is ousted. The banker must in fact know that the cheque is subject to a security interest. For the purpose of this application it does not matter whether s. 28(1)(b) or the trust provisions in the security agreement apply. In this lawsuit the end result is the same. 119 The fundamental problem for the Applicant is that the Respondent must in fact know the underlying transaction to each cheque before it might be said that cl. (b) has not been met. The s. 34 notice cannot circumscribe the effect of s. 31(3). It is the other way round. Section 31(3) is an exception to the effects of ss. 25, 26 and 28(3). The s. 34 notice cannot negate the exceptions in s. 31. 124 Certainly a banker might speculate about what a cheque is for and he might even be on the mark in his speculation. But that is not what subs. (4.1) is about. Speculation is not knowledge. He must know that the cheque is the sale proceeds of collateral that is subject to a security agreement. Nothing less will do. [204] CFI argues that Belarus should

not be followed and points to AGT Financial Corp. v. Ellake Services Ltd., 2011 BCSC 578, 78 C.B.R. (5th) 257. In that case, at para. 54, Masuhara J. referred to Belarus as being some authority requiring actual, conscious knowledge but concluded that "the weight of the authorities support the view that for the purposes of s. 31(3) actual knowledge is not required." [205] However AGT was primarily concerned with s. 1(2); in other words, the question of when a corporation is deemed to have knowledge. While both that provision and s. 31(5) deal with knowledge, they deal with separate things. Masuhara J. referred to the decision in Re Searcy (1991), 61 B.C.L.R. (2d) 247, [1992] 1 W.W.R. 573 (B.C.S.C.) in which Maczko J. recognised the distinction between the sections. Maczko J. said at para. 9: In my view, this section simply defines how knowledge will be fixed, that is, once the information has been delivered to a corporation in a certain method the corporation will be taken to have knowledge of the information that has been delivered. The information must, however, be such that the corporation would have actual knowledge that the automobile was in British Columbia. I do not think that the corporation is required to speculate that the motor vehicle is probably in British Columbia because the debtor has declared bankruptcy there. Although it may be a reasonable inference to draw,

the statute requires actual knowledge and in this instance G.M.A.C. did not have actual knowledge. Therefore, while s. 1(2) deals with when a corporation is deemed to have knowledge after information has been given to it, it is s. 31(5) that deals with the quality or level of the knowledge that is required for the operation of s. 31 (3) and 31(4). [206] Section 31(5) is clearly drafted. I agree with Belarus. Knowledge of the existence of a security agreement with a bank's customer is not enough to disentitle the bank from relying on the protection afforded by s. 31(3). There must be knowledge that the transaction violates the terms of the relevant security agreement. [207] I have set out the facts relating to the knowledge of RBC in section IV. In its written argument CFI summarised RBC's state of knowledge: a) RBC understood the nature of asset securitization and in particular understood that the cash flow, lease payments and net proceeds were beneficially owned by CFI. b) Throughout its business relationship beyond and until they became aware of the Discharge in the summer of 2006, RBC agreed and understood that CFI had priority over the Lease Portfolio and the proceeds. c) RBC knew that all proceeds from the Lease Portfolio were deposited into Totem's Operating Account. d) RBC knew that Totem had engaged in conversion of RBC vehicles by October, 2004. e) RBC knew that Totem

was having cash flow problems in the Fall of 2004 due to the Prime Truck Rental situation. f) RBC knew about the Prime Truck Defaults no later than December 2004. g) No later than December 2004, RBC knew that Totem was indebted to CFI under the Program Agreements in the amount of 2.6 million. h) By February, 2005, RBC knew about Totem's decision to close the dealership. i) RBC was aware by March/April, 2005 that Mr. Papp was seeking to increase his financing in anticipation of a sales slowdown that would adversely impact Totem's obligation to pay CFI for terminated and expiring leases. j) By the Spring of 2005, RBC was aware of Totem's deteriorating financial situation, yet despite previous practice decided to not conduct an annual review or obtain copies of CFI's audit reports. Instead Mr. Vida indicated on the BBTRs that CFI was satisfied with the lease portfolio quality without having actually confirmed that was the case. k) RBC continued to decrease Totem's credit facilities provided to Totem and to automatically withdraw credits in the Operating Account to decrease Totem's indebtedness to RBC. l) RBC was alive to the fact that given Totem had converted RBC vehicles, Totem may have also converted CFI securitized vehicles. Despite being armed with all of this knowledge RBC made no effort to ascertain if Totem had converted CFI securitized vehicles. [208] Item (d) is not

