Download Secured Transactions: MacDougall: 2010/2011 Term 2 These notes

Secured Transactions: MacDougall: 2010/2011 Term 2
● These notes are a compilation of my class notes, notes from MacDougal’s book, and
from the course package.
● The grammar and spelling below is atrocious and I can’t be bothered to fix it.
● Good luck! Hopefully some of this is helpful.
Chapter I: SITUATING THE PPSA
● Secured transaction is where the creditor takes an interest in property over which the
debtor has some rights as a way of ensuring the debtor will be able to pay him back
○ this works because the secured party may have preference over other parties
when it comes to bankruptcy
● PPSA and Bank Act cover this area of law, but Bank Act only covers situations where
chartered bank takes a security interest in particular types of property from particular
debtors.
● PPSA is much more comprehensive
○ modeled on article 9 of the UCC, adopted with modifications throughout Canada
● BC and other jurisdictions have recently made some changes to take into account
interests in investment property
● PPSA replaced a series of statutes
○ Sale of Goods on Conditions Act
○ Chattel Mortgage Act
○ Book Accounts Assignment Act
● Before PPSA, form of transaction was important, and the form of trnasaction could lead
to the interests in various registry.
○ plus, registration lapsed after 3 years, leading to all sorts of probelms with
respect to lapses.
Legal Aspects of a Secured Transaction
● intersection of laws
○ typically a creature of contract creating an intangible property interest (called a
debt),
○ basically a type of property interest created by contract and thus voluntary
■different from non-consensual interests like liens or encumberances.
○ law of contract governs the existence and nature of the relationship between the
D and the SP
○ the law of property governs the entitlement of the SP to the collateral, botha s
against the D and as against the rest of the world.
○ without the contract element, the interest created would be non-voluntary
○ without the property elemet the interest would only hold against the debtor, not
against the world
Purpose of Security Interest
● basically to give the creditor some comfort that the debt will be repaid
○ but the creditor will typically be happiest when the D simply performs the duty
owed.
Common Law of Secured Transactions
● PPSA regime is based on Articles 8 and 9 of the UCC
● common law still provides a backdrop
US Law - UCC
● in the 40s and 50s, the US reexamined and reformulated all the commercial law,
produced the model code: UCC, which was eventually adopted in various ways across
the US.
● Article 9 deals with PPSA, article 8 with investment securities
How the PPSA Affects the Common Law
● doesn’t deal much with creditor-debtor relationship, levaing this to common law and
other statute
● it does deem certain interests to be security interests
● limited form requirements, small modification to consideration
● deeply impacts the common law rules on priority, and sets out how SI can be used
remedially
● common law and equity had rules about SI- what counted, and how it could be used.
○ plus, these rules were highly dependent on the form of the SI- bailment vs leases
vs mortgages, etc.
○ PPSA covers all of these, and also some other interests-like leases via deeming.
○ covers other transactions through a brought definition of “purchase”
○ however, some true security interests are NOT covered by the PPSA
○ so the statute is both over and under inclusive.
Continuing Legacy of Pre-PPSA Law
● used to be separate regime for each type of SI, and each was treated differently
● PPSA does not care as much about the type of SI (except for land interests)
○ however, it does exclude certain things, and include others.
○ so form of transaction may still be complicated.
Partial Adoption of UCC
● while PPSA modeled on UCC, most other commercial statutes remate based on UK
system, where form is important
●
●
●
PPSA treats all the old ways of getting SI as “secured transactions”, as long as they
represent the giving of a security interest in personal property to secure payment or
performance of an obligation.
○ Must still create these interests following the old rules.
prioirty competitions between interests that arose before the coming into force of the act
are determined by the prior law
○ this is becoming rare as time passes.
Federal Bank Act still follows onld English approach
Federal/Provincial Jurisdiction
● regulated by both levels of government- joint jurisidiction
● where federally-charetered banks are involved there can be a conflict between the
federal law and the the PPSA
○ federal legislation is paramount
● courts have thus far been good at making the two sets of rules work harmoniously.
Development of the PPSAs and US Law
● UCC is constantly changing, new articles arising to address new issues.
○ usually new articles are adopted throughout the US
● Article 9 has made its way through Canada over the last 30 years or so
● Most provinces followed Ontario’s adoption
○ mostly the same as PPSA,
● no big changes since BC has joined
● most recent change is the implementation of a new Securities Transfer Act in many
provinces, including BC
○ recognises the reality that interests in shares are ofeten held indirectly through
an intermediary and is modelled on article 8 of the UCC
○ PPSA need some changes to accomodate this.
○ makes rules analogous to those for regulary property
● Quebec has no PPSA
● US Case law can be useful in interpreting the PPSA since very similar, but must make
sure the language of the two jurisidctions is close
● UK precendent useful for interepting Bank act, and for certain types of form of secured
transactions.
Continuing Effect of the Common Law
● except where inconsistent with the PPSA, the common law rules still apply in
determining the nature and effect of secured transactions
○ nemo dat applies where statute silent.
● PPSA has no defintion of “ownership”, so common law must fill gap
● equity has limited effect, since PPSA intended to be rigid
○
○
○
not based on actual notice or fairness, but on parties following certain
proceedural steps and the application of predictable rules.
equity would destroy this system
but a couple of equitable doctrines do still apply and are important
■tracing and marshalling
Paramountcy of the PPSA when in Conflict with Other Statutes
● where other statutes conflict, PPSA generally prevails
○ except for Land Title Act and the Business Practices and Consumer PRotection
Act.
■and any consumer protection provision in any statute
PPSA: ss. 73-76
● these provisions deal with the conflict rules
○ subject to a few exceptions, the PPSA prevails over any other act which conflicts
with the PPSA, unless the other act SPECIFICALLY says it prevaisl over the
PPSA
● exceptions in s. 74
○ Business Practices, Consumer Protection Act, and other provisiosn intendeding
to protect the consumer
○ Land Title Act
● all references in other acts to Chattel Mortgage Act, etc. lead to the PPSA instead.
● s. 76 gives the LGiC power to make a wide range of regulations to deal with the PPSA.
Marine Building Holdings Ltd. v. Proton Engineering & Construction Ltd. (1993) BCSC
Issue:
● How the PPSA Prevails over Other Legislation
Facts
● MB is suing PEC for arrears in rent
● MC got garnishing order against PEC and the Bank
● Bank says it aint paying.
○ plus, bank says persuant to the PPSA it gets priority
● at the time in question, PEC owed 237K, and the bank had SI in PEC accounts
○ SI attached when bank loaned PEC the money and PEC had rights in the
collateral
○ Bank perfected
Analysis
● bank has a perfected security interest, which has priority over unperfeected security
interests
● while PPSA does provide some protection to judgment creditors, not with respect to
competitions with perfected SI.
● there is a builders lein, but this is also subject to a perfected SI
Ratio
● with a few exceptions, PPSA takes priority over other acts
● perfected SI will typically win over other interest.
Chapter II: TRANSACTIONS CREATING A SECUIRTY INTEREST: PARTIES, FORM AND
THE OBLIGATION SECURED
● PPSA is intended to cover the bulk of secured transactions.
● definition in sectio 2 sets out that any transactions wherein an interest in personal
property is taken to secure payment or performance of an oblgiation is governed by the
PPSA
○ form not important
○ you can call it what you want, but if it isin substance an arrangement to secure
payment or performance of an obligation by taking an interest in personal
property then its form is irrelevant.
● escluded transactions include fixtures, interests in land, etc.
○ certain kinds of liens
● and certain kinds of transactions are deemed to be included, despite not creating
security interests.
● What is a Security interest?
○ true security interest
■transactions that are entered into for the purpose of giving a secuiryt interest
by a debtor to a secured party
■typically a back-up device for the true debt.
● and you cannot use a SI to put yourself in a better place than you
would be through the underlying security interest
○ this means you must know what is owed
○ but both the amount owing, and the value of the collateral,
is goign to change
○ and so the value you can get out of the collateral will
change as well.
■creation of a SI constitutes a purchse within the meaning of thatterm in the
PPSA
○ deemed SI
■transfer of an account or chattel paper
■commercial consignments
■lease for a lease of over a year
■these are all included even if not intended to secure a debt.
■thse are then re-excluded by being exempt from some of the remedies in part
5
■PPSA governs how, if at all, property interests of the deemed secured party
fare as against property claims of third parties, including true secured
parties.
●
●
●
●
Deciding whether a SI is created
○ can be difficult to tell whether a transaction was intended to create a SI
■sometimes obvious- chattel mortgage
○ lease usually does not involve a SI
■title not held back as a security
○ but sometimes leases do look like a conditional sale in that the lessor does not
expect toget the goods back.
○ the creation of the SI must be of the essence of the trnasaction for the PPSA to
apply.
Objective/subjective
○ substance is the key to determining whether or not a transaction created a SI, not
the form of the transaction.
○ while the test is objective, the reason parties entered into the agreement may
indicte their intention.
Parties to a Secured Transaction
○ there is always at least a secured party and a debtor, but ma be multiple parties
○ Secure Party/Creditor
■typically the creditor
■means anyone who has a security interest, including trsutees.
○ Debtor
■more complicated, and includes anyone who owes performance of an
oblgiation to the creditor, whether or not hte person ahs rights in the
collateral
● so includes a transferree of the collateral.
■sometimes the statute is clear that it is referring only to the person who
actually owes money to the SP- eg in the remedies part of the statute
■sometimes the statute is clear that transferees are included.
■the reason transferees are included is to encourage the SP to register against
their name.
● if the SP finds out about the transfer, it should register to notify
other parties.
● this can be quite burdensome on the SP
■also includes those who have deemed SI in the goods
■includes guarantors and indemnitors
■Sometimes the location of the debtor is important in terms of conlfict of laws,
but not for this course.
Governing standards for Parties
○ parties must act in good faith and in a commercially reasonable manner
■candour is an aspect of good faith
■deliberately setting out to defeat anothers secureity interest by fraud is a
breach
■acting with knowledge of another’s interest is not bad faith.
○ knowledge
■knowledge is important in the PSPA, measured objectively against hte
reasonable person
● reasonable person not required to speculate or to ask further
questions
● but may assume knowledge from facts
● objective test of constructive knowledge.
○ would a reasonable person under the circumstances take
cognisance...
● could be receipt of gods without documentation, impliedly through
knowledge about the functioning of a market, etc.
■partnerships get knoweldge when the information comes to the attention of a
general partner or a mangager
■a corporation has knowledge where the managing director, an officer, or a
senior managerial employee gets knowledge if a reasonable person
would take conginsance.
PPSA: Sections 1(1), 2, 4
● definitions in 1(1)
● Section 2 sets out that the PSPA applies to all transactions that in substance create a
security interest regardless of the form
● also lists some common law SI that are included, without being exclusive
● states that interests in land are not included.
● Section 4 sets out a series of interests that are not included in the act.
1. Parties to a Secured transaction and Standards of Behavior
● main parties creating SI are the party giving the interest (debtor) and the party receiving
the interst (the secured party).
○ must be consensual, but not need to use particular terms
○ the SP is the party to whom the underlying obligatio is owed
○ so the SP is also a creditor.
● debtor is more complicated
○ includes not only typical debtors, but anyone who comes to own collateral (but
does not actually necessarily owe anything)
○ guaranntors may also count as debtors, since they will owe payment or
performance, even though the guarantor has no rights in the collateral.
● PPSA is mostly rigid and mechanical in terms of the creation of SI and how the SI can
be used.
○ there is little “give” to these rules, but there are still requiements to act in good
faith and in a commercially reasonable manner
○ common law, equtiy, and the law merchant are all preserved where not
inconsistent with the rules in the PPSA.
PPSA: Section 1(1) creditor, debtor, receiver, secured party, 68
● creditor includes assignees, exceutors, administrators, or a committee of a creditor
● debtor is broadly defined
○ includes the person who owes payment/performance, whether or not that person
has rights in the collateral
○ person who receives goods under a commercial license
○ lessee under a lease for a term of more than one year
○ etc.
● receiver includes receiver-manager
● secured party includes the person who has the SI, a person holding the SI for the benefit
of someone else, and the trustee if the Si is embodied in a trust.
● 68 merely states that common law, equity, and law merchant applies except where
inconsistent with the PPSA.
○ also that you must act in good faith and in a commercially reasonable manner
○ but just because you act with knowledge of another’s interest does not mean you
are acting in bad faith.
2. The “Obligation Secured”
● you create a SI to secure an oblgiation from the D to the SP.
● usually payment of money, but not necessarily.
○ must be consensual
● in the context of guarantor, it will be an obligation to repay money borrowed by someone
else.
● the obligation must be made by the D to the SP, not to someone else.
● various parties will want to know about the obligation secured
○ the SP
○ other debtors
○ other secured creditors will want to know the extent to which the collateral is
encumbered.
■if the collateral is worth more than the oblgiation, may be willing to lend- but
beware of tacking!
PPSA: section 1(1) “security interest” (a)
● an interest in goods, chattel ppaer, etc that secures payment or performance of an
obligation
○ does not include negotiable bill of lading
2(1). Amount of the Obligation
● The SI is created to ensure the performance of the underlying oblgiation
●
●
it can only satisfy that obligatin - no more - so must know the amount of the underlying
obligatoin
this may change from day to day
○ interest, repayments, tacking
○ this can mean at the point where the SP would like to exercise a remedy, it may
not know exactly what is owed
○ it may also depend on what has been advanced by any senior secured parties
■there may be nothing left once the senior party has been paid off..
○ so subordinate SPs will want to know what the senior SP is up to.
○ the default priority rule is first come, fisrt serve
2(2). Future Advances and Tacking
● the SI may secure debt which increases and decresases over time
○ revolving line of criedit
○ if the D allows it, the SP can tack further advances onto the prior senior priority
position
● if the advance is made after the parties already have a secured relationship, and outside
the amount originally owed, this will be a future adgvance
○ future advances are not binding if the SP has knownedge of the collateral having
been seized, attached, charged, or made subject to equitable execution
● the basic rule is that priorty applies to all advances, including future advances
○ tacking
○ whether advances are tacked on is upt ot he parties involved.
○ may be able to tack on taxes, fees, insurance, etc.
○ not clear in BC, but may not be able to convert unsecured debts into secured
debts by tacking.
○ new debts may be tacked on by new SA
■could be covered by the same FS as the old SA, as long as the old FS
accurately describes the colltareal
○ typically the SP will just add future advances onto the existing SA
■this is critical part of the PPSA, particularly w/r/t competitions between SP.
■a junior SP may find itself without value due to tackign.
■if the junior SP takes an assignment of the interest of the senior party, it
porbably cannot use the senior position.
● it is important to find out exactly what the obligation is
○ you can only satisfy the actual obligation due at the time of default.
■if there are 12 monthly payments, and the D defaults on the first, only the first
payment can be seized against.
■would have to keep making seizures as the amounts become due.
● this lets the senior SP be confident of its priority while making more credit available, but
may be to the detriment of junior parties
○ junior parties are expected to know about tacking and taken it into account.
PPSA: Section 1(1) “Advance”, “future advance”, 14, 35(5), 35(6)
● advance means giving of money or credit
● future advance means an advance whethe ror not the advance is made with an
obligation, and includes reasonable costs incurred and expenditures made to preserve
and maintain the collateral
● S. 14 deals with future advances, and says the SA may provide for future advances
● s. 35(5) says the priority of SI appleis to all advances, including future advances
● s. 35(6) puts certain limits on advances where they are made after the SP aquries
knowledge of certain kinds of interests (judgments, seziures, etc).
Canamsucco Road House Food Co. v. Lngas Ltd. (1991) Ont. Ct.
Issue:
● can a SP tack on indebtedness obtained through an assignment of a SI?
Facts:
● C owned a restaurant
● restaurant subject to a general SA in favor of CIBC which gave priority over all assets
● C sold the restuarant to L, with L giving C a GSA as a part of the pruchase price
● CIBC still had the seucrity over the assets of the restuarant, so C’s SA was subject to
the CIBC interest
● if C didn’t pay, L was to pay CIBC directly, which is what happened.
● the L borrowed money from 036 to pay off the amount owed to CIBC, then had that
amount assigned to 036 and got another SA in favor of L
Analysis
● L says that the SA from 036 merged together through tacking to give 036 the priority
● nope, you can’t simply pay off the senior interest and obtaining an assignemnt of that
interest.
○ the owner of the second charge would unfairly lose out.
○ it would be inequitable to allow a third charge to take precednece over a second
charge by obtaining an assingment of hte first charge.
● what actually happened is that the first interest was discharged, meaning the second
interest (C’s interest) had priority, even though it was supposed to be C’s interest to pay
off!
○ C is order to pay off the charged assinged to 036
○ then the interest is paid off and discharged
○ C is second, L third.
Ratio
● cannot retain priority by assignment and tacking.
2(3) Acceleration Clauses
● Since SI in property can only satisfy an indebtedness in default, it could be annoying if
the SP had to keep taking actio neach time a new payment fails to be made.
○
●
●
●
●
the SP would hav eto keep resorting to the collatera l on an ongoing basis as
each payment comes due
so SA usually says that on default, all amounts that were to have been paid byt the D
immediately become payabel.
limited by s. 16 to situations where the SP has a reasonable and good faith belief that
payment is in jeapordy or the collateral is in jeapordy.
acceleration clauses are viewed sceptically by judges and construed strictly.
○ if there is no default, and the D’s financial situation is improving, there may not be
reasonable grounds to accelerate
the court can relieve the D from the operation of the acceleration clause on application
from the D
○ the relief is dicretionary, and the courts will generally hold the parties to the
clause unless it is just and fair to provide relief from the strict terms of the
bargain.
PPSA: section 16
● acceleration clauses are only able to work where the SP has, in good faith, a
commercially reasonable belief that the prospect of payment or performance is about to
be impaired, or that the collateral is or is about to be placed in jeapordy
3. The Form of the Agreement
● there must be a consensual agreement called a security agreemnent
○ s. 9 says that a SA is effective according to its terms
○ you can contract to whatever terms you like, as long as conisstent with the PPSA
● like any contract, to make it enforceable between SP and D there is no particular
requirement of form
○ a SA will be effective according to its terms.
○ the contract can be oral or written or both
○ PPSA makes no requirements as to offer, acceptance, etc- law of contracts
mostly unchanged.
○ consideration modified in that past consideration is valid.
○ also, if the D passes the collateral to a third party despite a proihbition in the SA
of such a transfer, the SP might be able to treat this as a default and seize the
property as its remedial actio nunder the SA
● if SP wants the SA to be good against third parties, then it must meet the form
requiremenets set out in s. 10
○ and since its hard to predict what will happen with the collateral in the future, its
usually wise to simply comply with the writing requirement
○ basically two requirements
■SP has possession of the colltaral
■or writing requirements met.
○
●
●
even if possession is taken, writing requirements usually met since it is not
always sure that the collateral will stay in the possession of the SP.
○ even if written requriements met, may not be enforceable withotu perfection
■but cannot perfect unless writing requirements/possession met.
○ must be some langauge in the agreement that show an intent to create a SI to
secure payment
■there must be some “charging” language, implicit or explicit.
○ written SA between SP and D, unless SP is to retain possession of the collateral.
○ SA will normally set out the amount owing, how it will be repaid, a description of
the collateral, the oblgiations of the parties in terms of the treatment of the
collateral, the events consittuting default, and the remedies avialable in the case
of default.
○ great care must be taken in describing the colateral
■must describe the collateral by item or kind, or by using the terms; “goods,
investment property, instruments, documents of title, chattel paper,
intangibles, money, crop or licenese”. Other variou sterms
■can take in all PAAP
■not enough simply to describe the goods as “consuemr goods” or “equipmet”
without reference to the kind of collateral
■but “consumer goods” can be used to exclude property from the description
of collateral.
■description of the collateral as “inventory” is sufficient to describe the
collateral, but only while it is being held as inventory.
■courts are geneorus here- don’t need to be too descriptive.
○ if the descriptioin is inadequate, then the SP will not be able to effect third parties
■so often better to use an over-inclusive term
■including PAAP
■then waive hte interest in property the SP doesn’t truly want.
○ the D or a respresentative must sign the written agreement, or not attachment
will occur
■later signature does not make the attachment retrospectively effective
■but once the the form requriements are met, the financing statemet can be
filed well before attachment.
○ proceeds do not need to be described, as an interest in proceeds arisings
automotaically when collateral is dealt with
■however, since proceeds must be described in detail in a FS to perfect, this is
a bit wierd.
○ SP can take an inrterest in all present and after-aquired property, usually known
as “all PAAP”
s. 10(a) and (d) set out the important things about writing requriements
○ a SI is enforceable against a third party only if the collateral is not an investment
property and is in the possession of the SP, or if the SI is in writing.
s. 10(1)(d) sets out the writing requirements
○ must be signed by the D
○
○
●
●
●
●
●
●
must describe the collateral by item or kind, or use the categories
you can take an all PAAP, or an all PAAP excluding certain properties
■this is often recommended, since it is better to be oversecured as opposed to
undersecured
IMPORTANT: 10(2) says you are not deemed to be in possession if the collateral is in
the apparent possession of the debtor
○ you can’t just keep the key to the car, or the document of title
○ you must have actual possession in most cases
10(4) a description of goods as inventory is only adequate as a written description while
the goods remain in inventory
○ when invenotry stops being inventory, the interest detaches
you may use the terms “equipment” or “consumer goods” , but not ont ehri own- you
must be more specific.
10(5) - don’t need to describe proceeds specifically for the purposes of s. 10
the SA should also set out a description of the obligatio nsecured, the amount secured
(including tacking agreements and acceleration clauses), a description of what
constitutes a default, a description of the collateral, and any non-stuatory remedies.
it is preferable to use the language of the PPSA whenever possibe, but this isn’t strictly
necessary
○ the PPSA applies to every transaction that in substance creates a SI, irrespective
of form or of title in the collateral.
○ PPSA brings in the old forms of secured transactions, by saying if somethign
looks like an SI, it is an SI
PPSA: Sections 1(1) “security agreement, 9, 10, 11
● security agreement means an agreement that creates an SI, and includes an agreement
providing for a prior SI and writing that shows a security agreement.
● s. 9 says that where the stautte is silent, the SA is effective according to its terms.
● s. 10 sets out the requirements to enforce against a third party, including the form
requriements of the SA
○ if the SP has possession, there is no need for this
● s. 11 says if the SA is in writing, the SP ust give D a copy of the SA within 10 days.
Riepe v. Stingray Holdings Ltd. 2002 BCSC
Issue
● what consequences follow from failing to comply with writing requirements?
Facts
● collateral is a truck
● S owns the truck, leases to BI
● under the lease, S would assing the lease to GMAC, but S would remain the owener of
hte truck , and BI not to transfer without consent.
● Bi assinge dthe lease to RR
●
●
●
●
there was to be a buyout at the end of the lease on option.
when lease expired RR was behind, but wanted to buy out.
RR gave SI post-dated chques for amount owing, most of which bounced.
RR is connected to BI in some way, but says that a SI is only enforceable against a third
party if the SI is in writing. RR claims to be a third party, and thus any verbal security
interest is unenforceable against him.
