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Understanding the use and limits of the

Repair and Storage Liens Act in Insolvency Proceedings

 

The Repair and Storage Liens Act[1] (the “RSLA”) endeavors to protect the rights of persons that maintain or increase the value of collateral though repair and/or storage services.  A successful RSLA lien claimant is granted a higher and better interest in repaired and/or stored collateral than all other parties claiming rights in such collateral.  In an insolvency proceeding, understanding the use and limits of the RSLA is essential to further the recovery of your client as a creditor (either unsecured or secured), and to limit, where possible, the exposure of your client’s interest or estate to priority RSLA lien claims. 

RSLA Basics

The RSLA covers the repair and/or storage of ‘articles’, broadly defined by the statute as an item of tangible personal property other than a fixture.[2]  To ‘repair’ an article, there must have been an expenditure of money on, or the application of labour, skill or materials to, an article for the purpose of altering, improving or restoring its properties or maintaining its condition.[3]  Similarly, one is a ‘storer’ of an article if one receives an article for storage or storage and repair on the understanding that the person will be paid for the storage or storage and repair.[4]   Interestingly, the RSLA does not define the act of ‘storage’ itself.

The RSLA is divided into possessory liens and non-possessory liens. 

A possessory lien is automatically created when a repairer or storer is granted possession of an article and commences an authorized repair or storage.  However, this lien exists only as long as the repairer or storer maintains continuous possession.  Where possession of the article is relinquished prior to receiving full payment for the repair or storage, the possessory lien is extinguished, and replaced by non-possessory lien rights.[5]

A possessory lien cannot be revived, even where possession is restored.[6]  Where an article which had been repaired or stored is returned to a non-possessory lien claimant for further repair or storage, such person may only claim a non-possessory lien for the amount of the first repair or storage, but can assert a possessory lien for the second repair or storage so long as continuous possession is maintained thereafter.  Every independent act of repair or storage on an article is to be considered separately, as are the rights associated with each act. 

The essential difference between a non-possessory and a possessory lien is the strength of the remedy.  A possessory lien holder has priority over the interests of all other persons in the article.[7]  A possessory lien holder can retain the article until the lien is satisfied in full, or sell the article in adherence with the provisions of the RSLA.  Assumedly, because possession rests with the lien claimant, the statute requires no documentary evidence as a precondition to enforce the lien.

In contrast, a non-possessory lien has priority against certain interests, but will always take behind possessory lien holders and other non-possessory lien holders with a better right to the article.[8]  A non-possessory lien holder can, in adherence with certain statutory provisions,[9] seize an article against which it holds a lien, and, similar to a possessory lien holder, sell the article to satisfy the indebtedness owing.

The biggest difference is that a non-possessory lien is not enforceable unless the repairer or storer has acquired a signed ‘acknowledgment of indebtedness’, which acknowledgement may be on an invoice or other statement of account.[10]  The RSLA provides no other parameters for what constitutes an acknowledgement of indebtedness.  In the case law, it has been held that a simple acknowledgement of an amount owing is sufficient to meet the statutory standards; an actual or specific monetary amount is not required.[11] Further, the acknowledgment of indebtedness does not have to be signed by the owner of the article but may be signed by others on behalf of the owner. In Royal Tire Service Ltd. v. Shelleby Transportation,[12] it was the equipment lessee and not the registered owner that executed the document relied upon as supporting the non-possessory lien. The court held that persons in legal possession of the article have the authority to authorize repairs and/or storage as necessary, and the signature of such persons sufficiently met the required acknowledgment.

The case law has further stretched the possibilities of that which constitutes a signed acknowledgement of indebtedness.  Trustees and receivers should be aware that they may unwittingly provide a non-possessory lien claimant with the means to enforce a lien claim.  In 1538565 Ontario Ltd. v. Leggat Aviation Ltd.,[13] it was held that the inclusion of the lien claimant on a list of creditors, as part of the statement of affairs signed by the trustee, sufficiently met the requirement of a signed acknowledgment of indebtedness.  The court noted that the requirement is permissive in nature and refers to ‘indebtedness’ rather than ‘debt’ or ‘specific debt’, and the RSLA should be liberally construed.  

The RSLA does not require that a lien claimant register its lien before taking steps to enforce against the entity that authorized the repair or storage.  However, a lien claimant cannot enforce its lien rights against a third party until it has registered.  Moreover, the priority claim of a lien claimant is subordinated as against a third party, if it was not registered before the third party acquired and registered its right.  This is true even where the lien claimant’s interest arose prior to the interest of the third party.[14] 

Interestingly, a failure to register has no impact in relation to non-possessory lien claimants.  Priority amongst non-possessory lien claimants is to be determined in the reverse order to the order in which the lien claimants released possession of the article, such that the last person to store and/or repair an article will have first priority.[15]

There is no prescribed time limit under the RSLA to register a non-possessory lien, although the statute does prohibit the tacking of liens.[16] A non-possessory lien claimant that chooses to register must register each lien arising from an individual repair or storage separately. 