accurate. In October 2004, RBC became aware that Prime Truck had sold (i.e. "converted") RBC-financed vehicles. RBC was told that Totem was the victim. CFI was in the identical situation. However, Totem did not volunteer the information to RBC; rather, RBC discovered the matter in an audit. [209] I do not think any of this rises to knowledge that the funds were deposited in violation of CFI's security arrangements, which is what the section requires, or that RBC's setting-off the deposited funds against the loans violated the security agreements. [210] While not necessary to my decision, I point out that this is illustrated by the fact that CFI had at least equal knowledge of the relevant facts and was in a better position to have knowledge of its own secured vehicles. While that might not have legal significance here, as it does to some of RBC's other arguments, it is has factual significance. If CFI did not have, as it contends, knowledge of the Totem misconduct, how could it be said that RBC did? [211] I conclude that RBC is entitled to the protection of s. 31(3) for the cheques. D. The electronic funds transfers [212] Subsection 31(3) provides protection for the purchaser of an instrument. Do wire or electronic fund transfers (EFTs) fall within the definition (set out above) of an "instrument"? [213] RBC relies, once again, on Flexi-Coil and counsel for both parties advise

there is no other case on point. The Court of Appeal held, at 148, that the EFTs should be treated in the same way as the cheques: When the PPSA was drafted, credit transfers were relatively new and therefore they are not referred to in the PPSA. What then should be the result? The credit union's proposal is entirely consistent with ss. 31(1), (2) and (3) of the PPSA. There is a great deal of merit to the credit union's position. Arguably, these sections, insofar as they deal with matters in federal jurisdiction, were not needed and merely restate the federal law. The goal of these sections is to leave money and cheques largely free from security interests to preserve the integrity of the payment system in Canada which now includes credit transfers. Churchill initiated these credit transfers, in the ordinary course of business, and they were treated by the credit union in the same way as the cheques. When a credit transfer was made, it was immediately applied to reduce the account balance. After the transfer occurred, no second generation proceeds were created. Accordingly, it is my opinion the credit transfers and the cheques should be treated alike judicially and priority given to the credit union with respect to the credit transfers as well. [Emphasis added.] [214] Unlike the Saskatchewan Court of Appeal, I think I must approach the matter as one of statutory interpretation,

rather than a matter of broader policy considerations. [215] It is to be noted that the definition of instrument is limited to the items that are set out within it; it is not a definition that begins with the word "includes". [216] The PPSA defines "account" as: "account" means a monetary obligation not evidenced by chattel paper or an instrument, whether or not the obligation has been earned by performance, but does not include investment property; An EFT appears to me to fit within that definition. Since an account is not included in the definition of "instrument", I conclude that an EFT is not an instrument. [217] That does leave a gap in the legislation, but it is up to the legislature to deal with that. E. Sections 31(1) and 31(2) [218] As I have said, I do not think RBC relies on subsections 31(1) or (2). In any event, I do not think they are applicable. This is so because subsection (1) refers to "money", which the cheques and EFTs are not. Subsection (2) requires that the creditor (RBC) receive an instrument drawn or made by the debtor (Totem); however, the deposits were comprised of cheques and EFTs made by Totem customers. F. Conclusion with respect to s. 31 [219] I conclude that, in the even I am incorrect in my interpretation of the priority agreement, RBC is entitled to the protection of s. 31(3) with respect to cheques which have been deposited, but not deposits