● GMAC says that P is not a bonafide purchaser for value wihtout notice, and that P knew
there was somethign fishy with the title.
Analysis
● the issue is whether or not the term “third party” in s. 10 (which states that SI
uneforceable against 3rd parties unless in writing) means any third party at all, or
whether it needs to be a BFPfV.
● here there is a new transaction, which was a sale, and this means RR is a third party.
○ Stingray is out of luck, since its interest was not in writing and thus not in
compliance with s. 10 of the PPSA
● anyways, SI accepted post-dated cheques, and this would be a situations where an
interest in godos is given up in exchange for a promise to pay.
Ratio
● the writing requirement is interpreted strictly
○ even if the third-party knew about the interest and the SA, the SA simply is not
effective if not in compliance with the writing requirements
674921 BC Ltd. v. New Soluntions Financial Corp. 2006 BCCA 49
Issue:
● How precise does the wording in a Security Agreement need to be?
Facts:
● NS says that the CJ was wrong in finsihg that the loan agreements created a SI arising
immediately, that it acquied AAP, and that the agreements complied with s. 10
Analysis:
● No partiuclar wording needs to be used to create a SI, a covenant by a debtor that it will
provide security at a later date means that the seucrity will be provided later.
○ not arising immediately, but down the line.
● the agreements referred only to the “assets” of AWTC and thus did not describe the
collateral by item or kind, or by the appropriate class of goods.
● nor did it say all PAAP or anything to that effect.
● shouldn’t be too stringent, but this is just too vague
● so the loan agreement did not succeed in creating enforceable security interests.
○ only once the D delivered the general security interest did the SI arising.
Ratio
● court will require that the assets be described by item or kind, or by category
○ the term “assests” is not listed in s. 10, and is not equivalent to an all PAAP
● if the writing requirement is not met since the language does not describe the goods by
item or kind, or a defined category, the SA will not be enforceable against a third party.
●
if the agreement says that the collateral will be passed in the future, the SI will not take
effect until that actually happens.
4. Transactions Creating “true” security interests
● old legislation very concerned with form, and different rules applied to different forms
● under the PPSA, as long as the transaction intends to create an interest to secure
payment or performance, it is a secured transaction, no matter what the parties call it.
● so form doesn’t really matter, though since the rest of BC law is based on UK model,
there is some importance in form
○ plus all of those forms still exist, they are all just goverend under the act
○ because they are still the same form, their peculiarities may still matter.
● the two basic forms of PPSA-specific security agreements
○ Secuirty agreement
■all other transactions could be abolished and subsumed into this form
■this is how all other forms are treated.
○ General Security Agree
■an intrest in all after-acquired property
■basically an all-PAAP SI.
● Conditional sales contract is a sale by dsicription
○ the sale of goods occurs but title is kept by the seller until payment is complete,
but the buyer typically gets possession.
○ a true conditional sale is always a SI
○ the retention of title is an interest in the property to secure payment- a back-up
device in case the buyer doesn’t come through
○ what constitutes a conditional sale is essentialy governed by common law, the
PPSA merely alters the effect.
○ conditional sale is often used as an analogy to determine whether other
transactions involve the creation of a SI
■ie. to determine whether a lease is a “true” lease or a “security” lease.
● Chattel Mortgages are a quintessential secured transaction
○ the owner of property gives an interest in property by way of mortgage to the
mortgagee to ensure repayment.
○ this is used where the D already has an interest in the collateral, and uses this
interest to give a security interest to the creditor.
● pledges are the deoposit of property or document of title with the lender as security.
● A security interest can be created by charge or floating charge
○ may be created by assignment
■an assignment may be absolute or conditional
■if absolute, it transfers the value uncodnitionally and the assignee can sue in
its own name.
■if the assignemnt is conditional, contingent on a possible future event, then it
is a charge and consituttes a SI under the PPSA.
○ typically the subject ot the assignment is a debt or account.
●
●
●
●
●
■may arise directly as proceeds
■if the debtor defaults, the SP tells the person paying into the debt/account to
pay the SP directly.
■this is a conditional assignment by way of charge and is a true SI.
The PPSA deems any transferee of an account to have a SI, so the transferee should
perfect its interest by registration.
a SA where there is an interest in SPECIFIC goods is called chattel paper, meaning one
or more writings that evidence both a monetary obligation and a security interest in the
specific goods.
○ because the value of the chattel paper is mainly the debt, the PPSA treats them
more or less like accounts.
fixed charge
○ the normal secuirty interest under the PPSA
○ floating charges will be viewed as a fixed charge over specific categories of
things
floating charges
○ used to be very common before the PPSA
■doesn’t really fit in the context of the PSPA
● when does attachment and perfection occur?
○ only at crystallization? problems with priorities...
alternative devices
○ may be better to try and create a floating charge through other means
■ie. a fixed charge over the present and afteracquire contents of a category of
property and then coupling the use of this form with … page 97
PPSA: Sections 1(1) “security interest”, 2(1), 75
● security intrests includes true security interests, but not bills of laden, and deemed
secuirty interests- transfer of chattel paper, commercial consignment, lease of more than
a year.
● 2(1) says the PPSA applies to all transactions that in substance create an SI, without
regard to the form and the person who was legal title.
● then lists some potential forms of SI.
● s. 75 brings in the old acts and calls those forms SI.
Yeung (Guardian ad litem of) v Au 2006 BCCA
Issue:
● In the absence of rules in the PPSA, what rules govern the form and nature of the
transaction?
Facts
● this case deals with who actually owns a car, because in some cases the owner of a car
may be viacriously liable for the negligent operation of the car by others.
○
but there is an exception where you technically still have title, but there is a
conditional sale and someone else is in possession
● but this gets into who owsns the care, which deals with conditional sales.
● and the Sale of Goods on Condition Act was replaced by the PPSA
○ the PPSA does not define conditional sales
● the Court below thought that this meant the Sale of Goods on Condition Act definition
therefore still applied.
Analysis
● so the question is how the “conditional sale” provisions in the motor vehicle act ought to
be interpreted given that there is no defintion in the PPSA of conditional sale.
○ under the old act, in a lease with an option to purchase, the lease counted as a
conditional sale with title passing immediately
○ and the Motor Vehicle Act said the owner of the vehicle is liable in accidents
○ this meant that when the dealership leased a vehicle, it didn’t need to worry
about insurance since the lessee was the owner already
○ but the Conditional Sales ACt was repealed, and the PPSA implaced instead
● other case indicates that Parliament meant to exclude all those who hold legal title under
conditional sales agreements, not jsut those which meet the former definition of “sale”
○ “sold” on condition means any arrangement where the purchaser or lessor
acquires possession of hte vehicle on terms that permit legal title to be
transferred when later specified events occur.
● The basic rule is that when an act of Parliament is repealed, it must be considered as if it
never existed.
● the repeal of hte Sale of Goods on Condition Act doesn’t mean that the law was not
previously correct, but nor does it help in this case one way or the other
○ the repealed definition is not necessarily correct.
○ the repeal of an provides no basis for assuming that previous judicial decisions
constring a term are to b preserved and imported into other, unrelated, statutes.
● since the PPSA is silent on the definition of conditional sale, the principles of common
law, against the backdrop ofo normal modern day business practices, will apply to
interpert what constitutes a sale in the motor vehicle act.
● further, keeping in mind the intent of the exceptio in the motor vehicle act it is clear that it
should not apply to people who have defacto sold their cars.
● so, what was this transaction in essence
○ it was a lease: it was called a lease, it paid rent, etc.
○ there was an option to purchase, but not necessarily.
○ clearly the owner still had title, and it would have been wrong for the operator to
interfere with the title.
○ this was neither a disguised sale nor a conditional sale.
● since this was not a conditional sale, it does not fall into the exception, and the owner is
vicariously liable.
Ratio
● once an act is repealed, it is to be treated as if it never had any effect.
●
so we have to use common law to determine whether what has occured is in essence a
sale.
○ basically PPSA abolishes the old statutes and reverts these kinds of interests to
the common law
○ paying of rent, labelling as lease, all suggests a lease, not a sale.
3(1) Typical Forms of Security Agreement
● Parties may use older forms, or jsut call their agreement a “security agreement”
○ may call it a General Security agreement (GSA) if its for all PAAP
● some of the old forms always create a SI
○ conditional sales, chattel mortgage, charge, and pledge
○ leases, consignments and trusts may or may not be SI, and are more difficult to
categorise.
3(2) Consignment as Security Agreement
● basic consignment is a bailment transaction involving an agency between the bailor and
the bailee
○ this alone will not create a SI
○ some consignments are in essence disguised conditional sales, and then fall into
the PPSA
● Consignments as a Security Agreement
○ true consignment
■this will not involve the creation of a security intrest
■true agency arrgement where the owner gets another to act as agent to sell
the goods.
■The owner consigns the goods to the agent, and the owner becomes the
consignor and the agent the consignee
■between the owner and agent, no security interest created.
● owner retains title, and the consignee never has title
■if no buyer found, the consigned goods are returned to the consignor
○ security consignments
■these are more like conditional sales
■the consignee is more like a buyer here, and is responsiblef ro insuring the
goods and must buy them if no outside buyer can be found.
■this measnt he seller gets rid of possession and property eventually, either to
a third party or to the consignee.
● goods would only return to the consignor in case or breach
■this does not become a sale, but is treated as a SI under the PPSA
○ commercial consignments may fall into PPSA, as we will see later.
● consignment cases often arise under the PPSA
○ the consignee has given SI to other SPs, who have perfected their interests
○ consignee goes bankrupt, the trustee liquidates the SP
○
○
○
before the PPSA, the owner would simply go retreive the consigned goods
following nemo dat.
if the consignment is not under the PPSA, this still occurs
but if it is a security consignment, the consignor must perfect the interest or the
trustees can ignore that interest altogether.
Re Toyerama (1980) Ont Sup Ct
Issue
● Is a consignment a true consignment or a secuirty consignment?
Facts
● Regal sold toys, had surplus stock which was not selling: WW and LC
● Toyerama was a seller of surplus mechandise
● R and T made an agreement
○ R would send the toys WWLC to T
○ title remained with R until the toys were sold and R was paid
○ if T doesn’t pay or otherwise breaches, the toys go back to R
○ Risk falls on T
○ each toy sold will result in R paying T 6 dollars, whether or not the toy is paid for
in full or if it is returned
○ T to give inventory and other stats.
○ T is not the agent of R
● T runs into cash problems, and could not pay for toys until they could be sold
○ so this was the only way it could be sold.
● Toys delivered to T’s warehouse, sent them out to the retail stores
○ this triggered payment
○ but the toys didn’t sell.
● so was this a security consginment? Did R sell these toys to T, or was this a true
consignment?
Analysis
● Looks at the relationship
○ contract requires payment delievered to retail outlets or sold to third parties
○ no payment required for goods in warehouse
○ no right for T to retgun the goods to R
○ risk borne by T
○ Regal got a fixed price no matter what T ended up selling the goods for
○ R needed some monthly stats.
● language of the agreement largely consistent with a consignment arrangment.
○ the statement that T is not an agent is puzzling, but the absence of an agency
relationshi does not necessarily mean that the agreement is not one of
consignment.
● the determinative factor is that there is no requirement for T to pay for toys not delivered
to retail outlets
○ combined with the purpose of the transaction and other terms
○
●
the toys that were either not sold to third parties or not delivered to retail outlets
were held by T on consignment, and were not purchased.
○ the toys delivered to retail outlets were sold to T, and were T”s property.
was this intended to be a security consignment?
○ no, there were other motivations
○ R wanted to market surplus goods
○ T could not otherwise pay for the goosd
○ n oSI created by the consignment in the toys that had never left the warehouse
Ratio
● whether or not something is a true consignment, a sale, or a security consignment is a
matter of constructing the contract and determining the intent of parties.
● right to return the goods may be very persuasive
● security consignment only exists where the purpose of the transaction is to secure
payment or another obligation.
● basically if it is clear that the seller does not intend to get the goods back even if the
buyer cannot find a consumer, likely a security lease
○ if it is clear in the SA that the consignee must buy the goods if it does not find a
buyer, definitely a secuirty lease
● also, who has to pay for the goods prior to ultimate sale? If the consignee is paying
insurance, taxes, and so on probably a security lease - under a true consignment,
normally the consignor bears the risk
3(3) Lease
● a basic lease is a bailment transaction, and without more the lessor/lessee is not a
SP/debtor
● however, in many cases, particularly where there is an “option” to purchase attached to
the elase, the transaction is like a disguised conditional sale and therefore involves the
creation of a security interest.
● True lease
○ no SI
○ the lessor retains title and gives possession to a lessee, but no SI because no
intention to create one
■the lessor hopes to get the goods back later
○ may be coupled with an option to buy, but under a true lease the lessee is under
no obligation to exercise the option
○ whether or not the purchase price represents the fair market value of the proeprty
at the end of the term may be important, but is not determinative.
● Security leases
○ some leases are much like conditional sales, in that there is no intention that the
goods will ever return to the lessor, barring default.
● categorizing leases
○ the court will look behind the parties characterizations of the transaction to
determine whether or not there is a true lease.
○
○
○
○
○
○
○
○
○
in a lease intended as security, the property that is subject to the lease is
intended to pass ultimately to the lessee
factors
■intent of parties
■whether a deposit is payable and if it is refundable
■who owns the goods at the end of the lease, and if there are purchase
options
■indicia of ownership like repair and insurance, who bears the risk.
■whether the lessee is responsible for taxes and licence fees
■whether the goods involved where acquired by the lessor specifically for this
lease.
■whether payment can be accelerated in the event of default
■whether there are liquidated damages
■whether there is a default provision in the lease inordinately favourable to the
lessor.
but default provisions should not be given too much weight, and true leases may
still have acceleration clauses.
■corroborative value at most.
typically a lease will be a true lease if it can be terminate at any time, or if it has
no option to purchase attached.
■if no option to terminate early, no option to purchase, and returns to lessor at
end of lease, true lease.
■if there is an option to purchase but for an above market some or a genuine
preestimate of value, probably true lease
■if the option is token or below pre-estimate of value, then probably a security
lease like a conditional sale
● option may be less than market and still be a true lease, just not
token.
■if not truly an option, but something that will certainly be exercised, then a
security lease
■if goods must be maintained or operated in a way that maintains the lessors
equity interest, more likely to be true lease.
■where the lease is open-ended where the leasee has the right of first refusal
to purchase at the end of the lease period, more likely to be security
lease.
if there is an option to buy that will certainly be exercised, probably a security
lease
if the option price is not a reflect of the value of the goods but merely nominal, a
security lease
if the lease is for the whole of the useful life of the goods, security lease.
security leases are not deemed to be sales, they are leases that create an SI
under the old act a lease with an option to purchase was a conditional sale.
■but this doesn’t apply in the PPSA era
■they are not deemed to be sales, just deemed to create an SI
●
even true leases may fall under the PPSA if they are longer than one year
○ leases over a year are deemed to be SI under the PPSA
PPSA: Sections 2(1), 68(1), 75
● 2(1) sets out that all transactions that make a SI are a security itnerest, and that the
older forms are all incldued
● 68(1) retains onld common law, equity, law merchant rules.
● 75 says all references to older acts apply to PPSA
DaimlerChrysler Services Canada Inc v Cameron 2007 BCCA
Issue
● Is a lease a true lease or a security lease?
Facts
● C leased a truck X from VCD
○ VCD licenced to DaimlerChrysler ©
● C failed to make payments
○ DC repoed
○ D wants damages, C says D is limited by part 5 of PPSA to a few remedies
○ not clear whether PPSA applies to this lease
Analysis
● PPSA includes leases created to secure payment
○ security lease
● also includes leases that do not secure payment, if they are over one year- these true
leases are deemed SI
● Part 5 (remedies) do not apply to a deemed SI such as a true lease.
○ so D could exercise common law remedies over the goods
● Part 5 does apply to security leases
○ this would limit D to statutory remedies in the PPSA
● lease
○ 4 year lease
○ truck at C risk, must maintain, repaire, and operate lawfully
○ no downpayment or trade in allowance
○ C could purchase at end of lease for roughly market value
○ C could terminate at any time, but had to purchase or pay an early termination
liability and return truck
■early termination liability- all past due amounts, all monthly payments not due,
plus some other stuff, minus the value of the reasonable sale.
● The PPSA s. 2(a) means the court has to inquire into whether the essence of the
transaction was to create a SI.
○ whatever you call a transaction, if it appears to create an SI, it is a security
agreement.
● some factors to consider
○
○
●
●
●
●
●
●
whether there was an option to purchase for a nominal sum
whether there was a provision in the lease granting the lessee an equity or
property interest in the equipment
○ whether the nature of the lessor’s business was to act as a financing agency
○ whether the lessee had to pay sales tax
○ etc.
terms of the elase important
○ short term indicates true lease, since the residual property will still have a lot of
life left in it.
whether or not something is a true lease or a security lease depends on whether the
property is intended to eventually pass to the lessee, who is obligated to pay the lessor
what might be reasonably regarded as the purchase price
○ then it is basically a conditional sale.
useful test
○ whether the option to purchase at the end of the lease termsis for a substantial
sum or a nominal amount
■if the purchase price looks like the fair market price, then the rental payments
where intended to pay for the use of the property, and the option is real
■if the purchase price is a lot less, the lease is merely a cover for a conditional
sale.
default clauses may be useful.
○ acceleration clause may be viewed as foreing to the lessor-lessee relationship
○ lessee is not obliged to pay a particular sum to the lessor
○ the lessor may be entitled to damages for breach, but there is no way to be sure
those damages will amount to all the rent that would have been paid.
○ however, acceleration clause may still apply to a true lease, as long as the
damages are mitigable.
■normal contractual principles apply to leases.
○ so acceleration clause not decisive.
fundemental question is whether a lease secures payment or performance of an
obligation
○ default provisions do not change this
○ CJ put too much reliance on the existence of the acceleration clause
option to purchase can be quite revelatory
○ a clause giveing option to purchase at below market price suggests lessee has
acquired equity in the goods, as if it were a conditional sale
○ but just because the option is at market value does not mean it is not a SA, if it
otherwise appears to be.
■especially if the lease is for the better part of the useful life of the goods.
■so considering the option price is only useful if there is still some life left in the
goods
■really what you are trying to do is show that the option price is not intended to
ensure the lessor is fairly compesnate, but was included for some other
purpose (like avoiding taxes).
●
default remedies should only tip the balance, since few agreements expect default to
occur.
Ratio
● Key Factors:
○ whether there was an option to purchase for a nominal sum
■below market price suggests leasee has aquire equity in the goods.
○ whether there was a provision in the lease granting the lessee an equity or
property interest in the equipment
○ whether the nature of the lessor’s business was to act as a financing agency
○ whether the lessee had to pay sales tax.
○ short term indicates true lease, since the residual property will still have a lot of
life left in it.
○ acceleration clauses occasionally useful as not characteristic of a true lease.
● whether or not something is a true lease or a security lease depends on whether the
property is intended to eventually pass to the lessee, who is obligated to pay the lessor
what might be reasonably regarded as the purchase price
● fundamental question is whether a lease secures payment or performance of an
obligation
Newcourt Financial Ltd. (c.o.b. Financialinx) v. Frizzel 2000 BCSC
Issue
● how is a true lease distinguished from a security lease, and what difference might it
make for a lessee?
Facts
● F leased a truck from EC
○ lease assigned to NF
● F failed to make payments, NF attempted to repo
○ F refused to cooperate
○ F continues to refuse to give up the truck
● F paid a security deopsit, held by NF without interest, which will be refunded if F does
not exercise the option to purchase and if no money is owing
● Once F defaulted, F’s friend B communicates with NF
○ B is very rude and unreasonable
● injunction obtained against driving hte vehcile, but suing it anyways.
Analysis
● was this a true lease, or a security lease
○ NF says its a true lease as thats what it purports to be
■but the correct approach is to determine the nature of the lease based on the
actual function of the arrangement
● look to
○ intent of parties
○ was there a deposit, and was it refundable, if so under what circumsntace
○ who will own the goods at the end of the agreement
●
●
●
●
●
○ indicia of ownership (burden of maintenance, risk, etc.)
deposit situation ambiguous
○ there was a deposit, but it could be refunded if the option was not exercised and
no money reamined
there was an option to purchase
○ since NF says this is a true lease, the onus lies on him to prove tha thte option is
equal to or higher than the market value of the truck.
○ yep, it does represent a market price
F was responsible for all cost of maitenance and repair
○ this may suggest security lease
○ but it can also demonstrate that F needs to protect NF’s equity
the big thing here is that the lease says it is a true lease, but F didn’t know the impact
this would have on her rights.
Based on all circusmtances, this is a true lease, and the common law prevails
○ NF can recover the vheicle.
○ F will pay the arrears and any costs involved with repossession, plus legal fees,
plus interest.
Ratio
● in order to determine whether something is a true lease, look to intent of parties, whether
there was a deposit (and was it refundable), the nature of the option to purchase, and
who bears the risk
● if it is a true lease, the common law will apply.
● very helpful list according to bruce
3(4) Trust
● Trust will generally not involve the creation of a SI
○ but may SI are set up to serve as trust, so that the SP can use tracing to follow
money through a mixed-source account
○ these equitable rules typically require a fidicuairy-like relationship, but in BC the
requirement for fiduciary relationship has been abolished.
● still, some trusts do create a SI.
● so trusts may be “true trust” or “security trust”
○ true trusts involve no security itnerest
● security trusts
○ trusts may be set up as a security device, usually as a way for the beneficiary to
ensure that monies received by thte trustee will be held for the benefit of the
beneficiary
■arises where there is a creditor/debtor relationship overlapping that of the
beneficiary/trustee.
○ used ot be required in order to access equitable tracing, but no longer require
■though parties may feel more cofortable
○ where trust involves an SI, it will be covered by the PPSA
○ if the parties don’t consider the relationship to be one of holding money or
property as security, then it will not be considered a trust relationship.
PPSA: Sections 1(5), 2(1)(b)
● 1(5) says proceeds are traceable whether or not there exists a fiduciary relationship
● 2(1)(b) says that all former statutory SI are included in the PPSA
Skybridge Holidays Inc. v. BC Registrar of Travel Services 1999 BCCA
Issue
● DOes holding money in trust for a creditor constitute a security interest?
Facts
● Skybridge is a travel agency that went bankrupt while holding money from travellers for
travel services
● were these monies held in trust? did the PPSA apply to them?
● once a bankruptcy occurs, all unsecured creditors must turn to the trustee in bankruptcy
to have their claims resolved.
○ the trustee becomes the representative of all creditors.
● however, this does not apply to beneficial trusts, they will get their money back.
● Basically the argument is that the travellers were the beneficiary of implied common law
trusts, which had not been recorded or documented.
○ but it is also argued this will be complicated for each individual to prove
○ and that the trusts, if they existed, were not perfected
● really the question is whether the deposited monies were security interests
Analysis
● the argument of the trustee is that the true nature of the deposits were security for
performance of the travel service, and that it is then under the PPSA as an unperfected
SI.
