Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Geneva Securities Convention wikipedia , lookup
Consumer Credit Act 1974 wikipedia , lookup
Debt settlement wikipedia , lookup
The Modern Corporation and Private Property wikipedia , lookup
United Kingdom insolvency law wikipedia , lookup
Uniform Commercial Code wikipedia , lookup
Bankruptcy Law in the Republic of Ireland wikipedia , lookup
Australian insolvency law wikipedia , lookup
1 Secured Transactions Summary: Fall 2001 INTRODUCTION AND OVERVIEW I. Rudiments of Debtor/Creditor Law Credit – one person, debtor, owes the performance of an obligation of any kind to another, a creditor, whether on demand or in the future Obligation may arise by operation of law, may be assumed, or may be statutory A. Compelling the performance of obligations Creditors may compel performance or the payment of compensation in lieu of performance Remedies depend on the nature of the obligation 1. Judicial enforcement Exercise of creditor remedies presupposes a judicial action Prior to commencing a lawsuit, creditors are generally not permitted to control the activities of their debtors 2. Seizure and sale of property Compulsory executions in real actions involve physically depossessing the debtor of the property Compulsory executions in personal actions give rise to the seizure and sale of a debtor’s property 3. Distribution of proceeds Creditor who obtains a monetary judgment is entitled to have the claim paid in full from the proceeds of the sale If there are several creditors QC: Creditors may ask the court to order the bailiff not to distribute the proceeds to the first seizing creditor. Proceeds are held in a common pool until all claims have been filed and then are distributed pro-rata. ROC: Under Creditors Relief Acts, there is a regime of compulsory sharing on a pro-rata basis (not the usual c/l approach of first-come, first-served) 4. Fraudulent conveyances and unjust preferences Regime to prevent debtors from sheltering their assets from creditors B. Limitations and inconveniences of the debtor/creditor regime There are 6 key features of the regime: 1. Need for judicial order 2. Conversion of most non-monetary obligations into their monetary equivalent 3. Enforcement of money judgments against property 4. Freedom of debtors to use or abuse their property prior to judgement and seizure 5. Exposure of all or almost all a debtor’s property to seizure and sale in execution 6. Rateable distribution of proceeds 1. Concerns of debtors Pro-rata distribution means that debtors who are high credit-risks will often be unable to purchase property on credit, or to borrow money at reasonable rates of interest Upon default, property may be seized and sold, leading to personal devastation 2 2. Concerns of creditors Between the date the obligation was contracted and the date of default, the debtor may have alienated a significant amount of property Earlier creditors who advanced credit based upon the debtor’s net worth at the time the obligation was contracted, run the risk of seeing the value of their claims reduced proportionately 3. Concerns of third parties Third party creditors are often unaware that the property of their debtor is under seizure – may have to invest considerable resources to monitor debtor’s activities Third party may have rights in the property seized Can be devastating on those who depend on the debtor 4. Palliating limitations and inconveniences Creditors may be able to enforce obligations w/out judicial order Creditor may get judgment for specific performance Security techniques II. Socio-Economic Context of Secured Transactions Law A. Incidence of Credit Transactions 1. State subsidies, equity and debt financing Consumers Obtaining credit is the primary way a debtor can finance property or a project Many are eligible for direct government assistance – scholarships, bursaries, unemployment insurance, job-retraining grants, family allowances, retirement pensions, etc. Family member or friend may take an equity participation in an asset to be acquired or already owned Businesses Government assistance – direct grants, bonuses or subsidies; tax relief agreements; indirect subsidies through government procurement contracts at inflated prices; special agreements in respect of externalizing the cost of doing business to others Equity – greater risk but greater potential for profit Debt 2. Unsecured and secured debt Lender transaction – creditors advance money to debtors as against borrower’s promise to repay or perform an obligation Supplier transaction – creditors advance property to debtors w/out immediately receiving full payment Law treats creditors the same, regardless of the time an obligation arises or its cause Ordinary (chirographic, general) or unsecured creditors – have not taken steps to ensure that their claims will be paid in full should the common pledge be insufficient to meet all claims against it Other creditors take elaborate precautions and secure the obligation 3 B. Types of Security 1. Personal security Creditor asks the debtor to find another person or persons who will fulfil the obligation in the debtor’s place in the event of default Creditor remains an unsecured creditor but has two separate funds to draw upon K of suretyship – ex. parent agrees to repay lender if child defaults Management and principal shareholders of closely-held corporations personally guarantee the debt obligations contracted by the corporation (non-suretyship personal security) Also includes fidelity bonds, performance insurance, irrevocable letters of credit, co-debtorship agreements, solidary obligations 2. Security on property Creditor may require the debtor to affect certain assets specifically for the payment of the obligation owed Creditor may sometimes require third-party to charge their own assets – real suretyship Security can consist of isolating, w/in the debtor’s patrimony, particular assets which will not be subject to the pro-rata scheme of distribution and over which a creditor will be able to claim an enforcement preference – security on property Creditor may also isolate particular assets which are either prevented from entering the debtor’s patrimony until the obligation is satisfied, or are removed from the patrimony to the exclusive benefit of the creditor upon default – title transactions See art. 9 UCC, PPSA 3. Formal typology of security on property Certain legal regimes mandate a preference independently of the will of the parties – ex. liens, privileges, rights of retention, deemed trusts, and qualified exemptions from seizure Legal Institutions for Generating a Bankruptcy Preference Legislatively determined preferences Consensual transactions III. Institutions relating to the composition of a debtor’s seizable assets Qualified exemptions from seizure Deemed trusts Installment sales Lease w/ option to purchase Finance leases Resolutory conditions Consignments Mortgage type transactions Institutions for generating priorities w/in the debtor’s patrimony Prior claims Statutory non-possessory liens, legal hypothecs/charges Right of retention/ posessory liens Charges and hypothecs Pledges Security Nexus: Debtors, Creditors, Obligations, Assets A. Universe of Debtors Historical distinction b/w commercial and consumer debtors, now being eliminated 4 Also distinctions b/w security on immovables and movables but disappearing B. Universe of Creditors 1. Market players Ordinary general lenders – banks, trust companies, credit unions, finance companies, etc Lenders and financiers of specific assets Suppliers of equipment Suppliers of materials Landlords Service contractors 2. Non-market players Delict and tort claimants State for taxes Statutory agencies claiming for sums due under legislation Financing buyers who have made deposits on specially manufactured goods Purchasers who have prepaid long-term warranties or service contracts Employees Judgment creditors in one shot transaction disputes Non-wage-earning spouses C. Universe of Obligations May be consensual or non-consensual May be future, conditional or indeterminate May be precisely determined at moment of K May be performed at once or over time May involve repayment of money or performance of service or activity Debtor may undertake not to do something May involve transfer of property D. Universe of Assets (Collateral) 1. Consumer debtors Immovable property Movable property Investments Wages 2. Commercial debtors Capital assets Inventory Revenues Contract and delict or tort claims Land Intangibles 5 IV. Illustrative Examples of Secured Transactions A. Consumer Transactions Purchase of real estate Purchase of car or big household item Renovations or repairs Life events – education, wedding, medical, etc B. Real Estate Transactions Development and redevelopment of immovable property C. Commercial Transactions Financing of business Lines of credit Term loans Long-term debt D. Financing Governmental Operations Governments provide services in advance, collecting payment for them by way of taxes and levies E. Financing the Administration of Justice Legal fees and other expenses undertaken in the general interest of the mass of creditors are typically secured by a preferential claim in the proceeds of sale of debtor’s assets F. Securing Payment of Monetary Judgments Registering some form of notice of the judgment in a public registry of security rights V. The Herein of Consensual Secured Transactions Belief that consensual security is wealth enhancing Debtors believe that granting security opens up access to credit Creditors believe that security enhances chances of obtaining performance A. Debtor Objectives and Interests Consumer debtor is interested in obtaining lower interest rate Commercial debtors issue security to escape rule of unitary patrimony, to protect a business from cherrypicking by small creditors on specified assets, to protect company management from excessive demands of shareholders and employees Debtor is generally interested in: 1. Fair opportunity to redeem the security 2. Reasonable opportunity to reinstate the loan prior to realization being commenced should it fall into default 3. A realization regime that does not permit excessive penalty clauses 4. A realization regime that maximizes the realization value of the secured assets when they are sold B. Creditor Objectives and Interests Wants to obtain a property right in a debtor’s assets Wants some certainty as to priority vis-àvis other claimants Ensuring the ability to effectively monitor the debtor’s dealing w/or disposition of the assets 6 Wants power to realize upon the assets subjected to the consensual security w/out recourse to judicial seizure, or w/ minimum notice and formality Control over the conditions of default In general, creditors are interested in a fair recourse that: 1. Will persuade debtors that there is little to be gained from breaching the obligation 2. Ensure low transaction costs C. Third Party Objectives and Interests Every gain by a secured creditor is offset by a corresponding loss by third parties Third party creditors are interested in maximizing the realization value of the property, minimizing the costs of realization to the secured party and ensuring large amount left for distribution Third parties subsequently acquiring the property want reimbursement for improvements to the property and previous owners of the assets are interested in reclaiming property free and clear of any security VI. Some Pervasive General Considerations In civil law, the universe of property rights, in the interests of promoting the certainty and stability of commercial transactions, is a closed one In c/l, freedom of K includes the freedom to use and alienate property to its best use and, in theory, property institutions are broad and varied C/l regime is transaction oriented while civil law is regulatory High level of long-standing commitment to the notion of publicity by registration in the area of movables financing Civil law distinguishes b/w security institutions which are nominally styled as such and the use of other legal institutions In c/l, nominate title security and nominate security devices are subsumed w/in a unified regulatory framework (PPSA) In c/l, seizing creditor is empowered to sell only the title or interest of the debtor in the asset and purchaser takes subject to any senior ranking interests In civil law, the seizing creditor sells the asset, not merely the debtor’s interest Under art. 9 UCC and PPSA, a security interest automatically attaches to the proceeds received by the debtor from a disposition or dealing in the original secured property (no equivalent notion in civil law) Civil law draws a sharper distinction b/w security created for business and consumer purposes DEBTOR-CREDITOR LAW I. Compulsory Performance of Obligations Assumption that the debtor will voluntarily perform the obligation Creditors may obtain judicial enforcement of the obligation, which will vary depending on whether the obligation flows from a right in property or a personal right A. Enforcement of Rights or Interests in Property: Real Actions In an action where the creditor seeks to enforce ownership or vindicate some other right or interest in property, the right or interest directly charges the property 1. Substantive remedies Persons claiming rights in corporeal property are entitled to directly enforce those rights against anyone interfering w/ them 7 Enforcement regime for rights and interests in property is identical, regardless of whether the right or interest arises by K, succession, prescription, apprehension or occupation, invention, or statute 2. Vindicating title and possession Where the object of the remedy has been either to interrupt prescription or to compel the defendant to cease a wrongful interference, the judgment will usually be registered on title to an immovable (for corporeal movables, enforcement will be by way of injunction) Where the object of the remedy is to recover possession of property in the hands of another, the principles of substantive law are given procedural effect by relatively detailed legislative regimes Ex. 565-567 CCP, Real Property Acts, Replevin Acts 3. Enforcement of rights and interests intended or deployed as security Instalment sale of movable property – seller retained title to the property until purchaser had paid in full Sale of land under K in which the vendor reserved the right to cancel the sale and take back the property if purchaser defaulted Creditors loaning money arranged to have the debtor transfer title to property to them, while retaining possession Vendors’ title transactions and lenders’ mortgage-type transactions were historically enforced through ordinary real actions but evolved to resemble the enforcement regime for security devices 4. Mixed real and personal actions Titularies of rights in property can also bring a personal action against wrongdoers who have damaged their property Plaintiff must make sure that the relief being sought is not inconsistent 5. Self-help remedies – recapture In c/l, a person entitled to a chattel may simply take it from a wrongful holder, even deploying force in some cases, as long as there is no breach of the peace. Secured creditor may also employ self-help upon default (not as developed in the civil law) In c/l, owner of building may simply retake possession and change the locks B. Enforcement of Personal Rights: Personal Actions Regime largely the same, whether the obligation arises by K or extra-Kually and whether the property is an object or land Special rules apply where the asset against which execution is sought is a claim owed by a third party to a debtor 1. Substantive remedies May bring an action for damages, specific performance, resolution or resiliation 2. Mechanics of enforcement Once judgment is obtained, procedural regime governing compulsory executions in personal actions applies Civil law – CCP C/l – doctrine, local practice, ad hoc and fragmented legislation Seizure and judicial sale of a debtor’s property 3. Self-help remedies Vast bulk of debts owed by recalcitrant debtors are collected w/out recourse to judicial process Creditors may write letters and make phone calls 8 Creditors may turn the file over to a lawyer to institute collection procedures or call a collection agency Collection agency will either purchase the debt and attempt to collect themselves or will act as mandatary or agent C. Collateral Incidents of Judicial Enforcement 1. Protecting the debtor’s interest Civil law – must exercise rights in good faith C/l – more discrete, fact-specific doctrines such as unconscionability, inequality of bargaining power Creditor must give notice of default before enforcing performance 2. Protecting the creditor’s interest Creditor can obtain a declaration that a particular juridical act was undertaken by the debtor in fraud of their rights (Paulian action, declaration of a fraudulent conveyance or preference) Civil law – creditors can exercise the rights of their debtors that they refuse to enforce (oblique action) Also available in QC – seizure before judgment; judicial sequestration; interlocutory, interim and ex parte injunctions (c/l more hostile towards these remedies) D. Three Basic Principles Governing Executions in Personal Actions Judgments are executed against property, not persons (civil and c/l) A debtor’s property, both present and future, is available to creditors to be seized and sold (civil) Creditors are to share equally in the distribution of proceeds realized from the sale of a debtor’s assets (civil and c/l) II. The Creditors’ Common Pledge Except as otherwise provided by law, all of a person’s property is available for seizure and sale to satisfy the claims of judgment creditors But not all assets of a debtor can actually be seized in execution Not all creditors have an identical asset base w/in their debtor’s patrimony (common pledge is not unitary) A. Attenuations to the Principle of Universal Patrimonial Liability 1. Exemptions from seizure Common pledge does not extend to property declared exempt Exemptions declared by law Principle – creditors should not be able to reduce their debtors to penury Three main categories of exempted objects: 1. Personal effects and necessaries 2. Social security payments, pension entitlements and employment income 3. Family residence Other exemptions include family heirlooms, papers, portraits, medals, etc, and works of art or cultural property brought into the jurisdiction and intended to be placed on public exhibit Exemptions resulting from a contract, gift or will In many jurisdictions, contracting parties, donors and testators can declare that certain property transferred to another is exempt from seizure 9 2. Deferred Exigibility The assets of a partnership are not automatically confounded w/ those of the individual partners at the moment of seizure Partnership creditors may seize the non-partnership property of individual partners only aver the separate creditors of each partner have been paid in full Personal creditors of a partner can only seize assets of the partnership after executing their judgment upon the non-partnership assets of their debtor, and after the creditors of the partnership have first been paid in full from these partnership assets 3. Limited recourse financing Gives the creditor security over certain property but frees up the rest of the debtor’s patrimony from its liability to that debt B. Attenuations to the Principle of a Unitary Common Pledge Increasing number of transactions under which ownership and detention of movable property is dissociated (ex. lease or installment sale) Dissociation b/w the patrimony and the common pledge 1. Title transactions and the problem of ostensible ownership Sale, lease, consignment The property does not form part of the debtor’s patrimony b/c the debtor does not own it or b/c ownership has been retroactively extinguished PPSA requires a secured creditor to publicize its security as a pre-condition to the effectiveness of the creditor’s interest as against intervening judgment creditors Mandataries, Agents, Trustees Trust is a separate patrimony from that of the constituant and the trustee 2. Extension of the common pledge beyond a debtor’s patrimony In some cases, the assets available to satisfy the claims of creditors may extend beyond a debtor’s own patrimony Extension by operation of law Debtor’s relationship w/ another person is intense Ex. in corporate settings, may hold shareholders, administrators and directors personally liable for the acts of the corporation Extension by agreement Suretyship agreement Ordinary – third person agrees to be personally bound to fulfil the debtor’s obligation Real – surety agrees to permit the creditor of a third party to seize designated property belonging to her to fulfil the defaulting debtor’s obligation C. Protection of the Common Pledge 1. Pre-judgment interlocutory proceedings 10 Seizure before judgment – attachments Any creditor may w/ judicial permission, seize a debtor’s property when there is reason to fear that the recovery of a debt may be put in jeopardy – conservatory attachment (civil law) Seizure is obtained by writ Requisitioner must demonstrate objective jeopardy in the recovery of the claim Attachment in revendication (civil law) Claimant is asserting a special interest in or a real right upon the property being seized Seizure freezes a debtor’s assets pending judgment and gives creditors close control over the management of their common pledge Similar remedies available in real actions in c/l – replevin, preservation of assets which are the subject of the action, filing of lis pendens C/l reluctant to permit pre-judgment attachment Judicial sequestration – receiverships Civil law – place property that is the object of a contestation in the hands of a manager pending trial Usually reserved for title disputes Obtained by motion either prior to or during a lawsuit C/l – may be used for the same purpose in real actions but rarely for personal actions Injunctions Can be either prohibitive or mandatory Mareva injunction – restrain non-resident defendants where there was a strong likelihood of pre-judgment removal of assets from the jurisdiction Subsequently extended to cases where a risk of pre-judgment dissipation of assets is shown 2. Creditor Supervisory Recourses Oblique action Permits creditors to exercise the rights of their debtor, when he or she refuses or neglects to do so and when this refusal or neglect causes them prejudice Creditor must have a claim which is certain, liquid and due Debtor must display positive signs of inaction In c/l, similar recourse is available through the appointment of a receiver Fraudulent conveyances and preferences – the Paulian action Permits creditors, in their own name, to impeach the acts of their debtors in fraud of their rights Claim whose recovery is in peril must antedate the act under impeachment Creditor’s claim must be certain, liquid and due Must be taken w/in 1 yr of the ordinary creditor’s knowledge of the fraudulent act 2 substantive preconditions – debtor’s act must be fraudulent, and the creditor must suffer prejudice 2 presumptions – gratuitous Ks entered into by an insolvent debtor are presumed fraudulent, and any payments made by an insolvent person to a creditor who knows of the insolvency are deemed to be fraudulent Other creditors who have not intervened in the action derive no benefit from the impeachment In c/l – most provinces have either an Assignments Act or a Fraudulent Preferences Act All c/l provinces permit a creditor to challenge: Conveyances made w/the intent to defeat, hinder or defraud creditors except for conveyances made for good consideration and bona fide to persons w/out notice Conveyances made w/ a fraudulent intent to a donee for nothing or for nominal consideration Conveyances made by an insolvent w/ the intent to unjustly prefer one creditor over another or others 11 EXECUTION OF JUDGMENTS I. Principle of Execution Against Property Creditors can neither imprison their debtors or members of their family, nor even claim the whole value of their labour In QC, creditor may seize the salary and wages of a debtor (earned income). Also allowed in c/l, but there is typically a minimum exemption. A. Procedures for Seizing Property Money judgments are enforced by means of a writ of execution issued by the clerk of the district where judgment was rendered, and executed by any sheriff or bailiff in the province Debtor may oppose the seizure Third persons may oppose the seizure of property on the basis that they have a right to claim it In c/l, sheriff’s sale only conveys to the purchaser whatever title the debtor had in the movable B. The Sale and Distribution of Proceeds of Sale Movables must be sold first Sale ends when sufficient money to pay the claim and costs has been raised Sale is by auction Bailiff distributes the money received C. Seizure by Garnishment of Property, Claims and Wages If property of the debtor is in the hands of a third person or a third person owed money to the debtor, the creditor may seize the property or money by garnishment II. Principle of Equality of Creditors Notion of equality of creditors extends beyond bankruptcy and insolvency regime A. Attenuations to the principle of Creditor Equality 1. Priorities for payment Creditor has a right to be preferred to other creditors in the distribution of the proceeds of a judicial sale Arises by operation of law and rank is determined by law 2. Security devices Security devices charge the property made subject to them, and the charge may be set up against third parties 3. Title security Title is removed from the patrimony of the debtor and vested in the patrimony of the creditor Creditor could retain or obtain title Upon default, title would retroactively vest in the creditor 4. Other disruptions to creditor equality Law relating to the execution of judgments In QC, first seizing creditor has priority in the distribution of the proceeds of sale 12 Law of obligations Creditor is able to assert a custodial right over property actually owned by their debtors Set-off for mutual obligations Property law Rules of accession to movables INSOLVENCY, BANKRUPTCY, CORPORATE REORGANIZATIONS, STATUTORY LIQUIDATIONS I. Historical and Policy Perspectives on Insolvency and Bankruptcy Private and individual creditor driven system of debt enforcement is reasonably effective where debtors are solvent Bankruptcy and Insolvency Act establishes a collective or unified debt realization process for creditors of an insolvent debtor whose patrimony is under the administration of a trustee in bankruptcy Collective debt enforcement exists in provincial law where more than one creditor has obtained an enforcement order against the same debtor QC: rule that first-seizing creditor is entitled to be paid by preference to other ordinary creditors. If creditor alleges insolvency, then the seizing creditor must advertise the seizure and invite creditors w/ outstanding claims. C/l: first-seizing creditor enjoys a qualified priority in the proceeds up to a %. Proceeds are distributed rateably among all execution creditors. A. Meaning of Bankruptcy and Insolvency Bankruptcy – status of a debtor who has been declared by formal legal adjudication to be unable to pay his debts Insolvency – indicates the factual state of being unable to meet debts as they fall due S. 91(21) C.A. 1867 gives fed jurisdiction over bankruptcy and insolvency Insolvency is also governed by provincial law in the absence of federal legislation by virtue of s. 92(13) C.A. 1867 (property and civil rights) 39 yr gap in federal legislation governing bankruptcy Important reforms in 1992 BIA – elimination of most govt preferences, detailed reorganization proposal process, automatic review periodically B. Functional Objectives of Modern Insolvency Regimes Re-adjustment of debts to avoid liquidation and allow for the rehabilitation of insolvent debtors For corporations, liquidation is possible only after reorganization is found not to be viable or an attempted reorganization has failed If debtor initiates proceeding, has choice b/w liquidation and rehabilitation. If creditor initiates the process, liquidation is the only option. There are mechanisms to convert from liquidation to rehabilitation, vice-versa. C. Rehabilitative Potential of Straight Liquidation Proceedings First-time bankrupt is entitled to an automatic discharge 9 months after filing an assignment Certain debts are exempt: court imposed fines or restitution orders; alimony or support payments; debts or liabilities arising out of fraud or false pretenses; liability for any dividend to undisclosed creditors; student loans unpaid w/in 10 years of leaving school Creditor or trustee may contest the discharge Court may make the discharge conditional on the payment of a sum of money over a period of time or may suspend the discharge 13 If there have been multiple bankruptcies, court may refuse the discharge D. Out of Court Creditor-Initiated liquidation and Rehabilitation Mechanisms C/l – appointment of a receiver Civil – secured creditor’s recourse of taking possession for purposes of administration Liquidation through a receivership allows the enterprise to be sold as a going concern Liquidation may be done w/out formal receivership (debtor acting at behest of a secured creditor w/ a first ranking security on all assets of the business and the power to control the debtor’s management of the business) Need cooperation of debtor for it to be successful E. Tensions Between Insolvency and Secured Transactions Regimes Bankruptcy proceedings are concerned w/ enhancing or maintaining the value of the bankrupt’s assets for the benefit of all creditors and imposing a baseline principle of creditor equality Secured transaction law is concerned w/ maintaining creditors’ collateral-based real rights Insolvency is concerned w/ fairness II. Outline of Contemporary Bankruptcy and Insolvency Regimes Regimes suspends the operation of provincial law and freezes creditor recourses A. Canadian Bankruptcy and Insolvency Legislation BIA is comprehensive in scope and applies to all natural and legal persons Prior void in re-organization provisions was filled by CCAA, which was enacted in 1933 to deal w/ the impact of the depression BIA amendments in 1992 included detailed reorganization proposal process CCAA protection was limited in 1997 to corporations w/ total claims of at least $5M Federal WRA as well as provincial WA deal w/ situations where the corporation is still solvent but is being liquidated B. Canadian Bankruptcy Court Structure No independent system of federal bankruptcy courts Provincially constituted superior courts have jurisdiction to exercise original, auxiliary and ancillary powers in proceedings authorized by the BIA (s. 183(1)) Reorganization arrangements under CCAA are initiated in the province in which the head office of the corporation is located, or if a foreign corporation, in the province where its assets are located (s. 9) Cross-Canada effect is given to judgments and orders rendered under BIA (s. 188) and CCAA (s.16-17). Hunt v. T & N Plc. [1993] 4 S.C.R. 289 – Courts in each of the Canadian provinces are constitutionally obligated to give full faith and credit to judgments rendered in proceedings in other provinces, as long as there exists a real and substantial connection b/w the defendant or the subject matter of the proceedings and that province. III. Liquidation and Reorganization in Canadian Bankruptcy Law A. Liquidation Proceedings Upon application, a debtor’s assets fall under the administration of a third party, who calls in all the assets and liquidates them for the benefit of the creditors. The administrator is also charged w/ ascertaining all the creditors who have unpaid and outstanding claims and establishing the character and amount of these claims. 14 1. Liquidation under BIA S. 47 – a debtor may make a voluntary assignment where there are unsecured claims totaling $1,000 and the debtor is insolvent in that (1) liabilities exceed assets, or (2) the debtor is unable to meet obligations generally as their become due S. 43 – creditor may force a debtor into bankruptcy through a petition for a receiving order. Petition requires (1) one or more petitioning creditors (2) to whom the debtor owes at least $1,000 (unsecured), and (3) commission of an “act of bankruptcy” listed in s. 42 Need min. territorial connection b/w the debtor and Canada - see definition of “debtor” in s. 2 2. Liquidation Proceedings under WA One or more creditors petition the court for a winding-up order A liquidator is appointed to gather in and liquidate assets of the institution and distribute the proceedings among creditors Rarely used if the corporation is insolvent b/c the liquidator does not have any of the extraordinary powers given to trustees in bankruptcy nor any protection from liability Any surplus is distributed to the shareholders in accordance w/ the articles of incorporation B. Reorganization Proceedings Debtor’s assets fall under the administration of a third party, whose task is to make an inventory of all assets and liabilities and attempt, w/ the cooperation of the creditors, to restructure the company’s debt 1. Reorganization under BIA Debtor files a notice of intention to make proposal or files the actual proposal Proposal – an offer to creditors asking them to give up rights to the money they are owed in exchange for an offer to pay so many cents on the dollar over time Debtor must file a projected cash flow statement and a report on the reasonableness of the projections from a licensed trustee in bankruptcy w/in 10 days of filing the notice of intention If debtor files a notice of intention, the trustee has 5 days to notify all creditors of the filing. Debtor has 30 days to file the proposal. Several 45 day extensions may be granted but the debtor can only have a max. 6 months to file the proposal. Proposal is subject to the approval of creditors and the court 2. Reorganization under CCAA Applies to companies incorporated either provincially or federally and to any non-Canadian corporation that has assets or does business in Canada Company must: (1) be bankrupt or insolvent and admit to insolvency; (2) have committed an act of bankruptcy w/in BIA or be deemed insolvent w/in meaning of WRA; (3) have made an authorized assignment against which a receiving order has been made under BIA or WRA Min. debt level of $5M Paralyzes rights of secured creditors 3. Reorganization under WA Rarely used C. Consumer Proposals under BIA If the aggregate debts don’t exceed $75,000 (excluding mortgages on a principal residence), a consumer can file a proposal under Division II of the BIA – result is a stay of proceedings brought by creditors of that debtor An administrator will work w/ the debtor to put a plan together for the creditors 15 If creditors don’t raise any objections, the proposal will be deemed approved w/out a meeting. Proposal is deemed approved by the court if no objection is taken w/in 30 days of approval IV. Logic and Operation of the Bankruptcy Regime Triggering events – debtor made a voluntary assignment in bankruptcy, the debtor has been forced into bankruptcy by creditors, the debtor has filed a proposal that it has subsequently dishonoured or that has been rejected by the creditors A. Appointment of the Trustee Trustee is nominated by the debtor but is primarily responsible to unsecured creditors Trustee is entitled to pursue any actions and raise any defenses to any actions available to the bankrupt Certain defenses that could be pleaded against the bankrupt can’t be raised against the trustee B. Assets Which Form Part of the Bankruptcy Estate All property of the bankrupt vests in the trustee except property exempt from execution under provincial law Any property acquired by the bankrupt until a discharge is obtained becomes property of the bankrupt Any portion of ongoing earned income that exceeds a reasonable amount for living C. Avoidance of Certain Pre-Bankruptcy Transactions S. 91 BIA – voluntary settlements If it took place w/in 1 yr of bankruptcy, the settlement is void as against the trustee If it took place w/in 5 yrs of bankruptcy, it may be void (like Paulian action) Under most provincial laws, an insurance K for the benefit of a spouse, child, parent or grandchild is typically exempt from seizure in execution Ramgotra v. North American Life Assurance Co, 37 C.B.R. (3d) 141 – while a change of designation of a beneficiary under a life insurance policy might constitute a settlement, the exemption provisions in s. 67(1) override s. 91 D. Effect on Enforcement Rights of Secured Creditors: Stay of Enforcement Proceedings 1. Stay of enforcement in liquidation proceedings S. 69, 69.1, 69.3 BIA – automatic stay on the commencement or continuation of enforcement proceedings by individual creditors once bankruptcy proceedings have been initiated In liquidation proceedings, secured creditors generally not affected by the stay but Trustee can apply for an order staying enforcement for up to 6 months to protect the interests of the other creditors (rare in practice) S. 244(1)(2) BIA – secured party who intends to enforce a security interest against inventory, A/R, or other business assets must give notice of intention in prescribed form Secured creditors must account to the trustee for any surplus value and can claim on an unsecured basis for any deficiency Under the BIA Statutory stay of enforcement extends to both secured and unsecured creditors in the case of reorganization proceedings Stay can be lifted if the court is satisfied that the creditor is likely to be materially prejudiced by the continued stay or that it is fair to lift the stay Suppliers can request payment C.O.D. and lenders are not required to make further advancements Certain short-term financial Ks can be terminated 16 Creditors vote on the proposal in person or by mail (3 weeks after proposal filed). Proposal must receive approval of at least 66% in $ and 50% +1 in number of eligible creditors who vote, and must be approved by the court. Everyone is bound by the proposal. Secured creditors not included in the proposal are not bound Not binding on creditors included in a class that rejected the proposal in the absence of a cram-down provision. But court has discretion in determining commonality of interests, structuring it so that opposers are a minority in a class. Under the CCAA Court has authority to stay proceedings by third parties, including secured creditors Suppliers can request payment C.O.D. and lenders are not required to make further advancements Certain short-term financial Ks can be terminated Threshold for approval is at least 66% in $ and 50% +1 in number of eligible creditors E. Ranking of Creditors’ Claims in Bankruptcy Third party who actually owns property that belongs to the bankrupt is able to reclaim the property from the trustee BIA does not recharacterize rights under provincial law, so the operation of the regime can vary b/w QC and c/l provinces 1. Creditors whose claim is founded on title C/l – treated as secured creditors QC – treated as owners Unpaid unsecured suppliers S. 81.1 – unpaid suppliers have the right to demand the return of goods delivered to buyers who become bankrupt or insolvent or are placed in receivership w/in 30 days of delivery in priority to all other claims to the goods (must meet statutory requirements) S. 81.1(11), 81.2(5) – preserves the operation of 1741 CCQ Supplier can be defeated if reorganization proceedings are initiated Farmers, fishers and aquaculturalists S. 81.2 – special in rem security rights in favour of unpaid suppliers who are farmers, fishers, aquaculturalists Products delivered w/in 15 days of the purchaser’s bankruptcy are deemed to be secured by a charge 2. Governmental claims S. 67, 86-87 BIA expressly disallows govts to give themselves first-ranking priority in bankruptcy Crown has super priority for deemed trust claims for unremitted source deductions 3. Secured creditors S. 136 – distribution of bankrupt’s estate is subject to the rights of secured creditors S. 2 – secured creditor defined broadly Applicable substantive law is provincial subject to federal legislation, ex. Bank Act, Canada Shipping Act Title security Creditor’s real interest is that of an owner, but functionally that of a secured creditor In c/l provinces, title security falls w/in BIA concept of security – Re Giffen (1998), 222 N.R. 29 (S.C.C.) 17 QC – retention or transfer of title is distinct form nominal security institutions Title transfer devices Mortgage is classic title-transfer device Retention of title devices May fall outside of definition of secured creditor S. 67 – trustee’s rights are limited to the property of the bankrupt Must process claims via s. 81 application Immovables S. 75 – a bona fide purchaser, mortgagee