made by way of EFTs. Sections 31(1) and 31(2) are not applicable. VII. Knowing Receipt [220] The Supreme Court of Canada set out the law relating to a claim of knowing receipt in two companion cases: Citadel General Assurance Co. v. Lloyds Bank Canada, [1997] 3 S.C.R. 805, 152 D.L.R. (4th) 411 and Gold v. Rosenberg, [1997] 3 S.C.R. 767, 152 D.L.R. (4th) 385. In order to succeed in a claim of knowing receipt the plaintiff must show that: a) the property in question was held in trust by a third party; b) the property was taken from the plaintiff in breach of trust; c) the defendant received the trust property and applied it for its own use and benefit; and d) the defendant had either actual or constructive knowledge of the breach of trust. [221] RBC says that the funds in question, namely the lease payments, were not the subject of a trust. I do not need to deal with that issue, since in my view this claim can be disposed of on the basis of lack of actual or constructive knowledge. [222] CFI does not allege that RBC had actual knowledge that Totem was depositing secured lease proceeds and not paying it to CFI. Rather, CFI relies on constructive knowledge of RBC. CFI does not specify a time at which the facts known to RBC should have put it on notice or inquiry. [223] RBC, does not deny, nor do I think it could, that it knew lease proceeds were deposited into Totem's account.

However, it does deny that it knew that the funds were not being paid to CFI as required or that it had any knowledge of suspicious or other behaviour on the part of Totem sufficient to put it on inquiry. RBC also says that CFI had earlier and greater knowledge of Totem's dishonest or suspicious dealings, and should have warned RBC in order to protect both parties' interests. Had RBC been alerted, it could have stopped advancing funds to Totem and could have frozen Totem's account, preventing ongoing payments to third parties. [224] Constructive knowledge is knowledge of facts which are sufficient to put a reasonable person on notice or inquiry. With respect to banks, Laforest J. put it this way in Citadel at para. 52: It follows that a bank which is enriched by the receipt of trust property and has knowledge of facts that would put a reasonable person on inquiry is under a duty to make inquiries of its customer regarding a possible breach of trust. If the bank fails to make the appropriate inquiries, it will have constructive knowledge of the breach of trust. In these circumstances, the bank will be unjustly enriched and, therefore, required to disgorge the benefit it received at the plaintiff's expense. [225] It cannot be that knowledge of a possible trust relationship or an actual trust relationship - something banks deal with day in and out - is sufficient to put a bank on

inquiry of possible wrongful conduct. That not only accords with common sense and commercial reality, but it also is in accord with s. 437(3) and (4) of the Bank Act, S.C. 1991, c. 46, which provides: Execution of trust (3) A bank is not bound to see to the execution of any trust to which any deposit made under the authority of this Act is subject. Payment when bank has notice of trust (4) Subsection (3) applies regardless of whether the trust is express or arises by the operation of law, and it applies even when the bank has notice of the trust if it acts on the order of or under the authority of the holder or holders of the account into which the deposit is made. I do not say - nor does RBC argue - that this cloaks a bank with immunity. Rather, there must something more than the mere existence of a trust to put a bank on notice. I think this is in accord with the remarks in Citadel at para. 52. [226] I have set out the facts relating to the respective knowledge of the parties in section IV and dealt with the consequences of that knowledge in relation to s. 31 of the PPSA in section VI.C. As I noted, the October 2004 Prime Truck conversions were attributed to Prime Truck's dishonesty. CFI stresses the fact that RBC had to discover the conversions itself. However, I do not think that is sufficient to put RBC on inquiry with respect to CFI's interest, given that RBC knew CFI was

aware of the Prime Truck situation and was dealing with it. [227] RBC was aware of no defaults in payments from Totem to CFI other than the October, November, December defaults that it knew CFI was working out with Totem. RBC did not have knowledge of any dishonest or suspicious behaviour on the part of Totem until October 2005. Given that, it is hard to see how RBC can be said to have constructive knowledge before then. [228] There is a further fact to which I have not previously alluded. Totem continued to pay the monthly payments on most or all of the terminated leases. (The reason for this is not significant, but it might have been a means to cover-up the terminations. Or, it might have been too difficult to avoid making the monthly payments because to do so would have necessitated involvement of further employees.) Totem was, in effect, operating a type of Ponzi scheme. There would therefore be no way of RBC knowing that the Totem deposits included termination fees that were not disclosed to CFI; those terminations were artfully concealed. [229] Finally, as set out above, CFI-related monies formed a very small minority of the total monies flowing through the account. RBC knew that Totem was paying CFI approximately $1 million a month on a regular basis. [230] A brief analysis of the cases relied on by CFI in which a bank has been held to have constructive knowledge