● but it is not clear that the relationship here is one of debtor to creditor
● PPSA says that a trust interest is a SI if the purpose of it is to secure payment or
performance. The nature of the truest is critical.
○ here the travellers are consumers, and if they became creditors it was
accidentally.
● so must look at the relationship of the parties at hand.
○ the PPSA is not going to transfor relationships
■eg doesn’t turn a solicitor-client relationship into a debtor-creditor relationship,
with the retainer as a debt
■the fact that the principal gives the agent money to buy a car for the principal
does not mean the agent is a debtor and the principal a creditor
● so the facts of each case must be examined in order to determine whether there is a
relationship analogous to that of a debtor and creditor giving rise to a SI
● the bankruptcy trustee cannot succeed to property held on true trust.
○ cannot take a better title than the bankrupt party had.
Ratio
● to determine whether a trust is a SI, look to see whether the relationship is analgous to a
debtor and a creditor
○
●
the PPSA is not going to turn all relationships of trust where one party has the
other’s money or property into a SI.
○ Bruce suggests this reasoning is flawed- there are many examples of people who
end up in a secured transaction without thinking of themselves as
creditors/debtors
an alternate route to the same conclusion would be to say that here the relationship was
required by statute, and the PPSA only applies to consensual relationships.
Security Transactions Excluded from the PPSA
● some security transactions are expressly excluded from the PPSA, typically because
they are non-consensual, federally regulated, or related to real property (land)
● Liens and Charges give by statute or common law
○ automatic liens are excluded
○ seller’s liens are excluded, since not consensual
○ subrogation is outside the scope of the PPSA, since non-consensual
● Federal Jusridiction
○ PPSA does not apply to a SA governed by federal law
■if there is a conflict, paramountcy means the federal law wins.
● First Nations Property
○ the Indian Act makes it difficult to use property on native land as collateral in a
secured transaction
○ conditional sales still possible
○ can’t take property off the reserve just to get around the Indian act.
● Land Interests
○ land interests, including leases on land, are outside the pPSA
○ can be tricky, since always hard to tell what is a fixture and what is not.
■cabins that are not plumbed or hooked up to electricity may be goods
■builders liens are not subject to PPSA since interests in land.
● Included Land interests
○ license to grow timber or harvest trees does fall into the PPSA
○ theoretically land-backed intruments could fall into the pPSA, but not likely
○ PPSA may cover fixtures, including fixtures which are continously attached
○ crops may also be covered in the PPSA
○ in the case of conflict with the LTA, the PPSA loses out, except with respect to
the provisions on crops and fxitures where the PPSA prevails
● Insurance related claims
○ the PPSA does not apply to the creation or transfer of insurance instruments.
● Claims for wages and other compensation
○ typically PPSA does not cover the creation or transfer of interests in present or
futreu wages, salary, or service, but fees for professional services are not
excluded.
■professional service interpreted narrowly- lawyers fees count, but
commissions to real estate agents do not
● Transfer of Unearned Right to Payment
○
●
●
PPSA does no apply to the transfer of an interest in an unearned right to
payment.
Some transfers of accounts or Chattel paper
○ does not apply to the sale of accounts or chattel paper as part of a sale of a
business out of which they arose, unless the vendor remains in apparent control
of the business after the sale.
○ benefits collection agents page 111
Does not include situations where goods are shipped under a negotiable bill of lading,
unless the parties have expressly intended to create or prvide for a seuciryt interest in
the goods.
JE Brooks & Associates Ltd. v. Kingsclear Indian Band (1991) NBCA
Issue
● Can First Nations’ Property be Collateral?
Facts
● K is an indian band, who purchased a Bus with government funds
○ K exercised a cahttel mortage in favor of the Crown
○ and is paying that back with fudns allotted to the band by the Department of
Indian Affairs
● JE entered a judgment against the band, and seized the bus while it was of reservation
● K says this was wrong since the bus had been purchased by partilaiment for the use and
benefit of the Band
○ so the bus was deemed to be situated on the reserve, and not subject to
attachment.
Analysis
● when interpreting treaties, you must read them as the Indians would have read them
since the Crown was in the superior bargaining power.
● but statutes relating to Indians express the will of Parliament and are subject to different
considerations
○ amibiguities are to be resolved in favor of indians, but don’t necessarily take the
best possible construction from the perspective of the indians.
○ must reconcile any interpretation with the polciies underpining the act.
● so Indians are not always going to have their property protected
○ the intent is to limit non-natives from interefering with the abhility of Indians to
enjoy their duly aquired property held on reserve land.
● property given to Indians by the Crown persuant to a treat or agreement is deemed
always to be situated on a reserve.
● this only applies where the goods are acquired through treaties relating to things like
education, health, housing and welfare
● once the goods are aquired through purely commercial agreements, they enter the
commercial mainstream and should be treated like other goods.
○ this kind of property must be situated on the reserve to be protected.
● here we have a judgment creditor trying to collect from a judgment debotr for services
totally unrelated to the bus.
●
●
●
it is not requried that the Crown itself purchase the goods for them to be protected. As
long as the goods were purchased with money provided by the crown for an above
stated purpose, they will be protected.
The bus was purchased with a loan from the ogvernment in order to help educated the
Indian children.
Besides, the bus was rarely off the resreve- it’s “paramount location” was on the reserve,
so it was situated on the reserve, and it was protected.
Ratio
● good purchased by the Government or with money from the government for the purpose
of educating, health, welfare, etc cannot be collateral
● goods purchased for ordinary commercial purposes through commercial agreements are
treated normally
● goods whihc are situated on the reserve - the reserve being the “paramount location” are protected.
6. Transactions Deemed to Create Security Interests
● BC PPSA includes deemed SI
○ interest of a transferree arising from the transfer of an account or chattel paper
○ person who delivers goods to another person under a commercial consignment
○ lessor under a lease for a term of more than one year.
● whether or not these are true lease or true consignments doesn’t matter with repect to
whether or not they are covered by the PPSA
○ they are deemed to be SI for policy reasons.
○ basically, potential creditors looking at property in D’s possession are entitled to
believe it actually belongs to D, unless the property has been registered.
○ this applies to interests AND deemed interests, though deemed interests are
exempt from Part 5
● Part 5 does not apply to these deemed interests, so still important to determine whether
they are “true SI” or “Deemed SI”
● but the rest of the statute does apply to these interests
○ so must perfect the deemed interest to preserve priority.
○ the statute sets out “deemed” definitions for the parties to a “deemed” SI
○ so the debtor covers the person receiving the goods udner the consignment or
lease.
● Even true leases of over a year will be deemed SI under the PPSA
○ may be either a security lease or a deemed lease.
○ if true lease over a year, the PPSA will apply, except for section 5, so rights and
remedies between lessee and lessor are largely unregulated by the PPSA
○ lease over a year includes a lease of an indeifinte iperiod is included
○ so is a lease of under a year with an option to renew that would take the lease
past a year
○ or lease for less than a year where the lessee nonetheless remains in
possession for over a year.
■in that case it becomes a deemed lease after the one year mark.
●
●
●
●
●
●
So in short:
○ true leases under one year do not fall under the PPSA
○ true leases over one year do fall under the PPSA, but not under Part 5
○ secuirty leases of any length fall under the PPSA, including Part 5
Commercial consignemnts, even when true, may be brought into the PPSA if it is found
to be a commercial consignment
○ this is a consighnment under which the goods are delivered for sale, lease, or
other disposition to a consignee who in the ordinary course of the consignee’s
business, deals in goods of that description by a consignor who
■deals in goods of that description and reserves an interest in the goods after
they have been delivered, but not under an agreement per se
■an auctioneer for sale
■a cognisgnee other than an auctioneer if it is generally known to the creditors
of the consignee that the consignee is in the business of selling or leasing
goods of others.
○ not always clear when it can be said a consignee or consignor deals in goods of
a description
■how would this apply if it was a first-time dealing?
■does it have to be a regular occurance?
○ not clear what constitutes knowledge by the creditors that a consignee deals in
consigned goods
■not met just because verybody actually involved ina given case knows that
there is dealing in consigned goods.
■not what people actually know, but what other potential creditors might be
expectted to know
In short, a true consignemnt is covered by the PPSA, but not Part 5
a security consignemnt is covered by the PPSA including part 5
Transfers of accounts and chattel paper
○ PPSA deems any trnasfer of an account or chattel paper, aboslute or otherwise,
to be subject ot the PPSA
○ the security comes into existence as soon as the account is created
○ if the transfer of the account or chattel paper is absolute, then Part 5 will not
apply
Accounts are monetary obligations not evidence by chattel paper or instruments,
whether or not the obligation has been “earned”
○ may be sold absolutely
○ the new purchaser becomes the new creditor
○ example:
■SP has an SI in X, which is owned by D
■D sells X to 3P, on credit
● so 3P owes D an account debt, which is proceeds from the sale of
X, meaning SP now has an interest in the account as proceeds
○ furhter, anyone who gets an interest in an account, other than the original
account creditor, counts as a SP
●
●
○
Chattel Paper
○ a secuirty arragnement that takes an interest in specific goods is called chatterl
paper
■meaning one or more writings that evidence both a monetary obligation and a
security interest in, or a lease of, specific goods.
■any transferee of chattel paper is deemed to have a SI
subodrination agreement
○ SP can agree to subordinate its SI to another party, which does not normally
create a new SI
○ it is possible that the party to who gets the benefit of this subordinatio
nagreement might also get a security interest in the subrodinating secured
parties interest, and this would be a SI
■tehre may have been an assignment of the subordinating party’s interest in its
repayment, which would constitute the assignment of an account.
PPSA: Sections 1(3), 3, 55(2)(a)
● 1(3) a lease that lasts less than a year but where possession continues with the consent
of the lessor only counts as “over a year” once possession has lasted over a year.
● 3 says that the Act applies to transfers of accounts and chattel paper, commercial
consignments, and a lease for longer than a year.
● 55(2)(a) says that Part 5 does not apply to deemed SI.
Newcourt Financial Ltd. v. Frizzel
Issue:
● What difference does it make that a lease for a term of more than one year is a true
lease as opposed to a security lease
Ratio:
● see above, page 43 of materials
Furmanek v. Community Futures Development Corp. of Howe Sound 2000 BCSC 809
Issue
● When can it be said that creditors “generally know” that a person is in the consignment
business so as to prevent dealings with that person being termed “commercial
consignments?
Facts
● F sold SJ to SE, sale financed by CF
● SE granted a GSA to F and CF, both of whom registered
○ F perfected before CF
● Seca delivered jewerely to SE
○ agreements not regsitered before possession turned over, and there was no
written notice of the arrangement- it was to be sold on consignment
● F brought judgment against SE and wants to realize SI, since SE is bankrupt.
○ but Seca had taken the property back, after bankruptcy
● both CF and F claim the jewelry is part of the SI
Analysis
● so F says the jewellry was part of the SE inventory and so falls under the PPSA, and
since F perfected before Seca reposseed, F has priority
○ Seca had not protected its SI
● this will be true if it is found that this was a commercial consignment.
○ commercial consignments count as SI
● both F and CF have perfected PMSI in all the assets, so they will have priority if the
consignment counts as a SI.
○ Seca failed to perfect
○ so if the jewelry was indeed part of SE inventory, then CF and F have priority.
● Seca says this was not a commercial consignment.
● Seca says it falls into paragraph d exception, which applies whre it is generally known to
the creditors of the congisnee that hte consignee is in the business of selling or leasing
the goods of others.
○ since F new that SE sold on consignment, the goods were not a commercial
consignment.
● the test is not actual knowledge by a creditor, but rather there is general knowledge on
the part of persons who deal with the consignee as creditors, buyers, or lessees.
● the point of the PPSA is to provide public disclosure of the existence of interests in
goods in possession of persons other than the holders of those interests
○ but there is no need to disclose anything if it is well known that the debtor is in
the business of selling other people’s property
● the arragenment here does not fall into para. d, and so it is a commercial consignment
● there is also an issue as to whether the jewelry was inventory
○ because the SA was perfected and made reference to after-acquired inventory,
the SI of the P attached to the unsold jewelry when it came into the possesion fo
SE
○ but according to the definition of inventory, it stops counting as inventory as soon
as it stops being the debtor’s inventory.
■a security agreement purporting to create a SI in inventory is only enforceable
against a third party so long as the goods remain in inventory
○ and Seca says sinec the goods arent in SE’s hands anymore (Seca having
repoed) the SI has detached, and no longer subject to the SI.
● Clearly, description as inventory does not give a creditor a SI over goods that are there
for consignment.
○ but you cannot simply repo to remove a SI in inventory
○ if all consignment goods taken from the inventory of a debtor and returned to the
consignor were no longer subject to the creditor’s SI, it would create a race to
seize assets.
● Since the consignor attempted to repo after the bankruptcy, the priority position of CF
and F previals
○ the unsold jewelry should have been part of the receivership process.
Ratio
●
●
whether or not something is a commercial consignment depends on whether there is
general knowledge on the part of persons who deal with the consignee as creditors,
buyers, or lessees that the consignee is in the business of dealing in other people’s
property.
○ not whether any particular creditors actually DID know that the D dealt in
consigned goods
○ objective not subjective
you cannot remove a SI in inventory simply by pulling the goods out of the debtors
inventory, since this would make a race for assets.
Chapter III: THE PROPERTY ENCUMBERED: COLLATERAL AND PROCEEDS
● the property subject to the SI is called collateral, which usually includes any proceeds
derived from original proceeds
○ you must interpret the purpose of the provision to determine whether proceeds
are included
1. Collateral
● any personal property may become collateral
○ personal property not defined in the PPSA, so defined by common law
○ collateral is defined as “personal property that is subject to a security intersT”
● personal property is all property other than real property
○ except fixtures, which are included in the PPSA despite being a form of real
property
○ licenses may or may not be collateral- it is somewhat unclear
● categorization of property is very important to the PPSA
○ sometimes more than one lable may apply : bike is a personal property, a
tangible property, and goods.
○ other labels are mutually exclusive: inventory, consumer goods, and equipment
■all goods may be characterized by one of these three discriptions
■not alwyas in a common sense way
● crops are goods, but if they don’t fit into the definition of inventory
or consumer goods, they are necessarily equipment.
○ never assume a word in the PPSA has an obvious meaning- it has quite a
specific set of definitions.
● property may change categories over time, from one group to another
○ s. 14 avoids a lot of potential chaos by saying that generally the determination as
to whether goods are consumer goods, inventory, or equimpment will be made
by looking at the time at which the SI attached.
● categorization is important, because some provisions of the PPSA apply only to certain
types of property
○ plus, common law rules still apply to certain types of property (like accounts)
● parties must agree as to what will be the basis of the security
○ if there is more collateral than debt, they are “over secured”
○ if there is lest collateral than debt, they are “undersecured’
●
●
●
●
●
●
●
●
collateral may be described as all-PAAP, in which case the SI attaches to the property
without any more specific discription or appropriation by the debtor
○ may also take an all-PAAP exclusive of certain kinds of collateral, often to allow
the D to give the senior interest in such property to another creditor
colltarl may be taken in a particular category of good
○ if thats the case, be sure to include “all after acquired” if that’s the intention
○ typically applies to inventory to allow the D to continue operating
There are vearies types of collateral, and you must know which applies as they may be
treated differently under the PPSA
various categories are specifically defined, and are often quite different from our intuititve
understandings of the term
○ must pay attentio to whether the definition is exclusive or inclusive (whether or
not other kinds of property that are not explicity described may be read into the
descriptioN)
Main categories are goods, an instrument, chattel paper, a document of title, money,
investment property, and intangibles, some of which have subclassifications
Goods: Inventory, consumer goods, equipment
○ Goods are an important kind of collateral
○ Goods are tangible personal property, including fixtures and crops, but not
chattel paper, documents of title, etc.
Goods may change category over their life: D may acqurie a car for the purposes of
selling it (inventory), then decide to use it for the business (equipment), then decide to
give it to his mother for personal use (consumer goods)
so s. 1(4) says that unless otherwise stated in the SA, the nature of the goods for the
categorization of property is fixed at the time of attachment.
Goods may be inventory, equipment, and consumer goods
○ equipment goods is the default category
○ goods may move through different classifications over its life
○ eg.
■truck may be part of all-PAAP, or it might be an inventory. Then it moves out
fo inventory and becomes equipment
● then it may be descibed precisely by serial number
● if sold to a consumer, it will become consumer goods
■so the description of the truck changes radically over the time
■however, the default rule is that the description is fixed at the time of
attachment
■so if it is inventory at attachment, it will remain an interest in inventory so as
against that debtor indefinitely.
■since multiple parties may have interests in the same collateral by different
descriptions, different procedural rules may apply to competing priorities
in the same goods!
Inventory
○
○
○
○
○
○
○
goods that are held by a person for sale or lease, or that have been leased by
that person
raw materials or work in progress
materials used or consumed ina business
■not that clear, and if read broadly could obviate “equipment”
very common form of collateral
typically materials used up or consumed in a business
typically inventory is to be sold, so it is in the interests of the D and the SP that
the goods can still be dealt with
the PPSA therefore makes inventory as liquid as possible, and thus makes it
easy for SP to lose priority or lose the interest altogether.
■for example, describing the goods as invenotry is adqeuate to meet the
writing requirements, but only while the goods are held by the D as
inventory. With other kinds of goods, as long as the description is
adequate at the time of attachment, it will stay attached.
■interests in inventory will often detach once the collateral is dealt with.
■getting a PMSI in inventory is much more difficult
Consumer goods
○ goods used or aquired for use primarily for personal, family or household
purposes
○ a description of goods as “consumer goods” is effective only if further
particularized, but you can exclude “consumer goods” from all-PAAP (or other
broad category) without further particularization
○ SI in consumer goods is restricted in terms of scope, and there are limits on the
available collateral
■aimed at consumer protection.
○ An SI does not aquire to after-acquired property that is consumer goods, unless
the SI is a PMSI, or the collateral obtained by the D is a replacement for goods
described in the secuirty agreement
Equipment
● default category of goods: if not inventory or consumer goods, then equipment
● a description of goods as equipment is adequate only if further particularized, but again
use of the term “equipment” is effective in terms of exclusions.
Accessions
● accessions are goods taht are installed or affixed to other goods.
○ the larger part is “The other goods”
○ together they make “the whole”
○ may be hard to say which is which, and sometimes the goods affixed are more
valuable than the “other goods”.
● accessions are one type of goods where a SI can attach by AAP in a consumer goods
context
●
at CL, an interst in the “other goods” would extend to the accession, and the PPSA
maintains this
○ however, the PPSA does allow for SI in just the accession or just the whole.
○ so there are rules dealing with competitions between SI in an accessiong and an
SI in the same thing as part of the whole
Returned goods
● a SI that has become detached because of dealing with goods can reattach if the goods
are returned.
Processed and Commingled Goods
● if goods are manufactured or dealt with so that they lose their identiy and become part of
a larger mass, an interest in them may continue in the larger mass
Instrument is usually a negotiable document
● but PPSA describes an “instrument” as a bill of exchange, note or cheque, or other
wirting that evidences a right to a payment of money
Chattel Paper - Specific good
● Special category of goods which plays a big role in commercial life
● it is writing that evidences both a monetary obligation and a SI in specific goods
● often a conditional sale
○ It is possible to get a SI in chattel paper, but this can cause problems if the goods
underlying the chattel paper are not perfected
○ you may have a worthless but perfected interest in the chattel paper, which itself
has lost priority due to non-perfection
● chattel paper is often transfered, which itself creates a SI
● PPSA has rules over transfer of chattel paper and intangibles.
○ if the chattel paper is assigned, the account debtor makes payments to the
assignor, unless there is a default in which case the account debtor will pay the
asignee directly
Intangibles
● these are personal property that are not goosds, chattel paper, investment property, etc.
● pure intangibles
● accounts are dealt with expressly, while intellectual property is dealt with by federal
statute
● interests in pure intangibles are dealt with by assignment
● PPSA deals with these assignments
Accounts
● simple debts
● a monetary obligation not evidenced by chattel paper or an intstrument
○ may be particularly valuable
○
○
○
○
○
dpeosit accounts, etc.
any transfer of an account is deemd to be a security transaction
if a SP gets an interest in an account from its debtor, there are now two debtorsthe debtor who gave the interest in the account, and the debtor of the account
itself (the account debtor)
if the account is assigned absolutely, the assignee becomes the new account
creditor
if the assingment is by way of a charge (so as a true SI), the SP can collect from
the acount upon default, so becomes the new account creditor at that point.
Crops and Fixtures
● both interests in land that nonetheless fall into the PPSA as collateral
● Crops
○ both naturally grown and planted, but only inlucdes trees grown as nursery stock
for reforestation, not for the production of lumber and wood
● fixtures
○ real proeprty, but deemed to be personal property for the purposes of the PPSA
○ subject of much litigatio. Four rules
■articles attached only by weight are not usually fixtures
■even slight affixation to the land counts as a fixture
■to vary these assumptions there must be clear evidence as to the object and
degree of annexation
■an intention of the person affixing the article is material only in so far as it can
be presumed from the degree and object of annexation
○ building materials don’t count as fixtures
○ fixtures may start as personal property, then become real proeprty
■so both PPSA and LTA may apply
AMAZING GRAPHS START AT 149
PPSA: Sections 1(4), 10(4)
● 1(4) sets out that by default and unless otherwise stated in the act, the description of
goods is assessed at the time the security interest attaches
● 10(4) says a description of goods as inventory is adequate as description only as long as
the goods remain in inventory- an exception from 1(4)
Saulnier v. Royal Bank of Canada 2008 SCC
Issue
● IS a license personal property in which a security interest can be created?
Facts
● S says a license is merely a privilege to do that which is otherwise illegal
○ thus not covered under the GSA, nor seizable in bankruptcy
Analysis
●
●
●
●
●
●
●
●
●
a fishing license may be the most valuable asset a commercial fishermean has.
○ thus may operate as useful collateral
but the Minister claims to have unfettered discretion in choosing whether or not to renew
li enses
○ but in reality licensing is stable and predictable to ensure commercial viability of
fishing
but just because licenses are valuable and necessary to partificpate in the commercial
fishing market does not mean they are necessarily property for the purposes of the
PPSA
○ we need to know whether licenses are property speicficaly within the context of
the pPSA
○ just becasue a license is not “property” for the puroses of the common law, does
not mean it is also exclusded from the PPSA
the pPSA describes property in the defintiions section
○ means goods, a document of titile, chattel paper, a security, an instrument,
money or an intangible
○ intanbgile meaning personal property that is not goods, a document of title,
chattel paper, a secuirty, an instrument or money
a creditor who enters into an SA over goods not covered by the PPSA may still have
access to contract remedies, but will not get prioirty over those who take an interest in
goods.
a fishing license is more than permission to do the otherwise illegal- it is permission to
do the otherwise illegal in order to acqurie valuable proprety- fish
a simple license itself could probably not be property at common law, but a commercial
license is clearly a major commercial asset
the tradtional approach has been that quotas and licenses do not count as property,
becuase they are renewed at discretion of minister so that they are transitory and
ephemeral
○ however, nowadays a more purposive approach
○ and there is a big differenec between a quota and a fishing license
■a fishing licesne is a bit like the old common law “profit a predre”, which was
a property right
■the person has a beneficial interests in the earnings from the license.
