A banker asked us: when does a lender need to obtain a PPSA estoppel letter in Ontario?

10 minute read
01 October 2015

Q: When does a lender need to obtain an estoppel letter or acknowledgment from another secured creditor under the Ontario PPSA1?

A: In completing a new financing of a debtor, the determination of when a new secured lender needs to obtain a PPSA estoppel letter2 from an existing secured creditor of that same debtor is unfortunately not an exact science. It depends in part upon the type of security interest the new secured creditor is seeking to perfect by its registration, and what information the existing secured creditor has recorded on its financing statement.

The need for estoppel letters and acknowledgments is somewhat unique to the Ontario PPSA as Ontario is the only jurisdiction in Canada that has the “check the box” system for completing registrations. Secured creditors indicate the scope of their security interest by checking boxes for either “inventory”, “equipment”, “accounts”, “other”, “motor vehicle” and/or “consumer goods”, and by including details of the make, model and vehicle identification number of motor vehicles in Lines 11 and 12 of the financing statement. In order to perfect a security interest in those classes of collateral, there is no obligation on a secured creditor to include any further description of the collateral to supplement the boxes checked. So for example if a secured creditor had checked the “equipment” box on its financing statement, it would perfect a security interest in all equipment of the debtor (assuming of course the underlying security document contained an equivalent grant of a security interest in all such equipment). If they wish, secured creditors have the option to complete a General Collateral Description in Lines 13, 14 and 15 of the financing statement (a “GCD”). However if the financing statement does include a GCD and the GCD contains words that appear to limit the scope of the collateral classifications, the secured creditor is generally considered to have limited the scope of the assets over which it has a perfected security interest to those described in the GCD.3

The most common situation where estoppels are needed arises where a new secured creditor on a new financing is intended to have a first ranking security interest over all assets, subject only to purchase money security interests (“PMSIs”) and equipment financing leases, and to security interests over specific assets situated at a specific location that the new lender is not financing or giving any lending value (“Site-Specific Assets”).4 The goal of the new secured creditor in that situation is to obtain an estoppel letter from any prior secured creditor (i) who has not included a GCD in its registration, or (ii) who has included a GCD but has not included sufficient details or words of limitation to restrict the scope of the collateral to make it crystal clear that the security interest it is claiming represents a PMSI or a traditional equipment financing lease or relates only to Site-Specific Assets.

In conducting the analysis of the PPSA search report to determine which estoppels are needed, the following are some common things to be on the look-out for:

1. Connecting the Assets to the Secured Party. If the CGD does not include words indicating that that the equipment was “supplied by the secured party”, or “financed by the secured party”, or “leased by the secured party” then an estoppel letter is needed to establish the direct connection between the assets subject to the security interest and the assets for which that secured party has provided funding. Otherwise the prior secured party might claim an interest in a broader class of equipment that extends to equipment over which the new secured party is claiming a security interest and attaching lending value.

2. Inadequate Limitation Language. Secured parties often include lengthy GCDs and although the first sentence contains words of limitation, the second and third sentences of their GCDs are left open-ended and not restricted in any way. In these situations, an estoppel letter is needed to clearly extends the words of limitation to all sentences and to ensure any references to proceeds are appropriately linked to the assets financed by that secured party.

3. Equipment and Motor Vehicles Checked Together. If the prior secured party has checked the boxes for “equipment” and “motor vehicles”, and has also included the vehicle identification numbers on Lines 11 and 12 but has not included a GCD, an estoppel letter is still needed. This most often arises where the financing statement has been filed to perfect a car lease. Section 46 (2.1) of the Ontario PPSA which limits the scope of collateral classifications only applies to limits contained in the GCD, not to the inclusion of motor vehicle particulars in Lines 11 and 12 which are in some cases mandatory. Thus the secured party in this example could potentially claim an interest in equipment other than the car being leased.5 An estoppel letter is recommended to preclude this from happening.6

4. The Secured Party has Checked the “Other” Box. The “other” box can conceivably apply to a wide variety of situations and types of collateral in which the applicable secured party may have a security interest. In addition, some lower court decisions have suggested that including text in the GCD only serves to limit claims to the more specific boxes like “equipment”, “inventory”, “accounts” and “motor vehicles” and does not limit “other”. In short, the “other” box calls out for further investigation by the new secured party so that there are no surprises. A number of lenders have developed a practice of seeking PPSA estoppel letters whenever the “other” box is checked in order to identify what collateral is contemplated by the reference to “other” so as to ensure that it is not collateral that is being financed by the new secured lender and to which lending value is being attached.7

5. Assets that are not Site-Specific. Frequently a GCD makes reference to Site-Specific Assets at a particular location, but also make reference to intangible assets that do not have a particular situs or location like accounts or intellectual property. An estoppel may be needed in those circumstances to link the accounts or intellectual property in which a security interest is being claimed to those exclusively arising from or exclusively used in the debtor’s operations at the specified location.

The above list is not exhaustive and is intended to provide some examples of when an estoppel letter is recommended to limit the scope of collateral claimed by a prior secured party. There will of course be other situations when estoppel letters are warranted for as mentioned above the determination as to when to pursue one is not an exact science. Estoppel letters will remain part of the lending landscape in Ontario until the provincial government proclaims in force the statutory amendments enacted in August 2007 intended to overhaul the “check the box” system.8 The best practice whenever clarity or specificity is lacking in a GCD is to err on the side of obtaining an estoppel letter even though the debtor may consider the requirement to produce an estoppel a burden or a nuisance.

1 Personal Property Security Act, RSO 1990, c P.10 [Ontario PPSA].

2 The document obtained from a third party secured creditor can have many names, including a PPSA estoppel letter, a PPSA acknowledgment or a “no interest” letter. In this submission, we shall for the sake of simplicity refer only to the term PPSA estoppel letter as describing any such third party document.

3 Ontario PPSA, Section 46(2.1).

4 This article is focussed upon this most common new financing situation. A consideration of all possible situations in which all possible types of secured creditors might need to obtain an estoppel letter is beyond the scope of this article.

5 Once again, this claim can only be made if the underlying security document creates a security interest in the broader class of collateral. The problem for the new secured creditor is that it will not in most cases be aware of what is in the underlying documents.

6 Some lenders may nevertheless choose to forego an estoppel letter because of the identity of the prior secured party (i.e. they are comfortable the prior secured party is a small operation that only makes car loans, and is not in the business of making general loans and financing available to debtors). However, many car leasing companies associated with the large automakers do make general financing available and in most cases should be pursued for an estoppel.

7 As with any “practice”, it is not always followed by all secured lenders. Lenders will often make a determination that the risk of an adverse characterization in respect of a specific prior secured creditor’s filing is remote, or the maximum amount claimed is not material, such that an estoppel letter is not pursued.

8 Those amendments were designed to replace the check the box system with a full narrative requirement for listing assets subject to a security interest, similar to the systems in place for most other provinces and territories. So far as we are aware, those amendments continue to be on the back burner while the provincial government works to overhaul its PPSA computer system.

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