illustrates the required level of knowledge to find knowing receipt. [231] In Citadel, the proceeds in issue were insurance premiums subject to a statutory trust. The court found that there were suspicious circumstances which should have caused the bank to make further inquiries. First, the Bank knew the sole income of its customer-borrower - Drive-On - was the sale of insurance policies. Second, the Bank knew the premiums collected by the borrower on the policies were all held in trust by the customer and all were payable to the plaintiff insurer. Third, the bank was directed to empty the account containing the premiums on a daily basis to facilitate the transfer of the funds to another account that did not belong to the plaintiff insurer, but instead was in the name of a company with identical signing officers to Drive-On; a direction found by the Court to be "very suspicious" [232] Peppiatt v. Nicol (2001), 148 O.A.C. 105, 106 A.C.W.S. (3d) 548 (C.A.), involved the construction of a golf club. The plaintiff members' letters of credit (which the trustee had assigned to the defendant bank) clearly indicated that the funds were held in trust subject to specific membership and course readiness conditions. The defendant bank knew that it was not entitled to be repaid with the trust funds until both conditions precedent had been met. Despite this, and despite being alerted to the

possibility of unsatisfied trust conditions, the bank blindly relied on its client's assertions that the trust conditions had been met and continued to pay itself from the trust funds. It would have been easy to confirm that the first condition precedent - sufficient membership numbers - had not been satisfied. As for the second condition, the bank's own solicitors had doubts about whether the project would receive the condition precedent zoning, with the zoning application being widely publicized and controversial. [233] In Provincial Drywall Supply Ltd. v. Toronto Dominion Bank, 2001 MBCA 38, [2001] 7 W.W.R. 37, the bank was specifically told by an agent of the plaintiff that the bank's customer was breaching trust obligations which flowed from statutory trusts over funds held by contractors for their workers' wages under the Builders' Lien Act, R.S.M. 1987, c. B91. Yet, the bank attempted to seize any money available for repayment, regardless of origin. [234] In A & A Jewellers Ltd. v. Royal Bank of Canada (2001), 53 O.R. (3d) 97, 143 O.A.C. 375 (C.A.), the bank failed to follow its own express procedures, which would have indicated that the funds were held in trust. The bank also failed in its contractual duty to its customer to require the signature of the principals of the plaintiff company. Those two failures were found to be the root cause of the problem. [235] I agree

with RBC that the case at bar is quite different. [236] Therefore, assuming for the purposes of this argument that the lease payments were trust funds, I conclude that RBC could not have had constructive knowledge of a breach of trust until October 2005. RBC would then have to be given some time to make the appropriate inquiries. By November 9, 2005 all of the funds claimed by CFI had been deposited and run through the account. [237] There is another difficulty that CFI faces. As I have shown above, it had the same knowledge it says that RBC had. It had much of that information earlier than RBC. Additionally, CFI had knowledge of further problems with Totem that RBC did not. Finally, it had greater capability than RBC to monitor its own lease portfolio. Yet, it made no attempt to alert RBC, whether to protect its own interests, those of RBC, or both. [238] The courts have held that a plaintiff in a claim for equitable compensation for breach of trust must take the most obvious steps to alleviate its loss: Canson Enterprises Ltd. v. Boughton & Co., [1991] 3 S.C.R. 534 at 553 - 554, 61 B.C.L.R. (2d) 1; First Majestic Silver Corp. v. Davila, 2013 BCSC 717 at paras. 236-242, [2013] B.C.J. No.