or chargee of the land takes free of a receiving order or assignment made unless the trustee registered notice of it in the relevant provincial registry before their interests came into existence See Canadian Imperial Bank of Commerce v. Saskatchewan Lawyers’ Insurance Association, [1996] 4 W.W.R. 123 (Sask. Q.B.). Movables Security interest must be publicized either by taking possession or by registration in a public registry to be effect against the trustee Non-consensual security rights Re Tots and Teens Sault Ste-Marie Ltd. (1975), 11 O.R. (2d) 103 (Ont. S.C.) – secured creditor includes a solicitor asserting a c/l or statutorily created charging lien on assets recovered or preserved for the client to secure fees owing Protz v. Protz, [1997] 10 W.W.R. 193 (Sask. Q.B.) – secured creditor includes a spouse asserting a judicially created charge on matrimonial assets Other claims to secured creditor status S. 70(1) – a receiving order or assignment in bankruptcy takes precedence over all debt attachment or enforcement processes Interpreted to preclude a judgment creditor from ranking as a secured creditor even when a provincial statute purports to make the filing of notice of judgment enforcement proceedings a charge or hypothec against the debtor’s assets – Laurentian Bank of Canada v. Woo (1994), 24 Atla. L.R. (3d) 345; Turgeon v. Delamare, J.E. 95-811 (Que CA); T.L. Cleary Drilling Co. (Trustee of) v. Beaver Trucking Ltd., [1959] S.C.R. 311; Québec (sous-ministre de Revenu) v. Giguère (syndic) (1998), 98 D.T.C. 6329 (Que C.S.) Claimants are precluded from asserting legal security rights vesting under external law where their claims are of a type expressly assigned a lesser priority ranking by BIA – Federal Business Development Bank v. Quebec (Commission de la santé et de la securité du travail), [1988] 1 S.C.R. 1061; Re Gingras Automobile Ltée (1972) 4 C.B.R. 123 (S.C.C.) Ownership interests created by operation of law in favour of preferred creditors have limited effect in bankruptcy – British Columbia v. Henfrey Samson Belair Ltd., [1989] 2 S.C.R. 24; Husky Oil Operations Ltd. v. Minister of National Revenue, [1994] 1 W.W.R. 629 (Sask. C.A.) Statutorily created liens and analogous devices will not be effective in bankruptcy – Re Factory Window and Door Ltd. (bankrupt) (1995), 135 Sask. R. 235 (Q.B.); Roscoe Enterprises Ltd. v. Wasscon Construction Inc. (1998), 161 D.L.R. (4th) 725 (Sask. Q.B.) 4. Privileged (preferred creditors) S. 136 recognizes principal categories of preferred claims Funeral and testamentary expenses of a deceased bankrupt 18 Costs of the bankruptcy administration Levy payable to the Superintendent of Bankruptcy Wages and commissions owing to the bankrupt’s employees Municipal tax claims Landlords’ claims 5. Unsecured creditors Receive remaining balance on a pro rata basis (after all super priority, secured and privileged creditors) 6. Deferred (subordinate creditors) These creditors are only paid after the other unsecured creditors have been paid in full S. 92, 93 – spouse’s claim based on marriage K S. 139 – lenders who also hold an equity participation S. 137(2) – spouse’s claim for salary S. 137(1) – claim resulting from a transaction that has been set aside as a preferential payment or a settlement 7. Treatment of compensation and set-off rights in bankruptcy Right of a debtor who itself is owed money by the creditor on another account or transaction to set off this liability in extinguishment or reduction of its own liability Purely personal b/w the parties and does not create security rights in the set-off obligation Removed from the bankruptcy estate – same practical effect as security 8. Debtor in possession secured financing in reorganizations No formal statutory regime for a restructuring debtor to obtain credit on a secured basis to finance its rehabilitative process V. Limits of Bankruptcy and Other Collective Procedures Three issues in Canadian law: How much should bankruptcy law remain a matter of quasi-private enforcement, through the protection of secured creditors’ rights, and the administration of a party-nominated trustee in bankruptcy? How much should bankruptcy law defer to provincial debtor/creditor law in the definition of claims, their characterization, their enforcement, their ranking? How much should bankruptcy law defer to consensual transactions that have for effect to strip the common pledge of unsecured creditors to almost nothing? HISTORY AND THEORY OF SECURED TRANSACTIONS I. Brief History of the Institutions for Obtaining Security on Property Present regimes can trace its roots back to Roman law A. Legacy of Roman Law Resurrection in late 10th C Italy 1. Roman law institutions Security-types devices originated in a transaction that involved the transfer of both title and possession to a creditor – fiduciary transfer Non-title charge on property emerged later as a security concept 19 Credit transactions involving movables were rare Lender’s security devices Nexum – agreement whereby a person who owned money to another agreed to bind himself or a woman or child under his potestas to the creditor (functional equivalent of K for slavery) Pignus – debtor delivered property to the creditor, who would hold it as a pawn until payment of the obligation owing (antecedent to pledge) Hypotheca – debtor created a charge over property in favour of a creditor, but retained possession of the charged assets Fiducia cum creditore – debtor transferred both the possession and the ownership of the property to the creditor as security Vendors’ recourses Most sale transactions were instantaneous, payment and delivery occurring at the same time In credit transactions, the purchaser could obtain possession of the property but title did not pass until the purchaser either made full payment, or the vendor accepted a third person’s promise to pay, or the purchaser had given security 2. Civil law security-type devices prior to Industrial Revolution Suretyship agreements widely used Debtor’s prison Lenders’ security devices Church promoted general ethic against loans upon interest Sale w/ right of redemption – borrower sold property to the lender for the price of the loan but was entitled to repurchase the property at a specified moment for a much higher price Pledge of immovables or antichresis – moneylender took possession of the immovable, and during the currency of the loan expropriated the fruits and revenues it generated as the equivalent of interest In the absence of reliable written publicity system, creditor possession of the secured property was substituted as a requirement Hypothec has to be evidenced by notarial deed en minute Vendors’ recourses Action in revendication – unpaid seller who had delivered property to a buyer on a cash sale basis could repossess it w/in a short period of time following delivery If title had been transferred to the purchaser, the seller’s sole remedy was to sue on the K Revendication required judicial order Seller could register a vendor’s privilege, which secured the unpaid purchase price for 10 yrs following the sale Seller could take a hypothec Right of resolution – unpaid seller could dissolve the sale and reclaim title to the property for a period of 10 yrs following the sale 3. Common law security-type devices prior to the Industrial Revolution Suretyship agreements were common Debtor’s prison Lenders’ security devices Mortgage transaction – borrower conveyed to the lender all rights and title that it had in the property as against the lenders’ promise to reconvey the property once the debt was paid in full. Upon non- 20 repayment, mortgagee was released from the personal obligation to reconvey and was entitled to keep the property Under courts of equity, mortgagor acquired an interest in the property that had been mortgaged (equity of redemption) Mortgagee could not dispose of the property free and clear of the mortgagor’s equitable interest w/out judicial order of foreclosure Vendors’ recourses Conditional sale – seller retained title to the chattel until full payment Hire-purchase agreement – purchaser initially leased the chattel, and was entitled to purchase it at the end of the hiring period Seller was entitled to reclaim the chattel under an action in replevin or conversion Vendor’s mortgage B. 19th C Consensus stabilization of the law of security and law of debtor/creditor relationships 1. Fundamental policies of 19th C civil law Issuing of consensual security was highly regulated and discouraged Movables could not be hypothecated, only pignus was allowed For immovables, only the antichresis and the hypothec were permitted In the execution of ordinary judgments a creditor had to dispose of all movable property prior to seizing and disposing of immovable property when both are seized together Possession was primary index of rights in movables Registration was primary index for immovables 2. Logic of the common law security devices Registry systems developed to permit the publication of rights and interests in land Legal mortgage transformed into something resembling a charge Chattel mortages and possessory liens Floating charge – business debtors could charge the whole of their present and future business undertaking No public registry system in England C. 20th C Re-consideration Rationalization – various legal transactions that have long stood as surrogates for security have been swept into the regulatory frame of secured transactions Computerization – enabled reasonably reliable regimes of publicity to be established Marketization – creditor recourses have been reorganized to maximize the value of secured assets 1. Common law consensus Land registration system Mechanics liens reflected the development and re-development of real estate Legislation such as Bills of Sale and Chattel Mortgages Act recognized chattel mortgages if they took place according to certain formalities and were registered in a public registry in a timely fashion 2 techniques developed for inventory and receivables field warehouse device floating charge Development of art. 9 UCC – made uniform the processes by which a consensual security right in movables opposable to third parties could be created and publicized. Also made uniform the remedies 21 available to the secured creditor and rationalized the rules governing third party effects and priority ranking of security rights PPSA in c/l provinces highly influenced by art. 9 UCC Non-consensual security rights in both movables and immovables and security rights in immovables remain outside the regime Non-consensual security interests in movables are regulated by Uniform Liens Act 2. Civil law consensus Law showed no awareness of commercial practice Many non-consensual priorities that were not published outranked security devices Abuse of consensual title transactions b/c of the prohibition on hypothecs over movables Book VI CCQ adapts the logic of art. 9 UCC to the civil law and extends it to both movables and immovables All extra-codal security devices were repatriated into the CCQ Legal framework of the diverse security devices were rationalized and consolidated CCQ reintroduced the general principle of restrictive enumeration of real security But failed to take best elements of art. 9 and kept some of the worst civil law elements D. Lessons of Legal History There are only a limited number of general legal techniques to secure performance of an obligation There will always be debtors and creditors who will seek to re-deploy other traditional legal institutions or will seek to deploy these traditional legal institutions in novel ways to generate a security right 1. Intellectual transformations Concept of person in law was very narrow in Roman law – men, women, children Development of corporate personality increased the number of persons recognized by private law Contemporary notions of corporeal and incorporeal property 2. Evolutionary themes From deploying persons as security to deploying property as security From depending on the transfer of title to depending on the creation of a charge over the property of the debtor From depending on the possession of the secured property to depending primarily on the registration of the security From immovable to movable property From corporeal to incorporeal property Increasing regulation has led to creative re-deployment of certain title transactions II. Issues of Legislative Policy A. Purposes and Economics of Security Creditors and debtors believe that consensual security is wealth-enhancing Creditors – security will enhance their chances of obtaining performance Debtors – give them access to otherwise unobtainable credit or loans or will lower interest rate No economist has been able to explain the reasons for giving and taking security in efficiency terms Interest rate reflects – prime rate, operating expenses, transaction costs, risk premium 1. Monitoring, signaling and distribution theories Agency costs 22 2. Calculating and negotiating risk Creditors will want to know who the debtor’s other creditors are any outstanding or pending lawsuits tax remittance patterns imminent strike supplies purchased w/cash or conditional sale other security granted s/h loans In consumer context, creditors want to know the person’s total indebtedness Declaration of family residence filed Alimentary pensions payable Outstanding gifts by marriage K B. Legal Structure of a Regime of Security on Property 1. Legal foundations or origins of the security: consensual and non-consensual security Should the legislature control the occasions when security may be asserted? Some techniques are non-negotiable – ordinary execution preferences, possessory claims and liens Others are negotiable – mortgage, security interest, pledge, hypothec, etc. 2. Creditor prerogatives: property and priority rights Some devices only provide creditors w/ a right to claim a preference in the distribution of the proceeds of sale Others give the creditor a property right in the assets of the debtor 3. Scope and extent of the security: initial objects and replacement property How extensively should a creditor be permitted to control a debtor’s patrimony? Should security be permitted over movables as well as immovables? Should security be permitted over claims and other incorporeal property, or just over corporeal property? Should security only give rights in the original property made subject to it or should the device extend through manufacturing and processing? 4. Debtor/creditor nexus: Who may grant security? Who may take security? For what obligations? Over what assets? Art. 9 does not impose any additional restrictions beyond those associated w/ regular debtor/creditor law Other regimes, such as s. 427 Bank Act restricts who can be a creditor, who may grant security, what obligations may be secured and what assets may be covered A distinction is usually drawn b/w debtors who carry on an enterprise, and those who do not (civil law) Distinctions among the classes of creditors at the point of enforcement QC does not permit security to be taken over an obligation that is future and indeterminate 5. Theory of priorities: quantitative (temporal) and qualitative approaches Qualitative considerations – character of the creditor, character of the debtor, nature of the claim Temporal – first to register has priority, last to register has priority Mixed – temporal scheme modified by special rules which either promote the claims of certain later sellers or subordinate the claims of certain prior sellers 6. Allocation of property and possessory rights Hypotheca (charge) – borrower retains both title and physical custody 23 Pignus – borrower retains title but not physical custody Title transactions – borrower retains or obtains custody of property, but not title to it Fiducia cum creditore – borrower obtains neither title nor physical custody, but merely holds the lender’s promise to reconvey and disgorge physical possession once the debt is extinguished 7. Conditions of default Don’t permit negotiation of default conditions, failure to repay is the only legal default Recognize the validity of a wide variety of conditions, but subject these to prior judicial scrutiny Impose ex post facto judicial control over default through damages actions for unwarranted or hasty realization 8. Mechanics of enforcement Enforcement only by judicial seizure and sale Creditors have option of private realization, but only upon renouncing any deficiency claim on the loan 9. Creditor recourses Creditor might be permitted to foreclose upon the property and become the owner of the property subject only to prior-ranking secured rights and the debt is extinguished Creditor might be permitted to enforce and realize upon the security right by selling the property or taking possession of it, free of all rights, or only of some rights Creditor might be permitted to sue the debtor personally for the deficiency after realization Creditor might be permitted to sue for the debt directly 10. Publicity and notice to third parties Is any form of third party notice necessary? How should publicity take place? What is the date of publication? Should the registry be asset based or debtor based? What is the object of publication? What is the effect of publication? III. Principles of Good Legislative Design A. Paternalism and Hedonism Paternalistic – legislatures should impose distributive schemes of execution preferences by reference to criteria that do not always relate to bargains b/w debtors and creditors Hedonistic – let the parties agree to whatever they wish, subject only to previous agreements they have made Regime should facilitate the parties’ legitimate desires, not impose technical barriers B. Principles Relating to the Issuing of Security Logic of the scheme should be as simple as possible The same regime of secured creditors’ recourses should apply regardless of the origin or form of the security right Rules that mandate the presumption of an implicit intention should be avoided Imperative rules should be clear and comprehensive 24 C. Principles Relating to the Enforcement of Security Rights created should reflect the legitimate interests and expectations of creditors, debtors and third persons Creditors – fair recourse, low transaction costs, transactional finality Debtors – fair opportunity to redeem security, reasonable opportunity to reinstate the loan prior to realization, a realization regime which does not permit excessive penalty clauses Third persons – maximizing realization value of the property, obtain reimbursement for any improvements made to secured assets Rules should encourage responsible behaviour and liability should follow responsibility THE LEGAL NATURE OF A SECURITY RIGHT OR INTEREST I. Basic Forms of a Security Right or Interest Concept of security rights or interest is rarely comprehensively defined Art. 9 and PPSA defines security interest as an interest in property that secures payment or performance of an obligation, w/out regard to the form of the transaction, and w/out regard to whether the debtor or creditor holds formal title to the secured object Quite broad, often have to look at illustrative transactions and contextual considerations to understand reach of security A. Inventory of Security Rights and Interests 1. Execution preferences A right which the creditor has of being preferred to other creditors according to the origin of the claim C/l – found in Judgment Enforcement Acts and common law Arise by operation of law and are claimable only on the proceeds of a sale in execution Typically do not need to be registered or otherwise published Ranking is established by reference to the nature of the claim (2651, 2657 CCQ) Significant differences b/w c/l and QC 2650, 2657 CCQ – prior claims rank before the claims of all other creditors (including secured) BIA – distribution of the bankrupt’s estate is subject to the rights of secured creditors C/l – sale pursuant to judgment enforcement proceedings typically conveys only the rights of the debtor in the relevant assets and secured creditors outrank claimants w/ just an execution preference To get equivalent of QC, legislature must confer a non-consensual security or other property right (ex. Statutory lien) 2. Nominate security rights on or over assets of a debtor Security rights must be published b/c they may prejudice third parties Relative ranking of security rights or interests is usually determined on a temporal basis Super-priority is usually given to supplier creditors and lender purchase money financiers 3. Security rights involving retention or transfer of title in favour of a creditor Title retention transactions Suppliers Installment sale – seller reserves ownership of property sold to, and placed in possession of, a buyer until full payment Sale under a suspensive condition – property is sold to a purchaser but the seller retains title to the property until condition stipulated is realized (payment) 25 Promise of sale – promise by the seller to transfer title to the purchaser if and when paid in full Lease w/ option to purchase Security lease – seller acquires property chosen by lessee for sole purpose of leasing it Lenders – typically take title to the debtor’s property Mortgage and the sale w/ a right of redemption – borrower sells property to lender, subject to borrower’s right to reacquire property once debt paid Double-sale – D sells property to lender and repurchases it under installment sale Sale-leaseback Title transfer transactions Vendors Seller’s right of resolution (by operation of law) Sale under resolutory condition (by terms of K) Lenders Giving in payment clause – upon the happening of a condition, title is retroactively vested in the lender Promise of a sale to a creditor – D promises to transfer title to lender if in default 4. Collateral institutions of the law of obligations, property and civil procedure Preferences arising from principles of the law of obligations Compensation or set-off If a creditor owes money to a debtor, the two obligations are automatically extinguished to the extent of their common value Possessory or custodial rights Creditor asserts a custodial right over property actually owned by their debtors Creditor is most often already in possession of the property Contractual or voluntary subordination May agree to postpone rights in the proceeds of a judicial sale Preferences arising from principles of the law of property Rules of accession to movables permits certain creditors to obtain full payment of their claim even in the event of bankruptcy b/c they are attributed ownership of the property Preferences arising from principles of civil procedure The content of a debtor’s patrimony is modified in favour of certain creditors If property is household goods or employment instruments, the exemption can’t be set up against unpaid sellers of, or hypothecary secured creditors on, the property If the property is an alimentary allowance, pension benefit or employment income, it may be seized to pay a support obligation up to 50% of its value B. Characterization of Security Rights or Interests Classical security rights Charges Pledges Imperfect security rights Execution preferences Possessory liens and rights of retention Title devices that closely resemble a mortgage transaction (w/drawal of property to secure an obligation) Sale w/ a right of redemption 26 Commissary pact Double sales Sale-leasebacks Reservation of title Installment sale Hire-purchase Lease Finance leasing Resolution or rescission of sale C. Idealized Security Right or Interest Civil law – only transactions that involve disruptions to the principle of creditor equality are considered security devices Modern QC regime still consider title transactions not to be security devices (they are creditor preferences) C/l – mortgage regarded as security but not supplier title retention devices Modern regime recognizes both traditional security devices and title devices as security interests What is security – whatever the legislature and courts of any particular jurisdiction consider security to be at any particular moment II. Formal and Functional Approaches to Understanding the Notion of a Security Right or Interest Efficient security should be relatively easy to create, should be adapted to the credit needs of the debtor Ideal security should be effective, opposable to third parties Security right should be indefeasible Security right should be relatively easy to enforce Security in strict sense – creditor’s conditional right, exercised upon property belonging to another person, to extract the economic value of that secured property, and to get paid by preference over other creditors from the proceeds of that realization (functional or purposive definition) A. Rationale for Regulating Title Transactions as Security 1. Real Estate 19th C c/l – held that a mortgage was not an absolute transfer of title Necessary to preserve the principle of the equality of creditors Unjust enrichment Corrective justice Civil law – did not make the same conceptual leap Almost all secured transactions relating to immovables in QC were either by resolutory condition, right of redemption or deed of hypothec containing a giving in payment clause – permitted the creditor to assume ownership of the charged property in the event of default Legislative change after rash of foreclosures during depression – 60 day notice required Nadeau v. Nadeau 1977 (C.A.) - all variations of title transactions covered by the notice period 2. Personal property C/l – requires publicity for supplier retention of title transactions Civil law used to prohibit dispossessory security on movable property QC – if title passed by consent, it was possible to defer the passing of title to a date other than the date of delivery (installment sale) Experimented w/ fictitious pledges (nantissements) 27 3. Principles and practice Whenever a form of legal regulation is imagined in order to control the manner and form through which certain transactions may be pursued, if that manner and form of regulation imposes either transaction costs on creditors, or limits their capacity to exploit their market position, they will seek legal advice to design and deploy other legal institutions Whenever the description of the regulatory strategy depends on characterization of legal form, creditors will find ways to avoid that form by inventing new forms B. Possible approaches to regulating title transactions PPSA, art. 9 UCC – functional approach to security concept Characterizes the objective intention of the parties Substance over form QC - does not follow a functional approach 1. Alternative regulatory strategies Prohibition of title transactions In France, any attempt to use title security is illegal Restricted to the devices set out in civil code or in statute Only covers situations of lenders, not vendors Presumption of hypothec Principle that the security devices listed in the code are exhaustive and a general deeming provision that recharacterizes title transactions as hypothecs Substance of the transaction Opposability and enforcement regime of title security would be that of a secured transaction Approach of PPSA and hypothecs on immovables in Nadeau v. Nadeau Selective regulation of title transactions CCQ regulates title transactions selectively General principle of a restrictive enumeration of security devices, a prohibition of title transactions such as giving in payment clauses grafted onto security devices and the assimilation of certain vendor-oriented title transactions Freedom of contract Whatever title devices the parties can dream up are enforceable on their own terms 2. Policy arguments in favour of one or the other approach Freedom of K is not always evil – movement in commercial law results primarily from the inventions of practice But just relying on freedom of K puts debtors at the mercy of creditors Selective regulation encourages creditor forum shopping Presumption of security Clean, comprehensive mechanism for regulating secured transactions Restricts freedom of K and consensualism Onerous and ineffective b/c would require registration even for small sales Would create uncertainty about the true nature of many agreements and about the formalities needed to perfect it 28 Substance of the transaction Reduce the cost of credit for debtors – less uncertainty and risk of loss b/c every security right would be publicized by registration Simplicity and coherence – all creditors would know how to perfect and realize on their security Balance Facilitate commercial exchange C. Limits of Functionalism Some transactions are not intended to function as security but it may be necessary to incorporate some type of publicity and regulatory scheme High level of judicial understanding and skill to administer appropriately In some transactions where the equivalent of a security device is given by operation of law, the regulatory scheme applicable to consensual security may not be appropriate III. Legal Nature of a Security Right or Interest 2660 CCQ lists the basic characteristics of a security a right or interest vested in a person (the creditor) in certain property over which another (debtor) is titulary or contingent titulary of rights of use and enjoyment certain prerogatives over such property are made available to the creditor over and above rights made available to ordinary creditors in order to satisfy an obligation personally owed, or recognized or guaranteed as owed to the creditor A. A Right or Interest C/l – all that matters is that a right be vested Civil Hypothec is a real right (2660 CCQ) But may charge claims, universalities of property and future property despite fact that it is theoretically impossible to have real rights in these assets B. In Certain Property which Another is Titulary or Contingent Titulary of Rights of Use and Enjoyment Different regimes of security for movables and immovables Different regimes for security over corporeals and intangibles PPSA unified structure of security rights in personal property CCQ went further by providing a hypothec can charge both movable (objects and claims) and immovable property No longer necessary for the grantor of a security right to actually have a right in property – ex. may have an equitable interest C. Certain Prerogatives Over that Property 2660 CCQ – secured creditor acquires 3 rights over the secured property Right to closely monitor the dealings of the debtor w/ the secured property and the right to follow Right to exercise specialized recourses (right to take in possession and right to sell) Right to assert an indefeasible priority as against others PPSAs recognize an equivalent set of substantive rights 1. Right to follow Consequence of the fact that a security right is a proprietary right Security can’t be eliminated unless the secured creditor voluntarily waives its security (s. 28(1)(a) PPSA) 29 The rights of secured creditors persist in the proceeds of disposition of secured assets in the ordinary course of business Forced sale by a third party creditor C/l – purchaser takes the property subject to any interests which are senior in priority to those of the creditor conducting the sale QC – secured creditor’s preference does not follow the property but shifts to a preference against the proceeds of its sale 2. Right to exercise specialized realization recourses Exercise real actions and execute judgments in real actions directly against any property Take possession of the secured asset Private sale by the creditor Strict foreclosure or taking in payment Right to bring the property to a quasi-public sale that extinguishes other rights 3. A right to claim a preference in the proceeds of realization Secured creditors escape the baseline rule of creditor equality D. A Right that Secures the Performance of an Obligation – an Accessory Right Secures the performance of an obligation and does not normally divest debtors from continuing to enjoy their rights over the charged property Secured debtors may use, appropriate the fruits of, alienate, charge or improve the secured property but may not destroy, waste or deteriorate it or materially reduce its value to the prejudice of the creditor 1. Extinction and modalities of the principal obligation Security must support the performance of a personal right If the principal obligation is extinguished the security right will be extinguished If the principal obligation is affected by a modality, the security right will be affected by the same modality 2. Extinction of the security but survival of the primary obligation Where the secured object is expropriated, the principal obligation survives IV. Attachment, Publication and Priority of Security Rights Publication reflects the broad principle that security rights should be publicized to the general public – registration is the most usual means of publication, but it is not the exclusive means Mode and manner of publication may vary according to the type of secured asset Publication should not be necessary to establish the effectiveness of a consensual security agreement b/w the parties Third parties should be protected against the prejudice of an unpublished security right 2663 CCQ s. 9 PPSA – must be able to point to an express source of statutory protection or the security right will be effective even w/out publication (will be ineffective or subordinate to certain 3rd parties) Security rights rank according to their date of publication Exceptions: vendor’s hypothec or purchase money security interest 30 TYPOLOGIES AND OBJECTS OF SECURITY DEVICES I. Typologies of Security Devices A. Security as a Regulated Legal Institution Idea that security is a regulated legal institution is central in civil law (ex. 2664(1) CCQ) Security can exist only where permitted by law Formalistic elements for taking security must be respected Prerogatives flowing from security are also regulated both at the level of the secured creditors and at the level of the impact of the security on third parties C/l begins from proposition that commercial actors are free to deal w/ property rights as they choose Protections are codified in Bank Act and PPSA B. Classification According to Source: Consensual and Non-Consensual Security Concept of hypothec in CCQ allows for a fundamental distinction to be drawn b/w consensual hypothecs and those that arise by operation of law (conventional and legal – 2664(2) CCQ) Conventional hypothec is created by K – 2681 CCQ Legal hypothecs – 2724-2732 CCQ Claims of the State Construction hypothecs Condominium hypothecs Judicial hypothecs C/l does not draw formal distinction b/w consensual and non-consensual security interests PPSA only deals w/ consensual security interests Non-consensual security interests are found in adhoc c/l and various statutes (ex. Construction Liens Acts , Mechanics Liens Acts) C. Classification According to the Mode of Constituting the Security: Possessory and NonPossessory Security Possessory pledge as a distinct form of security still exists in many legal systems But 2665(2) CCQ has reconceived it as sub-species of movable hypothec S. 3(1)(b) PPSA – mentions the pledge as an illustrative transaction that creates a security interest Distinction b/w possessory and non-possessory security S. 12(1)(c), 10(1) PPSA – delivery of possession of the secured object to the creditor (or a 3rd party holding for the creditor) is treated as an alternative to written security agreement for satisfying the formalities of attachment for a security interest 2702 CCQ – movable hypothec w/ delivery is granted by delivery of the hypothecated property to the creditor (or a 3rd party under 2705). If there is no delivery, movable hypothec must be in writing or it is null (2696) Possession of the secured property by the secured creditor also serves to publish the security (s. 24 PPSA, 2703, 2705 CCQ) In civil, some kinds of security can only be granted by a notarial instrument Immovable hypothecs – 2693 CCQ Hypothec to secure payment of bonds issued in favour of a person holding the power of attorney of creditors C/l – Statute of Frauds requires some form of signed memorandum as a pre-condition to the proprietary effectiveness Legal security usually does not depend on the existence of either writing or delivery Still need registration of notice confirming existence – 2725(2), 2727(2), 2729, 2730(2) CCQ 31 Non-consensual security usually arises from specifically defined circumstances and not from a juridical act undertaken by the debtor D. Classification According to Object Hypothec can charge corporeal and incorporeal property, movables and immovables – 2660, 2665, 2666 CCQ As category of movables is residual (907 CCQ), range of property is unlimited (in principle) C/l – freedom of K, parties, in principle, are free to adapt or create property institutions to secure different types of assets Category of personal property is unlimited (starting point) II. Objects of Security A. Movables and Immovables C/l – regimes regulating security over land and movables is independent Consequences of division of regulatory framework Modes of constitution differ Registration and publicity and priority regimes differ Logic of enforcement differs CCQ – treats security over immovables and movables according to a unified regulatory framework but there are differences (2660-2692 CCQ) Most important regulatory differences Separate registries for publishing security in movables and immovables Formalities for creating movable and immovable securities Registration effected against a specific parcel of land is required to extend security over an immovable to after-acquired movables Only security on movables may be published by possession Rule relating to the effect of an ordinary course of business disposition of secured assets only applies to movables CCQ establishes 6 categories of immovable property 900(1) – land and its integral parts 900(2) – plants and minerals as long as they are not separated from the land 902 – integral parts of an immovable temporarily detached and destined to be put back 901 – immobilized movables that lose their individuality 903 – movables that are permanently physically attached to an immovable w/out losing individuality 904 – real rights in immovables as well as actions to assert such rights CCQ defines movables in 905 and includes energy (906) and personal rights (907) C/l property considered to be real estate: Land and buildings Chattels affixed to the land Incorporeal heriditiments Crops are fruits not yet severed C/l considers all other property to be personalty B. Immobilized movables (incorporated materials and fixtures) Accession – adjoining of distinct assets or property so as to form a new asset Artificial accession – constructions, works, plantations (900 CCQ) Natural accession – alluvion, accretions, property added by a river changing course (965-970 CCQ) Hypothec extends to everything united to the property by accession (2671 CCQ) If crops are planted, buildings erected, etc, owner of immovable acquires these by right of accession 32 Distinction b/w: movables incorporated into an immovable so as to lose their identify – deemed to change their juridical nature and become immovable (901 CCQ) pre-existing hypothec on land automatically extends to them (2671) and any movable hypothec charging the property prior to immobilization is extinguished (2795) 2796 – creditor w/ hypothec on such a movable can re-register the hypothec against the immovable but this immovable hypothec ranks according to date of registration in land register (2951) movables that don’t lose their individuality are deemed immovable for as long as they are attached (903) a hypothec charging the immovable will extend to them (2671) if the movable was charged w/ a movable hypothec prior to its attachment to the movable, it retains its movable character (2672) c/l recognizes distinction b/w incorporated materials and fixtures incorporated materials – considered to have irrevocably lost their character as personal property and to become part of the realty extinguishes security taken in the goods prior to incorporation need to take a land mortgage to secure claim fixtures – don’t lose their identity separate security interest taken in fixtures is regulated by PPSA (definition of goods includes fixtures) and there are specialized enforcement rules and a specialized priority regime (s. 36, 49 PPSA) priority rules distinguish b/w security interests that attach to goods before they become fixtures and security interests taken in existing fixtures before – priority over any existing 3rd party interest in the land after – subordinated to any interest acquired in the land after the goods were affixed but before notice of the fixtures interest was published in the land registry and subordinated to existing registered land interests enforcement right of removal on default but can’t cause greater damage or injury to the land or cause greater