■profit of piscary was a property interested specifically for fishing.
○ so a fishing license is a bit like a statutory profit a prendre
○ so the subject mater of the license (the right to pariticipate ina fishery that is
exclusive to license holders) coupled with a proprietary interest in the fish caught
persuant to its terms bears a reasonabele analogy to common law property
■so does fall into the BIA at least.
Regulatory Approach
○ There was a series of cases that hinged whether a license was property on the
degree to which the Minister had discretion over renewal
○ the ability to request a renewal and to resist arbitrary denial of that renewal forms
part of a bundle of rights in which a security interest can be taken.
○
●
●
just because in theory the interest could be ended does not mean it is too
transitory and ephemeral to be a SI
■consider leases.
○ the problem with this approach is that there is no clear criteria to determine how
much discretion is enough to determine whether or not an interest in ephemeral
Comercial Realities Approach
○ license are commercial assets in practices, so they can be collateral
○ but many things that do not constitute property have commercial value, so there
is no necessary connection between the two.
Preferred approach
○ the important thing is that the license does not just grant a permission, it allows
for the creation of a property right in the fish harvested, and earning from their
sales
○ while this may not be propoerty it is close enough that it should fall into the
statutes.
○ the Bankruptcy Act was clearly intended to sweep up all kinds of property intersts
■this intention should be respected and licenese included
■thus on bankruptcy, the license will be assigned to a purchaser who will have
the same rights as the bankrupt party
○ PPSA has the category of intangibles for thigns that are otherwise personal
property but is not listed as tangible personal property
■intangible would included an interest of a license coupled with a interest in
property at common like like a profit a prendre
■then it should fall under the PPSA
Ratio
● a license will count as an intangible property under the PPSA if it includes a right to an
interest in property analogous to a profit a prendre
○ so a license plus some kind of right to a property interest.
Furmanek v. Community Futures Development Corp. of Howe Sound (REDUX) BCSC 2000
Issue
● Of what relevance is the subcharacterisation fo goods as inventory, consumer goods or
equpment
Facts
● F sold SJ to SE, sale financed by CF
● SE granted a GSA to F and CF, both of whom registered
○ F perfected before CF
● Seca delivered jewerely to SE
○ agreements not regsitered before possession turned over, and there was no
written notice of the arrangement- it was to be sold on consignment
● F brought judgment against SE and wants to realize SI, since SE is bankrupt.
○ but Seca had taken the property back, after bankruptcy
● both CF and F claim the jewelry is part of the SI
Analysis
●
●
●
●
●
●
●
●
●
●
●
so F says the jewellry was part of the SE inventory and so falls under the PPSA, and
since F perfected before Seca reposseed, F has priority
○ Seca had not protected its SI
this will be true if it is found that this was a commercial consignment.
○ commercial consignments count as SI
both F and CF have perfected PMSI in all the assets, so they will have priority if the
consignment counts as a SI.
○ Seca failed to perfect
○ so if the jewelry was indeed part of SE inventory, then CF and F have priority.
Seca says this was not a commercial consignment.
Seca says it falls into paragraph d exception, which applies whre it is generally known to
the creditors of the congisnee that hte consignee is in the business of selling or leasing
the goods of others.
○ since F new that SE sold on consignment, the goods were not a commercial
consignment.
the test is not actual knowledge by a creditor, but rather there is general knowledge on
the part of persons who deal with the consignee as creditors, buyers, or lessees.
the point of the PPSA is to provide public disclosure of the existence of interests in
goods in possession of persons other than the holders of those interests
○ but there is no need to disclose anything if it is well known that the debtor is in
the business of selling other people’s property
the arragenment here does not fall into para. d, and so it is a commercial consignment
there is also an issue as to whether the jewelry was inventory
○ because the SA was perfected and made reference to after-acquired inventory,
the SI of the P attached to the unsold jewelry when it came into the possesion fo
SE
○ but according to the definition of inventory, it stops counting as inventory as soon
as it stops being the debtor’s inventory.
■a security agreement purporting to create a SI in inventory is only enforceable
against a third party so long as the goods remain in inventory
○ and Seca says sinec the goods arent in SE’s hands anymore (Seca having
repoed) the SI has detached, and no longer subject to the SI.
Clearly, description as inventory does not give a creditor a SI over goods that are there
for consignment.
○ but you cannot simply repo to remove a SI in inventory
○ if all consignment goods taken from the inventory of a debtor and returned to the
consignor were no longer subject to the creditor’s SI, it would create a race to
seize assets.
Since the consignor attempted to repo after the bankruptcy, the priority position of CF
and F previals
○ the unsold jewelry should have been part of the receivership process.
Ratio
● whether or not something is a commercial consignment depends on whether there is
general knowledge on the part of persons who deal with the consignee as creditors,
●
buyers, or lessees that the consignee is in the business of dealing in other people’s
property.
you cannot remove a SI in inventory simply by pulling the goods out of the debtors
inventory, since this would make a race for assets.
○ court imputes a new qualification, that something held as inventory is fixed as
invenotry at the moment of default
2. Proceeds and Tracing
● A debtor may not keep the interest in the collateral
● with or without permission, the debotr may deal with the collateral
● what the debtor gets in exchange is called proceeds
○ property can be proceeds even if the D gets her interest after several dealings
after the original dealing with the collateral (Proceeds of proceeds)
● Proceeds are identifiable or traceable personal property, derived at directly or indirectly
from dealings in collateral or proceeds, from which the D gets an interest
○ so something that is derived from collateral, in which the D gets an interest
● it is critical that the D gets some interest in the goods in order for them to count as
proceeds.
○ so say D has an account X, and SP has an SI in X
■with the proceeds from X, D buys Y
■so SI carries over to Y
■but then, D sells Y to 3P
● 3P derives Z from Y
■Z is not proeceds, and SP has no SI in Z, because D has no rights or interest
in Z
● exception: if the SI is an account, any money resulting from that account IS an SI,
whether or not the D gets an interest in that money
○ if the money gets spent however, SP is probably out of luck
● while proceeds are enforceable against third parties whether or not the SA contains a
description of the proceeds, the provision says nothing it whether or not it counts as
perfected
● it can be quite hard to track down the proceeds, but there are rules for doing so both at
Common Law and at equity
○ this can be particularly tricky where the money has gone into a bank account
mixed with other funds.
○ there may be deposits and withdrawls from this account
● tracing is originally equitable, but it was brought into the PPSA
○ the PPSA allows proceeds to be traced even where there is no fiduciary
relationship between partries (an old equitable requirement).
● PPSA is not always clear as to when the term “collateral” includes proceeds, so must
consider context
● proceeds defined in statute in two different parts.
○
●
●
●
●
●
first part says that proceeds means identifiable or traceable personal porperty
derived directly or indriectly from any dealing with collateral or the proceeds of
collateral in which the D acquires an interest.
■so proceeds ony exist when D gets an interest in the new property, but it
does not require that the D have received or posses the goods.
■if D receives an account in exchange for the goods which has a negative
balance, the D does not have an interest in it and it cannot be proceeds.
○ second part inlcudes a right to an insurance payment or any other payment as
indemnity or compensation, a payment made in discharge or redemption of an
intangible, an instrument, or chattel paper
■in these cases, the D does not need to acquire an interest in the property for
it to be proceeds
■payment from an accoutn will be proceeds iven if the D has not acquired an
interest in it (perhaps he as assigned the account and the account
creditor is getting payments from the account debtor directly- still counts
as proceeds).
if something is proceeds, the SP gets an automatic interest in the proceeds emerging
from that collateral
the SI in the collateral may continue even after dealing, so the SP may have an interest
in the collateral and the proceeds- this may make the SP have even more secuirty
○ but typically not the case, since it is hard to realize an interest in property aftter it
has been dealt with
○ and s. 28(1) limits the value that can be obtained by going both collateral and the
proceeds to the market value of the collateral at the date of dealing.
the SP may also get an SI in the proceeds of proceeds
○ this leads to a an explosion of collateral
the amount of debt secured by proceeds is the same as the amount secured by the
original collateral.
○ the amount secured has no relationship to the value of the collateral
There is no requirement for the description of collateral to include a description of
proceeds in order to have effect against third parties
○ but in order to perfect, you will have to describe the interest in proceeds
Tracing
● To count as proceeds, the property must be identifiable and traceable
○ must be able to pick out which property has been dealt with
■otherwise you may be seizing something that doesn’t belong to you which is
obviously problematic
○ original proceeds and collateral are identifiable when they continue to exist in
their original form
○ they are traceable if they are converted into a substituted form that can be
located and susbtetitued for the original colltareal or proceeds
● tracigng money into accounts can be paritcualrly dificult.
○
●
●
if the account only contains money as collateral or proceeds, quite
straightforward
○ if it is a mixed account, tracing is more difficult
equitable rules of tracing
○ the basic rule is first in, first out- the first money depoisited is preumed to be the
first money withdrawn
○ under equity, if there is a fiduciary duty covering some of the funds, those funds
are presumed to be withdrawn after the trsutee’s own money
○ at some point, withdrawals out of a mixed account may have to come from funds
reamining affected by a third party interest, and new deposists do not
autonomatically refill this balance. in which case the lowest intermediate balance
rule applies
■benefiicaires are entiteld to follow thier contribution into the mixed fund
■the benefificares have a lien or charge over the whole of the fund to the
extent of their itnerest
■once a wrongful withdrawal has been made, the interest in the account is
reduced to the amount remaining, and further deposits do not replenish
this amount
■the inability to cliam against anythin in excess of the smallest balance of the
fund is because it is not possible to determine which parts of the money
were contributed by the beneficiary, and which were contributed by
others.
○ to use these equitable rules the account holder must have a fiduciary duty with
respect to the monies deposited towards the person who has the interest in the
monies
■often means you make the account holder the trustee of the moneies for the
person with the interest who is made the beneficiary
■funds taken from a mixed fund that are paid to a BFPfV are free of the
interest; funds given to a volunteer takes funds subject to the right to
trace.
PPSA modifies the rules of tracing
○ proceeds can be traced even in the absence of a fiduciary duty
○ Pettyjohn
■in this case, cattle subject to an SI were sold and money proceeds arose
■the money proceeds were used to pay down a debt
● so the account emptied out, the SI was gone
■but then the D borrowed back from the same account, and bought new cows
■the court found the SI applied to the cows so as to allow tracing as long as
there is a “close and substantial” connection between the original
collateral and the new collateral.
■since the collateral in the older herd represented only about 50% of the value
of that herd, the SI in the new herd was held to 50% as well.
Rule of tracing
●
●
what comes out of the account first is presumed to be the unencumbered funds
Example
○ X is goods worth 25 dollars, sold for 10 dollars with the money put into the
account. 15 dollars is taken out of the account, and used to by Y
■so what is the SI in Y?
○ the account held 60 dollars before the purchase of the Y
■so there is an SI in the account, but only to the extent of the SI that went into
the account- the 10 dollars from the sale of X.
■the 10 dollars secures 25 dollars of debt, since that’s what X was worth.
○ then 42 dollars were removed, leaving 18
■the equitable rules say that the encumbered funds are withdrawn last
○ so 18 dollars remain, 10 of which are SI
○ then the 15 dollars is removed to buy Y
■leaving 3 dollars in the account, all of which is subject to the SI worth 25
dollars
○ this means of the 15 dollars used to buy Y, 7 were SI funds
○ so there is now an SI in Y for 7/15th of its value
○ with the last 3 dollars, Z is bought, SI is in Z for 25 dollars entirely.
PPSA: Sections 1(1) proceeds, 10(5), 28, 35(3)
● proceeds are identiifable or traceable personal property derived directly or indreictly from
any dealing with collateral or the proceeds of collateral, in which the debtor acquires an
inters
○ includes a right to an insurance payment, redemption of intentangibles, etc.
● 10(5) says a SI in proceeds is enforceable against a third party whether or not the SA
contains a description of the proceeds
● s. 28 says that where property is dealt with or gives rise to proceeds, the SI continues in
the collateral unless the SP has authorized the dealing, and extends to the proceeds.
○ however if the SP enforces against both the collataral and the proceeds, the
amount secured by the SI in the collateral and the proceeds is limited to the
market value of the collateral at the date of dealing.
○ proceeds are continiously perfeceted if the interest in the original collateral
includes a description broad enough to include proceeds, or if it covers the
original collareal and the proceeds are money.
○ otherwise you are continuously perfected for 15 days, but becomes unperfected
15 days after tha tattachment in the proceeds
■uness you take possession or file a FS
● s. 35(3) says for the purposes of proceeds, the time of priority is the same time as the
perfection of the original collateral.
Re Canadian Imperial Bank of Commerce & Marathon Realty Co. Ltd.
Issue
● Do Proceeds of Proceeds constitute proceeds?
Facts
●
K entered into a lease under a GSA for all inventory and proceeds with M so that K could
set up shop
● K owed 53K to M
○ did the GSA include the proceeds of proceeds?
Analysis
● K says there is nothing in the PPSA or in the GSA which extends an interests in
proceeds to personal property acquired by those proceeds
○ property acquired by proceeds is covered by the broad language of the PPSA
○ proceeds are indentifable or traceable goods, and there is nothign that excludes
proceeds of proceeds from this definitnion.
● the SA had a provision that allowed M to insist that K pay all proceeds directly to the
bank
○ K says by not using this provision, M had waived its claim to the proceeds.
● the PPSA does not require SP to strictly insist in each term of the contract or risk losing
its SI.
● the lender should not be required to police the daily activities of the borrower in order to
avoid losign the SI
○ policing would make tracing easier, but is inconsistent with the basic pricniples of
the PPSA - to simplify commercial practices
○ and the PPSA does not require policing
○ proceeds arise automatically and the SI is attached
○ under teh PPSA a SI continues in proceeds as invenotry is sold
■to hold that a D and a SP need not engage in a continuing turnover, pay-over
arrangment in order to maintain a perfected SI is just commercial reality
○ there is no good reason to require K pay proceeds to M, only to have M lend
back again.
Ratio
● proceeds of proceeds constitute proceeds, and the SI in them continues
● the PPSA will not insist on strict rigorous compliance with all terms ofthe contract in
order to avoid a waiver of the SI.
Universal CIT Credit Corporation v. Farmers Bank of Portageville 1973 US Dis. Ct.
Issue
● How does the lowest intermediate balance rule for tracing money proceeds operate in
practice?
Facts
● GR entered into an angreement with CIT for wholesale fianncing (floor plan).
● CIT would advance money to pay for new cars, then as GR sold the car he would pay
CIT back
● CIT terminates the floor plan, putting GR out of business
○ so GR arrangemes to pay the local bank first in order to screw GR
○ so FB debits the owing abmount
○ the account had 16K, the bank withrdrew 12K
■the next day, GR took out another 3K
○
○
○
○
all of these funds came from the sale of 6 cars
■GR got funds by check from the purchaser, which were depositied in the
account
■each car sold and the proceeds from the sale were subject to CIT’s SI
● totalling 18K
GR had sent CIT checks for these cars, which were deposited in the bank 2 days
before the withdrawls.
while the FB was notified about the money GR owed, it had the habit of deferring
items until the day after receipt, which is common
this allowed the withdrawals to sneak through
■the debits were made the same day the cash letter for the cheques reached
FB, and thus the day before the cash letter was dealt with
■so on the day they were dealt with, there was insufficient funds.
Analysis
● CIT had a continuosly perfected SI in six cars and their proceeds
○ Ryan sold the cars and depsited the proceeds in the banks
○ funds from other sources were also deposited in the accounts, and various
withdrawls were made prior to the big ones.
● CIT says that the defendant bank was not entitled to make the 12K debit, sine the SI
continued in the collateral unless CIT was notified.
○ but GR says the money in the accoutns are not identifiable because it is a mixed
account, comingled with other funds, and substantial witrhdrawls had been made
exceeding the amount of the depoisted proceeds
■the proceeds lost their identity as such
○ funds are identifiable if they can be traced as proceeds.
● basic rule is that where there are comingled funds and some have been withdrawn, the
first funds withdrawn are those that are unencumbered
● was the bank entitled to amke the debits in the first place
○ while monies paid out of an account in the course of business are taken by
BFPfV free of the interest in proceeds, this is not true where the conveyance is
fraudulent.
■the bank clearly knew the withdrawals were not in the ordinary course of
business, so it will not be permitted to keep the interest.
● second rule is that the SP can only claim the value of the lowest balance of the account.
○ eg. D owes 100 Dollars to the SP, the account contains 150 dollars
■D withdraws 50 dollars, 100 dollars remian, 100 enumbered
■D withdraws 25 dollars, 75 dollars remian, 75 dollars encumbered
■D deposits 100 dollars, 175 dollars remain, 75 dollars encumbered.
○ LOWEST INTERMEDIATE BALANCE
■exception here is if the new deposits were made for the intention of restituting
themoies witrhdrawn
■and when it comes to trust funds, the funds subsequently deposited are
presumed to be by way of restitution
●
■but if the account is just an ordianry account, there is no presumption unless
you can show the intent was in fact to restitute
○ here there was no intent to restitute, so the subsequent dpeosits of funds not
relating to the proceeds will not be treated as restitution.
○ but the deposits from the cars will be treated as additions, following the lowest
interemediate balance theory.
so what happens here is that the 12K debit is disregarded
○ this means that the balance of the account was 15K prior to the debit
○ the amount owing as proceeds following the lowest intermediate balance rule
was 11K
○ so in teh account, 4K was unecumbered and 11K was proceeds
○ bank actually took 12K, so it will have to pay back 8K
■leaving the SP with 8K
see chart on 91
●
Ratio
● the lowest intermediate balance rule means that where there is an account with mixed
funds, any withdrawals first come from the unecumbered funds
○ when there are no unencumbered funds left, then you take from the encumbered
funds, and you reduce the SI in the account by the relevant amount
○ funds added to the account do not act to increase the amount of the SI unless
there is a demonstration that this was the parties intent (intent to restitute)
○ funds that are clearly proceeds may be added so as to increase the money in the
account and the SI owed.
Agricultural Credit Corp. of Saskatchewan v. Pettyjohn (1991) SKCA
Issue
● how have the equitable tracing rules been altered in the PPSA context?
Facts
● P are farmers, owned 100 cattle (C1)
● applied to FS for loan to purchase more cattle, FS gives 50K to purchaqse 70 cattle
○ P gives FS a SI in C1, and agreed not to sell the cattle without prior wirtten
consent
● P gets funds from BoM to purchase 33 cattle (c2)
● P gets a loan from ACCS for the purpose of pruchasing 50 more cattle, giving ACCCS a
SI in the cattle
● P gets more cattle, but mostly through BoM rather than ACCS
● P decides to sell cattle and buy a new breed, icnuding the cattle in which ACCS had a SI
○ numbereed 120 cattle
○ breached the SA since no consent or notification of the sale
● P prucases C3- the watusi cattle
● C3 purchased through BoM line of credit
○ proceeds of sales from old cattle were used to pay down the LoC, then money
from the LoC was used to purchase more cattle.
Analysis
●
●
●
●
Ratio
the PPSA does not define “tracing” or “traceable”
○ defined instead in common law and equity
○ tracing at common law and equity is propriety, aimed at following property as it
passes through hands and changes forms.
○ in establishing that one piece of property has changed into another, must show a
susbtantial and close connection so that it would be appropriate to allow the
rights over one to flow into the rights over the other.
tracing runs into problems where there are mixed accounts.
○ under the traditional rules, the proceeds from the sale of cattle were used to pay
down the overdraft, and where proceeds are used to pay debts, they proceeds
are dissipated and can n olonger be traced.
but here, P sold old cattle and purchased new cattle- this is a close and substantial
connection
○ basically, the old rules focus on whether the transaction was close and
substantial
○ but now we can look at the nature of the property and its commercial function
○ so you can trace where one set of chattels replaces another of the same kind.
■this reflects the PPSA’s focus on commercial realities as opposed to form,
and is consistent with the traditional approah to tracing at equity.
○ so the ACCS interest in C1 can be traced through to C3
but how much of the interest may flow?
○ ACCS had a PMSI in 50% of C1
■but C1 was twice the size as compared to C3
○ since ACCS had a PMSI in only half of C1, it will have a PMSI in only have of C3
○ giving ACCS a PMSI for all of the remaining debt would be inconsistent with the
nature of the triacing remedy
■the purpose of tracing is to ensure fairness among competing creditors
■here the unsecured creditor BMO could not have not have known that the
property of D which seemed unecumbered was in fact the proceeds of a
SI, and subject to tracing
■the unsecured creidtor extrends credit on the analysis of the D’s finacial
status, and assumes that items whihc appear unecumbered are
unencumbered
● so tracing is sort of unfair by defacto
■the unfairness to the unsecured debtor is outwieghed were there is a close
and substantial connection between the original collateral and the
proceeds
■but fairness between the parties requries that the secured creditor not end up
with more of the collateral than he otherwise would have.
○ so when we consider how much of the proceeds ought to be subject to the
proceeds, we need to look at broad public policy
■and the public policy seems to be that the goods of farmers ought to be
immune to seizure under the Agriculture Act unless they are PMSI
●
●
even where proceeds as funds have been dissipated in order to pay down a debt,
tracing may bring an SI through to new goods purchased, if those goods are the same in
nature as the goods sold to create the proceeds
○ the question is whether they are close and substantially connected, looking not
just at the form of the transaction, but also at the nature of the goods and the
commercial reality
goods traced in this way may be limited in their interest to the proportion they were in the
orignal category of goods.
Re River Industries Ltd. (1992) BCSC
Issue
● Has the Pettyjohn tracing approach been followed in BC?
Facts
● AL claims to have a SA entitiled to HPT’s inventory
○ HPT has been in partial bankruptcy, got a stay against creditors, and continues
to purchase inventory
● HPT sold all its operating assets later that eyar, except for the inventory supplied by AL
○ AL reposseseed this inventory but left it in the possession of the HPT
Analysis
● AL argues that normally the proceeds of the sale would have been used to purchase
new inentory, and so th e inventory reamining a tthe time of the bulk sale of assets was
proceeds
○ AL says that since the proceeds of the sale of intevnory was used to purchase
the new inventory, under Pettyjohn it should count as an SI in proceeds.
● HPT says that the proceeds from the sale of AL’s goods lost their identity and
traceablility once tehy were mixed with other sales revenues and were used for many
other purposes than inventory replacement
● the court finds the connection between the new inventory and the repalced inventory to
be close and substantial, and basically tehs ame as Pettyjohn
● so the inventories disposed of by HPT in bluk (which excepted inventory specifically
supplied by AL) did constitute traceable proceeds
● following Pettyjohn, the amount of the claim in the inventory is proportionate to the ratio
which inventory supplied by AL bore to the total inventory
Ratio
● Pettyjohn is adopted in BC
● the amount of the proceeds traced in this way will be equal to the ration of the original
collateral as compared to the rest of the class of goods that are the same as the original
collateral.