834. I am cognisant of the fact that in Citadel (at para. 51), the Supreme Court of Canada said that the focus of a knowing receipt claim is the state of mind of the defendant and not the plaintiff. Nevertheless, I do not think the Court meant to say that a plaintiff's conduct is to be completely ignored. Provided the context is properly taken into account, it appears to me that a plaintiff in a knowing receipt claim must also take obvious steps to avoid its losses. I do not think the cause of action contemplates allowing a knowing plaintiff (constructive or actual) to sit on its hands and then later make a claim, especially when it knows, as CFI did, the likely recipient of the funds (above, para. 129). [239] CFI should have been put on a state of yellow alert in May 2004 when it uncovered the shell companies related to Prime Truck. That went directly to Totem's honesty in its dealings with CFI. Not only did CFI not increase the number of vehicles included in its audits, but when it conducted its May 2004 audit and uncovered 17 unreported terminations, it accepted Totem's explanation. At that point, the deposits to the RBC account being claimed by CFI amounted to approximately $327,000. Had Totem's account been blocked at that point, any loss could have been limited to that. [240] Furthermore, when CFI became aware of the Prime Truck sales in the United States, it should have

been put on guard because of the prior use of the shell companies. That was something known and approved by Totem: it therefore directly implicated Totem in Prime Truck's activities that, in turn, circumvented Totem's contract with CFI. [241] In July 2004, CFI was again placated by another Totem explanation regarding further lease terminations. CFI's alert level should by then have elevated to code orange. At that point, the deposits to the RBC account that are being claimed by CFI amounted to approximately $670,000. [242] At the beginning of April 2005 when CFI discovered that Totem had sold the vehicles recovered from Prime Truck, recognised by Mr. Burns as being tantamount to theft, CFI's alert level should have been elevated to red. At that point, the deposits to the RBC account being claimed by CFI amounted to approximately $2.8 million. [243] It is hard to understand how CFI could have rejected the concept of a lock-box or segregated account at this point in time because it would be an "administrative nightmare" and because of staffing issues. The fact that such an arrangement could have been circumvented does not mean it should not have been put into place in an attempt to limit the scope of Totem's misconduct. In fact, it is likely that Totem would have had a more difficult time circumventing a lock-box account compared to the scheme actually employed, because

circumventing it would probably have necessitated more people being involved from the accounting department. Furthermore, a lock-box account was something that the Dominion Bond Rating Service had raised with CFI as a general practice in December 2004 when it rated CFI's bonds. [244] By avoiding an administrative nightmare in the face of what became a clear and present danger, and then making this claim, CFI is effectively attempting to foist the bad dream onto RBC. [245] CFI argues that freezing the account would not have alleviated CFI's losses. Even assuming that is correct, that was, by far, not the only step CFI could have taken. For example, CFI could have set up the separate "lock-box" account. The Secured Loan Purchase Agreement dealing with conditional sales allowed CFI to demand that Totem's customers make their monthly payments directly to CFI. CFI could have applied for a variant of a Mareva injunction, perhaps combined with an Anton Piller order. CFI's argument also misses the point with respect to RBC. RBC continued to honour payments to non-secured creditors and to advance funds to Totem. That could have been avoided. [246] If anyone turned a blind eye to the Totem problem and the possibility of the funds being dissipated by it, it was CFI. It appears to me that CFI did not take the most obvious and rudimentary steps to protect its own interest and to stem the

possible losses of RBC. [247] There is one final aspect I wish to address with respect to constructive knowledge, although having reached the conclusions I have, it is not one necessary for my decision. The phrase "knowledge of facts which are sufficient to put a reasonable person on notice or inquiry" begs the question as to whether the notice or inquiry would have been fruitful. In order to establish liability, I think it logical that the expected inquiry must be one which would, at least possibly, have led to actual knowledge of the breach of trust. To hold otherwise would be to allow for an "inquiry in the air". [248] What inquiry would RBC have made? Simply asking Totem whether it was paying all that was due to CFI would have been meaningless, and would have evoked an affirmative response. It could not have been legally sufficient. The inquiry obligation would therefore have involved raising the issue with CFI. RBC did that when it received the anonymous faxes and was re-assured by CFI. CFI - to RBC's knowledge - was aware of the payment defaults following the Prime Truck conversions, and was making arrangements to obtain eventual payment, as was RBC. Both RBC and CFI felt comfortable enough to continue to deal with Totem and not attempt to execute on their security. After that, all knowledge of suspicious conduct was CFI's alone, until October 2005, shortly after which