inconvenience than necessarily incidental must reimburse 3rd party who had a interest in the land 3rd parties w/ subordinate interest in the realty can retain the fixtures in situ on payment of the lesser of the amount secured and the market value that the goods would have if severed defined at c/l but PPSAs exclude building materials C. Movables attached to realty which retain their character as movables Stack v. T. Eaton Co. (1902) (Div Ct) – assumption that articles affixed to an immovable even slightly are considered part of the land Subject to reversal if the degree and object of annexation is that it was intended to continue as a chattel Err on side of caution an assume fixture – publish notice of security in land registry 903 – immovables as long as they remain there (permanence of attachment) D. Mobilized immovables (crops) 900(2) CCQ – plants and minerals are immovables until separated or extracted from the land 900(3) CCQ – prior to severance, can be separately sold as movables (movables by anticipation) 33 can charge movables by anticipation w/ a movable hypothec before they become movables (2698) but the hypothec only takes effect when they become movables w/ a separate existence and ranks by date of registration c/l – trees and minerals prior to severance or extraction are part of the real property to which they are attached attachment of security interest is postponed until severed or extracted (s. 12(4) PPSA) industrial crops have hybrid character crops are part of definition of goods (s. 1 PPSA) any security interest in the crops attach when the crops become growing crops (s. 12(4) PPSA) get priority over a person w/ security in the land but must file notice of crops interest in land registry (s. 37, 49 PPSA) E. Accession to movables (accessions, commingled goods) CCQ – where ownership changes as a result of specification or confusion, any hypothecs on the property should be maintained Specification – worker or artisan given raw material by a client w/ instructions to make an object (972 CCQ) Need to file notice of preservation of the hypothec under the name of the new owner w/in 15 days of being informed of the change in ownership (2700) Confusion – mixed or commingled inventories or fungible property, ownership passes to the person whose materials were more valuable (971) Conflicts b/w commingled hypothecary creditors solved by reference to the date of each subsisting hypothec provided that notice filed under the name of the new holder (2700) Adjunction – property united in such a way as to form a new object and to make separation costly (971) Ownership passes to the person having contributed most to the new object, either by labour or materials (973) 2673 creates something like a vendor’s right which will follow the transformation of the property these hypothecs rank concurrently , as of the date of the first registered hypothec on any part of the property forming the new movable, in proportion to value of commingled property s. 38 PPSA - accessions preserve the effectiveness and separate enforceability of security interests taken in accessions (s. 36 PPSA) s. 39 PPSA – commingled goods separate security interests in the component goods carry over to the new product priority rules (s. 37 PPSA) F. Fruits and revenues; rentals; capital product Natural increase of animals are fruits, not capital Fruits and revenues may be hypothecated Revenues always have a separate existence from the object that produced them Rentals generated by the lease of an immovable are movable but the hypothec is deemed to be an immovable hypothec (2695) C/l – mortgagee of leased land is not per se entitled to the rents from the property unless they take an assignment by way of security of the rents ON PPSA applies to the assignment of rights in payment owing under a mortgage, charge or lease of land where these rights are assigned separately from the land while the other PPSAs exclude these. G. Corporeal and incorporeal property Both corporeal and incorporeal property can be hypothecated (2666 CCQ, s. 1 PPSA) Real rights may be exercised w/out intervention of 3rd persons 34 Claims are personal rights and require additional steps to make security interests over them effective 2710-13 CCQ s. 41 PPSA H. Specifically identified property and universalities Floating charge – generic categories of assets susceptible to a general security right Field warehouse – security over a category of assets was given through a documentary pledge Art. 9 UCC simplified the grant of security over universalities (imported and adapted into PPSAs (s. 10)) Possible to grant a hypothec over specifically identified property or over a universality of property (2665(1), 2666) I. Present and future or after-acquired property All provinces allow security to be taken in the debtor’s future or after-acquired property w/ effect at inter partes and 3rd party levels Security may be taken over a specific item or a universality of future or after acquired property and the security attaches as soon as the debtor acquires rights in the collateral (s. 13, 12(1) PPSA) Priority is determined by registration w/out regard to the time of attachment (s. 35(1) PPSA) For real property, must be registered against the specific parcel to be effective Rank of a hypothec on any subsequently acquired immovable is the date of registration (2949(1)) For immovables, the date of the hypothec is postponed to the later of the date that the grantor acquires the right or the hypothec is registered against that immovable (2948(1), 2949(1)) Registration of the hypothec may precede the grantor’s acquisition of title (2948) Movable hypothecs covering future and after-acquired movables (2670, 2950, 2954) Ranks from the date of registration J. Consequences of the rationalization of security rights Compress into a common mould several discrete types of transactions: PPSA – nominate security and title security devices CCQ – consensual and non-consensual transactions, movable and immovable security Treats security on universalities in more or less the same way as security on specified present assets Common regulatory framework for security over corporeal property and security over personal rights or claims Assimilate non-possessory security constituted by agreement to security constituted by debtor dispossession SCOPE OF SECURITY, OBLIGATIONS SECURED I. Rights and Property not Susceptible to Security A. Property exempt from seizure by ordinary creditors 2668(1) CCQ – property exempt from seizure may not be hypothecated 2668(2) – furnishes main residence and is used by and is necessary for the life of the household all provinces except Ontario share QC’s view 1. Proposal to exempt certain goods from seizure by secured creditors Aimed at avoiding the complete destruction of the debtor as an economic and social entity 35 Consumer goods w/ a value below the realizable values typically found in exemption statutes have little or no utility as collateral in usual sense – value lies in the in terrorum effect of the secured creditor’s power to threaten instant seizure. Exemption should not apply to pmsi Assets that should be exempt: household furnishings, car to get to work, medical or health aids, consumer goods (w/in reason, below a certain amount) S. 67(1)(b) BIA excludes exempt property from the property of the bankrupt for the purposes of the Act, including the distribution scheme in s. 136 Limited category of assets Does not apply to pmsi Allow secured creditor to enforce its security where the realizable value exceeds the value of the exemption on condition that the amount of the value of the redemption be returned to the debtor B. Consumer assets CCQ has restrictions on the capacity of persons not carrying on an enterprise to grant movable hypothecs w/out delivery (2683), to grant hypothecs on universalities of property (2684), to grant hypothecs on movables represented by a bill of lading (2685) or to grant floating hypothecs (2686) Note – articulated by reference to the character of the debtor PPSA – invalidation of non-purchase money secured transactions involving after-acquired consumer goods (except in Saskatchewan) s. 13(2) PPSA Note – focus on the debtor’s subjective use of the secured property Concerns raised by deleting the provision: Situational monopoly – will the debtor remain tied to the secured creditor or can debtor go to new lender to pay off the first creditor? Possible distributional impact – totality of a consumer debtor’s tangible estate potentially will go exclusively to the first in time all assets secured creditor to the exclusion of the general creditors Increase transaction costs in pmsi context – pm financiers don’t have to worry about there being a prior lender whose interest will defeat their interest if they fail to perfect in the required time, but if deleted, it increases the risk of subordination for pm financiers who fail to comply w/ the preconditions for pmsi status Increase lack of uniformity b/w CCQ and PPSA in consumer goods financing (recall: purchase money financing by way of retention of title security is the only form of secured consumer credit in CCQ) C. Farm assets Farm debtors viewed as particularly vulnerable (historically) Can’t give security interest in crops grown more than one year after the security agreement has been executed (s. 13(2)(a) PPSA) No similar provision in CCQ Argue that it should be deleted – increased transaction costs and risks of the rule contributes to the general non-availability of crop financing under PPSA, limiting farmers to Bank Act financing D. Accessory Rights Not possible to hypothecate a servitude as a separate patrimonial right b/c of its accessory character E. Hypothecating a hypothec (security in security) Hypothecary right itself has intrinsic value C/l – no policy against the idea of security in security as such but difficulty in determining which aspect of the regulatory regime applicable to movables financing applied to the transaction (before PPSA) 36 Under PPSA, secured creditor acquires the segregated bundle of rights of the debtor pursuant to the relevant security agreement – the right, on default of debtor, to collect any monetary payments owing by the 3rd party as well as the right to enforce any real or personal rights held by the debtor against the 3rd party to secure that obligation PPSA treats chattel paper differently: Chattel paper – one or more writings that evidence both a monetary obligation and a security interest in, or a lease of, specific goods or specific goods and accessions (ex. conventional retail conditional sale K) Chattel paper has acquired a quasi-negotiable character such that delivery of possession of the chattel paper came to be accepted as effective to transfer the rights which it represents See s. 5, 7, 17, 24, 26, 29, 31, 41, 56 F. Inalienable property (new property) Law declares certain property to be inalienable As hypothecation is an act of alienation, inalienable property can’t be hypothecated Types of new property – licenses, permits, annuities, government prestations, etc. Inalienable by determination of civil law – action in damages resulting from the violation of personality rights and other extra-patrimonial rights, rights of use and habitation (1173) and property not subject to private appropriation (913-916) Prohibition may or may not be renounced Hypothecation may be permitted under the constitutive law provided that administrative or ministerial approval is obtained (ex. agricultural marketing board quotas, transport licenses, etc.) Various pension rights not yet opened and life insurance policies w/ irrevocable designations of beneficiaries can’t be hypothecated Sask PPSA – only one to explicitly clarify that a security interest may be taken in new property despite the existence of statutory restrictions on its alienability Empowers a secured party to enforce a security interest in a licence by giving notice to the licensee and licensor but the licensee’s rights may be disposed of only in accordance w/ the terms and conditions under which it was granted Reflects consensus among c/l analysts on the appropriate resolution of the issue and is consistent w/ judicial policy in caselaw (except ON) II. Impact of division of powers in federal systems Provinces – property and civil rights Federal – navigation and shipping, banks and banking, intellectual property, Indians and lands reserved for Indians Paramountcy doctrine A. Bank Act security S. 427-429, 435 empowers chartered banks to loan $ on the security of a borrower’s present and afteracquired corporeal movables, and establishes an attachment, publication, priority and enforcement regime Encompasses virtually every class of business debtor and virtually every form of tangible personal property Historical policy considerations – to overcome the barriers to the availability of capital created by the complexity, diversity, and rigidity of provincial lending regimes (fell w/in banking power) Principal differences w/ provincial regimes: Mode of publication by registration - s. 427(4)(a), security is published by the filing of a notice of intention to take a security interest not more than three years before the security agreement is entered into 37 Publication venue – filed in the appropriate office of the Bank of Canada (s. 427(5)) (Note that security in hydrocarbons and minerals in registered in provincial land registry s. 426) Priority consequences of failure to publish – s. 427(4)(a) renders the Bank’s security void as against creditors and as against subsequent purchasers or mortgagees in good faith Attachment and priority – s. 427(2) orders priority among competing secured creditors according to the order in which the security agreements are entered into, subject to compliance w/ filing Bank will be subordinated to any prior non-bank security even if the non-bank security is not published pursuant to provincial law Banks avoid this by securing a single obligation w/ security interests arising under both systems Creates policy issues b/c other creditors can’t pick and choose and creates uncertainty for other creditors – argue that it should be repealed B. Security in lands reserved for Indians Indian Act imposes a broad prohibition on the alienation of reserve land (s. 37(1)) (therefore it is not available for secured financing) S. 29 prohibits the seizure of reserve lands under legal process S. 89 - real and personal property of an Indian or band situated on a reserve is not subject to a charge, pledge, mortgage, attachment, levy, seizure, distress or execution in favour of or at the instance of any person other than an Indian or a band Inalienability relates to sui generis concept of aboriginal title Reserve lands declared as designated lands can be leased for purposes of commercial development w/out losing their reserve status and the leasehold interest in the lands can be mortgaged or seized by creditors – not used extensively Establishment of financial institutions owned and operated by aboriginal interests themselves – but they are affected by the prohibition too b/c the exception is for individual Indians or unincorporated bands Tripartite trust deed arrangement: Individual band members transfer the rights represented by the certificate of possession to a three person group of Indian trustees Transfer registered w/ approval under s. 24 On repayment of the loans, the rights represented by the certificate are re-transferred to the borrower On default, rights in the parcel are sold pursuant to a bid process and right to purchase is limited to the members of the community C. Security in movables located on lands reserved for Indians No general status-based immunity from civil suit in the ordinary courts S. 89 aimed at insulating the reserve-based property of Indians from encroachment by non-Indians Determination of where the property is situated for the purpose of the exemption: If it is clearly located on or off the reserve, end of story If mobile goods, the relevant test is whether their paramount location is on or off the reserve as determined by the overall pattern of safeguarding and use For intangible assets, apply principle of proximity (examine all relevant connecting factors) Debtor can’t deliberately re-locate off-reserve assets to an on-reserve location to take advantage of s. 89 Prohibition on attachment and seizure does not apply to claims by an Indian or band S. 89 does not preclude attachment or seizure by a non-Indian who is acting as the agent/rep or trustee of an Indian creditor, or who is relying on a subrogated right to payment by virtue of having satisfied an obligation originally owed to an Indian creditor S. 89 does not apply to a seller who takes or reserves an interest in property sold on credit as security for part of all the unpaid purchase price Corporation is not an Indian band even if it has its registered office on a reserve and even if its s/h are registered Indians 38 S. 90 deems certain property to be located on a reserve for purpose of s. 89, ex. transfer payments from the Crown D. Security in ships All maritime nations have a system for ship registration Facilitates the enforcement of international shipping standards Facilitates the simplification and reliability of commercial transactions involving ships Canada Shipping Act – ships are registered at a Cdn port and the property in a ship is divided into 64 shares Registration only mandatory for vessels which exceed 15 gross tons in size (smaller vessels may be registered) May register vessels under construction Don’t confuse registration of title w/ mandatory licensing scheme for small motor crafts (not open to public searches and don’t record encumbrances) S. 37(1) – only the owner of a ship, or a share of a ship that is registered or recorded may give the ship or share as security for a mortgage to be registered under the Act Unregistered vessels and unrecorded vessels are regulated by provincial regime Mortgage regime: Registration effected by filing prescribed form S. 39(1) – priority is determined according to date and time of registration S. 42 – mortgage is not affected by the bankruptcy of the mortgagor after the date of registration S. 41(1) – mortgagee has absolute power, subject to any limitation set out in the mortgage, to sell the ship or the share subject to the mortgage S. 41(2) – limits the power of sale where there is more than one registered mortgage in the same ship or share Need agreement of every prior mortgagee or an order of Federal Court S. 40 – protects the mortgagor’s interest in any surplus after the sale Legal or non-consensual security rights: Maritime liens to secure claims for damage done by a ship in a collision, the rendering of salvage services, the failure to pay wages of the master or crew when due Statutory right in rem Possessory lien that entitles a creditor who has performed services in relation to maritime property to retain possession until paid S. 427(i)(o) Bank Act – chartered banks can lend $ and make advances to fishers on the security of fishing vessels, fishing equipment and supplies or products of the sea, lakes and rivers E. Security in Intellectual Property Fed law does not expressly address security in IP, leading to uncertainty in the interplay b/w the general provincial secured transaction regimes and fed law There are registries for IP rights but these are for the holders of the rights (not designed for secured transactions) How would it be organized? Title based transaction? Would the security interests be governed by fed or prov? III. Security by Real Subrogation or tracing into Proceeds of the Original Collateral Security agreement will normally specify the property that is covered Can be by individually identifying property Can be by identifying a generic or sub-generic category Can be by specifying that only present property is included 39 Can be by specifying universalities in both present and future property Situations involving tracing of proceeds or real subrogation Ordinary course of business dispositions of property subject to a security Redemption and re-issue of share certificates on corporate reorganization Where property is expropriated Where property is destroyed and there is an insurance payment CCQ deals w/ transformation of corporate securities (real subrogation 2674-2677) PPSAs – a security interest in the proceeds vests automatically Distinction b/w a secured creditor’s right to follow the original collateral and to trace the proceeds of its disposition (s. 28 PPSA) (derived from Art. 9) Following – identification of the original assets in a different place or time, the security interest continues unless the secured creditor authorizes its disposition free of the security interest (s. 28(1)) Tracing – identification of a new assets as the exchange product of the original collateral, the tracing claims arises automatically (s. 28(2)) Following and tracing rights are cumulative, not mutually exclusive but the amount secured by the two interests is limited to the value of the collateral at the time of the disposition, not the total debt secured Definition of proceeds (s. 1) is broad (but don’t confuse w/ situation where original collateral is processed or commingled w/ other property) Clearly includes later generation proceeds Immovable proceeds are excluded so as to avoid any interference w/ the registration and priority values of land law The relevant property must be identifiable or traceable Non-ON PPSAs – debtor must have acquired an interest in the proceeds Sask C.A. – identifiable refers to the ability to point to the particular property obtained by the debtor as a result of the dealing w/ the original collateral, while tracing refers to the situation where that property is commingled w/ other property so that its identity is lost Re Hallett’s Estate - debtor is presumed to w/draw his or her own $ first so as to leave proceeds intact in the account Lowest intermediate balance rule – when the mixed account is subject to a series of w/drawals following deposit of the proceeds to the point where the balance falls below the value of the proceeds presumed to be left in the account under Re Hallett’s Estate, if the debtor deposits further funds, the value of the tracing claim can’t exceed the lowest intermediate balance If w/drawn funds are used to acquire other property, the secured property may be able to trace its proceeds claim against the other property Tracing is unnecessary where the secured creditor takes a general security interest in the debtor’s present and after-acquired personal property (not always feasible) Proceeds claim is necessary to enable the inventory financier to preserve its super-priority rights in the proceeds against prior secured parties Expect that inventory will be sold – that’s the whole purpose of it! PPSA wants to encourage pmsi financing (fair to debtor b/c opens up greater access to financing, doesn’t have to rely on the same creditor) proceeds claim is limited by two policy considerations – the need to maintain certainty in the banking and payment system and the need to preserve the ability of solvent businesses to pay their creditors on an ongoing basis despite the existence of a security interest in the source of those payments should you get proceeds by operation of law or should you have to get legal advice to cover yourself? 40 IV. Obligations that may be Secured A. Types of obligations secured All types of obligations may be secured Exceptions: obligations not enforceable b/c contrary to public order and obligations that can’t be reduced to a monetary equivalent Obligations arising by K or by operation of law Obligations to do, not to do, or to give Simple obligations, or obligations affected by a modality such as a term or a condition Present or future obligations Obligations contracted personally and obligations arising collaterally Fixed obligations or indeterminate obligations B. Indeterminate obligations Extent of obligation must be determinate at the moment that the security is sought to be enforced C. Monetary obligations Either related to the loan of $ or the balance of a purchase price due to a seller May be a future obligation D. Interest Where the obligation secured bears interest, the security will also secure all interest due upon it, subject to the limitations of Interest Act S. 6 – no interest shall be recoverable unless the hypothecary deed contains a statement showing the principal amount and the rate of interest chargeable is calculated on an annual or semi-annual basis but not in advance E. Costs of recovery Security usually covers legitimate costs incurred for recovering the loan or conserving the security $ spent by creditor to pay insurance charges, storage fees, tax levies or repairs to the property are not covered unless stipulated common to stipulate additional security from 15-25% of the initial loan as security to cover costs accessories to the obligation (penalties, acceleration clauses, etc.) have to be specified in the security agreement can’t enforce both the principal and the penalty CONSTITUTION OF SECURITY – PARTIES I. Theories of Parties to Security Agreements Security agreement is a collateral arrangement b/w a secured creditor and the grantor (secured debtor) of the security which secures performance of an obligation Considerations: Most often security is consensual (negotiated), but it may be non-consensual (operation of law) Most often the secured creditor and the secured debtor will be the creditor who gave value and the person who received the value but not always the case. Secured creditor may be a person who has purchased secured debt Secured debtor may have granted security in order to secure an obligation of another person Most often there are no limitations on who may be the debtor of a secured obligation but there are limitations: 41 Minor or person of diminished legal capacity Certain categories of debtors are not permitted to grant security over certain categories of assets (consumers over consumer goods, s. 427) Certain types of debtors are only permitted to grant certain types of security over certain types of assets (QC, person not carrying on an enterprise can’t grant creditor in possession security over movable property) Most often there are no limitations on who may be the creditor of a secured obligation but there are limitations: Some types of consensual security may only be taken by certain types of creditor (s. 427) In non-consensual security, the law will specify the creditor II. The Debtor A. Consensual security 1. The secured debtor of the secured obligation of another Security may be granted to secure the obligation of a 3rd person (2681(2) CCQ, definition of debtor s. 1 PPSA) Unless the 3rd person specifically agrees to be bound personally, liability is limited to the eventual seizure and sale of the property subject to the security 2. Capacity The person constituting the security must have the legal capacity to do so (2681(1) CCQ, c/l) Those who are legally incapable are legally incapable of granting security over their property 3. Titulary of rights in the collateral Nemo dat – person can’t transfer greater rights in a thing than she has B/c creation of security implies the charging of the grantor’s property, the grantor must be titulary of the right which the security charges S. 12(1)(b) PPSA – the debtor must have rights in the collateral before a security interest can attach to it Nemo dat and PPSA priority rules operate to protect the interest of a third party owner of an asset subjected to a security by a debtor whose rights in it are less than full ownership Not necessary for the grantor to have a presently existing absolute right in order to grant security but any security granted over that right will be subject to the same limitations as the grantor’s title (2682, 2670 CCQ, s. 13 PPSA) If a person’s right in property is open to an attack in nullity, then the person acquiring the security does so subject to the contingency Nemo dat rule subject to an important qualification: Operation of publication rules may result in a secured creditor acquiring a better right in the secured asset than the debtor has to give (registration required as a pre-condition to the effectiveness of the security against third parties, including competing subsequent secured creditors) C/l land registry statutes – subordinate the holder of an unpublished mortgage to a subsequent published mortgage only if the holder of the subsequent mortgage acquired her interest w/out actual knowledge of the prior mortgage Registry is merely depository of instruments C/l land title systems – off-record interests are allowed no or very minimal legal effect, whether or not the holder of a registered interest has knowledge of them PPSA extends beyond conventional security devices and if the holder of the security right does not publish, it will be subordinated to a variety of 3rd party interests even though the debtor had at best only a possessory right in the assets or had already disposed of all its rights 42 4. Fraudulent conveyances and preferences law Debtor’s capacity to grant an effective security is qualified by the rules governing fraudulent conveyances and unjust preferences 5. Particular restrictions affecting certain kinds of debtors C/l – prohibition on the grant of security in after-acquired consumer goods and in future growing crops (s. 13 PPSA) (limits granting of security by consumers and farmers) CCQ imposes limitations relating to whether or not the grantor carries on an enterprise (2683-2686) Carrying on an enterprise – producing, administering or alienating property, no requirement that the activity make a profit, no business purpose requirement Movable hypothecs w/out delivery 2683 CCQ – limits the categories of debtors who may grant movable hypothec w/out delivery partnerships, legal persons, natural persons carrying on an enterprise Hypothecs on universalities on property 2684(1) restricts the capacity to grant a hypothec on a universality to a person or trustee carrying on an enterprise Hypothec on property represented by a bill of lading and floating hypothecs 2685 – only a person carrying on an enterprise may grant a hypothec on a movable represented by a bill of lading Why doesn’t it mention trustee? Nothing in 2041-44 indicates need for such restriction Is it meant to suggest that other forms of documentary pledge transactions are prohibited or that they may be undertaken by persons not carrying on an enterprise is uncertain Only a person or trustee carrying on an enterprise may grant a floating hypothec on the property of the enterprise Regime of floating hypothecs (2715-23) B. Non-consensual security Only those debtors who are debtors of the principal obligation to which the security attaches can be debtors of non-consensual security C. Assumption of property charged w/ a security Where security over an object is granted by a person authorized to do so and the property is then sold before the principal obligation is paid off, the security, as a general rule, continues to charge (follows) the property sold Compare 2683 and 2701 CCQ III. The Secured Creditor A. Consensual security If the creditor can be the titulary of the principal obligation, there ought to be no reason why the creditor may not secure that obligation by a security device Exceptions: C/l – pawnbrokers must be separately licenced and are excluded from the enforcement provisions of the PPSAs (regulated under a different regime) S. 427 can only be taken by chartered banks 43 B. Non-consensual security Only those creditors who are creditors of the principal obligation to which the security attaches can be secured non-consensual creditors IV. Rationale of Restrictions Non-consensual – policy control is put in place primarily by identifying the type of obligation that can give rise to the security in question Consensual – focus is more on who is the debtor Civil law traditionally more paternalistic than c/l CONSTITUTION OF SECURITY – FORMALITIES I. General Theory of Formalities Consensualism is the basic rule of K – K is formed as soon as the parties have agreed to it but some formalities may be imposed A. Policy justifications for formalities 1. Inter partes justifications Three principles: Evidentiary – written deed constitutes a permanent written record of the transaction which can be used as evidence of the contents of the agreement, avoid later disputes Cautionary – the formality of the occasion will cause the hypothecary debtor to think twice before entering the agreement Channeling – formalities for granting security prevent people from confusing the deed of hypothec w/ other deeds None of the above actually support the requirement of written form Current practice of using standard form documents does not ensure equilibrium b/w the parties in noncommercial settings If we are concerned w/ substantive equity, better to impose the contractual form In commercial settings, aren’t the doctrines of equity and good faith in K more effective? 2. Third party justifications General idea – provide a check on collusion b/w debtors and creditors that would defraud others B. The timing of formalities 1. Ex ante formalities Directed at ensuring that contractual capacity of persons who grant security Some incapacities can be overcome by following certain authorization formalities which are extraneous to the grant of security itself 2. Contemporaneous formalities Imposed at the time the security agreement is signed as a pre-condition to the effectiveness of the security right itself Form – agreement be in writing; that it be in notarial form; statutorily-ordained form Physical transfer of custody of the collateral 44 3. Ex post formalities Related to the debtor’s rights in the collateral during the currency of the security agreement, or the secured creditor’s rights at this same time Relate to requirements imposed on creditors at the time of enforcement (giving of advance written notice of enforcement) Ex. in CCQ, must file notice in registry to enforce against the debtor, making it difficult to separate publication from constitution C. Types of formalities 1. Security constituted by a writing C/l maintains the principle of consensualism – except for specified types of secured transactions, no writing is required to constitute the security Mortgages of land and other secured interests registered against land Statutes of Fraud- written note or memorandum evidencing the agreement and could be dispensed of it there was part performance Still true in theory in land registry systems but they are in writing as a matter of practice b/c in some provinces a copy of the mortgage agreement must be delivered to the debtor w/in a stipulated time (note – non-compliance is only a $200 fine) For movables, c/l does not impose any formalities to constitute the security b/w the parties PPSAs – non-possessory security interest is enforceable against a 3rd party only where the debtor has signed a security agreement that contains a description of the collateral (s. 10(1)(b)) but as b/w the parties, the security attaches w/out any writing or other formality (s. 12(1)) Art. 9 requires writing (similar to CCQ position) CCQ imposes different forms of writing for different kinds of hypothecs: Any type of conventional hypothec may be evidenced in writing Immovable hypothecs must be granted by notarial deed en minute (2693) as well as hypothecs on rents produced by an immovable (2695) Movable hypothecs w/out delivery may be granted either by a notarial deed or by a private writing (2696) Hypothec originally created over a movable may be continued as against an immovable into which it was incorporated (2796) by simple registration of notice (2951(3)) Hypothec securing payment of bonds or debentures in favour of a person holding the power of attorney of creditors must be created by notarial instrument en minute (2692) Failure to respect formality means the hypothec is an absolute nullity even as b/w the parties (2692, 2693, 2696, 2702) 2. Security constituted by registration In western land title statutes, charge doesn’t take effect even b/w the parties until it is registered In other land titles legislation, registration is only necessary to establish priority (Ont Land Titles Act, s. 93) 3. Security constituted by delivery In c/l or civil law today, can’t create security over land by simply transferring possession to a creditor Pledge of movables: PPSA – for the purposes of attachment of the security b/w the parties, delivery of possession is not necessary but it operates as a substitute for writing to make it enforceable against 3rd parties (12, 10(1)) CCQ – delivery of the collateral is necessary to constitute the pledge and replaces the writing formality (2702) 45 Hypothecs w/ delivery may charge specifically identified property, or a universality of property represented by a bill of lading (2708), over a specifically identified present claims, or over a universality of present claims (2710-2711) 4. Formalities for constituting non-consensual (legal) security Different kinds of security or security-like institutions: Constituted by the possession of a creditor (possessory liens in c/l, right of retention in civil law) Constituted simply by a certain kind of K or juridical situation having arisen but no formalities needed (pure execution preferences) Ex. construction lien (CCQ 2627) – no need to clutter the registry Ex. maritime liens Ex. vendor’s prior claim (2651), retainer’s prior claim (2652) Arises from a K or juridical situation but not deemed to be constituted until registered (vast bulk of legal hypothecs in CCQ) In CCQ, all types of legal hypothecs require registration of a notice confirming their existence to be opposable against 3rd parties (2725(2), 2727(2), 2729, 2730(2)) Three also require publication by registration in order to be constituted: Statutory liability towards the state or a legal person constituted in the public interest (2725(1)) Assessment from a syndicate of co-owners of an immovable held in divided co-ownership for common expenses or contingency fund (2729) Judgment awarding $$$ (2730(1)) In c/l, some provinces allow creditors of $$$ judgments to register their judgment to get a priority position but recovery of the of the judgment itself does not create the security, security only arises when the judgment is registered II. Constituting the Security Agreement w/ a Writing A. Timing and form of the writing Writing need not be contemporaneous w/ the agreement , but in this case, enforceability as b/w the parties occurs when the required formality occurs 1. Immovable hypothecs Deed must be in notarial form and the property must be specifically identified in the constituting deed (2693, 2694) 2693 – applies to immovable hypothecs not hypothecs on immovables, so does not apply to reregistrations under 2951 but does apply to hypothecs on rents produced by an immovable Deed must specify the amount for which the hypothec is granted (2689) 2. Movable hypothecs w/out delivery Can only be created by a person who is exploiting an enterprise and the hypothec may only charge the property of the enterprise (2683) Exception: road vehicles Must be constituted in writing (2696) Only the hypothec must be in writing, any collateral covenants, etc of the obligation can be oral (but best to be in writing) Only the hypothec must be granted by a writing – it is possible that a hypothec w/ delivery (2702) can be later transformed into a hypothec w/out delivery (2707) and there is no requirement that the hypothec be then evidenced by a writing in order to be registered as a movable hypothec w/out delivery 46 3. Real estate mortgages and charges Registry Act – timing and form of the required writing will be controlled by the need to register the document Land Titles Act – typically describes the content of the documents that must be tended to the registrar 4. PPSA security interests Writing not necessary to constitute the security b/w the parties but necessary to make it opposable to 3 rd parties Under s. 12, compliance w/ the writing requirement in s. 10 is a condition for attachment of the security interest against 3rd parties Under s. 19, a security interest is not perfected until it has attached and is registered or otherwise perfected (if you don’t satisfy writing requirement in s. 10, security interest remains unperfected and is subordinated to certain classes of 3rd parties under s. 20) Priority b/w security interests in established in s. 35 and dates from the time of registration regardless of when competing interests attached as long as they have both attached by the time of the conflict B. Content of the writing Typically related to the obligation secured and the collateral charged 1. Contents of deeds of immovable hypothecs Obligation secured has to be clearly specified The immovable hypothecated must be specifically identified in the constituting deed (2694) Deed