Chapter IV: CREATING THE SECURITY INTEREST: ATTACHMENT
1. Attachment - General
● attachment is the moment when the SP gets an interest in the collateral
●
●
●
●
●
●
●
●
●
●
in order for SP to get a secure position, he must obtain an intrest to property in which he
will bet preferred treatment
○ this requires the SP to get the interest in the property: ATTACHMENT
○ this comes about pursuant to the agreement between SP and D
○ then, in order to ensure that SP’s SI will prevail against other parties, he must
perfect his interest
attachment is the most crucial part of the process, since it is what actually creates the SI
○ this is also the time when the competing interests of others will be measured
against for the purposes of nemo dat, and even some of the priority rules
○ so very important to ascertain when the attachment occurs, whose interests it is
attached to, and how much obligation it secures.
■all of these will impact on the common law and PPSA rules.
if the SP takes no interest in a particular property to ensure repayment, he or she is
“unsecured”
○ taking the SI gives the creditor somethign to fall back on if the debt is not repaid,
make the SP “secured”
the SP has no rights over the property unti lthe SI is attached
○ once subject to the SI and attached, the goods become collatareal
there are three requirements for attachment
○ value is given
○ the D has rights in the personal property that will become the collateral
○ satisfcation of the writing requirements of s. 10, or SP takes possession
■strictly speaking the last step is not required for SP to enforce against D.
these requirements may be met in any order, but only when all three are met at the
same time will SI attach
○ in the cases of SA in a category of goods or all PAAP, attachment may happen at
different times for different goods, as D gets interests in those goods.
a further requirement is that the parties must have actually intended that a SI be created
○ there must be some kind of charging language suggesting a SI will be created.
parties may consent to a different time of attachment in the security agreement, which
will be assessed as an ordinary contract matter
these requirements do not need to be continued - once attached, the SI remains even if
D loses rights in the collateral.
What constitutes Rights in the collateral
○ what constitutes sufficient rights to allow attachment has been subject to a
number of judicial opinions.
○ normally “rights” are interpreted braodly
○ as long as the D has some degree of control or authority over the collateral
placed in its possession, it has rights in the collateral
■so D must have some sort of possessory entitlement or other property right in
the collateral
■these must be present rights, and not merely potential future rights.
○ while practically any right may do, the SI will only take as much of the right as D
has to give- nemo dat quod non habet
●
●
■so if D has only marginal rights, SI will have only a marginal SI
■however, the PPSA creates may exceptions to this principle so beware!
○ in any case, an interest less than ownership is sufficient, there is no need for title
■a lease or even a license may do
○ while the D must have rights to attach, the D main continue as debtor once he
has lost the rights.
○ there are a few situations where their are insufficient rights
■if a D has no common law or equitable property, probably insuffficient rights
■licenses are possibly not enough
■it may be hard to tell if D actually has rights in the collateral, or whether a
closely related legal entity has the right instead
What constitutes Value
○ the SP must give value in excahnge for the interest
■this means consideration sufficinet to support a contract, but also includes
some forms of past consideration
■the fact that SP has loaned D money in the past is sufficient value
■typically the value will be an extension of credit
● an binding promise to do so will count as value even if the D never
actually ends up borrowing anything
■value might also be in promising not to collect on a debt already owing.
■a seal is probably enough to constitute value
■courts have occasionally looked to actual performance, but not in BC
● these courts have found that a post-dated cheque was insufficient
○ while an old debt is sufficient value for attachment, some parts of the PPSA do
look to new value in particular
Particular Property Attachment issues
○ AAP
■unlike a floating charge which would only crystallize and attach on default, the
AAP attaches immediately as a fixed charge once created.
● as soon as D gets rights in the after-aquired property, attachment
occurs
■consumer goods are exceptions to this rule- they aren’t automatically
attached
● unless the consumer good is a replacement of a good previously
obtained under a PMSI
■proceeds automatically attach by extending the SI into the proceeds
○ returned goods
■an interest can be detached through operation of the PPSA or through
consent, typically because the D has dealt with the collateral in some way
■if the goods return to the D, the interest reattaches as long as the obligation
between D and SP still exists
○ Crops
■D gets no rights in a crop until it is growing, and no rights in a tree until it is
severed.
●
●
■a SI does not attach to a growing crop that becomes a growing crop more
than one year after the SA has been entered into, unless the SI relates to
lease, purchase, or mortgage of land, in which case the SI may attach for
the term of the interest.
Transfer of Interest by SP
○ SP can always transfer its interest in collateral to another party, usually by
assignment
■date of attachment stays the same, since no new interest is created. The
assignee gets the same position previously held by the assignor.
■transfer may be listed in the financing statement, but not required to
■or the new party may file and perfect a previously unperfected interest.
■the asginee may not deny the accuracy of information about the SI provided
by the predecessor SP
Detachment of Interest
○ the SP may waive its interest or agree to release it, whereupon it becomes
detach
○ parts of the PPSA will also cause a SI to become detached
○ otherwise, the basic rules is that the SI, once attached, remains attached to the
collateral even if the D loses all rights to the collateral.
PPSA: sections 1(1) “value”, 12, 12.1, 13, 28(1)(a)
● value means any consideration sufficient to support a simple contract, and includes most
past cosniderations (old debts/liabilities)
● s. 12 covers attachment, and says SI attaches when value is given, the D has rights in
the collateral, and the SI is either in satisfcation of the writing requireemnts or in the
possession of the SP
○ exceptioN: it is still enforceable as between SP and D, even if the writing
requirements/possession are not met.
● sets out exception to attachment for crops, young of animals, minerals, trees
● s. 12.1 deals with securities intermediaries
● s/ 13 says that a SA that provides for an SI in AAP attaches to that property with the
terms of the agreement without the D having to specficially appropriate it
○ the SI arises as the D acquires rights
○ except in the case of crops that begin growing one year after the SA was made,
and consumer goods (except consumer goods that are replacements for PMSI)
● s. 28(1)(a) says that except where otherwise indicated in the act, if collateral is dealt with
or gives rise to proceeds, the SI interest continues in the collateral unless the SP
expressly or impliedly authorized the dealing.
Toronto Dominion Bank v. Nova Entertainment Inc. (1992) ABQB
Issue
● What constitutes “value”?
Facts
● D owed BS a sum of 800K through a series of advances
○
○
D gave a GSA to BS, creating an SI over all of the present and AAP of D to
secure the whole o f the indebtedness
D later gave an interest To TDB
■TDB says that the GSA between D and BS fails due to lack of consideration
■the SA was not a loan, BS never agreed to advance future money
Analsyis
● the advances made before the GSA was granted counted as loans and should be
treated as such, even though it was never in the contemplation of parties that those
loans would later become the obligations underlying a SI
● while past consideration is not consideration the PPSA specifically says that antecedent
debts or liabilities count.
● and anyways, it would have been consideration at common law since part of the GSA
was that BS would not demand immediate payment of the existing debt in exchange for
collateral, and the case law says that this can be consideration for the purposes of
granting a seucrity intrest
Ratio
● Past debts can count as value for the purposes of the PPSA, even if at the time those
debts were granted neither party anticipated them forming the underpinning of a SI
Kinetics International Corporation v. The Fourth National Bank of Tulsa US CA 1983
Issue:
● How broad is the notion of rights?
Facts
● OHTbuilt parts made on customer spec
● Bank issued a LoC to OHT taking an SI in OHT’s inventory
○ covered all inventory including AAP
● KTI shipped OHT parts to install into a box to be returned to KTI
○ KTI would keep titile of the goods
● during the time OHT was assembling the boxes, it defaulted on its loan, so bank gave it
some more time instructing KTI to pay bank directly
● but then OHT goes bankrupt, delivers keys to bank
○ Bank took possessio nand took control of all the inventory, including the KTI
goods
○ KTI wants these goods back, but Bank claims to have SI and offers to sell back
instead.
○ Bank says that the KTI goods were inventory collateral in OHT’s hands to which
the bank was entitled when OHT defaulted
○ Bank says that KTI just has an unperfected SI
○ KTI says bank’s interest enver attached since KTI retained the rights over the
goods.
Analysis
● In order for the Bank’s SI to be enforceable, it must have attached
○ an SI attaches when the D signs an SA describing the collateral, value has been
given, and the D has rights to the collateral
○
●
●
●
●
the first two steps are met, the only question is wether D had sufficient rights over
the collateral
the term “rights in collateral” is not defined in the PPSA, but it is clear that the D may
have less than full ownership rights
other cases have shown that a D has sufficient rights when the D obtains possession of
collateral pursuant to an agreement with the seller or manufacturer
○ possession with cotingent rights of ownerhsip is enough, even wihtout any
payment o nthe contract
○ D has sufficient rights when the D acquired possession of collateral puersuant to
a sales contract or similar agreement
typically D must have some control or authority over the goods, anything more than
naked possession
○ this accord well with the puprose of the PPSA
○ if more was required, a SP could be fooled into thinking it could get an SI in
goods the D had in possession, but did not have suffifient rights over.
further, KTI’s role here is like a creditor- someone lending goods instead of money
○ it could easily have protected itself by filling a PMSI in the goods, which also
furthers the policy of providing notice and certainty to inventory lenders
Ratio
● basically any interest more than naked possession showing some control or authority
over the goods will be sufficient to qualify as “rights” over the collateral.
● parties lending goods ought to protect themselves by fililng a PMSI over those goods.
Haibeck v. No. 40 Taurus Ventures Ltd. (1991) BCSC
Issue
● Is title necessary to have rights?
Facts
● N40 gives dibenture to H, registered
● Builders get an SI in appliances by conditional sale
● N40 Defaults
● then applicances registered
Analysis
● H says the PPSA applies, and that under that the debenture has priority over seriuty
since these are both security arragnement,s and since the debenture perfected first, H
has prioirty
● Builders say that the debenture did not create an SI in the applicances because No40
did not have title, since it had not paid it only had a right to purchase, which it lost on
default
○ since legal title did not pass, the debenture did not attach to the applicances
● both the conditional sale and the debenture are SI under the PPSA
○ in order for the SI to ttach, the debtor must have rights in the collateral
○ the delivery of the applicance to N40 provided N40 with rights, even those those
rights do not ammount to legal title or ownership
●
●
○ the rights need not be ownership, they may simply be possessory
rights for the purposes of attachment is very braod and includes many interests beyond
legal or equitable title to the collateral
whether the sale has actually been affected, or if it is merely a conditional sale, is of no
import under the PPSA
Ratio
● it is not necessary that a sale be affected or that legal or equitable title pass to the debtor
in order for the debtor to have sufficient rights over the collateral such that attachment
may occur
● the rights may simply be possessory in nature
2. Attachment - Purchase Money Security Interest
● some security interests get a particular label of a PMSI, and the PPSA goes out of its
way to protect these interests
● if the SP’s interest is in collateral that his money or credit has allowed the D to get rights
in, then the SI in the collateral is a PMSI
○ same may apply to leases and consignments
○ it must be possible to say that but for the SP, the D would not have the rights to
the collateral
■since D would not have the rights to the PMSI collateral but for the SP,
neither would other SPs
○ so the PPSA provides priority rules that favor the SP PMSI interest as against
regular SI interests
○ so called “Super-prioirty”
○ but, you only get preferential treatment for the value of the goods that were
purchased with the loan
■so if SP loans D 1000 in order that D can buy X, but X only costs 600,
● SP has an SI in X for 1000, but a PMSI in X for only 600
● True PMSI
○ financier PMSI
■the SP has provided financing of some sort to allow the D to acquire rights in
the colltareal that is the subject of the PMSI
■the SI is a PMSI to the extent that the value is applied to acquire the rights
○ seller PMSI
■the SP is the person who sold the collateral on credit to the D
■here there is a PMSI to the extent that the SI secured payment of all or part of
its purchase price
■often a conditional sale will create this PMSI
● Deemed SI
○ a lease of more than a year or a commercial consignment are deemed to be SP
whether or not the interests of the lessor or consignor seucres payment or
performance of the oblgaiton
○
●
●
●
●
the lessor or consignor is deemed to have a PMSI, because just as the Debtor
would not have the SI without the financire, the debtor would not have the leased
goods or consigned goods without the deemed SP
■it would be unfair if other parties could get prioirty over these goods.
an SI is only a PMSI to the extent that it secures the repayment of money that was used
by the D to acquire those rights.
○ so the SI of the SP may secure a certain sum of money, only part of which was
used by the D to acquire rights in a particular item of collateral
■eg. 1000$ advanced to be secured be X
● D used $200 of that money to get rights in X
● so the SI is for 1000, but it is a PMSI only to the etent of the 200
○ can be hard to determine exactly how much of the value was used to acquire
rights in the collateral
■typically just a matter of finding X
■but what if D uses 500 dollars loan to buy X, Y, and Z?
■the SI is 500 dollars in each item.
■if we do not know how much each item cost (because acquired as a lot), the
full 500 counts as a PMSI in each good.
■so, a PMSI is given for the purchase of goods as a lot, and it is impossible to
tell exactly how much each good cost, then the full value of the PMSI is
located in each good in the lot
Aquisition of rights
○ the credit or loan must be used to allow the D to acquire the rights to the
collateral, though this does not need to be made express
○ a general loan or credit for the general financial well-being of the D will not create
a PMSI
○ the SP must have some sense that it is getting a PMSI
Not always clear when and if the rights in the good are acquired
○ if the D buys something it had no rights in before, it has acquired rights in the
collateral
○ other times, must look to the substance of the transaction
■normally, as long as it can be said in some way that the entitlement to the
collateral has been enhanced, the debtor can be said to have obtained
rights in the collateral
■so it is possible to have a PMSI in goods that the D had a previous, albeit
worse, interest in.
○ paying off a creditor probably does count as new rights, sinec the D’s collateral
is less encumbered as compared to before
Special Rules for using PMSI
○ PMSI may create super-priority, but not necessarily
○ a SI will not attache to after aquired goods that are consumer goods, unless the
SI is a PMSI or relates to replacement goods.
PPSA: sections 1(1) “purchase money security interest”, 22, 34, 39(6)
●
●
●
●
●
a purchase money secureity interest is an SI taken in collateral to the extent that it
secures payment of all or part of its purchase price, where the credit was given for the
purchase of enabling the D to acquire the rights.
○ and covers the extent that th value is used to acquire new rights
it also includes a lessor of goods under a lease for a term of more than one year
and the interest of a person who delivers goods to another person under a commercial
consignment.
s. 22 says that where a PMSI is perfected within 15 days after D aquires the collateral
has priority interests listed in 20(a) which defeat unperfected SIs.
s. 34 sets out the priority rule for PMSI
○ if PMSI is perfected w/in 15 days after the day teh D takes possession, the PMSI
has prioirty over any other SI in the collateral given by the same D.
○ PMSI in inventory has priority over any other SI in the same collateral, but only if
■the PMSI is perfected
■the SP gives notice to any other SP who has before the PMSI is registered
already registered a FS that would cover the collateral in the PMSI
● notice must occur before the D takes the right
○ a PMSI in goods and proceeds that is perfected
■in the case of invenotry, at the date the D takes possession
■in the case of non-invenotry, within 15 days
■has prioirty over any other PMSI in the same collateral given by the same
debtor
○ a non-proceeds PMSI has priority over a PMSI in the same collateral as
proceeds, if both are perfected.
○ a PMSI in crops or their proceeds given for value to enable a D to produce or
harvest the grops and given while the grops are growing or right before they are
growing has priority over any other SI in the same collateral given by the same
debtor
Agricultural Credit Corp of Sasketchewan v. Pettyjohn (1991) SKCA
Issue
● what does it mean “to enable the debtor to acquire rights in the collateral?
Facts
● watusi cow case
Analsyis
● the test for a PMSI has three requirements
○ lender has SI in the collateral
○ lender gave value for the purpose of enabling the D to acquire rights in the
property
○ the value has, in fact, been used to acquire those rights
● clearly ACCS did take a SI in the 1981 and 1984 cattle
● what was the value?
○ ACCS sent a final loan approval letter constituting a binding commitment to
advance credit, which counts as value
○
●
●
●
●
a binding commitment could support a simple contract, so therefore value for the
PPSA
the final loan approval constituted an invitiation to the Pettyjohns to borrow/purchase on
the strength of the promised credit
it was clear from the letters that the purpose of the value was to enable the Pettyjohns to
aqruire rights in the new cattle
and in fact the Pettyjohns did exactly that, buying cattle with the loan (using the BMO
LoC as briding finance).
the final criteria is a bit tough, since the Pettyjohns had already aquire the cows using
the LoC prior to the loan money actually being delivered
○ the LoC was just used as interim financing, and always with the intention that the
Pettyjohns would pay it off once the ACCS money was aquired.
so PMSI did exist
●
Ratio
● a binding promise to extend credit constitutes value
● where the letters, receipts bills, etec, imply that the D was being invited to make
purchases on the strength of the loan, this may make it clear that the purpose is to
enable the D to acquire rights in the collateral
● just because interim financing rather than the actual value is used to acquire the rights,
doesn’t mean the PMSI is defeated
○ look to what was ultimately intended by the parties.
Unisource Canada Inc. v. Laurentian Bank et al. [2000] OJ
Issue
● Can providing funds to allow the D to change the nature of her right in property
constitute allowing the D to “aquire rights” in the property?
Facts
● PG acquired a press, sold it to the RB, and then leased it back for 5 years with option to
buy
○ RB registered and perfected a SI
● PG owed money to U for supply of paper, so gave a GSA over assets, perfected
● so at this point RB SI is prior to U
● L the paid RB the amount owing on the Press, and registered a GSA, which dischared
RB’s interest
○ L says it has a PMSI over the press, so retains proirity over U
○ U says that since PG already had the press, L paying off RB did not constitue
new rights aquried, and so its not a PMSI
Analysis
● after the discharge of RB’s interest and the acquisition of L’s GSA, the D retained
possession and use of the press
● Motions judge found no PMSI
○ this change in arrangment for the fiancing of the press oes not constitute an
aquisition of new rights
○ there were no new assets release to the D’s pool of assets
●
●
●
●
●
●
but this is wrong
○ L’s financing enable PG to aquire further rights in the press than it had before
the purpose of giving priority to a PMSI is to enable the person who has advanced funds
for the acquisiton of a particular asset to have the first priority over creditors who hold a
general security over the assets
here L advanced funds to PG that allowed it to acquire title to the press
○ when the press was just being leased to PG, PG only had an equitable title- the
right to purchase at the end of the lease
○ now PG had a right to the press absolutely
■there was certainty of title.
while merely refinancing does not constitute “aquring new rights”, a PMSI may still be
created if new rights are acquired.
○ here new rights were acquired: title to the printing press
this makes good commercial sense
○ distinguishing between a lease/option and aquirsition of title makes it easier for D
to enter into a new financing arrangment, since the new financier will now it can
get priority by PMSI
○ besides, it would be unfair for U to get priority over the press when the only
reason PG had title was due to the financing from L
by enabling PG to acquire title, the transaction with L did allow PG to acquire new rights
in the collateral.
so this was a PMSI
●
Ratio
● while merely refinancing is not enough to allow the creation of a PMSI since no new
interest will be created, where the financing allows the D to take new rights over the
same collateral it did not have before, that may create a PMSI
○ so if D starts with equitable title by lease/option and ends up with legal title over
the same collateral, this can create a PMSI
Chrysler Credit Canada Ltd. v. Royal Bank of Canada (1986) SKCA
Issue
● How extensive is a PMSI?
Facts
● WPC operated with a RB LoC serucred by a GSA, subrodinate to conventiona lsecurity
held by CC who financed the purchase of new cars from the manufacturer
● PPSA comes into force
● WPC and RB create a GSA to secure 200K LoC giving the bank an interest in the entire
busienss, which was registered as including all after acquired equipment and vehicles,
including trade ins.
● CC created an inventory and lease financing secuirty agreement
○ WPC gave an intrest in all invenotry and proceeds from sale of proceeds
○ 5 days after RB, CC perfects
● CC notified bank that it was claiming a PMSI in the inventory and the proceeds for sale
of inventory
●
WPC would purchase the new cars by conditional sale, with CC advancing the purchase
price
○ CC would pay manufacturer and mark down what WPC owed
● WPC goes invot receivership
○ receiver immediately turned over new cars, but didn’t know what to do with the
used vehicles, isnce not clear whether CC or RB was entitled to them
○ the sum of WPC’s debt was more than the value of the used car inventory
● 44 used vehicles total
○ 4 were first trades on the sale of new cars, -- the loans for the new cars had not
been paid from WW to CC
○ 31 were first or later trades traceable to the sale of new cars -- the loans for the
new cars had been repaid from WPC to CC
○ 9 could not be linked to the sale of new cars
● the cars have all been sold and the proceeds left with the receiver.
Analysis
● both RB and CC have perfected SI in the inventory of the dealer
● that CC had a PMSI in the inventory of the dealer, which generally ranked ahead of RB
● quesiton is the extent of the PMSI
● each time a new car was sold out of inventory, the PMSI in it ended
○ however, if a car was traded in, the PMSI covered it, either as proceeds, or
because it fell into the defitnition of inventory
○ so for the first category, CC is clearly first.
● third category: used cars that could not be linked to sale of new cars
○ Bank says that since it cannot be traced to PMSI new cars, no PMSI
○ Court agrees that this is correct
● second category: trade ins where the load was repaid
○ Bank says since the loan forming the basis of the PMSI had been repaid, and the
PMSI in the original car is gone, the PMSI is over (but the SI remains as covering
inventory), but Bank having registered first gets priority
○ terms of the CC agreement
■CC claims SI in all inventory in order to finance teh pruchase of new cars and
accesories
■CC says that all ivneontry, no matter the character or how it was acquired is
going to be covered by the agreement
○ the parties to the agreement intended that CC’s SI attach to the whole of the new
and used inventory
■the intended for the whole of the inventory be answerable to the whole of the
debt, so that as long as any of the indebtedness remaned owing, the
inventory remained liable to satisfy the debt
■the trade ins were a calss of property namely inventory that was used to
secure the grant of credit on an ongoing and revolving basis
● a PMSI is a PMSI, regardless of its form
●
the PPSA allows the inventory finacnier (RB’s) right to “cross-over” security: all of the
dealer’s inventory financed by the finacnier secures all of the advances that enabled the
D to acquire it
Ratio
● may be a fairly narrow application
● when credit is extended to purchase inventory on an ongoing basis, the PMSI may be in
“inventory” as a class rather than any one particular piece of inventory
● thus the whole of the inventory may be subject to the whole of the PMSI
Chapter V: PERFECTION OF THE SECURITY INTEREST
● attachment may create the SI, but it is perfection that gives the SI the benefits of the
PPSA when in competition with other creditors
○ it gives the creditor some certainty of the value of the interest in the collateral
○ you don’t just want to be a secured party: you want to be a secured party with a
perfected interest
○ if you are unperfected, you will usually be subordinated or discounted altogether
in a competition with the interest of anboy else, ecept the D who gave the interest
in the first place
○ the actual funcitoning of perfection is set out in the various rules.
