Canada: Motor Vehicles In A Consumer Insolvency. British Columbia Court Of Appeal Determines Trustees And Consumers Claims - TRAP For Subprime Auto Lenders Revisited

It is always an interesting question as to what rights a lender has with respect to a motor vehicle owned by a consumer who becomes insolvent, and whether a secured creditor is able to seize a motor vehicle in order to satisfy an obligation due under a loan. The answer may be surprising. The recent BC Court of Appeal case, Atwal (Re) (2011 BCSC 687), highlights the rights of a debtor vis-à-vis a trustee in bankruptcy with respect to the ownership of a motor vehicle. This case should also bring to mind certain provisions of the Ontario Personal Property Security Act ("Ontario PPSA") that are often over looked by consumer lenders when taking a security interest in a motor vehicle.

The case at hand is relatively simple. A consumer owned a motor vehicle which had a value of approximately $5,800.00. Under the British Columbia Execution Act (the "Execution Act") (and there are similar provisions in most other provinces), a motor vehicle having a value of the less than $5,000.00 is exempt from seizure by the trustee. As this vehicle had a value of slightly more than the $5,000.00 threshold, the asset was subject to the rights of the trustee. The issue arising was whether the first $5,000.00 of the sale proceeds remained as an asset of the consumer, exempt from the seizure, or whether the entire amount vested with the trustee. The lower court made the determination that the entire amount of the asset continued to vest with the trustee and that the consumer was not entitled to any of the value of the motor vehicle.

The Court of Appeal reversed this decision. It noted that the purpose of the Bankruptcy and Insolvency Act and the Execution Act are to assist debtors in making a new start, and to deprive a debtor of the value that would have been available had the vehicle had a lower value was not in keeping with the intent of the statute. The Court of Appeal's determination was that the first $5,000.00 was to be payable to the debtor and remained the property of the debtor and the balance was vested in the trustee for distribution to the creditors of the debtor. It was interesting to note in the case that there was some discussion as to the common practice taking place by trustees, which is to allow the debtor to pay to the trustee the amount in excess of the $5,000.00 and then have the vehicle remain in possession of the debtor. A sale and its costs are thus avoided. While this practice was not approved by the Court of Appeal, the ruling of the Court of Appeal clearly would allow this practice to continue.

In this particular case, there was no secured creditor who had an interest in the motor vehicle. If there were a security interest in the motor vehicle, then the provisions of Section 62(2) of the Ontario PPSA would apply (had this been an Ontario case). This section, which is not well known to most practitioners, sets out that:

In essence, this section sets out that if a secured creditor does not have a purchase money security interest in an asset that is exempt from seizure under the Execution Act, then the secured creditor cannot seize that asset. Accordingly, if a lender were to provide a loan to a consumer based on the value of a pre-existing motor vehicle (in essence, a refinancing) and that vehicle was worth less than $5,000.00 at the time of the seizure (as opposed to at the time of the loan), then the lender would not have a claim against the asset. This particular provision may come as a surprise to many auto lenders who take a security interest in a motor vehicle without realizing that they may be providing unsecured loans.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.