has to specify the amount for which the hypothec was granted (2689) Hypothecary creditor doesn’t have to be present at the moment the deed is signed by the debtor (2693) Notarial form is to protect the debtor Accessory clauses must be agreed to by the creditor (may be in deed or loan agreement) The following do not need to be granted in notarial form: promise of hypothec, a power of attorney to constitute a hypothec, the transfer of a claim secured by an immovable hypothec, the renunciation of a hypothec, or the cession of priority of rank Notary must attest: Verified the identity, the quality and the capacity of the parties (2988) That the document represents the will expressed by the parties (2988) The title of the grantor of the last holder was previously validly published (2992, 2994) If the deed charges a universality of present immovable property, the deed must specifically mention all the property held by the debtor (2694) – consistent w/ 2949 which requires registration against the immovable for 3rd party opposability If the deed provides for a universality of present and future immovables, don’t need to specify the future immovables but once their identity is known, it can be registered immediately w/ effect from date of acquisition (2948) 2. Content of deeds of movable hypothecs w/out delivery Specify the obligation secured and its amount and sufficiently identify the property (2697) May be difficult to describe factual universalities – regulations don’t give guidance 3. Content of PPSA security agreements Written agreement must contain: debtor’s signature, description of the collateral, language creating or evidencing the intention to create a security interest (s. 10(1)(b)) Description of collateral must be sufficient to enable it to be identified in ON (also the case under Art. 9) Rest of provinces, parties may use general categories defined in the Act but can’t use “consumer goods” and “equipment” w/out further reference to the kind of goods (10(4)) 47 “inventory” is a generally accepted term as long as the collateral is held by the debtor as inventory registration offers only imperfect evidence of non-possessory security interests to 3rd parties b/c notice can be filed before the agreement is entered into the written agreement provides 3rd parties w/ concrete evidence of the existence of scope of a particular security interest III. Constituting the Security Agreement by Possession No writing is needed for its creation and no registration is required for its publication b/c possession serves both an evidentiary function and is a form of publicity (2702-2709) Under PPSA, similar theory, but possession is a substitute for a writing only for 3rd party effects A. The nature of delivery: debtor dispossession or creditor possession Classical pledge imagined the debtor transferring property to the creditor – creditor possession seen as the essence Now reconceptualized so that the essence of the pledge rests in debtor dispossession Since it is possible to hypothecate incorporeal property, refer to “title” being delivered to the creditor (ex. s. 24 PPSA) Two types of situations for incorporeal property: Ordinary negotiable instruments such as bills, notes, cheques, share certificates and $$$ whether or not title is negotiable by delivery alone, or by endorsement and delivery (2709) To the extent that title is not negotiable, it serves only an evidentiary function and other formalities are required to make a claim enforceable against the debtor (2710, 1641) Negotiable documents of title such as bills of lading and warehouse receipts (2708) For documentary pledge transactions, the bill of lading or warehouse receipt represented the goods described therein Possible to constitute negotiable bills and receipts and to hypothecate them to a creditor by endorsement and delivery (2708-2709, s. 27 PPSA) Is it possible to create a documentary pledge transaction through a field warehousing agreement in which physical custody is placed in the control of an employee of the debtor as mandatary of the creditor? Until property is actually delivered, the hypothec has not been constituted (notional or symbolic delivery is not enough) (2702, s. 10(3) PPSA) B. Creditor possession through a 3rd party Not necessary that the creditor actually personally hold the pledged collateral (2705, s. 10 PPSA) CCQ – hypothec or security interest over property in the hands of a 3rd party may be constituted by the parties, even though the 3rd party is unaware of it (3rd party then holds as the creditor’s mandatary or agent) Possession constitutes an act of publication for the purpose of 3rd party opposability (s. 24 PPSA) but if creditor possession is through a 3rd party, the hypothec is not published until the 3rd party receives written notice of the hypothec (2702) Doubtful that 2705 would apply if the 3rd party takes initial possession as a mandatary of the creditor (this is the rule under s. 27(1)(a) PPSA0 C. Character of creditor possession and utility of writing Creditor’s possession must be uninterrupted, peaceful, public and unequivocal. Where the property to be pledged is already in the hands of the creditor, the pledge can only be constituted through an explicit interversion of the creditor’s possession (ex. brokerage industry) Substantive reasons for wanting a writing: Debtor wants receipt or some other evidence that the creditor acknowledges her right and title to the property 48 Creditor wants to prove interversion (in needed) Easier to prove date creditor took possession D. Continuity of possession Hypothec constituted by possession ceases to exist when the possession stops (2798(2)) and in order for it to subsist it must be in writing and rules of 2683 apply In c/l, possession is necessary for 3rd party opposability but when possession is lost the security interest is still effective against the debtor Creditor who is involuntarily deprived of detention can revendicate the property but can’t prevent another creditor from seizing the property or exercising hypothecary recourses (2706, tort of conversion) Where the creditor is prevented from possessing the thing by the unlawful act of a 3rd party, possession is deemed not to be interrupted (2704, c/l rules of conversion) Creditor can exercise a right to revendicate the property unless it is under seizure in execution by another creditor or is in the hands of a hypothecary creditor realizing upon it (2706) Possession not interrupted if property is undergoing evaluation, repair, transformation or improvement (2704, s. 26, 10 PPSA) PUBLICATION I. The Theory and Policy of Publication rd 3 parties normally have an interest in an asset subject to security creditors who want to make their rights opposable to 3rd parties must publicize their security publicity regime accomplishes: deters debtors and creditors from colluding ex post facto to claim that a security interests exists puts others on notice so that they can govern themselves accordingly mechanism for sorting out priorities publication is not synonymous w/ registration publication means registration or possession for movable hypothecs (2703, 2934, 2945) and registration for immovable hypothecs (2934, 2945) publication means registration for real estate transactions, Bank Act security, ships mortgages under Canada Shipping Act perfection is by possession or registration (s. 19, 24, 25 PPSA) subject to automatic perfection for temporary periods (s. 5, 7, 26, 29, 74 PPSA) A. Security rights not requiring publication 1. As between the parties Publication is not imposed as a requirement to constitute security b/w the parties (2941(2), difference b/w attachment and perfection in PPSA) Land Titles – in western provinces, registration needed to be effective b/w the parties, other provinces registration only needed for 3rd party opposability Registry Act – publication only preserves 3rd party opposability 2. Vis-à-vis 3rd parties Fully effective against 3rd parties w/out publication for temporary period but must eventually be published Construction lien (2726, 2727, c/l) Temporary interruption in the continuity of publication for a defined time period or to accommodate commercial convenience (2704, s. 26 PPSA) 49 Devices that disrupt principle of creditor equality but never require publication – common thread is limited opposability of the unpublished right claimed (i.e. no right to follow or to claim proceeds) Execution priorities (privileges and prior claims) (2665, Judgment Enforcement Acts) (only claims of the State may be registered 3017(2)) Rights in movable property that can be exercised w/out publicity – unpaid seller’s right of resolution (1741, s. 81.1 BIA) In c/l, non-possessory non-consensual security rights in movables are typically effective to charge property w/out publication outside of bankruptcy (s. 86 BIA ranks these claims as unsecured unless registered in accordance w/ s. 87) Exception – s. 81.2 BIA establishes super-priority charge on inventory in favour of fishers and farmers (temporal limitations) Maritime liens attach to the ship and are fully effective against 3rd parties w/out publication B. Publication of security and analogous devices 1. As between the parties Agreement is enforceable according to its terms w/out publication (s. 9 PPSA, 2663, 2941(1),(2), s. 427 Bank Act)) Security takes effect b/w the parties at the moment of its constitution but May agree that it takes place at later date (s. 12 PPSA) The nature of the security itself or the circumstances surrounding its grant may have the consequence that it can’t take effect until later Charges future property Property doesn’t exist It exists in a different form than the form the security envisions Doesn’t yet belong to the debtor 2. Vis-à-vis 3rd parties CCQ - Generally required for 3rd party opposability (2663 – applies to both consensual and legal hypothecs) 2934 – modes of publication, default is registration (absent a specific provision) 2703 – can also public movable hypothecs by possession PPSA – more concerned w/ priority effect of perfection (s. 20, 35) Failure to perfect doesn’t necessarily mean that the security is ineffective against all 3 rd parties priority as b/w unperfected security interests is determined by order of attachment (s. 35(1)) Registry Act – actual notice by a 3rd party of a prior unpublished security can sometimes compensate for lack of publication Land Titles Act – actual notice has no effect C. Publication of interests not intended as security 1. As between the parties Sale, lease, loan, deposit, consignment, etc. are effective b/w the parties w/out publication 2. Vis-à-vis 3rd parties Transactions that require publication b/c of the nature of the registry Land register is open to the registration of all rights in land – effective opposability depends on registration (2934, 2935) Transactions that require publication b/c they sufficiently resemble secured transactions General registry of movable rights in QC 50 II. PPSA deemed security interests must be published, can also file notices of judgment or notice of writ of execution Modes of Publication A. Registration default rule is registration CCQ – basic mechanics of the system in 2969-3025 (must be registered in the proper register for the hypothec to be published) Land registry office for registration of all real rights affecting immovables w/in registration divisions (2969(1)) Register in the division where the land is located (2970(1)) Register movable rights that also pertain to immovables (2970(2)) Computerized central registry for personal and movable real rights organized and indexed according to debtor (2969(2), 2070(2)) C/l has land registry and PPSA movables registry Mortgages or charges over land have to be registered in the district where the land is situated PPSA establishes computerized central registry for security interests organized and indexed by debtor B. Possession Can’t publish right in land by possession Movable hypothec w/ delivery published by the creditor or a 3rd party having physical custody or detention of the hypothecated asset (2703, 2705) Also applies to corporeal movables represented by a bill of lading (2708), right of retention (1592) Possession not interrupted if property repaired, etc (2704) Can effect possession through 3rd party (2705) Can perfect by possession certain categories of tangible assets and documentary intangibles capable of being taken into possession (s. 24 PPSA) Possession may be through 3rd party (s. 25, 27) Repairs, etc. don’t interrupt possession if less than 15 days (s. 26) C. Actual notice CCQ – no concept of actual notice can defeat a registered right Theory of appearances paliates this rule where the title of an owner may for a reason not apparent on the face of the registry, find title retroactively extinguished Security on claims (1743) Distinction drawn b/w Registry Act (actual notice may have impact) and Land Titles (actual notice means nothing) PPSA – actual notice is irrelevant to determining priority D. Other modes of publication 1. Notice to account debtors in respect of security over claims 2 kinds of 3rd parties for securities over a claim: 3rd parties generally (including other assignees of the same claim or secured creditors w/ rights in the claims) account debtors (those who are obliged to pay the claim) publication is not sufficient to set up the security against the account debtor CCQ – three mechanisms to make security collectible against account debtors (1638-1642) Debtor may have acquiesced in the grant of security 51 The debtor may have received actual notice of the grant of security The account debtor may have received some other evidence of the security PPSA – send a written notice of an assignment to the account debtor combined w/ a request for payment is needed to trigger account debtor’s obligation to pay the claim to the assignee or secured creditor (s. 41(7)) 2. Publicity by control of the collateral Recognized for bank deposit accounts, letter of credit rights, investment property and electronic chattel paper – revised Art. 9 UCC III. Content of the Document Assuring Publication by Registration A. Document-filing and notice-filing registries Document filing – had to file the actual documents creating the hypothec or the mortgage and these were archived and indexed and searchable by 3rd parties Notice filing – secured creditor files a notice of the security, as opposed to filing a copy of the document creating the security B. Scope of rights published What rights are deemed to be published for the purpose of 3rd party opposability? All rights are deemed published Only those rights specifically attaching the security are deemed published Some, but not all Kual rights are deemed published Land Titles Act – only publishes those rights required to be inserted on the title abstract, the rest are in personam Registry Act – claim can be made that certain personal covenants are brought to the attention of 3rd parties but c/l generally does not make these rights opposable to 3rd parties CCQ – various terms of a security agreement that relate to personal covenants can’t be set up against 3 rd parties (2748) PPSA – financing statement need only set out the names of the parties, the duration of registration and a description of the relevant collateral It is only prima facie evidence of the existence and scope of a security interest, to be fully perfected, it must also have attached (s. 19 – need a written agreement containing a description of the collateral (s. 12, 10) Third parties must check the actual security agreement (s. 19) IV. Changes in Mode of Publication A. Publishing rights so as to achieve perfection Unpublished hypothec can’t be set up against 3rd parties (2663) – once published, it becomes opposable PPSA – until registration or possession, the security interest is unperfected and it is generally not opposable against most significant classes of 3rd party claimants (s. 20, 35) Land Titles Act – unregistered has no 3rd party effects whatsoever Registry Act - registrant may take subject to prior unregistered mortgages (w/ knowledge), registration generally operates to preserve priority against subsequently registered interests Priority repercussions of failure to publish create a powerful incentive for secured creditors to publish 52 B. Changing the mode of publication for perfection 1. Registering a right first perfected by possession PPSA – as long as perfection is continuous (as long as new mode of publication takes place prior to perfection by possession is lost), the security interest is considered to have remained continuously perfected for priority purposes as of the time of initial perfection (s. 23, 35) Ties the question of continuity of perfection strictly to the issue of publication and not to any characterization of the security in question Nothing prevents a secured creditor who has perfected by possession to also register CCQ – movable hypothec granted w/ delivery may be published by registration later, provided publication isn’t interrupted (2707) Not clear whether the change in mode of publication also changes the character of the hypothec In order for the initial hypothec to retain its status as a movable hypothec w/ delivery, creditor can’t return it to the debtor For the hypothec to retain its rank as of the date of the delivery, registration must occur prior to the creditor remitting the property If return prior to registration, status depends on the intention of the creditor and surrounding facts If the creditor has not created the hypothec in a writing, it must be inferred that it intended to release the returned property from the hypothec – no hypothec survives and the registration can’t resurrect it If there is a writing, then the secured obligation remains in force as an unpublished right and may be made opposable against as of the date of registration Nothing prevents the secured creditor from also registering 2. Changing perfection by registering to perfection by possession Highly unlikely PPSA – security interest perfected by registration may later be perfected by possession and as long as possession occurs prior to lapse in registration, perfection is deemed to exist from the moment of the first registration Does not prejudice 3rd parties Nothing prevents the creditor from maintaining the registration CCQ – 2703 suggests that only movable hypothecs w/ delivery are published by possession Even if the creditor takes possession, it remains a movable hypothec w/out delivery If the creditor seeks to publish by possession, it may be that this can only occur by granting a new hypothec w/ delivery (no continuity) (absence of equivalent to 2707 would suggest this) Nothing prevents creditor from maintaining the registration C. Lapse of perfection CCQ – once a hypothec ceases to be published, it is not opposable to 3rd parties (similar result in Land Titles Act) PPSA – once a security interest ceases to be perfected, if it remains attached, certain limited 3rd party consequences are still produced (s. 35(1) – priority wrt other unperfected security interests that subsequently attach) Also preserves the perfected and priority status of lapsed or undischarged interests against prior interest over which the lapsed or discharged interest has priority previous to as long as registration is reinstated w/in 30 days (s. 35(7)) Can create circular priority problems b/c the Act does not resolve this exception Recall: if trustee in bankruptcy is in the picture, can’t revive it Who has best policy? 53 V. PPSA restricts circular priority problem to 30 days, a small burden compared to preserving security More people have access to registry (potential for accidental deletion) Allow for change in info CCQ – live w/ the consequences of your negligence Increased costs when there are exceptions Effects of Publication A. Between the parties Security agreement is effective b/w the parties according to its terms (s. 9 PPSA) Effective upon their agreement unless they agree to postpone its effectiveness Publication isn’t a pre-condition to the exercise of specialized enforcement recourses available to secured creditors against the collateral Hypothec produces its effects b/w the parties even w/out publication (2663, 2941(2)) Can exercise any rights of ordinary creditor and enforce any collateral covenants Enhanced rights to monitor don’t prejudice 3rd parties B. As regards to 3rd parties 2 main consequences in relation to 3rd parties flow from publication: opposability of security against 3rd parties fixing of priorities real estate in c/l and all hypothecs in civil law – security can’t be set up against a seller who is still entitled to exercise a right of resolution unless the creditor has already commenced realization and the security can’t be set up to defeat the claim of the seller of an immovable who has stipulated a resolutory clause in the deed of sale as for subsequent acquirers, once published, security can’t be rendered nugatory by the unilateral act of the grantor (apart for ordinary course dispositions of movable) once published, the right to enforce remedies can be set up against other creditors and 3 rd parties (may be taken over by prior ranking secured creditor C. Example in class – effect of publication Recall – the major difference b/w CCQ and PPSA is that for the former publication is a pre-condition to 3rd party opposability, while in the latter the effects of failure to perfect are articulated in terms of priority S. 20 PPSA – an unperfected security interest is ineffective against judgment creditors and trustee in bankruptcy unless perfection occurs before their claims arise, it is ineffective against a buyer (identifies specific categories of 3rd party interests against which unperfected interest will be unenforceable) S. 35(1) – unperfected security interest is subordinate Ex. 1 Jan 1 SC1 (does not publish) Jan 2 SC2 (does not publish) Jan 3 SC2 seeks to enforce and SC1 claims priority Under CCQ, security is inopposable if unpublished – neither party can claim and interest against the other Also, neither can enforce b/c publication is necessary for enforcement – therefore no issue of competing claims Under PPSA, don’t need to perfect in order to enforce against debtor As both interests are unperfected, look to date of attachment to determine priority – SC1 wins 54 Trustee in bankruptcy Recall: under BIA, priority ordering is established – secured creditors, preferred creditors, unsecured creditors, deferred creditors S. 20 PPSA –security interests is ineffective against the trustee unless perfected before bankruptcy (otherwise treated as unsecured creditor) Bankruptcy occurs when the BIA says it occurs If voluntary, date of filing of assignment If involuntary, date the receiving order is made by court (benefits secured creditor b/c no longer go back to the date the petition was filed – therefore secured creditor can perfect b/w petition and receiving order and still be OK) Recall: error invalidates registration – get it right! Same result under CCQ? (is there a temporal element built into the rule?) Yes b/c if not published, inopposable (implicit in its ranking rule) Buyers Under CCQ, need to be published when the 3rd party interest comes into existence (wouldn’t make sense if you could publish afterwards) Unsecured creditors Ex: Jan 1 SC is granted security Jan 2 unsecured creditor (get judgment) Jan 3 security is perfected In c/l, the unsecured creditors got rights when the writ of enforcement was delivered to the sheriff Considered unfair Rule in ON and western provinces – unperfected security interest is ineffective against a creditor if enforcement proceedings have reached the point where collateral is under the control of the judgment creditor (i.e. seizure) Atlantic provides, Alta, Sask (inspired by CCQ) – judgment creditor can register notice of judgment in registry for PPSA security rights (registration binds debtor’s assets in the same way as though the debtor has given security in those assets) For land, all provinces permit judgment creditors to register in the land registry CCQ gives creditor who acquires judgment a legal hypothec against movables and immovables (2730) Constitute it by registration (indicate the amount of the judgment) 2731 – court can reduce the # of properties so charged advantage – reduces costs of enforcement for judgment creditors b/c hypothec follows, reduces the debtor’s ability to deal w/ the asset 2945 – rank in order of date of publication caveat for legal hypothec or registered notice of judgment if bankruptcy intervenes, provinces can’t convert unsecured creditor claims into secured creditor claims to give them priority (once the receiving order is issued under BIA, all judgment enforcement proceedings are suspended) Unsecured creditors (consensual) PPSA – first to register, perfected over unperfected (s. 35(1)) CCQ – rank in order of publication (2945) Bank Act security Publication is by registration – file notice of intention to take security prior to agreement (can’t file afterwards) Unless filed, the security is ineffective against the debtor’s creditors generally and subsequent purchasers and mortgagees of the asset 55 Doesn’t seem to cover trustee in bankruptcy Only covers subsequent competing secured creditors Ex: Jan 1 PPSA/CCQ security interest in favour of Bank A Jan 10 Bank Act security in favour of Bank B (attached that day too) Jan 30 Bank A publishes Bank Act doesn’t give answer re priority CCQ - Bank B has priority b/c Bank A did not register before a 3rd party entered the picture PPSA – not just a question of filing, but focuses on security taken under the same regime (here, Bank B not taken under PPSA) Bank Act may slip b/w the 2 systems (issue of legislative policy) DESIGN AND OPERATION OF REGISTRY SYSTEMS I. II. The Variety of Registry Systems CCQ, PPSA, Land Titles Acts – have streamlined the process by consolidating registries, by simplifying the process of obtaining registration and by clarifying the effects of registration Separate registry systems for security under s. 427 Bank Act, Canada Shipping Act The Design of a Registry System A. The scope of the registry Designed w/ specific subject fields or specific security devices in mind (Canada Shipping Act, s. 427) Meant to record rights in connection w/ certain classes of property (land registries and personal property registries) Only those rights specifically permitted to be registered can be registered (2938, s. 42(1) PPSA) 1. Land registry systems 2938 CCQ – acquisition, creation, recognition, modification, transmission or extinction of an immovable real right requires publication 2969(1), 2970(1) – a land registry office is established w/in divisions and rights must be registered in the office of the division in which the property is located c/l works in parellel fashion central theme – meant to identify all rights in respect of identified parcels of land scope is local 2. Movable or personal property registry systems CCQ – computerized central registry for personal and movable real rights organized and indexed by grantor (2969(2), 2970(2)) PPSA – registry applies to all registration of security interests as defined in s. 3(1) (subject to exclusions in s. 4) and is available to other rights that are not security (s. 3(2) – commercial consignments, leases 1yr+, transfers of accounts or chattel paper, non-commercial sales of goods w/out a change of possession) The protection of 3rd parties who deal w/ holders of personal property should be in a position to easily ascertain whether such rights exist Scope is province-wide 56 B. Asset based or debtor based registry systems 1. Asset-based registries All land registers, search against the identified parcel 2. Debtor-based systems Registration is made under the name of the debtor of the obligation that the charged asset secures Possible to also use serial I.D. for big ticket items (makes it easier to trace multiple debtors) Main concern – ensure the integrity of the description of the debtor S. 43 PPSA gives complete indication of the kinds of info that is acceptable for registration purposes , similar rules in the General Regulation (QC) C. Notice filing or document filing registry systems Historically, document filing system – searchers could examine the original document in the registry itself Now, registry is merely repository of info about rights May confirm the nature of the rights (Torrens system) May just put 3rd parties on notice 1. Document filing registry systems Gradually being eliminated Relevant Act stipulates the nature and the quality of the document that may be registered 2. Notice filing registry systems 2 types in Cda: notice is an indication of the precise rights that are being claimed in the asset in question Torrens system Any right that may be registered but is not can’t be set up against 3rd parties Notice follows a prescribed form, and is meant simply to put the searcher on notice that certain rights may exist PPSA, CCQ 3rd parties, after searching the registry, must make inquiries to examine the actual documents to ascertain the scope of security granted any rights not registered can’t be set up against 3rd parties and all rights in the security agreement that fall w/in the described category of rights are held to be published D. Paper-based systems or computer systems 1. Paper-based systems Few remaining completely paper based systems Documents are presented to the registry office and the registry itself is paper based Registrar takes the document as presented and transcribes the required info Partial computerization – parties present paper documents and the info is transcribed electronically 2. Computer systems Both PPSA, CCQ systems dealing w/ movable real rights are computerized Documents are filed and searched electronically Quite schematic in content b/c merely put searchers on notice If computerized system is part of Torrens system, the registration itself is title to the property in question III. 57 Series of controls established to protect the integrity of titles on file (measure of supervision and control by the registrar) The Operation of a Registry System Throughout much of 20thC, various public registries organized as an adjunct to the system of judicature, registrar was a public official and the registry offices were public services Historically, in civil law, land transactions were recorded by local notaries In several types of commercial setting, the publicity function was assumed by those who controlled the industry (ex. ships, securities) Numerous proposals today to re-privatize registration A. State-run or user-run or both 2 types of user-run: Function of registration is delegated to the parties (most often creditors) who have the greatest interest in ensuring a viable system System involving the direct entry of data into the computer system Parties may go to registry office and directly key in the data Or Registrar may sign an agreement w/ parties giving them direct access from a remote location State-run – parties complete a financing statement document in the form prescribed and then it is transcribed into the registry by a public official B. Date of effect of registration – time lapse There will always be a lapse in paper –based system Can assign documents a number and a filing date based on when presented or assign a number only when they appear in the registry Modern systems adopt rule that registration is real time (doesn’t matter when it was received, but when it is on the computer screen) C. Duties of the Registrar 1. Quebec Entrusted w/ keeping of the registry office in each division and is required to execute the various provisions regarding registration in the CCQ (3007, 3008, 3024) Required to keep several indexes and entries Bound to allow all persons to examine the entry book and all registers (2971, 3019) Must notify debtors of any notice of intention to exercise hypothecary recourse or a prior notice of a sale for non-payment of immovable taxes (3017) IV. The Mechanics of Registration S. 25 PPSA – security agreement is perfected by the filing of a financing statement (must be done electronically, s. 43, 48) A. Timing of registration – advance registration No reason why registration can’t occur prior to security agreement actually being signed in notice filing system PPSA – date of registration generally determines priority as between secured interests, as against other interests, the date of attachment may be most important KEY – verify that no interests have arisen b/w registration and attachment 58 2947, 2948, 2950 – registration may occur before the debtor has rights in the collateral but a security agreement is necessary to support registration B. Duration of registration – renewals PPSA – variable (1-25 yrs or infinity) and cost increases w/ length, renewable for the same periods CCQ – movable hypothecs, 10 year renewal; immovable hypothecs, 30 year renewal EFFECTS OF SECURITY RIGHTS AND INTERESTS I. Effects of Security Rights and Interests Prior to Default Three basic time periods for assessing the effects of different security rights: What effects, if any, improperly or imperfectly constituted security devices will produce B/w the effective date of the security and the time the debtor is in default Period following default when enforcement is necessary A. Distinguishing inter partes and 3rd party effects What are the effects of security prior to default? 1. Common law approaches No general specification of the effects of security agreements As b/w the parties, it is a matter of K unless limited by law In so far as 3rd parties, focus is on the agreement of the parties – certain agreements are opposable provided that the formalities for perfection are met 2. Civil law approaches Generally states the normal consequences of security, whether a hypothec or some other device Code not only sets out constitutive rules and imperative rules, it provides suppletive rules Concept of hypothec embraces conventional and legal hypothecs 3. General effects of security between debtor and creditor Root principle – begin from premise that security, as b/w the parties, is a matter of K and absent some public order prohibition, whatever the parties specify is enforceable Enforcement b/w the parties in no way depends on the right in question being registered or otherwise perfected B. The moment that security rights take effect General principle – security takes effect b/w the parties at the moment of its constitution But, parties may postpone it until a later date (s. 12(2) PPSA) or the security can’t take full effect until a later date 1. Future property Three situations: Property doesn’t exist yet It exists in a different form other than the form that the security envisions The property does not yet belong to the debtor General principle - security does not take effect until the grantor acquires title (s. 12 PPSA, 2670) 2. Change of juridical nature Property that changes from immovable to movable 59 CCQ – movables by anticipation (902, 2698) PPSA – specific rules for crops, trees, minerals and offspring of animals (s. 12(4)) Property that changes from movable to immovable CCQ – immovable hypothec doesn’t begin to affect building materials and other movables until incorporation (2671) PPSA – security upon land charges building materials and fixtures as soon as they become incorporated or fixtures 3. Floating charges, floating hypothecs C/l floating charge – equitable right that hovers over the described collateral w/out actually attaching to any particular asset until crystallization S. 12(1) PPSA makes it clear that attachment is determined exclusively by rules of PPSA, regardless of any agreement b/w the parties to the contrary Floating hypothec is valid and effective b/w the parties at the moment that it is constituted , and any conditions are restrictions stipulated in the constituting act are fully enforceable (2715-2723) Right to hypothecary recourses is suspended until notice of crystallization has been given by the debtor Conclusion – neither the floating charge nor the floating hypothec actually postpones attachment of the security II. Inter Partes Effects Necessary to determine if there are any secured rights which a creditor may exercise that don’t bear on the rights of 3rd parties A. Rights of secured creditors as ordinary creditors Unregistered hypothec or unperfected security interest entitles the creditor to exercise any of those rights of an ordinary creditor Right to enforce personal obligations – claim for damages Specific performance (maybe) Resolution or resiliation of K, reduction of their obligations Conserve value of debtor’s estate Pre-judgment and interlocutory procedural remedies (seizure before judgment in civil law or attachment order in c/l; judicial sequestration or appointment of a receiver; interlocutory, interim and ex parte injunctions) 1. Creditor supervisory recourses Oblique action – permits creditors to exercise the rights of their debtor when she refuses or neglects to do so and when this causes them prejudice Paulian action – permits creditors, in their own name, to impeach the acts of their debtors in fraud of their rights Creditor’s claim must be certain, liquid and due Debtor’s act must be fraudulent and the creditor must suffer prejudice 2. Pre-judgment interlocutory proceedings Seizure before judgment or attachment W/ judicial permission seize assets where there is reason to fear that the recovery of a debt may be put in jeopardy Attachment in revendication – claimant is asserting either a special interest in or a real right upon the property being seized (formalities are simple and expeditious) Judicial sequestration or receivership 60 Place property that is the object of a contestation in the hands of a manager pending trial Sequestrator – administers the assets during legal proceedings and surrenders them after judgment Receiver – can sell or encumber the property Injunction Prohibitive or mandatory B. Rights of secured creditors as secured creditors 1. General regime Grant of hypothec does not divest the grantor of ownership of the property hypothecated (2733) Debtor remains titulary, retains possession, enjoys fruits and revenues Debtor can’t waste or materially reduce the value of the property (2734) Debtor may alienate the property, subject to the creditor’s right to follow (2733) When the debtor is in default, the creditor may exercise any of the hypothecary recourses against the charged property (2735) Title security still exists as such in CCQ (not in PPSA) For transactions like installment sales, the allocation of rights and obligations follows the property logic and not the logic of secured transactions Similar result in PPSA b/c it doesn’t regulate non-security aspects of title transactions 2. Preservation and loss of the right to follow Full hypothecary regime in 2733-2735 applies to immovable and movable hypothecs Major modification – right to follow (2700-2701, s. 30 PPSA) If hypothecated movables are alienated in the ordinary course of business of an enterprise, the hypothec will cease to charge the property (2674, 2700, 2732, 3106(2)) In the case of non-ordinary course dispositions, right to follow may depend on the hypothec being re-registered (2700-2701) 3. Revenues generated by secured claims Unless the creditor agrees otherwise, the creditor of a hypothecated claim collects not only the revenues produced by the claim but also any capital falling due (2743) 2743-2747 applies whether or not claim hypothecated w/ delivery general policy of CCQ – whenever the capital and revenues of an asset can’t easily be distinguished, the creditor is entitled to treat the capital as revenue and impute it to repayment of the secured obligation (2738, 2743, but cf. 2677) assignor of a debt is entitled to collect the debt from the account debtor until the assignee gives the account debtor notice of the assignment, afterwards must pay the assignee (s. 41(7, 8) PPSA) C. Effects of creditor-in-possession security Question – how does the fact that a creditor having possession of the collateral affect the allocation of rights and obligations b/w them? Security itself may be a pledge or a security interest perfected by possession (s. 17 PPSA, 2736-2742 CCQ) Possible for grantor and creditor to agree that the creditor will take possession of the secured collateral even prior to default (s. 17 PPSA, 2736-2742 will apply) As a prelude to enforcement of a security agreement the creditor enters into possession (to extent that the creditor’s rights are not defined by rules relating to enforcement or by the agreement itself, s. 17 PPSA, 2736-2742 apply) 61 1. Duties of creditors in possession Preserving the capital Preserve the capital and take reasonable care to prevent loss Conservatory acts don’t include those necessary to turn a profit or otherwise administer it, except in case of gross negligence Not using the property Creditor can’t use the property pledge w/out permission (s. 17(4) PPSA, 2736), normally permission is given or implied Where the property would normally have use value, the creditor is not obliged to impute a rent for his use Collecting fruits and revenues for the debtor Creditor will normally collect the fruits and revenues (2737, s. 17(3)(c) PPSA) 2737 – fruits remitted to debtor unless otherwise agreed s. 17(3)(c) PPSA – creditor retains fruits unless otherwise agreed 2. Rights of creditors in possession Right of retention for expenses Creditor is entitled to retain the property pledged until the debt is paid in principal, interest and costs (2741(1)) To extent that expenses to preserve the property are not covered by revenues (2737(2)), the creditor has a claim for reimbursement (2740) Independent right of retention and may be exercisable even when the pledgee would otherwise be obliged to disgorge the collateral b/c the pledge was redeemed (2706) Creditor in possession may claim for reasonable expenses incurred for preserving the collateral and these are secured as against the collateral Don’t give rise to possessory lien that has independent footing Limits on the right to use the collateral If creditor uses property in an unauthorized manner or abuses it, the grantor may obtain return of the pledged property and may also recover damages (2741(1)) and the creditor loses the hypothec upon judgment compelling return of the property to the grantor (2741(2)) Ordinary course of business dispositions Unclear whether the principle governing ordinary course sales would apply so as to extinguish the right to follow 2674 doesn’t distinguish b/w kinds of movable hypothecs but 2700 would suggest that it applies only to movable hypothecs w/out delivery s. 30 PPSA doesn’t distinguish b/w security interests perfected by possession and those perfected by registration – shouldn’t be an obstacle to the sale of property in the ordinary course of business situation unlikely to arise Creditor’s right to keep the property recourses of the creditor upon default are only those available under 2748 ff D. Typical covenants in security agreements Creditors typically seek 5 objectives in connection w/ security agreements: Property right in the secured assets Fixed right of priority Right to monitor 62 Right to control events of default Right to realize privately and expeditiously 1. Protecting the property right Debtor is usually obliged by K to look after the collateral Insurance Debtor usually obliged to assume the obligation and cost of insurance Insurance policies usually made subject to approval by the lender Rentals In land transactions, present and future rental payment are a significant asset which are not automatically covered by a hypothec or mortgage on the land and buildings Rentals may be made subject to a separate security (2695, s. 41 PPSA) 2. Protecting the priority right Object is to protect creditor’s rights as against 3rd persons Negative pledge covenants Constitute defaults which trigger the exigibility of the loan, or the loss of the benefit of the term accorded to the debtor Stipulations relating to the debtor’s dealing w/ the property Changing the use of the property w/out permission Failing to pay the taxes and local charges Failing to keep the property insured up to the value of the outstanding balance due Abandoning the property or failing to undertake essential repairs Relate directly to the rank of the creditor’s security Selling to 3rd party w/out permission Hypothecating the property w/out permission Engaging in construction giving rise to construction hypothec Failing to discharge any privilege or legal hypothec registered against the property w/in 30 days Leasing the property w/out permission Granting a servitude over the property in favour of another property Cession of priority clauses (subordination agreements) Normally a prohibition to issue security envisions all security, not just higher ranking security B/c even a first ranking creditor’s ability to realize quickly can be compromised by lower ranking creditors (2761-2762, 2778-2780, s. 58 PPSA) Creditor may expressly permit higher ranking security by cession or priority or a voluntary subordination agreement (s. 40 PPSA, 2956) 3. Controlling default and realization Insecurity clauses Subjective default conditions for failure to: comply w/ the terms and conditions of the deed of loan collect rentals provide the creditor w/ monthly income statements keep the premises rented to a certain min % generate min amt of monthly rental income repay the principal amount of any loan on the maturity date 63 creditor uses the info provided to make a judgment as to the standing of the loan although each are condition of default, normally the creditor will waive the default until it determines that the security should be realized Acceleration (loss of the benefit of term) clauses common clause whenever debtor is bankrupt, insolvent, etc., the term for repayment will be lost (1514(2), s. 16 PPSA) CCQ – simple default will be sufficient to trigger the loss of term and the acceleration clause won’t be necessary PPSA – must be some commercially reasonable ground for accelerating the debt Debtor has right to remedy the default W/in 60 days of receiving notice of default (2761-2762, 1594-1596) Reinstate the loan by paying the amount actually in arrears, defeating the acceleration clause (s. 62 PPSA) E. Special effects of non-consensual security Legal hypothecs have, in principle, exactly the same effects as conventional hypothecs Right to monitor (2733-2735) Access to hypothecary recourses (2748-2794) 1. Changing the situs of the security Owner of property charged w/ a legal hypothec may make an application to the court to determine which property the hypothec may charge, to reduce the number of properties charged, or to allow the applicant to substitute other security (2731) 2. Substitution of property Substitution could be either by way of another hypothec substituting for the initial hypothec or by way of an annuity, insurance policy, etc Important in eventuality that debtor goes bankrupt b/c judicial hypothec can’t be set up against the trustee in bankruptcy III. Third Party Effects A. General opposability of security Key – whether a hypothec has been published or security interest has been perfected CCQ distinguishes 3rd persons as being either previous owners, subsequent acquirers, ordinary creditors of a debtor PPSA – perfection generally allows secured creditors to set up their rights against whole classes of 3 rd parties, subject to specific priority rules 1. Owners and previous owners C/l – perfected security interest may be set up against previous owners, including previous owners who have themselves taken a security interest, the only issue is priority Civil law – published hypothec may, in principle, be set up against all previous titularies and subsequent acquirers of the hypothecated right 2. Subsequent acquirers and lessees S. 30 PPSA – ordinary course purchasers or lessees, purchasers or lessees of consumer property worth less than $1K, and good faith purchasers or lessees of serial numbered goods not registered by serial number take free of the security interest 64 CCQ – apart from ordinary course dispositions of movable property by an enterprise, no acquisition by a subsequent acquirer has the effect of annulling a published hypothec (2674), no right of lease can be taken free and clear 3. Other creditors (including floating hypothecs) Priorities as b/w perfected creditors and others (s. 32-40 PPSA) Priorities b/w published hypothecs (2947-2954) For floating hypothecs, they can’t be set up against 3rd parties until notice of crystallization has been published (2716(2)) 4. Claims Enforcement depends on account debtor being aware of the security (s. 41(7, 8) PPSA, 2710(2), 1642, 1643, 2718) As against all other 3rd parties, publication is sufficient to make the security fully effective Creditor can enforce as soon as it is constituted (s. 41, 2743(1)) B. Effects of prior claims and liens C/l – lienholder is expressly excluded from PPSA QC – prior claimant has no hypothec, but does fall w/in the codal regime for security rights Prior claims – right of preference exercised at the moment of the forced sale of a debtor’s property by means of a preferential attribution of the proceeds They don’t have to be registered and may be set up against other creditors w/out being published (2665) Except for prior claims for municipal and school taxes, prior claims give no right in property S. 32 PPSA – lien has priority over a security interest unless its constitutive statute provides otherwise 1592-1593 – right of retention is opposable to 3rd parties, except seizing creditors, who must pay the lienholder by preference in order to realize upon the collateral ENFORCEMENT OF SECURITY RIGHTS AND INTERESTS I. Preliminaries to all Types of Enforcement Presumption that debtors will voluntarily perform Security device has an independent legal existence A. Default – the normal triggering event Compulsory enforcement of obligations presumes that a debtor is in default 1. Default at law When a debtor does not perform an obligation when and where performance is due, he is in default Creditor may be able to seek resolution or rescission Basic principle – the parties will, in so far as possible, be restored to their pre-K position When another secured creditor attempts enforcement of the security CCQ – the enforcement of a security renders all security fully exigible PPSA – junior creditors don’t affect the rights of senior creditors, so only junior creditors are automatically put in a position of an automatic default 2. Contractual default A number of accessory clauses are inserted in security agreements to enable a creditor to quickly establish a default and enforce security General collateral covenants 65 General subjective default SEE ABOVE (Protecting the priority right) B. Enforcement w/out default 1. Right of retention (possessory liens) 2 types of possessory remedies that operate to enhance the likelihood of performance: exception for non-performance(unpaid vendor’s lien) – relates to K of sale where the obligations arising from a synallagmatic K are exigible and one of the parties fails to perform its obligation to a substantial degree or does not offer to perform it, the other party may refuse to perform to corresponding degree (civil law) seller holds onto the property, refusing to deliver, until the debtor pays for it (c/l) strict right of retention (possessory lien)– relates to K of service person who, w/ consent of the co-Kant, has detention of the property belonging to the latter has a right to retain it pending full payment of its claim (1592) produces a super-priority in favour of the retention claimant that can be set up against the other creditors of the debtor c/l- creditor in possession of collateral need not surrender it to the owner, or to anyone deriving rights from the owner (including secured creditors) until the amount of the lien has been paid off 2. Compensation (set-off) If a creditor owes $$ to a debtor, the 2 obligations are automatically extinguished to the extent of their common value Operation of law, does not require agreement of the mutual debtors CCQ – may be modified by K May neither be effected nor be renounced to the prejudice of the acquired rights of a 3rd party II. Ordinary Enforcement Upon Default Creditors must notify debtors of default before enforcing the obligation (1594-1600, Lister v. Dunlop) A. The personal action In relation to monetary obligations, debtors in default typically seek to perform voluntarily For other obligations it may not be possible to remedy or it may be too late 1. Compulsory enforcement of obligations Where debtors in default can’t or won’t perform, creditors may obtain judicial enforcement Enforcement regime – creditors may seek: Specific performance Damages Resolution, resiliation, rescission, reduction In most cases involving monetary obligation, personal actions give rise to seizure and judicial sale of a debtor’s property Procedure governing compulsory executions in personal actions set out in Executions Act, Judgment Enforcement Act, 568-579 CCP 2. Collateral incidents of judicial enforcement General principle requiring persons to exercise their rights in good faith (6, 1375) Rules governing content and interpretation of K (1434-1438) Principle of good faith found in judicial decisions, s. 65 PPSA 66 B. Conservatory and interlocutory recourses 1. Conservatory recourses Right of a creditor to intervene in certain lawsuits that affect the potential enforceability of the claim Intervene in certain juridical acts Right to obtain recognition from the holder of a current right, of the future interest Right of the creditor to undertake all acts necessary to preserve a conditional right Paulian action, oblique action, fraudulent preferences 2. Pre-judgment interlocutory proceedings Seizures before judgment – Mareva injunctions those that issue upon the authorization of a judge (733, 734.0.1, 734.1 CCP) any creditor, w/ judicial permission, may seize a debtor’s property where there is a reason to fear that the recovery of a debt may be put in jeopardy – conservatory attachment those that issue upon simple requisition of the plaintiff (734, 734.0.1 CCP) claimant is asserting either a special interest in or a real right upon the property being seized – revendicatory attachment c/l equivalent – mareva injunction Judicial sequestration (receiverships) place property that is the object of a contestation in the hands of a manager pending trial (741-750 CCP) usually reserved for title disputes relating to income producing assets requiring maintenance or admin sequestrator can’t undertake a liquidation of the assets, but must administer them during the trial and surrender them to proper person after judgment (can only sell or encumber in exceptional circumstances – 2308) receiver-manager in c/l is given extensive powers to manage an enterprise, and it is an effective recourse when there is fear that an ongoing operation may be allowed to decline 3. Injunctions Injunction may be prohibitive – prevent debtor from wasting assets May be mandatory – oblige the debtor to hand over custody pending adjudication C. Obtaining and enforcing judgments Judgment constitutes a new title and restarts the prescription period for enforcing the debt After judgment, creditor will normally attempt to enforce Debtor may be willing to pay – negotiate a payment schedule, accept a % Debtor may not be willing to pay – enforcement proceedings 1. The seizure of assets Money judgments are enforced by a writ of execution issued by the clerk and executed by a sheriff or bailiff General rule – pending sale, the seized property must be left w/ the debtor, who may continue to use it, but may not alienate or damage it Creditor may obtain an order entrusting the property to a 3rd party pending sale 2. The sale of seized assets Procedure governing sale of seized assets – Execution Acts, CCP Movables must be sold first, unless the debtor otherwise consents Sale ends when there is enough $$ to pay the claim and cost 67 Sale is by auction QC – purchaser acquires clear title to movables (577 CCP) and clear title subject only to certain limited charges, to immovables (695-697 CCP) and title of the purchaser is protected from revendication by the true owner (1714(1), 2919(2)) C/l – sale only relates the debtor’s interest in the property, purchaser takes subject to any charges that attach to the property D. Distribution (collocation) of proceeds Following sale, bailiff receives any claims to participate in the proceeds – can be brought by other creditors who have liquidated claims or creditors who are entitled to payment preference by law Bailiff produces a ranking list of the creditors, amount they are entitled to If the list is not contested w/in a delay, the $ is distributed Sheriff’s sale in civil law purges most real rights, including all consensual and all but one legal hypothec Rank all execution preferences and all secured creditors according to their priority and pay these in full before pro rata distribution among unsecured creditors Judicial sale in c/l does not purge the other security interests, so sale must specify the encumbrances E. Advantages and disadvantages of ordinary sales in execution for secured creditors Advantage of ordinary execution process – except in consumer transactions, if there is an acceleration clause its enforcement can’t be stopped by the debtor offering to pay only the installments actually missed Principal disadvantage – process takes a long time b/c judgment is required Also, in c/l secured creditor’s rank is not respected III. Secured Parties’ Enforcement Recourses Practically, secured party will almost always enforce by realizing upon the security instead of getting a judgment Realization remedies are essentially the same for all secured creditors and presuppose that the secured creditor has obtained possession of the collateral Receivership-type remedy Foreclosure-type remedy Sale in realization remedy A. Preliminaries to enforcement If creditor seeks to enforce in a normal way, the debtor will first be put in default Civil law – written notice to perform or by service of writ C/l – summoned to perform the obligation w/in a certain delay If creditor seeks to enforce security, procedural protections and advance notice to 3rd parties 1. Common law approaches General theory – secured creditor has an automatic right to possession of the collateral upon default (s. 58 PPSA) Apart from any notice requirements in BIA (10 days) or other statute, the creditor can claim possession upon giving the debtor reasonable notice of the default and its intention to take possession Only the debtor is entitled to notice of the default triggering creditor’s demand for possession Info provided in the notice of default and demand for surrender is not subject to any particular specification Reasonable notice is a flexible standard, objective standards are imposed once creditor has elected to pursue a realization recourse (20 days for sale, s.59(8), 15 days for foreclosure, s. 61(4)) Bank Act also maintains this general approach 68 2. Civil law approaches Creditors have to give notice prior to exercising any of their realization recourses (2749) Creditors aren’t usually entitled to compel surrender until the delays have expired (2675, 2767) Basic regime of persons entitled to notice (2757) File prior notice in the registry office and must be accompanied by evidence that it has been served on the debtor/grantor Content and length of notice periods (2758) Indicate the specific default ; remind the debtor that she has a right to remedy the default; set out the amount of the claim in capital and interest; specify which hypothecary recourse the creditor intends to pursue; describe the property; ask debtor to surrender the property by the expiry of notice period 10 days if remedy is taking possession for purpose of administration; 20 days if a movable hypothec is being enforced; 30 days if enforcement is taking place in a consumer transaction; 60 days for immovable hypothec B. Debtor’s remedies prior to surrender Creditors are required to act in good faith Imposed on creditors at all stages (s. 65 PPSA, s. 428(10), (11) Bank Act, 6, 1375, 1434-1438 CCQ) Creditors are required to act expeditiously and in a commercially reasonable manner Imposed on creditors at all stages (s. 65 PPSA, s. 428(10), (11) Bank Act, 6, 1375, 1434-1438 CCQ) Debtors may remedy the default so as to reinstate the security Open to all debtors at all stages of the realization process, up to the moment of sale or foreclosure (2761-2762, s. 59, 61) Debtor and interested 3rd parties can simply remedy the default and reinstate the security and the term loan as though no breach had occurred Debtors may redeem the security Open to all debtors at all stages of the realization process, up to the moment of sale or foreclosure (2761-2762, s. 59, 61) Presumes that the debtor or a 3rd party pays off the loan in its entirety, so that the collateral returns to the debtor free and clear of the security SURRENDER I. General Theory of Possession of Secured Collateral A. The principle of debtor possession Right of the debtor to possession of the secured collateral prior to default has a different legal basis depending on the security device Hypothec – implication that the debtor remains titulary of the right hypothecated and usus, fructus, abusus, continue to be vested in the debtor Mortgage – debtor actually transfers legal title to the collateral to the creditor, so need some other arrangement so that possession vests w/ the debtor Title transactions Swept into the logic of PPSA Civil law – normally vest the debtor w/ possession (if debtor retains title or obtains title and the security resides in the creditor’s right to obtain title) Creditor vested w/ possession where he takes titles or retains title but usually K that debtor will have possession Debtor will normally have possession until default Exception – pledge or pawn 69 B. Creditor in possession security Pledge-type transaction – control over the secured collateral is vested in the creditor Why creditor wants to retain possession Creditor is engaged in a documentary transaction involving a negotiable document of title Creditor doesn’t trust the debtor Rarely find creditor possession clauses either in conditional sales, leases, sales w/ right of redemption, chattel mortgages, etc. Possession of the creditor can always be exercised through a mandatary or agent C. Nature and purposes of surrender Material transfer of the collateral into the care and control of the creditor – surrender of possession Legal transformation of the creditor’s relationship w/ collateral that may already be in her physical custody Legal issue – how can the creditor obtain possession of the asset in such a way that it can appropriate its value for the purpose of liquidating the outstanding obligation? Either the creditor is seeking control of the collateral in order to foreclose it or sell it, or the creditor is seeking control so as to continue a business operation II. Surrender to Realize Upon or Dispose of the Collateral Assumed that the debtor is in default and that the creditor has elected to enforce the security agreement A. General object and delay for surrender CCQ – assumption that any step of enforcement of the security is prejudicial to the debtor, and that ex ante control on the timing of enforcement must be established PPSA – assumption that there is no additional prejudice caused to a debtor by a creditor taking possession of secured collateral, and that ex ante notice controls need only be applied when a specific realization remedy is being pursued Debtor may either surrender voluntarily or may resist SEE ABOVE FOR NOTICE AND DELAYS B. Voluntary surrender CCQ – occurs when a debtor abandons the property to the creditor on or before the indicated date, or consents in writing to hand it over at the agreed time (2674) Creditor who has obtained surrender will normally proceed to sell the property When taking in payment, the surrender must be attested in writing by the debtor (2764(2)) PPSA – creditor may obtain possession by means of self-help or repossession (s. 58) Certain assets can’t be seized by a secured creditor (s. 58(3)-(7)) Voluntary surrender is rare for land C. Forced surrender Creditor’s capacity to obtain surrender against the wishes of the debtor are limited by the principles governing self-help recourses Judicial order is necessary CCQ – request is a motions procedure, served upon the debtor (2765), court looks at whether the debtor’s refusal is justified (2769, 2766) PPSA – creditor can seek judicial assistance to obtain possession (s. 58), either by obtaining a judicial order or applying to the court for directions under s. 63 (s. 66) C/l mortgages – forced surrender will occur when the creditor obtains a writ of possession 70 D. Anticipatory surrender In some cases creditor may feel need to obtain surrender immediately (more likely in civil law b/c fixed delays) C/l – need to give reasonable notice and then there is a delay before realizing but can apply for authorization to sell the asset immediately (s. 59(18)) Civil – can obtain immediate surrender upon ex parte motion where recovery is in peril or the property may deteriorate rapidly (2767) E. Rights of creditor having obtained surrender Rules of c/l respecting bailees apply to creditors in possession – rights to deal w/ the collateral are severely limited Repair, improve or process the collateral; (s. 59(2)) CCQ – creditor who has obtained surrender will normally have the rights of the admin of property of another charged w/ simple admin (2766, 1301-1305) Normal to provide for somewhat enlarged powers of admin in the security agreement (otherwise repairs can’t be made) F. Other rights and obligations of the secured debtor Debtor continues to have an interest in the collateral, and in its disposition Debtor or 3rd party always has the right to remedy the default and re-instate the security, right up to the final recourse Debtor may claim a number of exemptions from seizure (s. 58) Debtor may supervise the creditor’s dealings w/ the secured assets III. Surrender as a Recourse – Receiverships Sometimes the surrender of the asset is the recourse the creditor seeks to enforce The security agreement must be sufficiently comprehensive to cover all the effective assets of the operation Debtor must grant the secured creditor collateral specific rights to use all assets and materials necessary to carry on the business Typically found for apt buildings, shopping centres, office towers, etc PPSA – no explicit limitation on the kinds of security and types of situation for which this recourse may be exercised CCQ – limited to when the hypothec charges the property of an enterprise (2773) C/l – receivership (s. 64 PPSA) Civil / judicial sequestration (2773-1777) A. Nature and kinds of receiverships If a receiver exercises rights under PPSA, s. 64 specifies the receiver’s rights and obligations Appointed pursuant to the terms of the security agreement or by the court Ordinary receivers – contractual and judicial sequestrators (2305-2311 CCQ, 742-750 CCP) Powers may be enlarged by K (2308) Recourse only available in dispute over title Those who act for creditors who have elected to enforce taking possession B. Appointment of receivers Can only be invoked when a debtor is in default, creditor sends a notice and debtor has 10 days (2758) Creditor only has simple admin until the expiry of the 10 days PPSA – receiver can be appointed by virtue of the security agreement and no restriction as to when as long as the debtor is in default and the standard Lister v. Dunlop notice has been given 71 May apply to court for appointment of receiver (s. 64(7)) C. The rights and obligations of receivers 1. Rights of receivers Manage an enterprise as a going concern S. 64(2)PPSA – take control of the collateral, open and maintain bank accounts, keep records and prepare financial statements, enter into Ks Need not comply w/ s. 59, 60 when disposing of collateral in the ordinary course of business Management of business subject to general rules of good faith and commercial reasonableness (s. 65) and the specific obligations of s. 17 Creditor is vested w/ powers of an administrator who has full administration (2773, 1306-1307) 2. Obligations of receivers Duties set out in s. 64 PPSA, CCQ rules on admin of property of another PPSA – duty to file a notice of the receivership w/in 10 days, provide bi-annual financial statements, to indicate that she is acting as a receiver, to make books and records available to debtor and 3rd parties , act in good faith and commercially reasonable manner CCQ – rules set out in 1308-1331 Upon insolvency, rules of BIA also applicable 3. For whom does the receiver act? CCQ – creditor who takes possession for purposes of admin is acting in her own name PPSA – possible to state that the receiver is acting for the debtor D. The termination of receiverships Can come to an end in 3 ways: Through the management of the receiver, the business is re-established and the loan is paid off or the creditor is willing to renegotiate its terms The receiver has managed to sell all the assets of the business in the ordinary course of the receivership The receiver has sold as much as is possible in the ordinary course, and the creditor now seeks to exercise another remedy PPSA – on completion of the receivership, a final account is rendered (s. 64(2)), if any assets remain and the obligation is not fully paid, secured party will either sell them (s. 59) or foreclose (s. 61) CCQ – receivership ends under all the cases where the admin of the property of another normally ends, when the debt is paid, creditor pursues another remedy (2775) Property returned to the debtor unless creditor elects to pursue anther remedy (2776) REALIZATION REMEDIES I. General Theory of Realization Historically, 2 mechanisms for generating creditor value – let the creditor keep the object, require the creditor to sell the object A. Origins of foreclosure remedy Foreclosure is the creditor’s right to appropriate the asset subject to security (today) 72 1. Movable After middle ages, only security allowed on movables was pledge Foreclosure had to be stipulated in the agreement Foreclosure attractive b/c: market for property given in pledge was not always significant creditor was usually quite particular about the object taken in pledge easy to do, avoided uncertainties in the market for disposition, often fulfilled the creditor’s own desire to appropriate that object normally agreed that the principal obligation would be extinguished by foreclosure (debtor couldn’t get surplus, creditor couldn’t get deficiency) 2. Land C/l – no special-purpose security device over land, so developed mortgage Upon default creditor would eject debtor (creditor already legal owner) Then equity of redemption developed – creditor’s remedy subject to review Usually extinguished the obligation Civil law – foreclosure was never part of hypothecary recourses Giving in payment clauses (amounted to sale by debtor to creditor under suspensive condition and created remedy akin to foreclosure) Usually extinguished the obligation B. Origins of the sale remedy If the object is sold in realization, the creditor merely acts as agent of debtor and title passes directly from debtor to purchaser 1. Movables Either the object is sold by invoking normal judicial process or the creditor has attributed to itself a power to sell the asset privately In these private sale remedies, they provided that they were acting as agent (no need to foreclose first) 2. Land For immovable hypothecs, sale was primary remedy, but exceptional to have power to sell other than by sheriff’s sale Right to sell privately could normally only be enforced after the creditor has notionally taken title – draft agreement carefully C/l mortgage, foreclosure was the primary remedy, sale only emerged after equity of redemption was recognized C. The problem of title security No longer possible to appropriate title in PPSAs Title security not eliminated under CCQ In title security, creditor seeks to use the right of ownership to obtain rights having an economic value over the debtor’s assets 2 main types: title retention title transfer enforcement is analogous to foreclosure creditor is already the owner and simply extinguishes whatever rights the debtor may have had to acquire ownership creditor becomes the owner by compelling the debtor to transfer title 73 II. usually extinguished principal obligation Strict Foreclosure or Taking in Payment A. Mechanics of enforcement 1. Notice to the debtor and other interested parties CCQ – notice to parties is ex ante, 20, 30 or 60 days (2749-2758) Even if the creditor is in possession, the remedy is not effectuated until the notice period has expired PPSA – 15 days notice for foreclosure (s. 61(4)) Mortgage – apply to court for order of foreclosure 2. Surrender If the creditor is already in possession, surrender is not required but creditor must take steps to confirm its title to the asset CCQ – debtor must sign a deed of transfer or a judicial order is required PPSA – transfer is automatic (s. 61) Mortgage – need second judicial order If creditor is not in possession, need to get surrender CCQ – motion (if not voluntary), if voluntary need writ attesting to the surrender (2764(2)) PPSA – self-help or judicial order (s. 58(2)) Mortgage – voluntary or judicial order SEE ABOVE for greater detail on surrender B. Debtor’s recourses 1. Ex ante requirements Sometimes the law provides that foreclosure is not allowed w/out prior judicial authorization CCQ – where a debtor has paid more than 50% of the secured obligation at the time a notice of enforcement is given, the creditor must normally obtain judicial permission to proceed w/ taking in payment (2778) Exception – voluntary surrender (2764) 2. Compelling a sale in realization General attitude – sale should be the primary remedy Creditor must exercise sale if the debtor so requires 2779, 2780 CCQ s. 61(2), (7) PPSA c/l mortgages 3. The right to remedy Debtors are given a right to remedy the default and reinstate the security C. Third party recourses Unless the 3rd party is acting in the name of the debtor, obtaining subrogation to the debtor’s rights, redemption requires paying the debt in full, not just remedying the specific default Subsequent hypothecary creditor can compel creditor to sell the property instead (2779) (prior creditors can only exercise their rights under 2750) 74 Must pay the costs and provide security that the sale will generate sufficient funds to pay the foreclosing creditor’s claim in full (2779(2)) Any subordinate creditor or creditor w/ an interest who has given notice to the foreclosing creditor, may w/in 15 days require the creditor to sell (s. 61(2), (6), (7)) D. Effect of enforcement on debtor and 3rd parties Transfers whatever interest the debtor had in the secured collateral to the creditor 1. Effect of foreclosure on the principal obligation Asset is substituted for the debt – extinguishes the principal obligation S. 61(4)(a) PPSA, 2782(1) Rule is harsh If the creditor risks extinguishing several obligations, foreclosure is not an option, and if a creditor is counting on several different assets named individually to satisfy the obligation, foreclosure against any one asset is not an option 2. Effect of foreclosure on 3rd party rights Other creditors Secured creditors w/ subordinated security interests and all judgment creditors w/ subordinated interests are purged but the rights of creditors w/ a superior position in the collateral are not affected by the foreclosure (s. 61(1), (4)(b)) Subordinate hypothecs are purged (2783(1)) Other 3rd parties Lessee who publishes rights after the hypothec has been taken but prior to the notice may enforce those rights against the creditor (2783(1)) Creditors who have rights granted by the debtor may enforce these rights against the realizing creditor (PPSA) E. The special case of title security Recall, PPSA assimilates realization recourses of those purporting to hold title security to the recourses of ordinary secured creditors 1. The Quebec regime CCQ assimilates a number of title transactions to the hypothec and restrict creditor’s remedies to regular hypothecary remedies – treated as thought they were attempting to exercise taking in payment remedy Security trust (1263) Seller’s right of resolution in immovable transactions (1741-1743) Conditional seller’s rights (1745-1749) Creditor-purchaser’s rights under a sale w/ a right of redemption (1756) Giving in payment is prohibited (1801) Right of resolution in the sale of movables in not covered in 1742 Not all sales under suspensive condition, and not all sales w/ a right of redemption are covered and leases and finance leases are not covered For these transactions, the creditor who actually has title may resolve the K, or enforce a Kal right to repossess and to extinguish the debtor’s eventual right to acquire Creditor who seeks to reacquire title under the sale of movables (1604, 1741) 75 2. The Bank Act regime Bank is deemed to acquire all rights and title of the debtor in the secured collateral Comprehensive mechanism governing notice, the taking of possession, the right to remedy, the kinds of private sale authorized and the bank’s right to foreclose III. Sale by the Secured Creditor Sale has become the primary remedy A. Private sale by the creditor S. 59 PPSA, 2784-90 CCQ 1. Formalities A creditor who has seized or repossessed may dispose of it (s. 59) Give notice to debtor and interested 3rd parties at least 20 days prior to sale (s. 59(8)) Notice provides info about the collateral, the debt, the default, collateral expenses, and other info about the sale (s. 59(9)) Don’t need to give notice if the collateral is perishable or there is another good reason for selling now (s. 59(18)) CCQ – prior notice is given regardless of the remedy exercised (2758) Set out who should get notice, the contents of the notice Can apply to court for authorization to dispose earlier (2767) Notice of enforcement doesn’t modify obligations but 2760 prevents debtor from alienating assets free and clear of creditor’s rights (paralyis 2674) Prof – this is bothersome b/c debtor should be free to alienate property, generally subject to right to follow but paralysis is even in light or ordinary course of business alienations 3rd parties aren’t protected b/c they won’t be checking the registry can escape this if secured creditor consents 2. Rights of creditors and types of sale Rights of creditors Creditor may repair, complete the manufacture of, or process the collateral prior to disposition (s. 59(2)) Creditor may delay the timing of the disposition (s. 59(7)) Creditor in possession has simple admin of the property until the sale takes place (2768) Usually explicit clause in the security agreement allowing the creditor to repair, complete the manufacture of, or process the collateral prior to disposition Sell the property w/out unnecessary delay, in best interests of debtor (2785) Types of sale Creditor may sell for cash, or if the security agreement provides, for credit or even exchange of assets (s. 59(5-6) PPSA) Creditor may sell by auction, private sale, tender, as a whole or by lots, or even may lease the assets Creditor may purchase at the sale if it is an advertised sale as long as the price is commercially reasonable (s. 59(14)) 2786-2788 CCQ provided for a variety in the modes of sale and nothing prevents the creditor from purchasing the assets being sold (but 1695 ff applies) 3. Recourses of debtors and 3rd parties remedy the default and reinstate the security up to the sale 76 4. Effects of the sale If the required formalities have not been followed, the good faith purchaser for value is protected and acquires the property free and clear of the secured party’s interest and all subordinate interests (s. 59(14) PPSA) Claim is secured creditor is paid – expenses first, then the secured obligation (s. 59(3)) S. 60 – surplus As it doesn’t purge senior claims, senior secured creditor often takes over to improve marketability Typical clause – if in default of another sec agreement, in default of this one 2789, 2790 provide imputation of price and 2791 describes the rights of 3rd parties creditor pays the costs of the disposition, all rights and claims prior to hers, and then her own claim if the proceeds are insufficient, the creditor retains a deficiency claim (2789(3)) sale does not extinguish subordinated rights, and the purchaser takes subject to these (2790) creates slight perversion as the subordinated secured creditor gets more than what its prioirty ranking would suggest surplus is remitted to the court for distribution (2789(2)) B. Public sale by a designated official C/l doesn’t contemplate means of disposition other than sale under s. 59 or foreclosure under s. 61 Sale by judicial authority – 2791-2794 1. Formalities A party seeking this recourse must indicate so in the prior notice (2758) and apply to the court for permission (2692) Nature of application set out in CCP 2. Effects of a sale by judicial authority Purges all existing real rights in the property (2962, 2964) Makes the purchase of assets a much less risky proposition for the buyer and enhances the realization value C. Bank Act regime Bank realizing upon the security is entitled to sell the property privately EFFECTS OF ENFORCEMENT I. II. General Context One of primary objectives of security is to escape the pro rata allocation scheme that would otherwise be imposed in a distribution of the debtor’s assets There may be 3rd parties w/ interests in the collateral Consider the interest of the person who acquires the collateral as a consequence of