■typically a perfected interest has priority over an unperfected interest, and
particular kinds of perfected interests may have still better priority
■against judgment creditors, buyers, an dother transferees of the collateral, an
unperfected SI is subordinate
■an unperfected SI may also be subordinate to the interest of a trustee in
bankruptcy
● putting the SP in the same position as unsecured creidtors
● without perfection, the only prson the SP can be assured that it can use the SI against is
the D
● prefection requires attachment
● perfection then requires registration of a financing statement or taking possession of the
collateral
● perfection may be accomplished when the SI has attached, and then the SP either has
possession or registers a financiang statement
○ for certain investment properties, delivery may lead to perfection
○ for secuirites, “attachment and control” may perfect
● attachment is a crucial precondition to perfection
○ perfection is only attained at the momemnt ALL steps are accomplished
○ though for the purposes of the priority rules, sometimes it is the moment of filing
rather than the actual perfection that sets priority
● continuous perfection occurs when an SI is perfected in one way, then is perfected in a
second way without any lapse of perfection in btween
○ also continuous where SP transfers the SI to a transferee
● There are a series of grace periods where an SI is deemed perfected during that period,
even though it is not actually perfected
○
○
○
SI in proceeds is deemed perfected for 15 days as long as the interest in the
origingal collateral was perfected
in some situations where perfection was by possession, but possession ends,
there is a 15 day grace period
etc
PPSA sections 19, 19.1, 9.2, 23, 24, 24.1, 25, 26
● s. 19: an interst is perfected once it is attached, and all steps for perfection under the Act
have completed, regardless of the order in which this occurs
● s. 19.1 deals with security interests
● s. 19.2 deals with investment property
● 23: if an SI is perfected uner this Act, then is again perfected in a differet way without
any lapsed period of time, the SI is continuous for the whole period of the act
○ a person who receives an SI as a result of a transfer has the same priority as the
original SP
● s. 24 says perfection can be made fby possession
○ possession does not occur if the goods are in the actual or apparent possession
of the D or the D’s agent
● s. 24.1 says a security in investment property is prfected by control
● s. 25 says perfection may be aquired by the registratio of a financing statement
● s. 25 says that an SI perfected by possession that is delivered to the D for sale or
exchange, registration of transfer, or presentation, collection or renewal is deemed
perfected for the first 15 days it is under th econtrol of the debtor
○ the same goes for negotiable documets of titile that are in the hands of the D for
sale, loading, unlaoding, storing, shipping, etc,
1. The Registry System
● often the SP will want the D or a third party to have possession, so perfection by
possession will not be in the cards
○ often the D may need to use the collateral to carry on business to pay back the
SP
○ even when possible to perfect by possession it is usual to also file a FS, possibly
to ensure that any proceeds can be perfected.
● so if the SP does not want to keep the collateral, it must register a financing statement in
the Personal property registry
○ normally this is done electronically
● includes only enough information to give bare notice
○ the D and SP names, the type of collateral, and the period the registration will
last for (possibly forever).
○ then s. 18 allows parties to acquire more information from the SP
○ purpose of registry is not to give complete information, but simply to alert
individuals to the eixstence of the SI in the personal property, so that these
individuals can inquire further elsewhere
● Collateral must be described
○
○
○
●
●
●
●
●
●
●
if there FS describes collateral that is not included in the SA, has no effect
if the collateral is included in the SA but left out of the FS< not perfected
if collateral described too ambiguosly, may be a registration error
■but the level for acceptable identification has been set at “a relatively low
level”
○ normally collateral must be described by
■item or kind
■as all present and after-aquired property
● possibly excluding certain items or kinds of personal property
■as inventory
■or by serial number (possibly in addition to the above)
○ a description as “consumer goods” or “equipment” is not enough
○ desciption of proceeds may be very important
○ if the information in the registry is no longer accurate, a FS change statement
can e used to correct the problem
■often is the case where there is a new debtor, or debtor has changed names
if the D has changed, or has changed name, the SP is supposed to amen the
registration to include the “new debtor” if the SP knows of the transfer or has authorised
it
○ this is to ensure the registry remains reliable and efficient
○ if they are not made, the SP may lose priority under the priority rules
Most of the provisions relating to registration requirements are set out in part 4 of the
PPSA and the regulation
○ registering/filing a financing statement is simple, and may be done against
anybody’s name as debtor, even if there is not yet or never will be a SI
○ s. 50 provides the means to have a SI removed
○ paper forms are only used where the means does not exist to transfer
electronically
■otherwise, always registered electronically
Registration is according to the time assigned by the registry
○ if simultaneous, order is determined by the sequential number of the FS
a single financing statement may cover multiple security agreements if the D and SP are
the same and the collateral is adequately described
if multiple financing statements are used to cover the same collateral, only the earliest
one counts.
unlike the LTA, the registration of a financing sttemtn does not consitute express,
constructive, or implied notice of the contents of the FS.
○ registration is merely efective to proptect the interest, not notify others.
○ plus generally notice is irrelevant under the PPSA
S. 45 allows a party to trnasfer a SI, and the FS can be changed to show the SI has
been transferred, but this is not strictly necessary
○ the inquiring party would contact the transferor, who would pass them on to the
transferee
○ the transferee has the same position for priority as did the transferor
●
●
●
analgamation may lead to an effective change in the name of the D, which should be
amended
○ but amalgamations per se do not constiutte transfer tha t could lead to a newFS
change statement.
if the collateral is destroyed and replaed, a new FS needs to be registered to perfect the
interest in the replacement collateral
FS statement may be filed at any time, inlcuidng before the SI atttaches or an SA is even
met
○ early filling is standard practice
■this allows access to a grace period allowing parties to file at one point and
have registration retroactively effective for pu to 60 days
○ plus, priority compeittions with other SP are often settled on the basis of which
FS was filed first
■this may lead to a race to the registry
○ once the FS is there, other parties are notified that an interest is planning to be
created
Errors
● an error made by the reigstry itself probably does not affect the validity of the
registration, and loses made be recovered under the Crown Proceeding Act
● the PPSA says the validing ot a FS is not affected by error unless the defect is seriously
misleading, and the problem has occured in the “searchable fields”
● not always clear what constitues a seriously misleading error
○ definitely filign against the wrong debtor is ineffective
○ error in serial number for consumer goods required to be filed by serial number
are seriously misleading
■if serial number optional, error arguably not seriously misleading
○ a name will be correct if it is correct according to statute or common law
■so if a person has changed their name, their new name is correct even if
probably people will be searching under the old name
○ normally grammatical errors will be interpreted generously and not invalidiate the
SI
● a seriously misleading error is own that might mislead the reasonable person
○ burden is probably on the registering party to show the error is not seriously
misleading
○ quite fact specific, and it is not necessary to prove that someone was actually
misled.
● leaving collateral off the FS is probably seriously misleading
○ however if the failure occurs in a reregistry after lapse, and the first registration
was correct, this may not be seriously misleading because we would expect the
person to take this extra step
■may be a bit dodgy
● if a serial number or other information is correct it may “cure” another error
○
●
●
●
so if you have the wrong name, but the right serial number, BC authority
suggests the defect will be cured
defect in serial number probably always seriously misleading, even if the name of the D
is correct
○ unless a search using the correct number would generate the reigstration under
the erroneous number
ultimately the computer program is often determinative
○ if a search under the wrong information would nonetheless reveal the
registration, it is probably not seriously misleading.
○ BC program returns numbers that are close matches
○ there is a strong presumption that an incorrect registration not revealed by a
correct version of the criteria is seriously misleading, but this is not determinative
a copy of the FS must be given to the D
Effect of Error
● not always clear
○ if there are consumer goods of a kind that must be registered by serial number,
and the serial number is in error, the registration is not effective and the goods
are not perfected.
● but the normal assumption is that the effect of the error or omission in all cases is to
make the registration ineffective
● if there is an error in the registration over only a part, the PPSA says the error will effect
only that part.
Duration of Registration
● it can be 1-25 years, or infinity
○ it may be renewed by a financing change statement
● if registration lapses through accidental dischareg or failure to renew, the SI is no longer
perfected by registration
○ you can save your position if you reregister within 30 days of the lapse/discharge
○ if you do this, you will maintain your priority against people who were subordinate
to you before the lapse, except with respect to advances made after the lapse
and before the registration
Removal of registration
● registrations may create financial difficulties in some cases, so those identified as D or
having encumbered property will have an interest in having invalid or exhausted
registrations removed.
○ if the SI is in consmer goods, the SP must remove the FS within 30 days of the
paying off of the underlying obligation
● D may give written demand that FS be dischaged or amended
○ may occur where obligations have been performed, SP has agreed to release
interest, the description of the collateral is over includsive, etc.
●
●
●
if the SP is not entitled to be repaid or has not committed to giveing further value, it must
remove the the FS withing 10 days.
registrar has broad discretion to remove information from the registry
○ if the SP refuses to apply, the D may have the registrar effect the demand.
if there is a registratio nagainst a D or D’s property that is improperly made, the D might
have a claim for slander of title.
PPSA: sections 1(1) “financing statement”, “financing change statement”, 1(2), 18, 19, 23(2), 25,
28(2), 35(4), 42-48, 50, 52, 54
● financing statement means data to be transmitted electronically to effect a registration
● 1(2) sets out that a person has knowledge when information is acquired in a situation
where an ordinary person would take cognizance of it.
○ partnership has knowledge when a partenr or manager would take cognizance
○ etc.
● 18 a debotr, creditor and other parties may demand in writing further information about
the collateral from the SP, inlcuidng a copy fo the SA, the amount of the indebtedness
and terms of payment, list of all items that are collateral, sufficient information to find the
SA, etc.
● 10 a SI is perfected when it is attached and in possession/registered, regardless of order
● 23(2) a transferee of a SI has the same priority with respect to perfection of the SI as the
transferor had at the time of transfer
● 25 registration of a FS prefects a SI in collateral
● 28(2) proceeds are continously perfected if the interest in the original collateral by a FS
that
○ contains a description of the proceeds that would be sufficient to perfect SI in
original collateral of the same kind
● 35(4) an SI in equpiment that are of a kind that the reuglations require be registered by
serial number are not perfected or registered by FS unless the FS contains a description
of the goods by serial number
● 42 Registry is described
● 43 Registration of financing statements
○ registration effective from the time assigned to it
○ FS may relate to multiple SA
○ validity of FS not affected by error unless seriously misleading
■if one or more debtors are not disclosed, or there is an error in the serial
number of consumer goods that require description by #, this is deemed
sriously misleading
○ no need to prove anyone was actualy misled.
● 44 Registratio nlasts for as long as it says on the FS, and may be renewed before expiry
○ amenmdnet may be made by financing change statement
● 45
○ you may register a transfer in SI
● 46
○
●
●
Registration does not by itself constitute notice or knowledge of the FS or its
contents, or of the existence of the SI
50 deals with the procedures for amending and discharging the SI
52 and 54 deal with recovery against the crown for error
○ cant recover for reliance on verbal advice made by employee, or failing to
register correctly
674921 BC Ltd v New Solutions Financial Corp. 2006 BCCA
Isssue
● can a financing statement relate to a SI that comes into existence after the filling of the
FS?
Facts
● A FS was filed before the GSA came into existence, and before the GSA was even
contemplated
○ could this allow for perfection?
Analysis
● A FS is very simple, and does not call for the terms of the borrowing or even the amount
secured
● there is no need to impose a requirement that a FS be filed in contempaltion or in repect
of any particularl loan
○ indeed a FS may relate to several SA, and the SP may specifiy any time for
which the FS is to be effective
○ a FS may be filed before the borrower has executed a loan agreement or even
agreed to borrow.
● SP may immediately register once D makes known they are interest in loan
○ this allows the SP to be certain about its priority position once a loan is struck
○ otherwise it would be hard for SP to be sure it would get priority
● all that needs to happen is that the FS needs to adequately describe the collateral, which
it did
Ratio
● A FS may be filed in advance of a loan, or even before a loan has been contemplateed
● this allows the SP to ensure its place in priority.
● a single FS may relate to multiple SA, some of which may have been in existence well
before the filing of the FS
Regal Feeds v. Walder and Niverville Credit Union Ltd. 1985 MBQB
Issue
● how much information about collateral ought a registration to reveal?
Facts
● DW sold pigs, with the money placed in trust, so that the court could determine priority
● DW was owed 82K, RF 173K and NCU 9K
● RF’s filing statement may have been defective in two ways
○ the FS stated “hogs pigs, etc” but did not reference AAP or hogs conceived in the
future.
○ the FS did say livestock aquired in the future
● so the other parties say the FS did not perfect RF’s interest in hogs that are not yet
conceived
Analysis
● a SI is perfected when attached and registered/possession.
● registration is intended to affect bare notice
○ once the search has revealed the existence of a FS, it is up to the searching
party to determine the exact state of affair
● the parties had notice that a claim existed, and it was then up to them to inquire furuther
● the FS will be sufficient if it discloses enough information to permit the person search to
determine the existence and basic nature of the underlying agreement
● since it includes “after aquired livestok” and pigs, it was enough to put the other parties
on notice
Ratio
● the FS will be sufficient if it discloses enough information to permit the person search to
determine the existence and basic nature of the underlying agreement
○ other jurisdictison have come to other conclusions on this type of problem
Re Munro (1992) BCSC
Issue
● what can be left out of the registration of a name and not be seriously misleading?
Facts
Analysis
● leaving out a middle name or initial is not seriously misleading
○ the correct birthdate, and the D’s correct first and last name, is suffiicent to avoid
being seriously misleading.
● is the error in each serial number misldeaing?
○ regulations require that the description include the last 25 characters of the serial
number
● the test is whether the error is seriously misleading, not whether anyone was actually
misdlead.
● it is difficult to see how anyone could be seriosuly misled by the one digit error in each
serial number
○ especially because a search by correct serial number disclosed the charges in
faovr of the bank, even though the charges were registered using the incorrect
serial numbers
○ no one has been mislead, and these are not seriously misleading
Ratio
● omitting a middle name or initial is not seriously misleading
● the test is whether the error is seriously misleading, not whether anyone was actually
mislead
○ though the court seems to take the fact that no one was actually misled as a
factor suggesting the error was not seriously misleading
● where a search may disclose the FS despite the error may not be seriously misleading
Coates v. GM Acceptance Corp. of Canada [1999] BCSC
Issue
● Should the registry computer programme determine what is seriously misleading?
Facts
● GM registered a FS in respect of a truck, and enetered the serial number incorrectly
○ transposed a B for a 6, and an S for a 5
○ it did show the correct name for the debtors, H
● H loaned money to C on the basis of a promissory note and a blank signed transfer of
the check
○ H defaulted, C searched the registry for regsitrations on truck
○ the search result did not disclose GM’s interest
○ C transfered truck into his own name and took possession
● Truck was located on the lot of a GM dealership
○ C showed documents indicating ownership
○ GM claimed prior charge against vehicle
● GM showed document from registry showing his promissory note as the only exact
match for serial number, but did show the GM interest as an inexact/similar match
○ the difference in results was the product of the way the registry was searched
○ not clear why C searched the way he did.
Analysis
● key question is whether the registration of the incorrect serial number was seriously
misleading
● just because serial number incorrect does not necessarily mean that they were seriously
misleading
○ search of the registry using correct numbers did reveal the GM interest, even
though it should the numbers slightly differently
● some suggest the test ought to be objective: if a search of the registry using the correct
numbers would reveal the interest, then the FS is not seriously misleading
○ if there are two fields, and one would not produce the FS, then it is seriosuly
misleading even if a search using the toher field would not be misleading.
● the registry system is designed so that a correct search will reveal an imperfect
registration
○ in order for the FS to be valid (because it is not seriously misleading), the
program must disclose the registration to the searching party in such a way thtat
the searching party could reasonably be expected to know or to be suspicious
that the D in the registration is the same person whose name the searching party
is suing.
● so the crucial fact is whether the incorrect filing prevent a searcher from finding the
registration when searching under one fo the alternate search critiera
○ if a search using a correct version of the criteria does not not reveal the
registration, the registration has failed.
Ratio
●
●
●
●
●
the test of whether registration seriously misleading is objective and based on what a
search using the correct information would disclose
perfect accuracy in registration by name or serial number is not necessary
a seriously misleading description of EITHER the name or the serial number will defeat
the registration
a seriously misleading registration is one that
○ would prevent a reasonable search from disclosing the registration
○ would cause a reasonable person to thin kthe pregistration referred to some
other chattel.
some courts have disagreed with the result here: the programmer of the computer
system should have no legislative authority to determine what is seriously misleading
Alda Wholesale Ltd. (Re) 2001 BCSC
Issue
● What is the scope of s. 43(6) and does it apply to grammatical problems?
Facts
● BC loaned A money
● AFC had a registered FS giving priority, but BC says it is defective.
○ the wording is such that it is not clear whether AFC is claiming to have a SI in all
motor vehicles or just those that are leased.
○ BC says the ambiguity should defeat the registration since it is seriously
misleading.
● AFC says it is not misleading; grammatical ambiguity is not seariously misleading.
Analysis
● PPSA has two key requirements for filing a FS
○ name of D, and description of the collateral
○ collateral may be consumer goods, inventory or equipment
○ once registered, parties can search the registry by the name of the D or the serial
number of the goods to assess state of title
● many cases have dealt with errors in the searchable fields (name, number), but not in
areas that are not searchable (Description).
● the wording of the PPSA does not limit seriously deceiving errors to searchable fields
○ so a description may be seriously misleading.
● where the goods are equipment, they must be registered by number to be perfected.
● the goods here were inventory, and the PPSA requires that the collatearl be described
○ for inventory, you may perfect simply by description as “inventory”, or by all
PAAP
○ either would have been suffiicent, but AFC chose to register by description by
item or kind.
○ so the question is whether there was an error in this description that could be
described as seriously misleading.
● in the AFC FS, nothing suggesting they intended to get AAP property, so any reasonable
searcher would conclude AFC does not have an interest over the AAP
●
●
●
●
●
●
●
plain reading of the description is confusing as to whether the SI covered all vehicles, or
only those that were leased.
○ so definitely misleading
○ but was it seriously misleading?
the question is whether the defect, irregularity, omission or error would be seriously
misleading to any reasonable person within the class of persons for whom benefit
registration and other methods of perfection are requireed.
○ whether a reasonable person using the search system would end up believing
something important that is incorrect.
The class of person is the person who is to search the registry and read the description
to see what was covered by the SA
underinclusive descriptoins of collateral may mislead a reasonable searching party,
since they would be led to believe that the SP does not have an SI that falls outside the
description.
the description here is vauge, confusing, not clear what exactly is being described.
AFC says the description was enough to put other parties on notice such that they would
know an interest exists, and would then be able to get more information
○ but the party may not be able to inquire too much, since the PPSA limits the
invesetigation to D, creditors, sheriffs, and other people with interests in the
property
○ and its not the job of a third party to clean up after a mistake made by the SP
■a reasonable person is entitled to rely on the assumption that the onus to
avoid a loss due to error lies on the person who made the error
○ this also preserves the notifying funciton of the registry.
so burden falls on AFC
○ the intergrity of the registry is best preserved by requiring accuracy in descriptoin
so that creditors are able to obtain accurate descriptions of the collateral
○ certainty and predictability must predominate
○ the errors made would not have been ascertained by a reasonable search.
Ratio
● the question is whether the defect, irregularity, omission or error would be seriously
misleading to any reasonable person within the class of persons for whom benefit
registration and other methods of perfection are required.
○ whether a reasonable person using the search system would end up believing
something important that is incorrect.
○ underinclusion/error in description may be enough, since the searcher would
conclude that goods are unencumbered when they are not.
● illustrates the pitfalls that may occur when registration is done improperly
2. By Possession (or delivery)
● reigstration is necessary because when people see property in the hands of D, they
assume he owns it
● but this is not a concern where SP has the SI in possession
○
●
●
●
●
●
●
●
●
●
●
●
so SP may perfect simply by taking possession, without having to file a FS or any
other writing requirement
○ and since possession may also attach SI (no need for writing requirement where
godos in possession), taking possession may perfect as well as attach
because D doesn’t have the property in possession, potential creditors will ask him
where it is, and when they find out SP Has it in possession they will have notice of the
interest.
perfection by possession only possible for tangible property
possession must be actual, not symbolic or constructive
if the property is negotiable or quasi negotiable (money, chques) it is quite common for
SP to perfect b y possession
○ since if he left it with D, D would take advantage of the negotriable quality to pass
to a third party free of SP interest.
also may be common where the SP wants to prevent the D from dealing with or
otherwise jeapordizing thecollateral
one cannot perfect by possession after a default has already occured
○ so if learning about default SP repos unregistered collateral, it cannot perfect by
possession
○ which also applies to deemed party
■So A may have leased X to B without registering, then B defaults and A takes
X back
● X doesn’t count as perfected by possession
○ however, you can file a FS in advance to cover such an eventuality
perfection by possession only takes place if the possession is taken in order to perfect
○ so if SP takes possession accidentally or involunarily or for a reason other than
to perfected, the possession is insufficient to perfect
○ can be difficult to prove exactly why a PS took possession, however
○ comes up quite often in BC due to the legacy of the seize-or-sue system, which
still applies to consumer goods
○ D would attempt to dump goods on the SP, so that the SP couldn’t sue
○ difficult to tell whether the possession was for the purpose of perfection
you cannot claim perfection by possession if the collateral is in the possession or
apparent possession of the debtor.
however, a receiver is sometimes held to be an agent of the SP, so potentially if a
receiver takes possesion that may constitute perfection
○ it is more normal for the SA to state that the receiver is a rep of the D, however,
so this wouldn’t take place
intangibles obviously cannot be perfected by possession
while in possession, the SP must take care of the collateral
○ must use reaosnable care in the custody and preservation of collateral
○ for instruments such as chattel paper, this includes reasonable steps to preserve
rights against other parties.
○ SP may use property in its possession to the extent the SA permits
○
●
any retianed increase or proftis, other than money, gotten through the possessed
collateral must be used to reduce the obligation secured
○ D usually still responsible for expenses including insurance costs and taxes.
it is common for a FS to be filed in addition to possession
○ makes it easier to prove the terms fo the agreement where in writing
○ the writing and financing statement requirements will often be necessary to get
access to proceeds, which typically will be in the possesison of the D or third
party and so cannot be perfected by possession
PPSA: sections 1(1) chattel paper, document of title, instrument, money, security, 17, 24, 29, 31
● chattel paper means writing that evidences both a monetary obligation and a SI in
specific goods or goods and accessions
● document of title means a writingissued by or addressed to a bailee that covers the
goods in bailees possesion that are identified, and in the writing it is stated the goods will
be delivered to a named person or to the bearer
● instrument is like a bill of exchange, note or cheque, or any other writing that is evidence
of a right to payment of money that is normally transferred by delivery, possibly by
endorsement/assignment, but not chattel paper, document of title, or interest in land.
● money is a medium of exchange adopted by Canada or any foreign government
● security: defined in security transfer act.
