When a professional corporation operates with equipment owned personally by its director, how do secured creditors assert priority over proceeds from a receivership sale? A recent Alberta Court of Appeal decision in Royal Bank of Canada v Patterson Dental Canada Inc, 2025 ABCA 391 (Patterson Dental), offers important guidance on Personal Property Security Act, (PPSA) priority disputes, the treatment of purchase-money security interests (PMSI) and the proper distribution of holdbacks in insolvency sales.
Background
Dr. Faissal Mouhamad obtained financing from RBC for his dental clinic, Faissal Mouhamad Professional Corporation (FMPC), of which he was the sole director and shareholder. As security for the loan, FMPC granted RBC a security interest in all of FMPC’s present and after-acquired personal property. RBC perfected its security in 2016. On July 21, 2022, RBC added 52 Dental as a debtor and Dr. Mouhamad as a debtor on August 17, 2022.
In 2022, Dr. Mouhamad personally purchased dental equipment from Patterson Dental Canada Inc. under two sales agreements. Under the first, Patterson sold dental equipment worth C$375,084.72, which Dr. Mouhamad paid using C$51,823.59 in RBC loyalty credits, which the court found FMPC had earned and obtained possession April 28, 2022. Under the second agreement Patterson sold a scanner for C$36,850, which RBC conceded Patterson had priority security interest. Patterson registered its security interest July 5, 2022 and May 9, 2022, respectively, prior to the addition of Dr. Mouhamad and 52 Dental as debtors by RBC.
Shortly after these purchases, Dr. Mouhamad entered into a master lease with 52 Dental Corporation (52 Dental), a company controlled by his wife. Under this lease, the disputed equipment was to be used in a Calgary clinic, 52 Dental, for a seven-year period.
Later in 2022, RBC became concerned about transactions involving FMPC, 52 Dental and others and initiated receivership proceedings, appointing a court-appointed receiver to sell assets of FMPC and 52 Dental. Dr. Mouhamad himself was not a debtor in the receivership. During the sale of 52 Dental's assets, including the scanner and disputed dental equipment, the receiver held back C$417,000 to resolve competing claims.
The dispute in this case centered on which creditor, RBC or Patterson, had priority over the proceeds from the equipment sale. RBC relied on its longstanding security over FMPC’s property, while Patterson relied on its sales agreements and early registration against Dr. Mouhamad personally. The court was asked to determine how the holdback should be distributed, taking into account the PPSA rules on security interests, ownership, and registration timing.
The Chambers Judge’s Decision
The chambers judge found that RBC’s security did not extend to equipment personally owned by Dr. Mouhamad. The Court concluded that Patterson’s security interest, perfected against Dr. Mouhamad before RBC registered against him, had priority. The Court also determined that the master lease was a “true lease” rather than a financing arrangement, meaning the equipment remained the property of Dr. Mouhamad rather than part of 52 Dental’s receivership estate. The chambers judge ordered the full holdback of the sales proceeds of C$417,000 to Patterson, despite the fact that only approximately C$243,000 of the purchase price was attributable to the property at issue. RBC’s entitlement to the C$51,823.59 FMPC loyalty credits was recognized, but the remaining C$365,176.41 of the purchase price holdback was awarded to Patterson pending a determination of the disputed equipment’s actual realized value.
The Court of Appeal Decision
The Court of Appeal upheld Patterson’s priority and emphasized that ownership and the identity of the debtor are decisive when determining whether a creditor’s security interest extends to contested assets. The Court of Appeal specifically rejected RBC’s s. 51 argument under the PPSA, clarifying that s. 51 only preserves a perfected security interest in transferred collateral. As Dr. Mouhamad personally owned the equipment, RBC’s corporate security over FMPC did not attach except for the loyalty credits used in the purchase. Although at appeal RBC argued that FMPC and Dr. Mouhamad were in an agency agreement it was not argued before the chambers judge.
Although Patterson had registered its interest after a 15-day window for PMSI super-priority, the residual priority rules favored the first to register against the correct debtor, being Dr. Mouhamad. The Court of Appeal also confirmed that Dr. Mouhamad as lessor didn’t need to register a security interest against 52 Dental as the lease exception in the PPSA applied as Dr. Mouhamad was not regularly engaged in leasing goods, and therefore, the equipment did not enter the receivership estate of 52 Dental. While the chambers judge had misstated Patterson’s registration date in some instances, the Court of Appeal found these errors did not affect the outcome as Patterson’s registration against Dr. Mouhamad nonetheless preceded RBC’s. RBC had not alleged fraud or another mechanism to attribute Dr. Mouhamad’s purchases to FMPC, which was key to rejecting its claim.
The Court of Appeal took a different view on the distribution of the holdback. Evidence from the receiver indicated that the realized value of the disputed equipment was approximately C$243,000, significantly less than the C$417,000 held back. Awarding the full holdback, without accounting for the realized value, created a windfall for Patterson and prejudiced the receiver’s ability to satisfy other claims arising from the sale. As a result, the Court of Appeal remitted the matter to the Court of King’s Bench to determine the actual value and allocate proceeds accordingly, leaving room for a final proof of claims process in the receivership.
Key Takeaways
Patterson Dental underscores several critical considerations for secured creditors, receivers and courts navigating priority disputes under the PPSA:
- Importance of identifying the proper debtor: Creditors cannot automatically extend a corporate security interest to assets personally owned by directors or shareholders, even if those assets are used in corporate operations. Understanding who legally owns the property is a key fact in the security analysis.
- Need to register against the correct party: While Patterson did not benefit from PMSI super-priority in this instance, its early registration against Dr. Mouhamad, the proper debtor, ensured that it prevailed over RBC. Early perfection remains essential in contested situations to preserve priority and prevent disputes.
- Need to assess the Nature of Leases: Whether a lease is a true lease (i.e., assets remain the property of the lessor) or a financing lease (i.e., assets become the property of the lessee) is critical to the security analysis.
- Leases do not always create a security interest: Under the PPSA, leases with lessors who are not regularly engaged in the business of leasing goods do not create a security interest and require registration to maintain priority with other creditors. In this case, the lease between Dr. Mouhamad and 52 Dental fell within that exception, keeping the equipment outside the receivership estate and protecting Patterson’s priority. Creditors must carefully analyze whether lease arrangements create security interests and whether PPSA exceptions apply.
- Importance of assessing value before distribution: The chambers judge erred by distributing the full C$417,000 holdback without determining the realized value of the disputed equipment, which the receiver estimated at approximately C$243,000. Receivers must carefully evaluate the actual value of disputed collateral to avoid unjust enrichment and ensure proper allocation among competing creditors.
- Need for careful planning in intra-family or related-party arrangements: When assets are personally owned but used in corporate operations, thorough documentation and due diligence are critical. Without clear records of ownership, leases and security interests, priority disputes can arise, potentially undermining creditor protections.
Overall, Patterson Dental demonstrates that ownership, registration timing, lease structures and actual value must all be carefully considered to resolve PPSA priority disputes fairly and effectively.