the creditor exercising a remedy Inter Partes Effects A. Between default and creditor possession Once default, creditor is in position at law and under the security agreement to start enforcement But in practice, default doesn’t always attract strict enforcement proceedings 77 1. Waiver of default Creditors will often waive default Either pretend it didn’t occur or ask the debtor to fix the default, or indicate waiver Rights and obligations of the debtor remain unchanged 2. Notice of enforcement Once they decide the default is serious enough to enforce, they must give notice (SEE ABOVE for greater detail on notice requirements) Giving of notice doesn’t itself directly modify either the obligation owed or the debtor’s rights in the collateral But notice under CCQ paralyses the debtor’s ability to alienate the assets free and clear of the creditor’s rights (2760) (no such limit in c/l) Creditors who feel that recover of their claim may be in peril may obtain seizure before judgment or an attachment order Freeze the debtor’s right to alienate the seized collateral and require the debtor to account for any fruits during seizure Motion for immediate surrender (2767), ex parte application for immediate possession (s. 67(c) PPSA) Obligation to repay the principal obligation may be affected (acceleration clause, subject to ability to remedy default) B. During creditor possession prior to realization 1. Constructive possession CCQ – if they agree that the debtor may remain in possession, the terms of the agreement will specify the debtor’s rights (same if creditor gets constructive possession by means of judicial order) 2760 limits debtor’s rights to dispose of the collateral once prior notice filed PPSA – collateral may be left in the debtor’s control, under the creditor’s constructive possession (s. 58(2)) and debtor’s rights subject to agreement C/l mortgages – remains in possession until foreclosure or sale 2. Actual possession Where the creditor takes control of the property personally, the debtor will typically be unable to deal w/ it at all. CCQ – creditor in possession has powers of simple admin (2768, 1301, 1303) Debtor loses the use of the asset, the capacity to collect its fruits and revenues and the right to alienate or encumber the asset C/l mortgages – mortgagee in possession can manage it as it sees fit, subject to the security agreement 3. Effect on the principal obligation Where the creditor takes possession, it should have no impact on the debtor’s duty to repay the principal obligation If the fruits haven’t been assigned to another creditor, the creditor is entitled to appropriate these to repayment of the debt (2736-2737) PPSA – b/c of the extra powers of the receiver, it is rare that revenue-producing assets will remain for any length of time in simple possession of the creditor C/l mortgages – mortgagee in possession collects rents and applies them to the outstanding obligation 78 C. After the exercise of the chosen remedy 1. Effect on collateral Where a creditor exercises a remedy of taking possession for purposes of admin or appoints a receiver, control of the secured collateral passes out of the debtor’s hands (2773, s. 64) Debtor only has right to accounting Where creditor exercises foreclosure or taking in payment, the exercise of the recourse operates a transfer of title from the debtor to the creditor (2782) Where the creditor elects to sell the property, the sale is deemed to be a sale from the debtor to the purchaser (s. 59, 2786) 2. Effect on the principal obligation Appointment of receivership No impact on the existence of the debtor’s obligation to the creditor To extent that receiver liquidates assets, $$ received is used to pay down the outstanding debt Surplus returns to debtor (2676, 2777, s. 64) If not fully liquidated, secured creditor can sue debtor for deficiency Foreclosure Extinguishes the principal obligation (2782, s. 61(4)(a)) Keep excess, can’t claim deficiency D. The right to reinstate the security Debtor’s right to reinstate is central feature 2761-2762 accomplish 2 objectives (public order – can’t be waived) debtor may remedy the default and reinstate the security at any time prior to remedy effectively exercised – simply pay the amount due or remedy the breach and pay creditor’s costs creditor can’t demand from debtor any indemnity or any other amount other than interests and costs (acceleration or forfeiture of the benefit of term clauses can’t be enforced as against a debtor who seeks to redeem the collateral and reinstate the security similar regime in s. 62 PPSA but appointment of receiver terminates the right to reinstate c/l mortgages – only right to redeem, not reinstate and acceleration clauses are fully enforceable III. Third Party Effects A. Other creditors 1. Unsecured creditors No rights in the secured collateral as such No rights to stop the enforcement, other than to step in the debtor’s shoes and redeem the collateral, being subrogated into the realizing creditor’s rights Get no benefit from foreclosure If sold, get pro rata share of any remaining $$ after higher-ranking creditors are paid in full 2. Preferred creditors Either they are vested w/ an execution preference or they have a possessory lien (right of retention) Execution preference – treated as unsecured creditors except: No rights in the collateral and can’t assert any claim against it after sale or foreclosure 79 CCQ – creditor w/ prior claim is entitled to be paid by preference upon the sale of the collateral (2789(1), 2793) or to be paid the value of the claim by the realizing creditor who takes the collateral in payment (2782(2)) PPSA – creditor who forecloses is not responsible for liquidating execution preferences b/c they are rights in the collateral C/l mortgages – typically paid by foreclosing mortgagee or are liquidated upon the sale Possessory liens Assert rights as against the realizing creditor (2770, s. 32) 3. Other secured creditors Resolved as questions of priority Controlling realization CCQ – higher ranking secured creditor may take over the process of realization, even if another creditor has commenced execution (2750) Act expeditiously, reimburse other creditor for expenses Lower ranking creditors have the same rights as the debtor to redeem the collateral or reinstate the security, right to compel foreclosing creditor to proceed to a sale PPSA – permits lower ranking creditor to compel foreclosing creditor to sell (61(2)), but doesn’t specifically address whether senior secured party can interrupt a realization by a junior creditor in order to proceed w/ its own realization Secured creditors usually negotiate among themselves Senior creditor can realize against whatever assets it wishes (2662, 2753) Junior secured creditor can’t force a senior secured creditor to either realize against other assets or to pro-rate the value of the secured obligation as against the various assets Rights after realization Foreclosure extinguishes junior security and preserves senior security (s. 61, 2782-2783. C/l mortgage) Sale C/l mortgages and PPSA extinguish subordinate interests but preserves senior security interests (s. 59) CCQ – depends on the type of sale: Sale by creditor – extinguishes senior security (2789) but maintains junior security (2790) Sale by judicial authority – purges all security an secured creditors are paid in the order of priority of their claims (2692-2694) Marshalling of security Distribution of surpluses to lower ranking creditors whose security is extinguished by the sale in order of priority (s. 60, 2789-2790, 2794) Marshalling – a senior creditor who realizes against several items of collateral, only some of which are encumbered by junior security, must, to the extent possible take payment from the proceeds generated by the unencumbered assets, so as to max surplus from encumbered assets available to pay the claims of junior secured creditors (PPSA) Effect – prefer all secured creditors to the extent possible over unsecured creditors who can only claim in balance, if any, once all secured creditors are satisfied Creditor must pro rate payment of the claim across the various assets subject to realization, even where those assets may be encumbered by junior security as well (2754) Effect - ensures that some proceeds will be available to unsecured creditors, even if not all junior secured creditors have been fully paid 80 B. Sellers PPSA – sellers are simply secured creditors whose enforcement rights are determined by the Act None of the classical seller’s remedies are preserved Sellers may take steps to give themselves pmsi, but whatever rights they have can only be those of a secured creditor under the act C/l mortgages – seller has a preferential position CCQ – position more complex Vendor’s hypothec – makes the seller a senior secured creditor and regular enforcement rules apply when a junior secured creditor attempts to enforce Transactions meant as security (1743, 1745-1749, 1750-1756) – recourses are that of hypothecary creditor Unpaid seller may refuse to delivery or stop delivery in transitu, revendicate the property from a purchaser w/in 30 days of delivery (1741) Right can be exercised against any realizing secured creditor, up to surrender Retention of title, defeasibility of title, leases, consignments can also defeat secured creditor’s attempt to realize C. Purchasers Purchaser will either acquire the collateral free and clear of security or will acquire the collateral subject to the security, or will assume the principal obligation along w/ taking the collateral subject to the security Only conflict where a purchaser is in fact the personal or secured debtor of the secured creditor – effects of enforcement will be those that apply to ordinary secured debtors D. Purchasers at the sale in realization Rights of purchases at a sale in realization are determined by the advertised conditions of the sale and the legislative enforcement regimes CCQ Sale by judicial authority purges all registered rights in the property, except servitudes, rights of superficies and emphyteusis, registered leases and the legal hypothec of municipalities and school commissions (2794) For movables, all registered rights are purged Sale by creditor does not purge junior claims PPSA – extinguishes the realizing creditor’s security, all subordinate security interests and all rights subordinate to those of the secured debtor (s. 59(15), purchase takes subject to senior rights Sale in realization can’t be set aside lightly, w/ the good faith purchaser acquiring clear title notw/standing any formal defects E. Holders of subordinate interests; lessees No rights to prevent enforcement, except to act through the secured debtor to redeem the collateral or to reinstate the security (entitled to notice s. 59, 61, 2758) If an estate in land, or a usufruct in an immovable were granted prior to the mortgage or hypothec, the interest of the secured creditor can’t affect the pre-existing registered interest w/out their consent If the subordinate interests are in personam, these interests will generally be extinguished when the right of the secured debtor is extinguished F. The right to redeem and reinstate the security Right of 3rd parties to remedy a default and reinstate security well protected (2761-2762, s. 62 PPSA) 81 ENFORCEMENT AGAINST CLAIMS I. The Theory of Security Over Claims Players: Secured creditor – may also be an assignee of the claim Secured debtor – may also be an assignor 3rd persons generally account debtor – the person’s whose timely payment is the secured creditor’s guarantee of repayment A. Scope of the regime of security on claims Basic idea – if a debtor is owed a prestation by a 3rd party, that claim is a source of value in the debtor’s patrimony (property) But there is a 3rd person whose participation is necessary in order to enforce – need to make sure they know about the security and who to pay 1. Business claims A/R – some businesses don’t want to run a credit and collections department so they immediately sell their claims at a discount to a bank, finance corp or factoring corp Receivables from non-ordinary course of business transactions – sale of capital equipment, tax rebate, insurance proceeds, etc Not all types of claims or personal rights have an immediate monetary value Futures Ks Intangible rights – franchises, distributorship agreements, TM and other IP (economic value) 2. Non-business claims Individual sells car to neighbour Services – salary, commission due Tax refunds, social welfare payments, insurance pay-out, investment income, etc Personal rights not involving $$ B. Garnishment of claims and wages 1. Types of garnishment Seizure of claims (most common) Seizure of $$ owing for services rendered Garnishment of wages (first garnishing creditor will be paid in full before next garnishing creditor receives anything) 2. Differences b/w garnishment and security on claims Where security has been taken on claims, the creditor can acquire a right to payment of the claims prior to default, and doesn’t need a judgment in order to enforce payment against the account debtor Creditor may let the secured debtor continue to collect the claims until later event Rank of the secured creditor is established in advance by publicity and not by the order in which the garnishment orders are served on the garnishee Garnishment is not a mechanism to secure performance of another obligation voluntarily assumed by the debtor – it is a means of executing a judgment obtained C. Assignment of claims Absolute assignment – the claims immediately passes to the assignee 82 Assignee takes the identified claims as payment for value given to the assignor – no claim for deficiency or right to expropriate surplus Enforcement rules in 2743-2747, s. 57 don’t apply Security assignment – still remains part of the debtor’s patrimony even if the assignee is actually collecting the claim II. Creation of Security over Claims – Assignments Regime of hypothecs on claims is presented as a specification of movable hypothecs on claims (27102713, s. 3(1), 41) CCQ – rules setting out the effects of hypothecation are presented w/out any reference to movables (2743-2747) 2695 – hypothec over rentals of an immovable is an immovable hypothec 2699, 2708 – hypothecation of corporealized claims 2461, 2697 – security on insurance claims PPSA – structure of enforcement and priorities in receivables set out in s. 41 (s. 55 says that Part V doesn’t apply to s. 3(2)) S. 57 – relevant enforcement principles of security in receivables S. 4 – excludes rent from real property, insurance claims A. Creation as b/w secured debtor and secured creditor 1. Capacity and collateral No particular restrictions either as to capacity or collateral in PPSA CCQ – 2 restrictions B/c a hypothec on rents produced by an immovable is an immovable hypothec (2695), a natural person not carrying on an enterprise but happens to be a landlord, may hypothecate the rents due w/out delivery as long as the hypothec is not a universality of claims (2684) Occasionally permits the hypothecation of a claim in principle but limits the extent to which the hypothec can actually be enforced against that claim (ex. life insurance policy) 2. Formalities Basic rules governing the formalities for creating security over claims are those of the general regime CCQ - slightly different regime for pledge of claims (2710, 2709) – endorsement may be necessary part of delivery 3. Publicity and perfection General regimes of attachment and perfection under PPSA and general regime of publicity under CCQ apply Distinction is drawn b/w enforceability against 3rd persons generally and collectability as against account debtors Collectability requires additional step (s. 41, 2710(2)) Only certain types of claims can be published by possession (s. 24, 2709) Hypothec on a universality of claims must be published in the proper register (2711) Special publication formalities is the hypothecated claim is itself secured by a hypothec (2712) Both the transfer of a claim includes its accessories (1638) as does the hypothecation of a claim B. Opposability to account debtors S. 41(7)-(9) PPSA – specific notice of the security or the assignment must be given to the account debtor in order for it to be opposable CCQ – rules relating to ordinary assignments of claims set out in 1638 ff apply to hypothecs on claims 83 3 mechanisms to make hypothecs collectable against account debtor account debtor may have acquiesced in the hypothecation (informed) account debtor mat have received a copy or pertinent abstract of the deed of hypothecation account debtor may have received some other evidence of the hypothecation which may be set up against the hypothecary debtor C. Assignments Possible for a debtor to simply assign debts outright to a creditor Creditor automatically becomes the payee of the claims and must notify the account debtor of the assignment 1. Basic structure CCQ – assignment of non-bearer instrument (1638-1646), bearer instruments (1647-1650) If hypothecation of claim, must also follow rules on hypothecs PPSA – uniform regime imposed at the moments of creation and ensuring collectibility (s. 3(2), 41) 2. Conditional assignments PPSA – recall substance of the transaction rule in s. 3(1), doesn’t matter if security interest is taken in form of mortgage, conditional sale, etc. all fall under Part V enforcement regime CCQ – conditional assignment of claims is theoretically possible as a title transaction, so that the rules for absolute assignments will apply to conditional assignments (and not rules for hypothecs on claims) Some argue this doesn’t exist b/c of 1801 but not conclusive – possible to make any obligation subject to a modality such as a condition (1497-1507) (see 1741, 1745, 1756) III. Effects of Security over Claims Examined from 4 angles: Scope of the rights secured Rights of the secured creditor to collect payment of the claims Other rights of the secured creditor to enforce the hypothec Rank of a security interest on claims when several competing securities CCQ 2743-2747, PPSA s. 41, 57 Mechanics of enforcement having nothing to do w/ the exercise of ordinary secured recourses over corporeal property or over real rights in corporeal property set out in 2748-2794 A. Scope and nature of secured rights Embraces all its accessories (1638) Where a claim is subject to security or has been assigned, the secured creditor or the assignee collects both capital and revenues (2743, s. 57(2)) Foreclosure clauses are prohibited, once the claim is paid in principal, interest and costs, the creditor must remit any excess to the hypothecary debtor (2747, s. 57(2)(b)) If the claim is assigned outright, creditor gets to keep the excess B. Right of the secured creditor to collect account debts Creditor is entitled to enforce the hypothec as soon as the hypothec is constituted (2743(1)) Seems to treat the creditor holding a hypothec on claims as a hypothecary creditor in possession of hypothecated property (pledgee) PPSA requires that the debtor be in default prior to the creditor attempting to collect (s. 57(2)(a)) 1. Creditor collection Creditor must fulfill the formalities of 1641 or 1642 in order to collect from account debtors (2710(2)) 84 Hypothecary creditor collects both revenues and capital (2743) In the absence of any agreement to the contrary, the creditor collects from the account debtors even id the obligation secured is not yet due or the amount collected exceeds the amount then due (2743(2)) Repayment may take on a rhythm of its own Imputation of payments (1569-1572) PPSA – possible for parties to agree that creditor will begin collecting the claims immediately 2. Authorization of debtor to collect PPSA – default rule is that the secured debtor will collect from the account debtor, and the account debtor will continue to pay the secured debtor until informed otherwise (s 41(8)) CCQ – secured creditor may authorize the debtor to collect payments as they fall due (2744) Extent of authorization determined b/w the parties 3. Implicit authorization of debtor to collect 2744 presumes that the authorization given to the debtor to collect must be contained in the act of notification given to account debtors given that the creditor has no right to enforce collection until account debtors have been notified, if they aren’t notified, they continue to pay the hypothecary debtor as though no hypothec existed 4. Withdrawal of authorization to collect Where the hypothecary creditor has given notice of the hypothec to account debtors but has explicitly authorized collection by the hypothecary debtor, it is necessary to specifically w/draw authorization 2745 – hypothecary creditor may selectively w/draw authorization if no prior notice was given, just need to give notice under 1641-1642 and collect from account debtors 5. Formalities for withdrawing the authorization to collect 3 requirements governing the creditor’s exercise of the right to enforce w/drawal (2745) creditor must serve notice on the account debtor that the creditor will thereafter collect the debts also serve this notice in the grantor register it PPSA – upon default the secured creditor gives a notice to the account debtor whether or not the secured debtor was then collecting the account debts and the secured creditor must notify the secured debtor that it is collecting w/in 15 days (s. 57) BIA may also apply – need to give 10 day notice of default prior to enforcing the security against account debtors C. Enforcement rights and protection of account debtors Principal effect of taking security over claims is that it can lead to the divesting of the title of the secured debtor B/c the transaction is security, a lien de droit continues to exist b/w the secured debtor and the account debtor as a result of the secured debtor’s contingent right to again collect the claims once the secured debt is paid in full (2747, s. 57(2)(b)) and from the secured debtor’s right to sue to enforce payment (2713, 2746) 1. Status of account debts Publicity makes the secured creditor not only the payee but effectively the creditor of the account debtor, so the normal incidents of debtor-creditor relations will apply Compensation (1672) 85 CCQ draws a distinction as to the scope of compensation depending on the manner in which hypothecation was made opposable to the account debtor If account debtor acquiesces unconditionally, can’t set up any compensation that could have been raised against the hypothecary debtor prior to acquiescence (1680(1)) If account debtor received notice, then she may set up compensation of debts w/ the hypothecary debtor which came due prior to notice being given (1680(2)) Suggests that when a hypothecation of claims takes place, the creditor assumes the claims as they then stand S. 41 PPSA – an assignee takes subject to the equities as they stand b/w the assignor and account debtor unless the account debtor has agreed to waive these Notice also freezes the equities as of the moment the account debtor is informed Good faith a commercially reasonable immaterial modifications to the K are also opposable to the secured creditor 2. Actions to enforce account debts CCQ – hypothecary creditor need not sue to recover any $$ owing but may simply inform the hypothecary debtor of any irregularity in payment (2746) Both hypothecary creditor and debtor must be parties to an action PPSA – until notice, only the assignor may sue to collect 3. Limitations on opposability to account debtors Until the hypothec is validly made opposable to account debtors, any payment made by them to their ostensible creditor as well as any other cause of extinction of the obligation may be set up against the assignee (1643(1)) If the account debtor pays an apparent creditor in good faith, the payment may also be set up against the assignee (1643(2)) PPSA – assumption is that good faith payment to an ostensible creditor in situations of confusion will normally discharge the account debtor 4. The secured debtor’s equity Secured creditor shouldn’t be allowed to collect more than the outstanding balance of the secured debt (2747, s. 57) D. Priorities 1. Under the CCQ Date of publication determines rank Even though a creditor has not actually begun collecting claims, the first to publish the hypothec has ultimate priority (2945) A movable hypothec on claims but not an immovable hypothec on claims may actually rank at a date prior to its publication If the claim is hypothecated w/out delivery, the date of the hypothec given will be fixed by the date at which the hypothecary creditor gave value provided that the hypothec is registered or published by possession w/in 10 days (2699, 2708) 2. Under the PPSA Order of priority follows the order of perfection, or if no security interest is perfected, the order of attachment (s. 35) 86 In situations where a subordinate secured party is collecting from the account debtor, prior to the time that a senior secured party has given notice of enforcement, in the absence of a subordination agreement the subordinate secured party is actually collecting on behalf of the senior secured party and must account for and hand over $$ collected 3. Conflicts b/w inventory proceeds claims and security on claims as original collateral CCQ – if the inventory of equipment financier actually wants to collect claims, the claims proceeds have to be identified and the account debtor notified (2674(3) speaks of cash or near cash proceeds) First to publish security over the claims would prevail PPSA – the inventory financier who perfects in proceeds so as to maintain continuity of perfection will outrank a receivables financier (s. 34) IV. Particular Types of Hypothecs on Claims 11 regimes for hyopthecs over claims individual claims (2710, 2743-2747, 1641) universality of claims (2710, 2711, 2743-2747, 1642) claims secured by registered hypothec (2712) rents of an immovable (2695, 2743-2747) rental insurance (2695) damage insurance (2497) life insurance (2461) liability insurance (2500) claims arising from ordinary course sales of movables (2674) corporealized claims (2699, 2708) floating hypothecs on claims (2718) 87 Table of Contents – Secured Transactions Summary INTRODUCTION AND OVERVIEW ....................................................................................................................................... 1 I. A. RUDIMENTS OF DEBTOR/CREDITOR LAW ......................................................................................................................... 1 Compelling the performance of obligations ................................................................................................................ 1 1. 2. 3. 4. B. Limitations and inconveniences of the debtor/creditor regime ................................................................................... 1 1. 2. 3. 4. II. A. Judicial enforcement ....................................................................................................................................................................... 1 Seizure and sale of property ............................................................................................................................................................ 1 Distribution of proceeds .................................................................................................................................................................. 1 Fraudulent conveyances and unjust preferences .............................................................................................................................. 1 Concerns of debtors......................................................................................................................................................................... 1 Concerns of creditors ...................................................................................................................................................................... 2 Concerns of third parties .................................................................................................................................................................2 Palliating limitations and inconveniences ....................................................................................................................................... 2 SOCIO-ECONOMIC CONTEXT OF SECURED TRANSACTIONS LAW ...................................................................................... 2 Incidence of Credit Transactions ................................................................................................................................ 2 1. State subsidies, equity and debt financing ....................................................................................................................................... 2 2. Unsecured and secured debt ............................................................................................................................................................ 2 B. Types of Security ......................................................................................................................................................... 3 1. Personal security ............................................................................................................................................................................. 3 2. Security on property ........................................................................................................................................................................ 3 3. Formal typology of security on property ......................................................................................................................................... 3 Legal Institutions for Generating a Bankruptcy Preference............................................................................................................. 3 III. SECURITY NEXUS: DEBTORS, CREDITORS, OBLIGATIONS, ASSETS ................................................................................... 3 A. Universe of Debtors .................................................................................................................................................... 3 B. Universe of Creditors .................................................................................................................................................. 4 1. Market players................................................................................................................................................................................. 4 2. Non-market players ......................................................................................................................................................................... 4 C. D. Universe of Obligations .............................................................................................................................................. 4 Universe of Assets (Collateral) ................................................................................................................................... 4 1. Consumer debtors............................................................................................................................................................................ 4 2. Commercial debtors ........................................................................................................................................................................ 4 IV. ILLUSTRATIVE EXAMPLES OF SECURED TRANSACTIONS .................................................................................................. 5 A. Consumer Transactions .............................................................................................................................................. 5 B. Real Estate Transactions............................................................................................................................................. 5 C. Commercial Transactions ........................................................................................................................................... 5 D. Financing Governmental Operations .......................................................................................................................... 5 E. Financing the Administration of Justice ..................................................................................................................... 5 F. Securing Payment of Monetary Judgments ................................................................................................................. 5 V. THE HEREIN OF CONSENSUAL SECURED TRANSACTIONS ................................................................................................. 5 A. Debtor Objectives and Interests .................................................................................................................................. 5 B. Creditor Objectives and Interests ............................................................................................................................... 5 C. Third Party Objectives and Interests........................................................................................................................... 6 VI. SOME PERVASIVE GENERAL CONSIDERATIONS ................................................................................................................ 6 DEBTOR-CREDITOR LAW...................................................................................................................................................... 6 I. A. COMPULSORY PERFORMANCE OF OBLIGATIONS ............................................................................................................... 6 Enforcement of Rights or Interests in Property: Real Actions .................................................................................... 6 1. 2. 3. 4. 5. B. Substantive remedies ....................................................................................................................................................................... 6 Vindicating title and possession ...................................................................................................................................................... 7 Enforcement of rights and interests intended or deployed as security ............................................................................................. 7 Mixed real and personal actions ...................................................................................................................................................... 7 Self-help remedies – recapture ........................................................................................................................................................ 7 Enforcement of Personal Rights: Personal Actions .................................................................................................... 7 1. Substantive remedies ....................................................................................................................................................................... 7 2. Mechanics of enforcement .............................................................................................................................................................. 7 3. Self-help remedies ........................................................................................................................................................................... 7 C. Collateral Incidents of Judicial Enforcement ............................................................................................................. 8 1. Protecting the debtor’s interest ........................................................................................................................................................ 8 2. Protecting the creditor’s interest...................................................................................................................................................... 8 D. II. Three Basic Principles Governing Executions in Personal Actions ........................................................................... 8 THE CREDITORS’ COMMON PLEDGE ................................................................................................................................. 8 88 A. Attenuations to the Principle of Universal Patrimonial Liability ............................................................................... 8 1. Exemptions from seizure .................................................................................................................................................................8 Exemptions declared by law............................................................................................................................................................ 8 Exemptions resulting from a contract, gift or will ........................................................................................................................... 8 2. Deferred Exigibility ........................................................................................................................................................................ 9 3. Limited recourse financing.............................................................................................................................................................. 9 B. Attenuations to the Principle of a Unitary Common Pledge ....................................................................................... 9 1. Title transactions and the problem of ostensible ownership ............................................................................................................ 9 Sale, lease, consignment.................................................................................................................................................................. 9 Mandataries, Agents, Trustees ........................................................................................................................................................ 9 2. Extension of the common pledge beyond a debtor’s patrimony ...................................................................................................... 9 Extension by operation of law ......................................................................................................................................................... 9 Extension by agreement .................................................................................................................................................................. 9 C. Protection of the Common Pledge .............................................................................................................................. 9 1. Pre-judgment interlocutory proceedings ......................................................................................................................................... 9 Seizure before judgment – attachments ......................................................................................................................................... 10 Judicial sequestration – receiverships............................................................................................................................................ 10 Injunctions..................................................................................................................................................................................... 10 2. Creditor Supervisory Recourses .................................................................................................................................................... 10 Oblique action ............................................................................................................................................................................... 10 Fraudulent conveyances and preferences – the Paulian action ...................................................................................................... 10 EXECUTION OF JUDGMENTS ............................................................................................................................................. 11 I. PRINCIPLE OF EXECUTION AGAINST PROPERTY .............................................................................................................. 11 Procedures for Seizing Property ............................................................................................................................... 11 The Sale and Distribution of Proceeds of Sale .......................................................................................................... 11 Seizure by Garnishment of Property, Claims and Wages ......................................................................................... 