● s. 17 sets out the rights and obligations of the parties in possession
○ must take reasonable care to preserve the collateral
○ raesonable expenses are payable by the D by default, secured by the collateral
○ risk is born by the D unless caused by the SP
○ the SP may hold as additional security any increase or profits, like dividends or
share, but this also reduces the obligaiton secured by the D
○ the SP may use the collateral as set out in the SA
● s. 24 covers perfection by colateral, and says that possession perfects except for
intangibles
○ if the goods are in the actual or apparent possession of the D, then not in
possession
● s. 29 covers returned/respossed goods, dealt with above (I think)
● s. 31 covers transferees of negotiable and quasi-negotiable collateral
○ says that if someone takes negotiable without konwledge that it was subject to
an SI, then the third party takes free of the SI even if the SI was registered.
Re Bank of Nova Scotia and Royal Bank of Canada et al. (1987) SK CA
Issue
● When is it too late to perfect by possession?
Facts
● FR granted RBC intrest in all PAAP, perected by registration
● FR purchased 2 trucks from DC by conditional sale
○ conditional sales assigned to BNS
● RBC appoints receiver persuant to SA
●
then BNS registeres SI in trucks
○ this perfects BNS PMSI-interest
● trucks sold
Analysis
● The appointment of a receiver does not necessarily constitute bankruptcy, so the BNS
reigstration was not neessarily too late
○ so BNS could still perfect by registration
● BNS says that when RBC took the cars via the receiver, they were not in possession
○ it says that the possession must be taken to secure payment
○ the receiver was not RBC’s agrent
○ RBC did not have actual possession until BNS perfected by reigstation.
● in order to perfect by possession, a party must
○ actually hold the goods
■not constructive possesion- physical possession
○ hold the goods as collateral
● possession may be of the support that will support a lient
○ it must be reasonably clear and actual possession
● whether or not an unperfected SI which goes into default may count as perfected
depends on whether or not it may be said that it is being held “s collateral”
○ the SP must be holding the goods so as to secure performance or paymnet
○ the SI is perfected by possession only when actually held as collateral
○ so must have possession for the purpose of securing a debt, NOT to realize it.
○ when a SP takes possession of property after a default, they are taking
possession to realize the debt, not to hold the goods as collateral
○ so property that is repossessed is not being held as collateral
○ repossession does not possession to secure or guarantee a payment, so is not
capable of perfecting by possession.
● besides, RBC was never in actual possession- at best the goods were in its possession
by way of the receiver by agency
Ratio
● you cannot take possssion of property after default in order to perfect, because when
you do so you are holding the property not in order to secure a debt, but in order to
realize it.
● possession is probably going to have to be actual and apparent in order to count for
perfection.
Royal Trust Corp of Canada v. Number 7 Honda Sales Ltd. (1988) Ont Div Ct
Issue
● what constitutes possession?
Facts
● O entered into an agreement to purchase car
○ prior to payment, R transferred ownership
○ O paid with cheque, and R delivered car, intending that O would be the owner
○ but the cheque bounced, as did two more.
○
O returned the car, but still wanted it
■and R still treated the sale as valid.
● then A loaned money to O in order to purchase the vehicle, secured by promissory note
and chattel mortgage, which was duly perfected by registration of FS
○ at this point O was the sole registered owner of the vehicle and was
unencumbered on title.
● then R tries to make good on the K which allowed R to repossess if O defaulted
○ R got judgment, transfered title to self, sold to PS
○ PS returnd the car finding the title encumbered by A
○ then car sold to AN
● the distrcit court judge found that the agreement to sale which allowed for default and
repossession consituted an SI, and that the once the car was returned R had perfected
by possesion
Analysis
● this was not perfection by possession
● R and O both considred O to be the owner
○ R never behaved as if it had an interest in the car- in fact, it wanted specific
performance of the sale
● there was no perfection by possession, because the car was actually in possession
○ the car was not in possession to serve as collatral
○ O brought the car in and R was acting as bailee
● mere possession is not enough to perfect
● at best, this was constructive possession, and that’s not enough to perfect.
Ratio
● whether or not someone is in possession to secure depends on the facts
● here there was no reason to believe that hte parties even thought there was SI (so no
attachment) much less that R was in possession for the purpose of perfection
● constructive possession is not enough- possession must be actual.
● Possession must be for the purpose of perfection in order to constitute perfection by
possession
3. Temporary Perfection
● a SP can have a perfected in SI without possession or the filling of the FS statement
○ in certain limited circumstances, an SI that has been perfected by possession
may temporarily remain perfected.
● the point of this is to allow the D to regain possession to do certain things with it: sell,
present, register, load, ship and porcess it.
● these provisions cover limited types of collateral
○ instruments, secuirties, negotiable documents of title, or goods held by a bailee
without a negotiable document of title.
○ lasts for 15 days upon the goods coming into possession of the D
● very unusual
●
●
could lead to a secret lien, in that for the period of 15 days the SI in the D’s possession
with remain perfected, even though SP is no longer in possession, and there is no
registered interest
so as typical with grace periods, you typically form the agreement but don’t actually lend
until all potential grace periods have expired
○ then you recheck, and if there are still no interest, then you make the loan.
PPSA: section 26
● sets out that a SI that is in an instrument or a negotiable title of goods that was perfected
by possesion remains perfected for 15 days after it comes into control ofthe D
4. Other Perfection Issues
● Investment property has it is own methods of perfection (attachment, control) that are
roughly equivalent for perfection by possession for a type of property that cannot be
possessed
○ since STA, the PPSA deems certain intersts perfected at the time of attachment
○ these interests are favored to the point that the PPSA does not think they should
have to do more to perect
○ an SI in investment property may also be perfected by control of the collateral
● good in the hands of bailees and others
○ an SI in goods held by a bailee may be perfected by various methods involveing
the goods themseves, or involving the document of title or receipt relating to the
goods
■perfection may occur by the bailee holding the goods on behalf of the SP in
accordance with the rules for perfection by possession in s. 24
■by registration of an FS over the goods
● there are complex rules relating to the perfection of an SI in goods that were once
covered by an SI, then detached, then when the goods are returned they are reattached
○ could just leave the FS filed
■the time of perfection for goods that detach and then reattach is the time of
filing, if the FS was effective at the time the goods are returned
● crops and fixtures can and should be registered in the LTO
● Automatic perfection
○ the PPSA sets out various instances where a perfected SI in collateral is deemed
perfected by the virtue fo the fact that there is alread perfection of an SI in some
other property or juridiction, usually for a very short period of time
○ Proceeds
■a perefected SI in collateral extneds to proceeds derived from the collateral
○ perfection of an SI in a securities account or future account also perfects an SI in
the futures or securities contained int he account
○ somtimes the PPSA extensds interests in certain property to goods
transactionally or physically connected to that property
■if the interest in the other goods is perfected, the interest extented to the
goods is automatically prefected
○
○
○
○
returned goods
■when SI detaches because of dealing with goods, but the goods return, and
SI may reattach and be perfected in the goods
● if the interst dervies from a perfected interest in an account or
chattel paper, the goods are deemed perfected for 15 days.
Accessions
■if the SP has a perfected SI in “other goods” to which an accession is affixed,
the SP perfected interest in the other goods will extend to the accession
Processed/comingled goods
■a perfected SI in goods that beome part of a product or mass continues in the
goods, despite the gods losing their serepate identity
conflict rules
■there are rules that allow for SIs perfected in other jurisdictions to be deemed
continued in BC for a limited period when the collateral or debtor
relocates to BC or other jurisdiction
PPSA: 12.1, 17.1, 19.1, 19.2, 24, 24.1, 25, 26, 49
● 12.1 says that an SI in favour of a sercurities intermediary attaches in certain
circmstances
● 17.1 says a party having control of investment property as collateral may create an SI in
the collateral, may sell, transfer, use, or otherwise deal with the collateral
● 19.1 says perfection of an SI in a securities account/futures account also perfects the SI
of the interest carried in that account
● 19.2 says an SI arising in the delivery of a securities internmediary, or investment
property, or futures account/contract perfects at the time of attachment
● 24 is perfection by possession, see above.
● 24.1 sets out that an SI in investment property may be perfected by control, and remains
perfected by control until the SP loses control, or the D arquires rights to the collateral in
various ways
● 25 registration of a SI perfects an SI in collateral
● 26 allows temporary perfection of certain property (instruments, secuirty, document of
title) that was perfected by possession, but is given to the D for a period of time
○ deemed perfected for 15 days
● 49 deals with registration in the LTO
5. Proceeds
● an SI in the proceeds is treated as a continously perfected SI for the first 15 days after
the D gets the interest in the goods.
○ if during this period the SP meets the requirements in 28(2), FS that covers the
description of the proceed, the SI will remain perfected.
○ if not, the goods will become unperfected, though remain SI
● proceeds are collateral and so any of the methods of perfection for original collateral will
do
○ however if you perfect by filling a NEW FS< you will get a late date
○
●
●
●
●
●
and if you take possesion, you will also get a late date
■so better to use an old FS
the PPSA sets out how to get continous perfection for the collateral in porceeds,
meaning they will keep the same priority date.
○ you get an initial 15 days of continous perfection
■this continous perfection does not operate to protect the SI when a buyer or
leasee gave value for the interst and had no knowledge of the SI
○ in order to get past these 15 days, the interest in the origianl collateral must have
been perfected by the filing of a FS
■to get a continously perfected SI, use one of the three methods allowed by
the proceeds provisions
● if the requirements are met, there is a continously perfected SI in
those proceeds
Three categories
○ Proceeds described
■the proceeds are specifically described in the original PPSA
■the language must be enoguh such that it could perfect the goods were they
original collateral
○ proceeds similar to original collateral
■the proceeds are of a type similar to the original collateral
■only necesary if the original SA did not cover AAP
■if it did cover AAP, there would be a SI in it as original collateral, so the
interest in it would be largely superflous
○ money, cheques, deopsit accounts
■if the proceeds are money, cheques, or deposit accounts there is a
continuosly perfected SI as long as the SI in the original account was
perfected by filing a FS
partial continuos perfection
○ it is possible that different kinds of proceeds may arise, some of which fall into
the categories above and some of which do not.
effect of hiatus on non-perfected proceeds
○ it is possible to end up in weird situations under this rule
○ X is described in the FS, and thereby perfected
■X is dealt with and gives rise to Y as proceeds, but Y is not continously
perfected
■but the Y is dealt with again and gives rise to money as proceeds, which are
automatically continously perfected
■however, if Y was not perfected, how does the money give rise to a perfected
interest.
○ AS LONG AS THE ORIGINAL COLLATERAL IS PERFECTED, it doesn’t matter
if one step down the chain of proceeds is not perfected.
Dual Nature: Proceeds and Original Collateral
○ some proceeds will be both original collateral and proceeds
●
●
■may have all PAAP interst; goods arising as proceeds would count both as
proceeds and as original collateral
○ this normally doesn’t matter
○ but in rare situations, you may get that 15 days deemed continously perfected,
even if the (new) collateral is not adequately described under the SA
In short 28(2) applies where the original collateral was described in a registered FS, and
will make the proceeds continously perfected:
○ if the SA contains a description of the proceeds that would be sufficinet to cover
original collateral of the same kind,
○ or if the proceeds are of the same kind as the original such that the description of
the original covers the proceeds,
○ or if the proceeds are money, cheques or accounts
28(3) applies where the original collateral was not perfected by a FS, and gives the SP
15 days deemed continuous perfection over the proceeds, which may be extended if the
goods are then perfected by registration of a FS.
○ if you then file a FS hoping to cover the proceeds, you can get continuous
perfection, but you will be pretty late in terms of priority.
PPSA: sections 1(1) proceeds, 10(5), 17.1, 28, 35(3)
● proceeds are identifiable personal property deriving directly or indirectly from any dealing
with collateral or the proceeds of collateral, in which the D acquires an interest
○ includes right to insurance payment or indemnity for loss of or damage to the
collateral
○ includes payments made in discharge/redemption of an intangible, investment
property, etc.
● a SI in proceeds is enforceable against a third party whether or not the SA contains a
description of the collateral.
● 17.1 allows the SP having control of investment property as collateral may transfer, use
or otherwise dealw tih the collateral as provided for in the SA
○ any proceeds derived from the collateral may be held as addtioanl security
● 28 deals with security interests in proceeds
○ where collateral gives rise to proceeds,, the SI continues in both the original
collateral and in the proceeds.
○ if the original collateral was perfected by registration of a FS, it remains
conitnously perfected if the SA contains a description of the proceeds that would
be sufficinet to cover original collateral of the same kind, or if the proceeds are of
the same kind as the original such that the description of the original covers the
proceeds, or if the proceeds are money, sheques or accounts
○ and you get 15 days continous perfection, to be extended if the goods are
registred before the lapse.
● 35 says that subject to s. 28, the time of registration, possession or perfection of an SI in
original collateral is the same tim e as registration, possession and perfection of its
proceeds.
Chapter VI: COMPETING INTERESTS: PRIORITY AND DETACHMENT RULES
● More than one party may have property interests in the same property, some of which
may be secuirty interests
● How these interests rank in relation to one another is called priority
● One interest will typically have priority over another, though in rare cases they may have
the same property
○ figuring out priority can be critical
■ofr the purposes of notice, and thus ensuirng you can use the remedial
measures
■and to know which party has priority so you can know if you can dispose of
the goods free of subordinate interests.
■also need to know if one party has an interest in the goods as a PMSI, or as
proceeds
■the category of goods may impact the SI
● all of these factors may mpact on the priorities
● Sometimes one party’s interest extinguishes the SI, in which case there is no remaining
property interest
1. What a Priority Rule Is
● PPSA provides rules only where one party is secured
● If a secured party has priority, in theory its debt is settled before any other secured party
or other claimants.
● A junior party cannot ignore the interests of a senior secured party.
○ higher ranked party have rights to the property that must be satisfied before the
junior party’s debt can be settled.
● Rules must be applied strictly- they are very specific and should not be forced into
situations where they do not clearly apply
● PPSA is not exhaustive, and common law may fill in the gaps
○ basic common law priority rule is the first-in-time rule: nemo dat quod non habet
PPSA: s. 68(1)
● Priniciples of common law, equity, and commercial law continue to apply except where
inconsistent with the PPSA.
●
Detaching a security interest
○ some times a party may take collateral free of any SI, in which case the interest
is said to detach.
■in this case there is no “competition” per se, since the detached SI no longer
exists.
○ typically trustees in bankruptcy and those who buy property in the ordinary
course of business
●
●
○ typically only affect unperfected interests
What is a Priority Rule?
○ a rule which establishes which of two interests has priority over the other
○ subordinate parties may seize the property, but do so subject ot the interest of
the senior paryt.
○ senior parties may seize the interest and sell it notwithstanding any junior
interests, the junior interest will only get what is left over.
○ where PPSA is silent, typically nemo dat will apply- this is still a kind of priority
rule.
○ however PPSA does override or alter many common law rules.
How do you use Priority Rules?
○ Paired Competitions
■rules are set up to compare priority between two interests.
■where more than two, must look at each interest as compared to each other
in a set of binaries
■may create “circularity problems”
○ Timing
■not always clear at what time priority is to be assessed.
■Inconsistent rules as between Ontario and Alberta
■priority rules only potentially affect rights until someone tries to take action
with respect to the goods- at that point priority may crystallize
● up to that point, a series of factors may alter priority
○ Appropriate Rule
■It is necessary to know many things about the competition in order to decide
which rule should apply.
● who is the debtor
● what category of property
● are interests perfected
● how much is the debt, and when were advances made
● is it PMSI
● if not SI, what kind of interest are we talking about
■not all of these factors will apply in any given case, but all could potentially
play a role in deciding priority.
■if more than one rule could potentially apply, use the more specific rule as
opposed to the more general rule.
● if competition between SPs, and no rule appears to apply, use
residual rule in s. 35(1). Otherwise, nemo dat will apply.
○ No Extension of rules
■don’t try and force things into category.
■PPSA rules should not be massaged or extended or modified so as to apply.
■most rules do not allow exercise of discretion
■if no rule applies, use nemo dat (or other applicable CL rule)
○ Application to the court
■a court may, on application, make an order determining the question of
priority or entitlement to collateral s. 70(a)
Robert Simpson Co. Ltd. v. Shadlock et al. (1981) Ontario High Court of Justice
Issue
● Is priority determined by the order of perfection/registration, or by actual notice?
Facts
● P sold Dbt goods for hotel, got SI, and notified D, but did not register until 1978
● Dbt mortgaged hotel to D, registered 1976
Analysis
● actual notice is abolished
● perfection is what counts
● cannot read into a comprehensive piece of legislation something which was deliberately
ommitted.
Ratio
● what is important for priority is the time of registration (and thus perfection), and not the
time actual notice occurs.
2. Priority Rules: General Issues
● Priority rules can be modified by the SA or by the courts.
● A party to a SA can agree to subordinate its priority interest to others through contract
● a Court can alter the affect of priofity through the equitable doctrine of marshalling.
● Courts may need to intervene in order to fix problems of Circularity.
PPSA s. 63- Supervisory Jurisdiction of court
● sets out the various orders a court may make on application of creditor, debtor, secured
party, and other parties with interests in the collateral
● basically enforces rights in ss. 17, 36, 37, and 38
○ s. 17 SP must take reasonable care to preserve collateral
○ s. 36 stuff about fixtures
○ s. 37 stuff about crops
○ s. 28 sutff about accessions.
● presumably other rights as well
Circularity Problems
● since priority is assessed with respect to paired interests, and different rules apply, may
be that circularity occurs
○ A is prior to B, B is prior to C, and C is prior to A.
● no built in way of resolveing these problems.
● if you can show that the problem is the result of fault on the part of one of the parties,
they may be made to suffer.
●
otehrwise may simply need to decide based on policty
○ judge may decide that one kind of interest is simply more important than others.
○ eg
■PMSI often take priority, given special treatment under the PPSA
■some courts have put the priority of the party taking aciton w/r/t the collateral
last.
■can use marshalling to attempt to ensure everyone does well.
■can use the “expectations” of parties as to who goes first in order to resolve
the problem.
GSM Securities & Appraisals Ltd. v. Rich-Wood Kitchens Ltd and National Trust Co. (1995)
ONCA
Issue
● how do you resolve a circularity problem?
Facts
● O buys land
● mortgages land to Trust Co, for a series of advances
● second mortgage to Darcon
● Rich-Wood delivers cabients, gets SI in cabinets
● cabinets become fixtures
● third mortgage to GMS, registered withiout notice of Rich Woods interest. (GMS treated
as 2nd mortgage in the case).
● then Rich-Wood registerest SI
● Trustco attempts to sell
Analysis
● according to s. 36(3)(c), National trust is prior to Rich-Wood, because mortgage prior to
the goods affixing to property.
● But GMS is prior to Rich-Wood, under s-s.(3)(A), because it got its mortage without
notice of RW notice, because RW didn’t register.
● But National Trsut also gave an advance at the end which is subsequent to everyone
else (or something), so first and last.
○ i think this is due to the Mortgages or Registry acts
● there is no way of resolving the circularity without breaking one of the statutes.
● could make rich-Wood go last, because it was late in registering its interest
○ but the PPSA does not require registration unless it want’s to be prior to
subsquent interests, so it’s not like RW was WRONG in not registering
○ s. 69 makes PPSA prior to any other act in case of conflict.
○ but could argue that not a true conflict here, because PPSA does not address
conflict between prior mortgagee and a subsequent mortgagee for value without
notice.
● Solution
○ basically, RW could have removed fixtures prior to a sale to a third party, but
instead NT sold
●
■NT sold subject to the RW interest, and kept money back to pay off that’s
interest.
■so NT should pay out RW, but GMS has prioirty by way of 36(3)(a)(only in
Ontario Act I guess)
basically it looks like the court tries to give effect to the priorities implied by the PPSA
and the reigstry system of priority registration, but keeping in mind the reasonable
commercial expectations of the party.
Ratio
● when settling a circularity problem, courts will often need to be creative.
● Consider
○ What would be consistent with the PPSA
○ Consistent with other statutes
○ Consistent with the reasonable expectations of commercial parties.
Subordination Agreements
● Priorities may be arranged between parties by contracts called subordination
agreements
● these are authorized by s. 40
● Senior party may subordinate to junior party in order to allow the debtor to access new
credit.
● Senior party may contract with debotr to subordinate to some third party, often only a
certain type of subsequent party.
○ intended to facilitate debtors ability to continue to do business with later creditors.
○ rules of privity would normally stop this from working, but PPSA explicitly
circumvents privity.
● basically these are contracts outside the PPSA that parties may enforce to rearrange the
priorities set out in the PPSA.
● Quite common, particularly where the Senior party has an all PAAP, and D needs more
creditors to stay in business, and if D is fully encumbered no one will loan money
○ so SP may agree to subordinate to otehr SP by contract
○ this subordination agreement will have no impact on third parties
● courts are fairly liberal in finidng subordination agreements exist, as long as there is a
clear and unequivocal agreement.
● courts are typically strict in contrsuing the content of the subordination agreement
○ the agreement will be interpreted strictly against the party who is intended to
benefit from it
○ language must be clear and unequivocal before a court will say that one party
has given away an entitlement it otherwise had.
● Agreements may be registered, but are not required to be registered
● in the US there is “equitable subordination” which allows, in the context of an insolvent
debtor, the ability to subordinate the claims of some creditor where they are connected
with inequitable conduct on the part of the claimant that is prejudicial to the interests of
other creditors
○
not clear that this is part of Canadian law.
PPSA: s. 40
● basically authorizes subordination agreements.
● third parties may enforce if the third party was the intended beneficiary of the contractcircumvents privity.
PPSA: s. 45(6)
● subordination agrements may be registered, but are not required to be registered.
Subordination Example
● D has 3 creditors, each with an SI in X: X is worth 500
○ C is first, and is owed 400
○ B is second, and is owed 200
○ A is third, and is owed 150
● by default, C would get 400 dollars, B would get 100, and A would get nothing.
● but C can choose to subordinate itself to A
○ A would then be paid 150, leaving 350 left in X
■C is owed 400, and B is owed 200
■but the effect of the subordination agreement cannot be to prejudice B
■so B will still get 100, leaving 250 for C to toake.
Royal Bank of Canada v. Gabriel of Canada Ltd. (1991) On. Ct. Jus. (Gen. Div.)
Issue
● what constitutes a Subordination Agreement, and who can enforce it?
Facts
● RBC wants its SI found prior to Fitzpatrick’s.
● deciding this requires interepretation of the SA and the application of ss. 30 and 38 of
the PPSA
○ 30(1) residual rule says if no other rule applies, priority is determined by order of
registration regardless of order of perfection
○ but s. 38 (s. 40 in BC) gives effect to subordination
● is Fitzpatrick’s interest subordinated to RBC’s?
● D purchased business from F, based on loan from Bank.
○ bank did not register
○ F did registerits interest, but did so with the intention that the bank would be priior
Analsyis
● By s. 30, F registered first and so had priority
○ but s. 38 allows subordination
● IN the case at bar there was aan agreement that any security interest given to F would
be subordinated to the Bank.
