Executing an Operator’s Lien? Take Time to Register it with a PPSA
In a recent Alberta court decision, a creditor claimed it had priority in the defunct debtor’s estate, because the creditor and debtor had executed an operator’s lien. The operator’s lien, however, was not registered in compliance with the PPSA. Subsequently, the creditor did not perfect its security interest and did not hold priority.
What Section of the PPSA Governs the Priority of an Operator’s Lien?
In a recent legal decision, the Court of Queen’s Bench of Alberta stated operator’s liens fall under section 35 of the PPSA.
35(1) Where this Act provides no other method for determining priority between security interests,
(a) priority between perfected security interests in the same collateral is determined by the order of occurrence of the following:
(i) the registration of a financing statement, without regard to the date of attachment of the security interest,
(ii) possession of the collateral under section 24, without regard to the date of attachment of the security interest, or
(iii) perfection under section 5, 7, 26, 29 or 77, whichever is earlier,
(b) a perfected security interest has priority over an unperfected security interest, and
(c) priority between unperfected security interests is determined by the order of attachment of the security interests.
Essentially? First in time, first in right. Which means, if a Financing Statement isn’t registered, a security interest is unperfected.
Cansearch Resources Ltd (Cansearch) was the day-to-day operator and partial owner of the Joffre Gas Battery and Compression Facility. Cansearch entered an operator’s agreement with the now bankrupt Regent Resources Ltd (Regent).
Within the agreement, there was language granting Cansearch an operator’s lien for unpaid expenses. At the time the operating agreement was executed, Cansearch did not perfect its security interest under the PPSA.
The agreement also allowed Regent to mortgage its ownership interest, which it did. Alberta Treasury Branches then loaned Regent $28M and perfected its security interest in compliance with the PPSA.
When Regent filed for bankruptcy protection, Cansearch argued its operator’s lien gave it priority, but the court nixed the argument because Cansearch did not perfect its security interest — the operator’s agreement needed a registered PPSA to be perfected.
It’s worth noting, Cansearch did abandon its claim to priority, because it failed to register the lien under the PPSA, and instead pursued a possessory lien. Unfortunately, the court determined a possessory lien would not apply either.
Never Assume an Agreement is Enough
According to Pantelis Kyriakakis, author of Operator’s Liens and the PPSA Priority Regime, “Generally, operator’s liens that arise under an agreement are consensual security interests that are subject to the framework and priority system set out in PPSA.”
Kyriakakis states operators should register a PPSA to perfect their security interest; however, many simply don’t.
“It is both possible and advisable for operators to perfect their operator’s lien by registering such security interests in accordance with the PPSA. However, this is not common practice. As a result, operators remain unperfected secured creditors. …in the event an operator does perfect their security interests in an operator’s lien, they will likely be in a subordinate priority position to any prior registered secured creditors.”
Take advantage of the laws that protect you! If you have the security language/granting clause within your agreement, take time to register a PPSA (or file a UCC in the US). Never assume the agreement will be sufficient in proving priority.