11 II. PRINCIPLE OF EQUALITY OF CREDITORS ......................................................................................................................... 11 A. Attenuations to the principle of Creditor Equality .................................................................................................... 11 A. B. C. 1. 2. 3. 4. Priorities for payment .................................................................................................................................................................... 11 Security devices ............................................................................................................................................................................ 11 Title security ................................................................................................................................................................................. 11 Other disruptions to creditor equality ............................................................................................................................................ 11 INSOLVENCY, BANKRUPTCY, CORPORATE REORGANIZATIONS, STATUTORY LIQUIDATIONS ................ 12 I. HISTORICAL AND POLICY PERSPECTIVES ON INSOLVENCY AND BANKRUPTCY............................................................... 12 Meaning of Bankruptcy and Insolvency .................................................................................................................... 12 Functional Objectives of Modern Insolvency Regimes ............................................................................................. 12 Rehabilitative Potential of Straight Liquidation Proceedings .................................................................................. 12 Out of Court Creditor-Initiated liquidation and Rehabilitation Mechanisms ........................................................... 13 Tensions Between Insolvency and Secured Transactions Regimes ........................................................................... 13 II. OUTLINE OF CONTEMPORARY BANKRUPTCY AND INSOLVENCY REGIMES ..................................................................... 13 A. Canadian Bankruptcy and Insolvency Legislation .................................................................................................... 13 B. Canadian Bankruptcy Court Structure...................................................................................................................... 13 III. LIQUIDATION AND REORGANIZATION IN CANADIAN BANKRUPTCY LAW ....................................................................... 13 A. Liquidation Proceedings ........................................................................................................................................... 13 A. B. C. D. E. 1. Liquidation under BIA .................................................................................................................................................................. 14 2. Liquidation Proceedings under WA .............................................................................................................................................. 14 B. Reorganization Proceedings ..................................................................................................................................... 14 1. Reorganization under BIA ............................................................................................................................................................ 14 2. Reorganization under CCAA ........................................................................................................................................................ 14 3. Reorganization under WA ............................................................................................................................................................ 14 C. Consumer Proposals under BIA ................................................................................................................................ 14 IV. LOGIC AND OPERATION OF THE BANKRUPTCY REGIME .................................................................................................. 15 A. Appointment of the Trustee ....................................................................................................................................... 15 B. Assets Which Form Part of the Bankruptcy Estate ................................................................................................... 15 C. Avoidance of Certain Pre-Bankruptcy Transactions ................................................................................................ 15 D. Effect on Enforcement Rights of Secured Creditors: Stay of Enforcement Proceedings .......................................... 15 1. Stay of enforcement in liquidation proceedings ............................................................................................................................ 15 Under the BIA................................................................................................................................................................................ 15 Under the CCAA............................................................................................................................................................................ 16 E. Ranking of Creditors’ Claims in Bankruptcy ............................................................................................................ 16 1. Creditors whose claim is founded on title ..................................................................................................................................... 16 89 2. 3. 4. 5. 6. 7. 8. V. Unpaid unsecured suppliers........................................................................................................................................................... 16 Farmers, fishers and aquaculturalists ............................................................................................................................................ 16 Governmental claims .................................................................................................................................................................... 16 Secured creditors ........................................................................................................................................................................... 16 Title security ................................................................................................................................................................................. 16 Immovables ................................................................................................................................................................................... 17 Movables ....................................................................................................................................................................................... 17 Non-consensual security rights ..................................................................................................................................................... 17 Other claims to secured creditor status .......................................................................................................................................... 17 Privileged (preferred creditors) ..................................................................................................................................................... 17 Unsecured creditors ....................................................................................................................................................................... 18 Deferred (subordinate creditors).................................................................................................................................................... 18 Treatment of compensation and set-off rights in bankruptcy ........................................................................................................ 18 Debtor in possession secured financing in reorganizations ........................................................................................................... 18 LIMITS OF BANKRUPTCY AND OTHER COLLECTIVE PROCEDURES .................................................................................. 18 HISTORY AND THEORY OF SECURED TRANSACTIONS ............................................................................................ 18 I. A. BRIEF HISTORY OF THE INSTITUTIONS FOR OBTAINING SECURITY ON PROPERTY .......................................................... 18 Legacy of Roman Law ............................................................................................................................................... 18 1. Roman law institutions .................................................................................................................................................................. 18 Lender’s security devices .............................................................................................................................................................. 19 Vendors’ recourses ........................................................................................................................................................................ 19 2. Civil law security-type devices prior to Industrial Revolution ...................................................................................................... 19 Lenders’ security devices .............................................................................................................................................................. 19 Vendors’ recourses ........................................................................................................................................................................ 19 3. Common law security-type devices prior to the Industrial Revolution ......................................................................................... 19 Lenders’ security devices .............................................................................................................................................................. 19 Vendors’ recourses ........................................................................................................................................................................ 20 B. 19th C Consensus ....................................................................................................................................................... 20 1. Fundamental policies of 19th C civil law ....................................................................................................................................... 20 2. Logic of the common law security devices ................................................................................................................................... 20 C. 20th C Re-consideration............................................................................................................................................. 20 1. Common law consensus ................................................................................................................................................................ 20 2. Civil law consensus ....................................................................................................................................................................... 21 D. Lessons of Legal History ........................................................................................................................................... 21 1. Intellectual transformations ........................................................................................................................................................... 21 2. Evolutionary themes...................................................................................................................................................................... 21 II. A. ISSUES OF LEGISLATIVE POLICY ..................................................................................................................................... 21 Purposes and Economics of Security ........................................................................................................................ 21 1. Monitoring, signaling and distribution theories............................................................................................................................. 21 2. Calculating and negotiating risk .................................................................................................................................................... 22 B. Legal Structure of a Regime of Security on Property ................................................................................................ 22 1. Legal foundations or origins of the security: consensual and non-consensual security ................................................................. 22 2. Creditor prerogatives: property and priority rights ........................................................................................................................ 22 3. Scope and extent of the security: initial objects and replacement property ................................................................................... 22 4. Debtor/creditor nexus: Who may grant security? Who may take security? For what obligations? Over what assets? ............... 22 5. Theory of priorities: quantitative (temporal) and qualitative approaches ...................................................................................... 22 6. Allocation of property and possessory rights ................................................................................................................................ 22 7. Conditions of default ..................................................................................................................................................................... 23 8. Mechanics of enforcement ............................................................................................................................................................ 23 9. Creditor recourses ......................................................................................................................................................................... 23 10. Publicity and notice to third parties.......................................................................................................................................... 23 III. PRINCIPLES OF GOOD LEGISLATIVE DESIGN ................................................................................................................... 23 A. Paternalism and Hedonism ....................................................................................................................................... 23 B. Principles Relating to the Issuing of Security ........................................................................................................... 23 C. Principles Relating to the Enforcement of Security .................................................................................................. 24 THE LEGAL NATURE OF A SECURITY RIGHT OR INTEREST .................................................................................. 24 I. A. BASIC FORMS OF A SECURITY RIGHT OR INTEREST ........................................................................................................ 24 Inventory of Security Rights and Interests ................................................................................................................ 24 1. Execution preferences ................................................................................................................................................................... 24 2. Nominate security rights on or over assets of a debtor .................................................................................................................. 24 3. Security rights involving retention or transfer of title in favour of a creditor ................................................................................ 24 Title retention transactions ............................................................................................................................................................ 24 90 Title transfer transactions .............................................................................................................................................................. 25 4. Collateral institutions of the law of obligations, property and civil procedure .............................................................................. 25 Preferences arising from principles of the law of obligations ....................................................................................................... 25 Preferences arising from principles of the law of property ............................................................................................................ 25 Preferences arising from principles of civil procedure .................................................................................................................. 25 B. C. Characterization of Security Rights or Interests ....................................................................................................... 25 Idealized Security Right or Interest ........................................................................................................................... 26 II. FORMAL AND FUNCTIONAL APPROACHES TO UNDERSTANDING THE NOTION OF A SECURITY RIGHT OR INTEREST ....... 26 A. Rationale for Regulating Title Transactions as Security........................................................................................... 26 1. Real Estate..................................................................................................................................................................................... 26 2. Personal property .......................................................................................................................................................................... 26 3. Principles and practice .................................................................................................................................................................. 27 B. Possible approaches to regulating title transactions ................................................................................................ 27 1. Alternative regulatory strategies.................................................................................................................................................... 27 Prohibition of title transactions ..................................................................................................................................................... 27 Presumption of hypothec ............................................................................................................................................................... 27 Substance of the transaction .......................................................................................................................................................... 27 Selective regulation of title transactions ........................................................................................................................................ 27 Freedom of contract ...................................................................................................................................................................... 27 2. Policy arguments in favour of one or the other approach .............................................................................................................. 27 Presumption of security................................................................................................................................................................. 27 Substance of the transaction .......................................................................................................................................................... 28 C. Limits of Functionalism............................................................................................................................................. 28 III. LEGAL NATURE OF A SECURITY RIGHT OR INTEREST ..................................................................................................... 28 A. A Right or Interest ..................................................................................................................................................... 28 B. In Certain Property which Another is Titulary or Contingent Titulary of Rights of Use and Enjoyment ................. 28 C. Certain Prerogatives Over that Property .................................................................................................................. 28 1. Right to follow .............................................................................................................................................................................. 28 2. Right to exercise specialized realization recourses........................................................................................................................ 29 3. A right to claim a preference in the proceeds of realization .......................................................................................................... 29 D. A Right that Secures the Performance of an Obligation – an Accessory Right ......................................................... 29 1. Extinction and modalities of the principal obligation .................................................................................................................... 29 2. Extinction of the security but survival of the primary obligation .................................................................................................. 29 IV. ATTACHMENT, PUBLICATION AND PRIORITY OF SECURITY RIGHTS ............................................................................... 29 TYPOLOGIES AND OBJECTS OF SECURITY DEVICES ................................................................................................ 30 I. TYPOLOGIES OF SECURITY DEVICES ............................................................................................................................... 30 Security as a Regulated Legal Institution.................................................................................................................. 30 Classification According to Source: Consensual and Non-Consensual Security...................................................... 30 Classification According to the Mode of Constituting the Security: Possessory and Non-Possessory Security ....... 30 Classification According to Object ........................................................................................................................... 31 II. OBJECTS OF SECURITY .................................................................................................................................................... 31 A. Movables and Immovables ........................................................................................................................................ 31 B. Immobilized movables (incorporated materials and fixtures) ................................................................................... 31 C. Movables attached to realty which retain their character as movables .................................................................... 32 D. Mobilized immovables (crops) .................................................................................................................................. 32 E. Accession to movables (accessions, commingled goods) .......................................................................................... 33 F. Fruits and revenues; rentals; capital product ........................................................................................................... 33 G. Corporeal and incorporeal property......................................................................................................................... 33 H. Specifically identified property and universalities .................................................................................................... 34 I. Present and future or after-acquired property............................................................................................................... 34 J. Consequences of the rationalization of security rights ............................................................................................. 34 A. B. C. D. SCOPE OF SECURITY, OBLIGATIONS SECURED .......................................................................................................... 34 I. A. RIGHTS AND PROPERTY NOT SUSCEPTIBLE TO SECURITY ............................................................................................... 34 Property exempt from seizure by ordinary creditors ................................................................................................ 34 1. Proposal to exempt certain goods from seizure by secured creditors ............................................................................................ 34 B. C. D. E. F. Consumer assets ........................................................................................................................................................ 35 Farm assets ............................................................................................................................................................... 35 Accessory Rights ....................................................................................................................................................... 35 Hypothecating a hypothec (security in security) ....................................................................................................... 35 Inalienable property (new property) ......................................................................................................................... 36 91 II. IMPACT OF DIVISION OF POWERS IN FEDERAL SYSTEMS .................................................................................................. 36 A. Bank Act security ...................................................................................................................................................... 36 B. Security in lands reserved for Indians....................................................................................................................... 37 C. Security in movables located on lands reserved for Indians ..................................................................................... 37 D. Security in ships ........................................................................................................................................................ 38 E. Security in Intellectual Property ............................................................................................................................... 38 III. SECURITY BY REAL SUBROGATION OR TRACING INTO PROCEEDS OF THE ORIGINAL COLLATERAL ................................ 38 IV. OBLIGATIONS THAT MAY BE SECURED ........................................................................................................................... 40 A. Types of obligations secured ..................................................................................................................................... 40 B. Indeterminate obligations ......................................................................................................................................... 40 C. Monetary obligations ................................................................................................................................................ 40 D. Interest ...................................................................................................................................................................... 40 E. Costs of recovery ....................................................................................................................................................... 40 CONSTITUTION OF SECURITY – PARTIES ..................................................................................................................... 40 I. II. THEORIES OF PARTIES TO SECURITY AGREEMENTS ........................................................................................................ 40 THE DEBTOR................................................................................................................................................................... 41 A. Consensual security .................................................................................................................................................. 41 1. 2. 3. 4. 5. The secured debtor of the secured obligation of another ............................................................................................................... 41 Capacity ........................................................................................................................................................................................ 41 Titulary of rights in the collateral .................................................................................................................................................. 41 Fraudulent conveyances and preferences law................................................................................................................................ 42 Particular restrictions affecting certain kinds of debtors ............................................................................................................... 42 Movable hypothecs w/out delivery ............................................................................................................................................... 42 Hypothecs on universalities on property ....................................................................................................................................... 42 Hypothec on property represented by a bill of lading and floating hypothecs............................................................................... 42 B. Non-consensual security ........................................................................................................................................... 42 C. Assumption of property charged w/ a security .......................................................................................................... 42 III. THE SECURED CREDITOR ................................................................................................................................................ 42 A. Consensual security .................................................................................................................................................. 42 B. Non-consensual security ........................................................................................................................................... 43 IV. RATIONALE OF RESTRICTIONS ........................................................................................................................................ 43 CONSTITUTION OF SECURITY – FORMALITIES .......................................................................................................... 43 I. A. GENERAL THEORY OF FORMALITIES ............................................................................................................................... 43 Policy justifications for formalities ........................................................................................................................... 43 1. Inter partes justifications ............................................................................................................................................................... 43 2. Third party justifications ............................................................................................................................................................... 43 B. The timing of formalities ........................................................................................................................................... 43 1. Ex ante formalities ........................................................................................................................................................................ 43 2. Contemporaneous formalities........................................................................................................................................................ 43 3. Ex post formalities ........................................................................................................................................................................ 44 C. Types of formalities ................................................................................................................................................... 44 1. 2. 3. 4. II. A. CONSTITUTING THE SECURITY AGREEMENT W/ A WRITING ........................................................................................... 45 Timing and form of the writing ................................................................................................................................. 45 1. 2. 3. 4. B. Security constituted by a writing ................................................................................................................................................... 44 Security constituted by registration ............................................................................................................................................... 44 Security constituted by delivery .................................................................................................................................................... 44 Formalities for constituting non-consensual (legal) security ......................................................................................................... 45 Immovable hypothecs ................................................................................................................................................................... 45 Movable hypothecs w/out delivery ............................................................................................................................................... 45 Real estate mortgages and charges ................................................................................................................................................ 46 PPSA security interests ................................................................................................................................................................. 46 Content of the writing................................................................................................................................................ 46 1. Contents of deeds of immovable hypothecs .................................................................................................................................. 46 2. Content of deeds of movable hypothecs w/out delivery ................................................................................................................ 46 3. Content of PPSA security agreements ........................................................................................................................................... 46 III. CONSTITUTING THE SECURITY AGREEMENT BY POSSESSION .......................................................................................... 47 A. The nature of delivery: debtor dispossession or creditor possession ........................................................................ 47 B. Creditor possession through a 3rd party.................................................................................................................... 47 C. Character of creditor possession and utility of writing ............................................................................................. 47 D. Continuity of possession ............................................................................................................................................ 48 92 PUBLICATION.......................................................................................................................................................................... 48 I. A. THE THEORY AND POLICY OF PUBLICATION ................................................................................................................... 48 Security rights not requiring publication .................................................................................................................. 48 1. As between the parties................................................................................................................................................................... 48 2. Vis-à-vis 3rd parties ....................................................................................................................................................................... 48 B. Publication of security and analogous devices ......................................................................................................... 49 1. As between the parties................................................................................................................................................................... 49 2. Vis-à-vis 3rd parties ....................................................................................................................................................................... 49 C. Publication of interests not intended as security ....................................................................................................... 49 1. As between the parties................................................................................................................................................................... 49 2. Vis-à-vis 3rd parties ....................................................................................................................................................................... 49 II. A. B. C. D. MODES OF PUBLICATION ................................................................................................................................................ 50 Registration ............................................................................................................................................................... 50 Possession ................................................................................................................................................................. 50 Actual notice ............................................................................................................................................................. 50 Other modes of publication ....................................................................................................................................... 50 1. Notice to account debtors in respect of security over claims ......................................................................................................... 50 2. Publicity by control of the collateral ............................................................................................................................................. 51 III. CONTENT OF THE DOCUMENT ASSURING PUBLICATION BY REGISTRATION ................................................................... 51 A. Document-filing and notice-filing registries ............................................................................................................. 51 B. Scope of rights published .......................................................................................................................................... 51 IV. CHANGES IN MODE OF PUBLICATION ............................................................................................................................. 51 A. Publishing rights so as to achieve perfection ............................................................................................................ 51 B. Changing the mode of publication for perfection...................................................................................................... 