One of the effects of the registration provisions of the RSLA is that a lien claimant can register a lien following the appointment of a receiver, or, as found in the case law, after an assignment in bankruptcy.  Trustees and receivers may have rights in certain collateral, but they do not have registered interests akin to, for example, a Personal Property Security Act[17] secured creditor. Consequently, a lien claimant can enter receivership or bankruptcy proceedings already in progress, and still be able to assert a priority interest in an article which can trump all other interests, including that of the receiver or trustee.[18] 

What constitutes part of the lien?

The base lien amount, or the priority amount, for any RSLA claim is the commercially reasonably cost of the repair or storage.  The cost of a repair or storage can be challenged on the grounds of commercial reasonableness even where an amount may have been previously agreed upon or assumed by the parties. The existence of a signed acknowledgement of indebtedness does not prejudice the right of an owner or any other person to dispute the quantum of the lien claimed.[19] 

Parties with an interest in an article seeking to challenge RSLA repair liens should carefully consider the nature of the work done.  Accessions and other topical additions to an article may be considered by some as an ‘improvement’, but will not meet the statutory definition of repair.  In GMAC Leaseco Ltd. v Tomax Credit Corp.,[20] the court, when reviewing repairs claimed against a car, disallowed the installation of a stereo system on the finding that it was an accession, but approved a security door locking system on the basis its installation improved the overall safety and security of the car. 

 Charges for the towing of an article cannot be included in the base lien amount unless the towing was incidental to the repair.[21]  For example, a repairer hired to repair a car may claim the cost of towing the car to its repair shop to begin repairs as part of its lien.  Towing costs which are incidental to the repair should be distinguished from towing costs incurred through enforcement of lien rights.

The contract between the repairer or storer and the owner or authorized controller of the article will be an important factor when assessing what additional amounts may appropriately be included in the base lien amount.  For example, financing and interest costs may be built into the base lien for repair contracts to be paid over a period of time.

The contract may also provide for a lien right over amounts incurred by the repairer or storer in the event payment of the base lien is not paid as agreed.  However, the provisions of the RSLA and the case law will limit what amounts will be claimable as part of the base lien in priority to other persons having an interest in the article. 

Costs claimable as part of the priority lien amount

 Certain costs of enforcement may be challenged by an owner or interested party in an article when such costs are asserted as part of the amount required to satisfy a lien.  This is particularly relevant to the claims of non-possessory lien holders.    

 Where a lien claimant has seized and sold an article, subsection 28(2) of the RSLA allows for the recovery of reasonable expenses incurred in the custody, preservation and sale process.  The lien claimant may include such amounts as part of the total amount required to satisfy the lien.  However, subsection 28(2) does not expressly state such amounts are to form part of the base lien itself, to be given priority over other parties with an interest in the article.  In a bankruptcy or receivership, or in any situation where the proceeds of sale of an article are insufficient to satisfy all claims against it, it is imperative that priority be given to the lien claimant for only those amounts which may rightly be claimed as part of the base lien. 

 Costs arising from and relating to seizure may be challenged by other parties with an interest in an article seeking to limit exposure of lien claims.  To begin, section 14 of the RSLA allows a registered non-possessory lien claimant, or a lien claimant exercising a contractual right or a right otherwise provided by law, to seize the article as part of its enforcement rights.  Prior to 2006, the case law (and implicitly, the RSLA) allowed, as part of the amount required to satisfy the lien, costs for seizure and storage incurred under subsection 14(3), where the repair and/or storage contract specifically provided for the recovery of such amounts by the lien claimant. 

In 2006, the RSLA was amended to include the following provision:

                  S. 14 (3.1)   If the costs on a seizure made under subsection (3) are recoverable
                       as provided for by contract or otherwise by law, they shall not exceed the fees
                       and costs allowed under the Costs of Distress Act as if that Act applied to the
                       seizure and they shall not form part of the lien itself. (emphasis added)

 Subsection 14(3.1) expressly excludes costs relating to or arising from seizure from the base lien amount.  Such costs should not automatically be given priority over the interests of other persons to the article, and may be excluded from the priority lien amount.

 In addition to costs of seizure, the case law specifically excludes the recovery of bailiff costs as part of the base lien amount, on the ground that section 12 of the RSLA does not require that bailiff costs be paid prior to the discharge of a lien.[22]  Payment of a bailiff's fees and disbursements cannot properly be made a condition precedent to the discharge of a non-possessory lien, and therefore should not be given priority over persons with competing interests in the article.