all deposits that might belong to CFI were run through the account. Any information that RBC would have conveyed to CFI, CFI already had, plus more. In the face of that, it was content to allow Totem to collect and deposit the lease payments in the normal course. [249] The inescapable conclusion is that if RBC had been put on notice by the facts argued by CFI (above para. 207), any inquiry would not have uncovered a breach of trust, or put CFI on any heightened alert to make further inquiries of its own. [250] In summary, RBC was entitled to assume that CFI was being paid in the regular course (or, with respect to the Prime Truck defaults, in an approved manner) and that therefore the money it was using to pay down its loan was not subject to either a security interest or a trust. [251] For the reasons I have set out, I dismiss the claim in knowing receipt. It is therefore not necessary for me to address RBC's argument that a claim in knowing receipt cannot exist because the relationship between the parties is governed by the PPSA. VIII. Unjust enrichment [252] CFI advances an alternative claim in unjust enrichment. RBC argues that because the PPSA governs the relationship between the parties, there can be no such claim as it forms a complete code for secured transactions. I will not address that argument, since I think that CFI's claim for unjust enrichment must fail on other

grounds. [253] For a plaintiff to succeed in an unjust enrichment claim it must show that it has been deprived, that the defendant has been enriched, and that there was no juristic reason for the enrichment. [254] Once again, I will make some assumptions without deciding the points; I will assume that CFI has been deprived and that RBC has been enriched at the expense of CFI. Nevertheless I agree with RBC that there was a juristic reason for the enrichment, namely the loan agreements between RBC and Totem. The Ontario Court of Appeal addressed this issue in Bank of Montreal v. iTrade Finance Inc., 2009 ONCA 615, 310 D.L.R. (4th) 315 (aff'd on other grounds 2011 SCC 26, [2011] 2 S.C.R. 360). At para. 39 Blair J.A. stated: A valid contract leading to a debtor-creditor relationship between the person enriched and another - as was the case here - is sufficient to establish the existence of a juristic reason for an enrichment that can be accounted for on the basis of that contractual relationship. In this regard, the absence or presence of a juristic reason in connection with the enrichment need not necessarily arise out of the relationship between the party asserting the claim for unjust enrichment (i Trade) and the party enriched (BMO): see Re Attorney General of Canada v. Confederation Life Insurance Company (Gen. Div.) at p. 771; Rathwell v. Rathwell at p. 455; Harowitz. [255]

The courts have also held that being a bona fide purchaser for value (as I have held RBC to be) is a juristic reason: Bank of Montreal v. iTrade Finance Inc., at paras. 41 - 42. IX. The ADP Data and the quantum of the claim [256] The amount of the proceeds deposited to Totem's RBC account was re-constructed from the ADP data server which Mr. Burns retrieved from Totem's vacated premises (above, para.125). The data was taken off the server's hard drive and analysed, and was the subject of an accounting report prepared by Paul McEwan of Ernst & Young. [257] During the course of the litigation, the server was unable to be located in CFI's offices, where it was finally found two weeks before the start of the trial. RBC points out that this made it impossible for them to perform their own analyses of the data. However, they would have the opportunity to review and analyse the information extracted from the hard drive by CFI. [258] CFI called one witness from Totem who worked with the accounting system. Jeremy Wong was an administrative clerk at Totem who worked in the accounting department from 1993-2005. Mr. Wong took over as controller in the Fall of 2004. Prior to Mr. MacLean's departure, Mr. Wong reported to the controller. Mr. Wong was involved in the daily accounting for Totem and was familiar with the ADP system. [259] Totem used the ADP system to keep track of its