52 1. Registering a right first perfected by possession ........................................................................................................................... 52 2. Changing perfection by registering to perfection by possession ................................................................................................... 52 C. V. Lapse of perfection .................................................................................................................................................... 52 EFFECTS OF PUBLICATION .............................................................................................................................................. 53 A. Between the parties ................................................................................................................................................... 53 B. As regards to 3rd parties ............................................................................................................................................ 53 C. Example in class – effect of publication .................................................................................................................... 53 Trustee in bankruptcy .................................................................................................................................................................... 54 Buyers ........................................................................................................................................................................................... 54 Unsecured creditors....................................................................................................................................................................... 54 Unsecured creditors (consensual) .................................................................................................................................................. 54 DESIGN AND OPERATION OF REGISTRY SYSTEMS .................................................................................................... 55 I. II. THE VARIETY OF REGISTRY SYSTEMS ............................................................................................................................ 55 THE DESIGN OF A REGISTRY SYSTEM ............................................................................................................................. 55 A. The scope of the registry ........................................................................................................................................... 55 1. Land registry systems .................................................................................................................................................................... 55 2. Movable or personal property registry systems ............................................................................................................................. 55 B. Asset based or debtor based registry systems ........................................................................................................... 56 1. Asset-based registries .................................................................................................................................................................... 56 2. Debtor-based systems .................................................................................................................................................................... 56 C. Notice filing or document filing registry systems ...................................................................................................... 56 1. Document filing registry systems .................................................................................................................................................. 56 2. Notice filing registry systems ........................................................................................................................................................ 56 D. Paper-based systems or computer systems ............................................................................................................... 56 1. Paper-based systems...................................................................................................................................................................... 56 2. Computer systems ......................................................................................................................................................................... 56 III. THE OPERATION OF A REGISTRY SYSTEM ....................................................................................................................... 57 A. State-run or user-run or both .................................................................................................................................... 57 B. Date of effect of registration – time lapse ................................................................................................................. 57 C. Duties of the Registrar .............................................................................................................................................. 57 1. Quebec .......................................................................................................................................................................................... 57 IV. THE MECHANICS OF REGISTRATION ............................................................................................................................... 57 A. Timing of registration – advance registration........................................................................................................... 57 B. Duration of registration – renewals .......................................................................................................................... 58 EFFECTS OF SECURITY RIGHTS AND INTERESTS ...................................................................................................... 58 93 I. EFFECTS OF SECURITY RIGHTS AND INTERESTS PRIOR TO DEFAULT .............................................................................. 58 A. Distinguishing inter partes and 3rd party effects ....................................................................................................... 58 1. Common law approaches .............................................................................................................................................................. 58 2. Civil law approaches ..................................................................................................................................................................... 58 3. General effects of security between debtor and creditor ............................................................................................................... 58 B. The moment that security rights take effect ............................................................................................................... 58 1. Future property .............................................................................................................................................................................. 58 2. Change of juridical nature ............................................................................................................................................................. 58 3. Floating charges, floating hypothecs ............................................................................................................................................. 59 II. A. INTER PARTES EFFECTS .................................................................................................................................................. 59 Rights of secured creditors as ordinary creditors ..................................................................................................... 59 1. Creditor supervisory recourses ...................................................................................................................................................... 59 2. Pre-judgment interlocutory proceedings ....................................................................................................................................... 59 B. Rights of secured creditors as secured creditors ...................................................................................................... 60 1. General regime .............................................................................................................................................................................. 60 2. Preservation and loss of the right to follow ................................................................................................................................... 60 3. Revenues generated by secured claims ......................................................................................................................................... 60 C. Effects of creditor-in-possession security.................................................................................................................. 60 1. Duties of creditors in possession ................................................................................................................................................... 61 Preserving the capital .................................................................................................................................................................... 61 Not using the property ................................................................................................................................................................... 61 Collecting fruits and revenues for the debtor ................................................................................................................................ 61 2. Rights of creditors in possession ................................................................................................................................................... 61 Right of retention for expenses ..................................................................................................................................................... 61 Limits on the right to use the collateral ......................................................................................................................................... 61 Ordinary course of business dispositions ...................................................................................................................................... 61 Creditor’s right to keep the property ............................................................................................................................................. 61 D. Typical covenants in security agreements ................................................................................................................. 61 1. Protecting the property right.......................................................................................................................................................... 62 Insurance ....................................................................................................................................................................................... 62 Rentals........................................................................................................................................................................................... 62 2. Protecting the priority right ........................................................................................................................................................... 62 Negative pledge covenants ............................................................................................................................................................ 62 Cession of priority clauses (subordination agreements) ................................................................................................................ 62 3. Controlling default and realization ................................................................................................................................................ 62 Insecurity clauses .......................................................................................................................................................................... 62 Acceleration (loss of the benefit of term) clauses.......................................................................................................................... 63 E. Special effects of non-consensual security ................................................................................................................ 63 1. Changing the situs of the security ................................................................................................................................................. 63 2. Substitution of property ................................................................................................................................................................. 63 III. THIRD PARTY EFFECTS ................................................................................................................................................... 63 A. General opposability of security ............................................................................................................................... 63 1. 2. 3. 4. B. Owners and previous owners ........................................................................................................................................................ 63 Subsequent acquirers and lessees .................................................................................................................................................. 63 Other creditors (including floating hypothecs) .............................................................................................................................. 64 Claims ........................................................................................................................................................................................... 64 Effects of prior claims and liens ................................................................................................................................ 64 ENFORCEMENT OF SECURITY RIGHTS AND INTERESTS ......................................................................................... 64 I. A. PRELIMINARIES TO ALL TYPES OF ENFORCEMENT .......................................................................................................... 64 Default – the normal triggering event ....................................................................................................................... 64 1. Default at law ................................................................................................................................................................................ 64 2. Contractual default ........................................................................................................................................................................ 64 B. Enforcement w/out default ........................................................................................................................................ 65 1. Right of retention (possessory liens) ............................................................................................................................................. 65 2. Compensation (set-off) .................................................................................................................................................................. 65 II. A. ORDINARY ENFORCEMENT UPON DEFAULT ................................................................................................................... 65 The personal action ................................................................................................................................................... 65 1. Compulsory enforcement of obligations ....................................................................................................................................... 65 2. Collateral incidents of judicial enforcement .................................................................................................................................. 65 B. Conservatory and interlocutory recourses ................................................................................................................ 66 1. Conservatory recourses ................................................................................................................................................................. 66 2. Pre-judgment interlocutory proceedings ....................................................................................................................................... 66 Seizures before judgment – Mareva injunctions ........................................................................................................................... 66 94 Judicial sequestration (receiverships) ............................................................................................................................................ 66 3. Injunctions..................................................................................................................................................................................... 66 C. Obtaining and enforcing judgments .......................................................................................................................... 66 1. The seizure of assets ...................................................................................................................................................................... 66 2. The sale of seized assets ................................................................................................................................................................ 66 D. Distribution (collocation) of proceeds ...................................................................................................................... 67 E. Advantages and disadvantages of ordinary sales in execution for secured creditors ............................................... 67 III. SECURED PARTIES’ ENFORCEMENT RECOURSES ............................................................................................................ 67 A. Preliminaries to enforcement .................................................................................................................................... 67 1. Common law approaches .............................................................................................................................................................. 67 2. Civil law approaches ..................................................................................................................................................................... 68 B. Debtor’s remedies prior to surrender ....................................................................................................................... 68 SURRENDER ............................................................................................................................................................................. 68 I. GENERAL THEORY OF POSSESSION OF SECURED COLLATERAL ...................................................................................... 68 The principle of debtor possession ............................................................................................................................ 68 Creditor in possession security ................................................................................................................................. 69 Nature and purposes of surrender ............................................................................................................................ 69 II. SURRENDER TO REALIZE UPON OR DISPOSE OF THE COLLATERAL ................................................................................. 69 A. General object and delay for surrender .................................................................................................................... 69 B. Voluntary surrender .................................................................................................................................................. 69 C. Forced surrender ...................................................................................................................................................... 69 D. Anticipatory surrender .............................................................................................................................................. 70 E. Rights of creditor having obtained surrender ........................................................................................................... 70 F. Other rights and obligations of the secured debtor................................................................................................... 70 III. SURRENDER AS A RECOURSE – RECEIVERSHIPS .............................................................................................................. 70 A. Nature and kinds of receiverships ............................................................................................................................. 70 B. Appointment of receivers ........................................................................................................................................... 70 C. The rights and obligations of receivers ..................................................................................................................... 71 A. B. C. 1. Rights of receivers......................................................................................................................................................................... 71 2. Obligations of receivers ................................................................................................................................................................ 71 3. For whom does the receiver act? ................................................................................................................................................... 71 D. The termination of receiverships ............................................................................................................................... 71 REALIZATION REMEDIES ................................................................................................................................................... 71 I. A. GENERAL THEORY OF REALIZATION .............................................................................................................................. 71 Origins of foreclosure remedy................................................................................................................................... 71 1. Movable ........................................................................................................................................................................................ 72 2. Land .............................................................................................................................................................................................. 72 B. Origins of the sale remedy ........................................................................................................................................ 72 1. Movables ....................................................................................................................................................................................... 72 2. Land .............................................................................................................................................................................................. 72 C. II. The problem of title security...................................................................................................................................... 72 STRICT FORECLOSURE OR TAKING IN PAYMENT ............................................................................................................. 73 A. Mechanics of enforcement......................................................................................................................................... 73 1. Notice to the debtor and other interested parties ........................................................................................................................... 73 2. Surrender ....................................................................................................................................................................................... 73 B. Debtor’s recourses .................................................................................................................................................... 73 1. Ex ante requirements ..................................................................................................................................................................... 73 2. Compelling a sale in realization .................................................................................................................................................... 73 3. The right to remedy ....................................................................................................................................................................... 73 C. D. Third party recourses ................................................................................................................................................ 73 Effect of enforcement on debtor and 3rd parties ........................................................................................................ 74 1. Effect of foreclosure on the principal obligation ........................................................................................................................... 74 2. Effect of foreclosure on 3rd party rights......................................................................................................................................... 74 Other creditors............................................................................................................................................................................... 74 Other 3rd parties ............................................................................................................................................................................. 74 E. The special case of title security ............................................................................................................................... 74 1. The Quebec regime ....................................................................................................................................................................... 74 2. The Bank Act regime .................................................................................................................................................................... 75 III. SALE BY THE SECURED CREDITOR .................................................................................................................................. 75 A. Private sale by the creditor ....................................................................................................................................... 75 95 1. Formalities .................................................................................................................................................................................... 75 2. Rights of creditors and types of sale.............................................................................................................................................. 75 Rights of creditors ......................................................................................................................................................................... 75 Types of sale ................................................................................................................................................................................. 75 3. Recourses of debtors and 3rd parties .............................................................................................................................................. 75 4. Effects of the sale .......................................................................................................................................................................... 76 B. Public sale by a designated official ........................................................................................................................... 76 1. Formalities .................................................................................................................................................................................... 76 2. Effects of a sale by judicial authority ............................................................................................................................................ 76 C. Bank Act regime ........................................................................................................................................................ 76 EFFECTS OF ENFORCEMENT ............................................................................................................................................. 76 I. II. GENERAL CONTEXT ........................................................................................................................................................ 76 INTER PARTES EFFECTS .................................................................................................................................................. 76 A. Between default and creditor possession .................................................................................................................. 76 1. Waiver of default........................................................................................................................................................................... 77 2. Notice of enforcement ................................................................................................................................................................... 77 B. During creditor possession prior to realization ........................................................................................................ 77 1. Constructive possession ................................................................................................................................................................ 77 2. Actual possession .......................................................................................................................................................................... 77 3. Effect on the principal obligation .................................................................................................................................................. 77 C. After the exercise of the chosen remedy .................................................................................................................... 78 1. Effect on collateral ........................................................................................................................................................................ 78 2. Effect on the principal obligation .................................................................................................................................................. 78 D. The right to reinstate the security ............................................................................................................................. 78 III. THIRD PARTY EFFECTS ................................................................................................................................................... 78 A. Other creditors .......................................................................................................................................................... 78 1. Unsecured creditors ....................................................................................................................................................................... 78 2. Preferred creditors ......................................................................................................................................................................... 78 3. Other secured creditors.................................................................................................................................................................. 79 Controlling realization................................................................................................................................................................... 79 Rights after realization .................................................................................................................................................................. 79 Marshalling of security.................................................................................................................................................................. 79 B. C. D. E. F. Sellers ........................................................................................................................................................................ 80 Purchasers ................................................................................................................................................................ 80 Purchasers at the sale in realization ......................................................................................................................... 80 Holders of subordinate interests; lessees .................................................................................................................. 80 The right to redeem and reinstate the security .......................................................................................................... 80 ENFORCEMENT AGAINST CLAIMS .................................................................................................................................. 81 I. A. THE THEORY OF SECURITY OVER CLAIMS ..................................................................................................................... 81 Scope of the regime of security on claims ................................................................................................................. 81 1. Business claims ............................................................................................................................................................................. 81 2. Non-business claims...................................................................................................................................................................... 81 B. Garnishment of claims and wages ............................................................................................................................ 81 1. Types of garnishment .................................................................................................................................................................... 81 2. Differences b/w garnishment and security on claims .................................................................................................................... 81 C. II. Assignment of claims ................................................................................................................................................. 81 CREATION OF SECURITY OVER CLAIMS – ASSIGNMENTS ................................................................................................ 82 A. Creation as b/w secured debtor and secured creditor .............................................................................................. 82 1. Capacity and collateral .................................................................................................................................................................. 82 2. Formalities .................................................................................................................................................................................... 82 3. Publicity and perfection ................................................................................................................................................................ 82 B. C. Opposability to account debtors ............................................................................................................................... 82 Assignments ............................................................................................................................................................... 83 1. Basic structure ............................................................................................................................................................................... 83 2. Conditional assignments ............................................................................................................................................................... 83 III. EFFECTS OF SECURITY OVER CLAIMS ............................................................................................................................. 83 A. Scope and nature of secured rights ........................................................................................................................... 83 B. Right of the secured creditor to collect account debts .............................................................................................. 83 1. Creditor collection ......................................................................................................................................................................... 83 2. Authorization of debtor to collect.................................................................................................................................................. 84 3. Implicit authorization of debtor to collect ..................................................................................................................................... 84 96 4. Withdrawal of authorization to collect .......................................................................................................................................... 84 5. Formalities for withdrawing the authorization to collect ............................................................................................................... 84 C. Enforcement rights and protection of account debtors ............................................................................................. 84 1. 2. 3. 4. D. Status of account debts .................................................................................................................................................................. 84 Actions to enforce account debts................................................................................................................................................... 85 Limitations on opposability to account debtors ............................................................................................................................. 85 The secured debtor’s equity .......................................................................................................................................................... 85 Priorities ................................................................................................................................................................... 85 1. Under the CCQ.............................................................................................................................................................................. 85 2. Under the PPSA ............................................................................................................................................................................ 85 3. Conflicts b/w inventory proceeds claims and security on claims as original collateral ................................................................. 86 IV. PARTICULAR TYPES OF HYPOTHECS ON CLAIMS ............................................................................................................ 86