Storage costs cannot be included in a base lien unless the article was delivered for storage pursuant to section 4 of the RSLA.  Further, in the absence of a contractual agreement to the contrary, there is no lien for the storage of an article on which a repair is made, even where it is necessary for the lien claimant to pay for the storage of the article while enforcing its base lien rights.[23]      

This is not to say that a repairer or storer is denied all recourse to seek costs of enforcement.  Rather, the recent amendments to the RSLA and the case law limit the right of a lien claimant to assert a priority claim over certain costs of enforcement which trumps the rights of all other interested parties in an article.  This is particularly significant in insolvency proceedings, when multiple parties, certain of which will be secured parties, will be competing for the first and best right to the article or the proceeds derived therefrom. 

Commercially Reasonable Costs

Similarly to amounts claimed for repair or storage, general costs of enforcement may be challenged by an owner or interested party in an article on grounds of commercial reasonability. 

As a minimum standard, costs of enforcement must not exceed the parameters of the Costs of Distress Act[24] (the “CDA”).  The CDA limits, amongst other things, costs for notices of sale, general distress costs, and possession charges.  However, almost in opposition to the foregoing, the CDA allows a lien claimant to claim the ‘actual expenses reasonably incurred in tracing, recovering, removing and handling the goods distrained’.  Unfortunately, the CDA provides no guidelines as how to deal with ‘actual’ costs claimed where such costs are commercially unreasonable.  The case law helps to fill this void.

An interesting provision of the CDA is that which limits costs to the greater of 5% of the amount paid in settlement of the claim or $10.00, where the amount due is satisfied in whole or in part after seizure and before the sale of an article.  In Basko v. Kay Bailiff & Adjustments Ltd.,[25] the court utilized this provision in limiting the costs (in this case, solely claimed by the hired bailiff), to 5% of the settlement amount.  This provision is strategically useful to limit cost exposure for an owner or payee of a lien claim that wants to resolve lien issues prior to the sale of an article. 

Interest and other financing charges may be challenged even where contractually provided for in the repair and/or storage agreement amongst the parties.  In Alexandrov v. 1030999 Ontario Ltd.,[26] the court refused to honour the contractually agreed upon monthly interest rate, on the grounds that the contract failed to expressly state the annual interest rate applicable.  This failure was deemed to be a violation of the Interest Act.[27]  The court only allowed recovery of interest at the maximum statutory rate per annum, which was significantly less than what the parties arguably intended.

In General Electric Capital Equipment Finance Inc. v. Transland Tire Sales & Service Ltd. (“Transland Tires”),[28] the court discussed at length the concept of commercially reasonable expenses, and the refusal or reduction of unreasonable costs submitted by lien claimants.  In Transland Tires, the lien claimant submitted costs of $1800.00 incurred to enforce its lien amount of $1500.00 against a trailer.  The court found such excessive costs unreasonable in light of affidavit evidence demonstrating seizure and storage could have been achieved for less than $300.00.  Of interest, the court noted that the $65.00 per day storage charge submitted by the lien claimant was ‘grotesquely unreasonable’, and remarked, ‘for that money, the trailer could have been housed at the nearest Holiday Inn.’[29]

Positive Action – taking steps to reduce costs  

As a general statement, the most significant cost of enforcement is the cost of preparing for or undertaking the sale of an article.   

In an insolvency situation, it may not be practical or commercially reasonable for a lien claimant to sell an article.  Consider the following example: a debtor operates a fleet of rental vehicles for hire.  A secured creditor holds a general security agreement against the fleet.  The debtor defaults on its obligations with the secured creditor, and the secured creditor takes steps to realize via sale of the vehicles.  The secured creditor discovers each of the vehicles is subject to one or more liens by multiple RSLA claimants, and certain of the vehicles have already been seized.  

Who should make the sale?  The lien claimant has the right to sell if the amount of its lien is not satisfied.  The secured creditor has a significant interest in the vehicles, but cannot directly rely on its security interest or the RSLA to force the lien claimant to release the seized assets prior to the payment of the lien.  

From an economical perspective, where several articles are subject to liens by various lien claimants, it makes better sense to have one entity sell all of the articles to reduce the overall costs of sale, and increase the return on the articles.  Liquidation of the entire fleet by auction or other process will significantly reduce costs of sale as opposed to several private sales of one or more vehicles at a time.  A logical solution is the appointment of a private or court appointed receiver to oversee the sales process on behalf of all interested parties.  