transactions, including leasing and accounting information. Totem had been using the system for at least 20 years. [260] The ADP system was designed for the auto industry and licensed by ADP. It included parts, service, leasing and payroll modules. The data on the system was stored on the server taken by Mr. Burns. Totem employees used the ADP system frequently on any given day. [261] To access the modules and data, employees could access the information from their personal computers by inputting their user IDs and passwords. All Totem accounting staff and managers had access to the accounting module. The accounting staff at Totem consisted of five employees in addition to the controller. [262] The responsibilities of the various employees were: · The accounts receivable clerk was responsible for receipting customer payments into the ADP system. · The cashier would also sometimes receipt customer payments into the system but was mainly responsible for balancing the cash receipts. · The accounting clerk was responsible for processing sales transactions and inputting them into the accounting module. · The sales administrative clerk worked with the sales department and assigned a new stock number when a vehicle was brought into inventory. · The controller was responsible for overseeing the accounting department, ensuring internal controls were in place and preparing financial

statements. [263] When a customer made a lease payment, the leasing department would log into the ADP system, enter the customer number and input the receipt. The leasing department brought the payments to the accounting department so that the accounting department could balance what was posted in the system. The ADP system would then generate a receipt number for each cash receipt which was used to track the particular payment. [264] Mr. McEwan concluded that 266 of 268 entries listed on CFI's claim (Schedule "A") are verified by and consistent with, the ADP Records. The two entries that could not be confirmed were based on typos made by Ms. Henderson in Schedule "A" that were addressed during trial. [265] Originally, Mr. McEwan concluded that 98% of the total amount recorded as debited from the cash on hand clearing account in Journal 56 was recorded to either the Operating Account or the RBC Fleet Account. [266] Mr. Wong testified that one of the reasons the cash on hand clearing account would not match the bank deposit was because the bank deposit amount did not reflect cash receipts for credit card transactions which were posted automatically to the bank account. This also applied to electronic funds deposits. [267] With this evidence, Mr. McEwan revised his opinion with respect to the proportion of cash receipt recorded as deposited in Journal 56. Mr. McEwan said that the

total of credit and debit card entries in the DEP Register for the period from January 1, 2004 to November 10, 2005 is $7,332,213. He states in his reports that if that amount is not included in the total entries to the RBC general ledger accounts, the total percentage of amounts deposited to the RBC bank accounts would increase from 96% to 99%. [268] Mr. Vida agreed that the ADP Records appeared to be consistent, accurate and reliable from his review. [269] I admitted the ADP data, and the ADP server itself on the basis that it was a business record, but held that I could assign an accuracy level to it of anywhere from 0 to 100%. [270] RBC has shown several inaccuracies in the ADP data, and consequently Mr. McEwan's analysis. It argues that it is not reliable and should be assigned no weight. [271] There is always a concern about relying on the accounting system of an enterprise which has apparently acted fraudulently. Nevertheless, the fraud related not to the accounting system per se but to the double-selling or securing of vehicles and the failure to report the lease terminations. Further, I had the benefit of Mr. Wong's evidence, and his credibility was not challenged. [272] While RBC did point out several inaccuracies in CFI's analysis, they do not rise to a level of inaccuracy that would cause me to reject either the analysis or Mr. McEwan's report in their entirety.

Even an exercise in accounting is not subject to a standard of perfection. RBC did not supply its own report. Therefore, subject to the specific inaccuracies pointed out by RBC (set out at Appendix A of their argument), I would accept, on a balance of probabilities, the accuracy of the ADP data and consequently Mr. McEwan's supplementary analysis. [273] From Mr. McEwan's analysis, would have to be deducted the $50,000 which CFI received by way of settlement with Mr. Papp. X. Tracing [274] An issue in this case is whether, for the purposes of the PPSA or the common law and equitable claims, the funds claimed by CFI can be traced into the hands of RBC. A. Bona fide purchaser for value without notice [275] The PPSA defines "proceeds", in part, as "identifiable or traceable personal property''. It contains no definition of these terms. However, s. 68(1) provides that: 68 (1) The principles of the common law, equity and the law merchant, except insofar as they are inconsistent with the provisions of this Act, supplement this Act and continue to apply. The ability to trace in equity is subject to the answer of being a bona fide purchaser for value without notice. That would therefore be the case whether CFI founds its claim in equity or the PPSA. [276] In my analysis above, I concluded that RBC was a purchaser for value (I will deal with the notice issue momentarily) for the purposes