Problematically, the RSLA does not expressly address a situation where an entity other then a lien claimant sells an article subject to RSLA liens.  Although statutory authority for the receivership or sale may be found outside of the RSLA, the RSLA itself only contemplates a sale made by a lien claimant.[30]   

For clarity, and to prevent future disputes, practitioners should consider including provisions in court orders approving the sale of collateral subject to RSLA liens which allow the receiver, or trustee, or other entity overseeing the sale to distribute the proceeds in accordance with the priority provisions of section 16.  Other considerations are i) waiver of certain procedural requirements as mandated in the RSLA;[31] ii) priority charges for the receiver or trustee’s reasonable fees incurred in preparing for the sale; and iii) in a complicated sale, express provisions for priority charges for the costs of auction.  Although section 16 provides for payment of the reasonable fees and expenses incurred in a sale, express reference to costs of appraisal, insurance costs, storage where appropriate, and other related charges may be needed.

Criticisms of the RSLA  

A significant criticism of the RSLA is its lack of accountability for lien claimants themselves.  There is no express statutory provision which mandates commercially reasonable behaviour on which an owner or creditor can rely when evaluating the claims of a lien claimant.  Recently, there has been a significant increase in RSLA claims in insolvency proceedings, with an emerging trend of multiple lien claims against a series of related articles, owned by or leased to a debtor and secured by creditors that will ultimately take behind the RSLA liens.  As a general statement, most RSLA lien claims are asserted against collateral with a finite and depreciating value.  When the aggregate amount of lien claims against an article is equal to or exceeds its value, secured creditors are effectively denied their rights of recovery.    

The foregoing is particularly problematic with respect to leased and/or financed collateral.  The debtor has an interest in an article such that it may authorize repair and/or storage of such article.  However, the debtor is not necessarily the owner of the leased collateral, or, alternatively, may be the owner in title only as a result of a financing arrangement with a secured creditor.  Where a debtor defaults and cannot pay for the repairs and/or storage authorized, the lien right continues in the article.  Ultimately, it becomes the responsibility of the owner or secured creditor to satisfy the lien claim.  ;

At what point can an owner or creditor assert it was no longer commercially reasonable for a repairer or a storer to continue to extend credit to a debtor?  

The lack of accountability for lien claimants can result in a significant loss to a creditor or owner.  What are the responsibilities of a repairer or storer which knew or ought to have known that the debtor or person authorizing the repair or storage was not likely able to pay for the services rendered?  Alarmingly, the insolvency community is faced with more and more situations where lien claimants continue to extend credit frivolously to a debtor, knowing that the owner or secured creditor of the collateral will in the end likely pay for services rendered.  The absence of statutory checks and balances arguably encourages abuse of lien privileges.   

Unfortunately, finding a way to impose greater standards of accountability on RSLA lien claimants is difficult, particularly in consideration of the underlying purpose of the statute, which is to protect the rights of relatively unsophisticated entities that provide repair and/or storage services to the benefit of the debtor, owner, or creditor of the collateral.   

A possible solution is placing limits on the aggregate amount claimable as a superpriority for repairs done on one piece of collateral, which would encourage repairers to consider the solvency of the debtor before extending further credit.  At a bare minimum, stricter documentary requirements which go beyond ‘a signed acknowledgement of indebtedness’ are needed, particularly for those claimants that extend significant credit for repairs done on one or more related pieces of collateral.  The current standards of the ‘acknowledgement of indebtedness’ is simply not enough to prevent against abuses of the statute.     

Conclusions 

Knowledge of the RSLA, its benefits and downfalls will assist practitioners in being able to act effectively for varying client needs.   

The statutory definition of repair is sufficiently broad so as to encompass many industry services.  The omission of a definition for the act of storage also increases the situations in which the RSLA may be utilized as a means of enforcing a right of payment or a right against a particular article.  Whenever one can answer yes to the question “does my client store articles as part of its business?”, or, “does my client repair articles as part of its business?”, there is a potential remedy in the RSLA.   

Taking steps to plug potential holes in the legislation with additional provisions in a receivership or trustee order will protect the interests of all creditors having an interest in an article, and potentially reduce costs of enforcement overall.  Further, understanding the limits of the legislation will assist in defending against bad faith claims, and in limiting the amounts claimable as a superpriority over the interests of other entities with prior but lesser rights then a lien claimant.   

As a matter of commercial expediency, legal possessors, owners, and secured creditors each benefit from repair and/or storage services.  Understanding the use and limits of the RSLA, and its role in insolvency proceedings will allow practitioners to increase client recovery, and reduce client exposure to certain aspects of lien claims.  

 

This article was originally published in the May 2010 editions of Briefly Speaking the Official Magazine of the Ontario Bar Association