of s. 31 of the PPSA. I think the same analysis must govern if the matter is analysed apart from the PPSA. The PPSA definition of "purchase" and "value" are no wider than the common law concepts. [277] I turn now to the issue of RBC's knowledge. I have held (in dealing with the knowing receipt claim) that RBC was not apprised of facts sufficient to put it on inquiry until October 2005. Within weeks after that, any deposits claimed by CFI stopped. This conclusion is also determinative of CFI's ability to trace the claimed funds into RBC's hands. [278] That is sufficient to dismiss any claim for tracing. However I will deal briefly with the tracing methodology, in the event that the above analysis is incorrect. B. Tracing method [279] CFI says that the court can tailor a tracing remedy that is most appropriate in the circumstances. It argues that I should look at the operating account as a global fund (as per Law Society of Upper Canada v. Toronto-Dominion Bank (1998), 42 O.R. (3d) 257, 169 D.L.R. (4th) 353 (C.A.)) and conclude that the lease proceeds can be traced to RBC. The funds in RBC's hands bear a close and substantial connection to the lease proceeds (see Agricultural Credit Corp. of Saskatchewan v. Pettyjohn (1991), 79 D.L.R. (4th) 22, 90 Sask. R. 206 (C.A.)). [280] Within bounds, the proposition that the tracing remedy should be tailored to the situation is no doubt

correct. However, the method proposed by CFI would result in it recovering all of the claimed lease proceeds. I do not think that is appropriate in the circumstances of this case. [281] I have already alluded, several times, to the volume of transactions that ran through Totem's account. Given CFI's state of knowledge and dilatory conduct, and the realities of how the account was operated, if tracing were allowed at all, I would conclude it should be on a pro rata basis, based on the amount of the claimed lease proceeds deposited to the account as against the total deposits ($774,746,077). [282] To be clear, I am not addressing the issue of whether tracing is available at all because of the co-mingling of funds and whether they are identifiable or traceable. I will not comment on that argument, having said enough by way of alternative outcomes. XI. Conclusion [283] The action is dismissed on the following basis: a. Pursuant to the priority agreement, RBC had priority with respect to the lease proceeds. That is sufficient to dispose of the claim. b. In any event, CFI does not have the ability to trace the lease proceeds into RBC's hands because RBC was a bona fide purchase for value without notice. In the alternative, I reached the following conclusions: c. As against RBC, CFI is entitled to have its security registration treated as reinstated retroactive to the date of

discharge. Nevertheless, it would still be subject to the priority agreement. d. Under s. 31(3) of the PPSA, RBC has priority over the lease proceeds deposited by cheque. It does not have priority over the deposits made by electronic funds transfers because those do not fall within s. 31. e. RBC is not liable for knowing receipt because it was a bona fide purchase for value without notice. f. RBC is not liable for unjust enrichment because it was a bona fide purchaser for value without notice. Further, its loan agreements with Totem constitute a juristic reason for the enrichment. g. If I were prepared to allow tracing, I would order the pro rata method which I described above. Because this finding is done in the alternative to the dismissal of the action, I have not made the calculations. h. I dealt with CFI's dilatory conduct in the context of its knowing receipt claim. However, that analysis would apply to all of the equitable claims, namely tracing and unjust enrichment. CFI would therefore not be entitled to any equitable remedies. i. I would admit the ADP data and the analysis of Mr. McEwan, but the amount claimed would have to be adjusted downward as I set out above. Once again, I have not made the calculations. [284] I have not dealt with the issue of whether unjust enrichment or knowing receipt can exist as separate claims in the context of both parties interested being the parties to security and priority agreements subject to the PPSA. [285] I thank both sides for their comprehensive and well-organised arguments and the electronic handling of this trial. "E.M. MYERS, J."