○
definition of the notes given to F was clear that they would be subordinate to the
Bank’s interest.
And Bank can enforce this even though agreement is between F and D
●
Ratio
● whether or not there is a subordination depends on the intent of parties, but mainly on
the clear and mandatory terms of any agreement
○ no requirement of form- even if the agreement is quite casual, it can be enforced
● a third party may enforce a subordination agreement if that third party was intended to
be the beneficiary.
Transamerica Commercial Finance Corp., Canada v. Imperial T.V. & Stereo Centre Ltd. [2004]
ABQB
Issue
● How strictly will subordination agreements be interpreted?
Facts
● ITV sells electronics
● gave CU a floating charge over all PAAP, which was registered
○ ITV was not to give other interests without prior consent, except on the basis of
loans given to ICF from banks, which could take priority
○ TCF financed purchase of ITV inventory. TCF pruchaser, then ITV has
possession for purpose of sale while TCF held title.
● ITV gave TCF SA in inventory to secure debt, which gave TCF PMSI in all inveotry
financed by TCF, which was registered
○ but did not give CU notice of registration of PMSI, which is required in s. 34 of the
PPSA
● BANKRUPTCY!
○ who has priority?
Analysis
● PMSI can’t take priority because didn’t notify the other CU
● But can subordination apply?
○ if it does, then it will give the TCF priority.
○ fact that TCF did not notify or register is irrelevant if it can fall into the
subordination agreement.
● But in order to fall into the subordination agreement, TCF had to be a bank.
● Court intereprets bank narrowly- does not include any party who extends credit.
● only applies to Bankers, not Creditors
● so subordination agreement will not take effect.
Ration
● Subordination agreements will be interepreted very narrowly and strictly.
Marshalling
● equitable remedy which may be ordered when a party is over secured.
● Has 2 possible effects
○
●
●
●
force the oversecured party to rely on his interest in a collateral that is not
affected by the junior party
○ give the undersecured party an interest in property it did not previousy have an
interest it
Equitable and designed to promote fairness, so court will not order in usual
circumstances
○ must come in time with clean hands.
○ cannot adversely effect a third party.
not a priority rule; acts to effec tthe interest of the seior party
Better to ask the senoir party to marshall before seeking a court order.
Surrey Metro Savings v. Chestnut Hill Homes (1997) BC SC
Issue
● How does marshalling work?
Facts
● CH owns lands where it built condos
● CH gave mortgages in favor of CHM, the to SMSC, and gave SMSC priority.
○ registered in LTA.
● CH gave SMSC a SI in all PAAP, registered in July 28
○ registered in PPSA, but not LTA (fixtures) until quite a lot later.
○ CH still owes ~50k
● CW supplies appliances, delivered a number of appliances to CH which were installed.
○ payment to be made in 30 days, 26.82% interest per annum
○ got PMSI in all goods delivered
● basically SMSC oversecured.
Analysis
● everyone agrees that SMSC has first priority, that second mortgage is second charge
against land, and the CW is second charge against goods.
● CW argues that since SMSC had first interest in land, should have to use that interest
first (rather than going after the all PAAP).
● in the alternative, CW wants marshalling.
● Doctrine of marshalling
○ rests on principle that where a creditor has the means of satisfying debt out of
two or more funds, he shouldn’t use this to prejudice another creditor whose
security comprises only one of the funds.
○ aimed at lessening the chance that the junior party will lose its security at the
whim of the senior party’s choice of property to pursue.
● Some say PPSA precludes marshalling, but court does not agree.
● No reason why it should not still apply so long as it doesn’t impair the senior creditor.
○ up to party claiming marshalling to prove that the doctrine won’t inconvenience
the senior party.
● Equitable doctrine, will only apply where the seeking party is not the author of its own
misfortune.
●
●
●
Here, CW was author of own misfortune- took a long time to register PMSI in the LTA,
so lost the potential for priority.
Further, all potentially affected parties need ot be gathered in court to discuss
marshalling, which CW failed to do.
Basically CW failed to give notice of the application and to thus have an opportunity to
make submissions on the matter.
Ratio
● Marshalling may apply when the senior party has two or more sources from which it
could realize its security interest, and only one of those sources is available to the junior
party
○ if junior party comes in good time, with clean hands, and where the problem is
not its own fault, the senior party may be forced to use the collateral not affected
by the junior party’s interest before the rest of the collateral.
● Must make sure everything is on the level- all affected parties should get a chance to
make submission.
Residual Priority Rules: Competition with Another Security Interest
● Ideally in a priority competiotn, you will try and find a speicifc rule that applies to your
type of interest between the types of parties at hand
○ but if you cannot find a specific rule, you can use the residiaul rules
○ if no residual rule applies, then you may use the common law rules: nemo dat
quod non habet
● s. 35(1) contains the residual rules, which apply only if not other priority rule covers the
specific instance. This deals with residual priorities as between SECURED PARTIES,
not between an unsecured party and a secured party (that is dealt with in s. 20)
○ perfected SI has priority over unperfected S S. 35(1)(b)I
○ between perfected SI, priority goes to the party who either filed a statement or
took possession first.
○ time of attachment irrelevant, but must have occured at some point (or interest
would not have been perfected in the first place).
○ between unperfected SI, itis determined by order of attachment
■this can apply among several competing unperfected SI interest.
■may lead to several interests having the same priority, because they may all
attach at the same time- ie. the time the debtor takes possession/gets a
right over the good.
● may result in all the creditors sharing the collateral rateably.
○ as long as at least one perfected security interest exists, the competition will not
result in equal priority, because registration takes place in sequential numbers.
○ if the collateral is serial numbered equipment goods that must be registered by
serial number, 35(4) says they only count as registered if numbers are listed.
○ for proceeds that are continously perfected, the relevant period f time is the time
of possession/perfection of the security interest in the original collateral.
● apply even if the SI were given by different debtors, although s. 35(8) and 35(9) modify
this rule, and are quite complicated.
●
●
s-s. 35(7) sets out rule allowing continous perfection where there has been a discharge
or lapse in registration, provided that there is a re-registration within 30 days of the
discharge or lapse.
Tacking allows further debts to be granted on the basis of one initial security agreement
○ residual rules specifically allow tacking in s. 35(5)
○ other, more speicfic rules may apply solely to particular advances.
○ in some cases between two SP, A and B, A will have priority over some
advances, while B will have priority over other advances, because diffferent
priority rules will apply to the different amounts.
Registration After Lapse
● normally as SI is either perfected or not, and if the method of perfection changes
(possession to FS), the time of perfection is the time of the earliest perfection
● Sometimes there is a hiatus between two methods of perfection, which case the more
recent perfection is the relevant time.
○ no general grace period between two kinds of perfection if perfection lapses.
● however, s. 35(7) allows perfected status to be deemed continous for 30 days after
lapse.
○ does not matter why the lapse occured, even if it is wholly the fault of the secured
party.
○ only works if there is a reregistration within the 30 days; if it is reregistered, it will
be retrospectively deemed continuously perfected.
○ however, any advances made by another party during the period where
perfection has lapsed will be given priority over all advances, including advances
made before and during this period.
○ see example at page 287
○ new secured parties who had not registered an FS before lapse will not be
affected by the registoration rules; they will get priority over the lapsed, restored
interest.
PPSA: s. 35: Residual Priority rules
● 35(1)
○ (a) priority between perfected interests is based on first to register FS or to
take possession
■if there are multiple FS relating to the same interes tby the same SP, use
the earliest
○ (b) a perfected SI takes priority over an unperfected SI
○ © priority among unperfected SIs is determined by the order of attachment
● 35(2) continously perfect interests are treated as perfected by the method by which it
was originally perfected. So you use the date of the original perfection
● 35(3) time of registration for proceeds is the time of registration of the original collateral
s-s. (3)
●
●
●
●
SI in equipment that must be registered by serial # are not perfected unless serial # is
listed. s-s. (4)
tacking is allowed, except after the SP acquires knowledge of orders to the contrary, etc.
s-s. (5)
lapse of SI gets 30 days to reregister continuously, unless someone has gotten an
interest in the interim.
○ if someone advances in the interim, you may still get priority, but not for
advances made in the interim
if the D transfers the collateral which is subject to a perfected SI, the SI remains prior
over any other interests granted by the D prior to the transfer, except for advances made
after 15 days after the day the SP knows that it should register a new FS disclosing the
trasnferee as the new debtor. (8)
○ doesn’t apply where the transferee aquired the interest free from the SI granted
by the D (ie, where the SI was lost through ordinary course of business.
Ontario Dairy Cow Leasing Ltd. v. Ontario Milk Marketing Board (1993) ONCA
Issue
● How is Priority established as between unperfected security interests?
Facts
● There are two documents creating SI, neither of which were successfully established.
● they are in conflict
Analysis
● since neither interest perfected, must turn to residual rules in 34(1) of the PPSA
○ attached at the same time because both SI were in existence at the time the D
obtained the rights to the proceeds of the sale.
● so the parties are entitled to share in the funds pro rata.
Ratio
● in a competition between unperfected security interests, whichever was first attached is
prior
● if both attach at the same time, the SI will be split pro rata.
Royal Bank of Canada v. Agricultural Credit Corp. of Saskatchewan (1994) SKCA
Issue
● Can a single financing statement perfect multiple SIs even when the subsequent loans
constitute seperate and distinct transactions?
Facts
● Y got financing to purchase beehives from FS: ACS loan A
○ secured by chattel mortgage in all PAAP
○ registered FS
● Bank made loans to Y on LoC, got SI by assignment of book debts, registered.
● Y gave further security to ACS in form of SA, covering same stuff- all PAAP, proceeds,
and a PMSI
●
●
Y guaranteed laon from ACS to PCC, secured by land mortages
Bank registers FS in all PAAP dealing with agriculture, proceeds, and PMSI- claimed to
be a SA
● Y gave docs to SA as security
● Loan A renewed
● ACS gets another FS against all PAAP, proceeds, and PMSI
● Y borrow more from ACS to buy more bee equipment, based on SA over all past debts
to ACS, and PAAP - 1985 ACS SA
● Y borrow more based on promisorry note secured by 1985 ACS SA
● Y gives ACS a bunch of promissory note, not clear whether they were to be for fresh
advance or as security for past debt.
● bank adds a ford truck to its FS
● Y defaults
Analysis
● the key question is whether ACS’s first FS can cover all prior loans, if not, the bank will
have priority over later loans.
● the question is whether s. 25 requires each SA requires a separate FS, or whether a FS
whch describes SI made at a later date can cover several SA that fall into the same
description.
● the point of the registration system is not to give detailed info abotu each transaction, but
rather to put parties on notice as to SI
○ it is thus not necessary for their to be detailed information on the nature of the
loan as long as the nature of the collateral is adequately described.
○ registry merely intended to give sufficient information such that the searching
person can determine the existence and basic nature of the underlying
agreement
■if they want more detaiil, they caninvestigate for themselves.
● it would be difficult, expensive, and inefficient to require multiple registrations each time
a SA is made or each time money is advanced.
○ the object here is simplicity and the giving of notice.
○ it is enough to know that hte goods in question are the subject of some kind of
SA.
● registration is notice and warning- nothing more.
○ so it doesn’t matter if the notice covers SA which did not exist, or were not even
contemplated, at the time the FS was registered.
● a single financing statement, if adequately prepared, can effectively register security
interests taken under one or more security agreements or ammendments to security
agreements.
○ may cover transactions not yet contemplated as long as the descreiption of the
collateral in the FS can cover those goods.
○ FS does not describe the debt, it describes the collateral, so it doesn’t matter if
the security interest has changed as long as the collateral is adequately
described.
○
●
the FS is intended to give notice of the possibility of an existing or future SI in
certain collateral and is not intended to relate to a specific security agreement or
transaction.
so where an intial SA is made and a FS filed, a further advance or SA based on the
same collateral will fall into the same FS and will be deemed perfected.
Ratio
● one FS may cover several and subsequent advances and SA, as long as the collateral
underlying those advances and SA is adequately described so as to put other parties on
notice that a SI exists or may exist in those goods.
PPSA: s. 20 Competitions between Unperfected SIs vs. Unsecured Interests
● 20(c) if a SI is not perfected, and the unsecured party does not know about the SI, the
unsecured party has priority if the unsecured party acquires an interest that is not a SI,
and aquires the interest for value
● 20(b) an unperfected SI is not effective against a trustee in bankruptcy or a liquidator
○ SI loses not just priority, but has no effect whatsoever
● 20(a) once there has been a default against an unsecured creditor, and the unsecured
creditor gets a judgment against the debtor, then the creditor gets a certain type of
property interest, and that interest takes priority over an unperfected security interest.
● s. 35(6) also deals with competitions between SP and an unsecured judgment creditor
as set out in 20(a)
○ basically 35(6) says the SP may continue tacking on advances until you become
aware that the judgment creditor has seized the collateral, in which case the SP
must stop tacking on advances.
Priority for a Purchase Money Security Interest
● A PMSI may give speical position: superpriority
● the holder of the PMSI may have first priority to the collateral even if under the residual
rules someone else whould have first priority
● to do so must fall within s. 34, which also extends the superpriority to proceeds
○ if the PMSI is in inventory, must take several steps in the right order to get
superpriority
○ rules often quite narrow, so just because you have a PMSI doesn’t mean you will
get super-priority
● this rule applies only between an PMSI interest, and a non-PMSI interest, not if both
parties have a PMSI
● Justified on the basis that absent the PMSI lender, the senior lender would have no
rights to the colltateral in the first place, since it was the PMSI loan that allowed the
purchase of the collateral
● two kinds of PMSI
○ financier
■lends money to D in order that D can buy something
○ seller
■makes sale based on credit, secured in the item sold.
●
●
●
●
●
●
●
●
leases and consignments are deemed PMSI, since you get a security interest in the
thing leased or consigned automatically.
even if you don’t get super-priority, a PMSI is still as SI, and so the other rules may
apply.
basic superpriority rules
○ collateral other than inventory
■if perfected not later than 15 days after the day the D gets possession, the
PMSI has priority over any SI in the collateral that has been given by the
same debtor.
■therefore wise to file before the SA is made, so PMSI can kick in as soon as
D gets possession
○ collateral in inventory
■requires more steps
■must have perfected the SI
■must have given notice to any other party including other SPs who have
registered a FS contaiing a description that includes the same item or
kind of collateral, stating that the person giving the notice expectes to
aquire a PMSI, and describeing the inventory by type or kind.
■must have completed the above BEFORE OR BY the time the debtor gets
possession
■must use the term PMSI in the notice.
■does not apply if the proceeds are inventory- in that case, use the rule for
goods other than inventory
○ so we need to know when the debtor got possession
■can be complicated if the D took possession before the PMSI came into
existence.
■resolved by finding that the relevant time is the date of attachment- PMSI
must come into existence before the clock starts ticking.
only applies where interests given by same debtor- if interests given by different debtors,
PMSI does not apply.
if both parties are PMSI parties, we fall back to the residual rule (s. 35)
○ exception: where one PMSI is the seller PMSI, and the other the financing PMSI,
the seller PMSI will get priority.
if superpriority applies, also apliles to any proceeds.
○ can be tricky, since the SP will have sent out notice to any parties with interests
in the original collateral, but are not required to do so with interests in the
proceeds.
if one PMSI is in the collateral as proceeds, and another in the collateral as original
collateral, the non-proceeds collateral wins out as long as the non-proceeds PMSI was
perfected within 15 days, or on possession if it is inventory.
accounts and chattel paper get special treatment
○ a non-proceeds SI in accounts given for new value has priority over a PMSI in
accounts as proceeds, as long as the new interests are perfected prior to the
pmsi, or a filing statement is registered.
○
●
chattel paper are also prefered
■a PMSI in chattel paper as proceeds will not have super-priority over the
interest of the purchaser of the chattel paper who took possession of it in
the ordinary course of business and for new value.
Crops financing
○ perfected SI in crops or their proceeds given for value to allow the debtor to grow
the crops and given during the growth of the crops or 6 months prior to planting
has priority over any other interest in the same collateral
■basically like a PMSI for farmers.
PPSA: Section 34: PMSI Priority
● 34(1) PMSI in non-inventory goods Must perfect within 15 days of debtor taking
possession, or if its intangibles, perfected within 15 days.
○ this has priority over other security interests in the same collateral given by the
same debtor
● 34(2) PMSI in inventory or proceeds has priority if
○ the pmsi in inventory is perfected at the time the debtor takes possession: NO
GRACE PERIOD
○ the SP gives notice to any other SP who has registered a FS or a SA prior to the
PMSI which appears to cover the collateral.
○ the notice should state that the SP intends to get a PMSI in the inventory, and
describe the item and kind of inventory.
○ the notice should be given before the debtor obtains possession.
○ so in order to get superpriority for a PMSI in inventory, you must send a notice to
the other SI, telling them the PMSI is being created and describe it preceisely,
must take all steps necessary to perfect, and you must do this prior to the D
taking possession.
● 34(4) PMSI in goods and proceeds, taken by the seller, lessor, or consignor has priority
over nother PMSI interests if it is perfected
○ by possession if inventory
○ or if not inventory, that perfection takes place no later than 15 days after the
debtor takes possession
○ basically this gives the seller-PMSI priority over the financier PMSI
● Non-proceeds SI in accounts given for new value has priority over a PMSI in the
accoutns as proceeds if a FS relating to the SI in the accounts is registered before the
PMSI is perfected, or before the PMSI FS is registered.
● Non-proceedes PMSI has priority over a proceeds PMSI in the same collateral if the
non-proceeds PMSI is:
○ inventory that was perfected at the time the debtor came into possession
○ other than inventory, perfected within 15 days of the time the debtor came into
possession.
○ basically a non-proceeds PMSI has priority over a proceeds PMSI, if the nonproceeds PMSI was perfected in 15 days.
McLeod & Co. v. Price Waterhouse Ltd. (1992) SKQB
Issue:
● when does the Grace period to perfect for superpriority begin?
Facts
● MC, PW, and FCC all claim to be entitled to the proceeds from the sale of a tractor.
○ question is priority
● Avonlea gave SEDCO a GSA to secure payment of loans
○ SEDCO assigns to EKATON
● EKATON gave MC money to be realized from proceeds
● FC was asignee of a contract of sale over the collateral X.
○ Ekaton was co buyer
● Question is whether FC has a perfected PMSI
○ MC says no, because FC did not perfect within 15 days of the D obtain
possession of the collatearl
Analsyis
● s. 34 of the PPSA requires that PMSI be perfected within 15 days after debtor obtains
possession of the collateral
○ but here, Avonlea had possession of the collateral for months as leasee before
the SA and before eprfection.
○ until the point where FC accepted the assignment of the SI and thereby validated
the SA agreement, Avonlea was not owner, but a conditional buyer.
○ So FC did not become creditor until it agreed to accept the debt by assignment.
○ once it accepted, it did perfecct within 15 days.
● Basically the court says that Avonlea was not in possession “as debtor” until the FC
agreed to finance the purchase of the truck and take a pmsi as security
○ only at that point did the clock start running
Ratio
● the time where the PMSI clock starts running is the time the debtor comes into
possession of the goods as collateral, not simply the gets the goods themselves.
Returned Goods
● SI may detach from collateral, usually because of some dealing by the debtor (sale of
the good)
○ s. 29 contains rules for establishing the priorities of SP who want to regain or
obtain the SI in the goods upon repossession by the debtor
○ may include those who had a SI in the goods before the Debtor sold or leased
them, and those who gain their security interest in the goods by virtue of chattel
paper or accounts created at the time of the sale or lease.
● very complex, examinable?
● basically, if goods that have been sold free of the SI are retured, the SI will reattach if the
underlying obligation still has yet to be performed, and the time and status of perfection
will be treated as if the goods were never sold
● accounts and chattel paper are treated differently.
○
●
accounts or chattel paper which are created by the sale, and if the goods are
returned then the party with the account or paper gets a secuirty interest in the
returned goods
○ this is deemed perfected for 15 days, but then becomes unperfected unless a FS
is filed
there are special priority rules which apply within interests in returned goods.
○ there may be new Si which arose after the sale but prior to the return.
○ SI given by the buyer or leasee, if they are perfected once returned, have proirity
over the reattached and registered SI in the reutned goods.
○ SI in returned goods created by an account is subordinate to other interests.
○ SI in returned goods created by chattel paper has prioirty over SI in goods
created by return or repossession.
■a purchaser of chattel paper who gives new value and takes possession of
the mortagage has priority over the SI in chattel paper as proceeds from
deaing with the inventory in which they had an interest.
PPSA: s. 29: returned or repossessed goods.
● if the debtor sells goods under circumstances where the purchaser takes free of a
security interest, the SI will reattached if
○ the goods are returned to/repossessed byt he debtor and the obligation secured
remains unperformed
● if the SI reattaches in this way, the time and status as perfected of the collaeteral is
determined as if the goods had not been dealt with- continuosly perfected.
● if the sale creates an account or chattel paper which is transfereed to a secured party,
and the goods are returned to the debtor, the transferee of the account or chattel paper
gets a SI in the goods that attaches when the goods are returned, seized, or
repossessed.
○ this status of perfection will expire within 15 days unless the transferee reigsteres
a financing statement or takes possession.
● the security interest in an account that is created by repossession is subordinate to a
perfected SI in the original goods and subordinate to a SI in chattel paper created by
return of goods.
● A SI in goods that a transferee in chattel paper has priority over SI in the goodsthat
reattaches,
● basically hugely complicated, reread.
Competition with a Trustee in Bankruptcy or a Liquidator
● unless the SI is perfected, it could be deemed not effectiev against the interest of a
trustee in bankrupcy or a liquidator as set out in s. 20(b)
○ basically means the SI disappears for all practical purpose.
○ prevents a party with an unperfected SI from exercising its rights against the
trustee.
○
●
●
●
●
●
gives the trustee full rights over the property where the debtor only had limited
rights.
○ anyone taking from a trsutee in bankrupcty does so with a clear title.
to be effective, perfection must occur prior to the date of bankruptcy
a PMSI gets a grace period of 15 days to pefect to still have priority
○ starts at the date the SI attaches.
does not intrude into federal powers over bankruptcy, since SCC interprets the rules as
being about property rights rather than bankruptcy.
if the SP loses its security as a result of being unperfected, it may still claim as would
any unsecured creditor, but it gets no special priority.
this can be hard on deemed SP, such as leasors and consignors who might not even be
aware they have created a SI.
○ the statute allows these parties generous damages claims which they can claim
as unsecured creditors in bankruptcy proceedings.
PPSA: s. 20(b): SI ineffective against Bankruptcy Trustee
● A SI is not effective against a bankruptcy trsutee or liquidator if the SI is unperfected at
the date of the bankrupcty
Re Giffen [1998] SCC
Issue
● Can the trustee in bankruptcy have a better position in relation to the collateral than the
bankrupt debtor did?
Facts
● lessor leased X to BCT, leased to CAG (the bankrupt).
○ lessor was not privy, but played role in this arrangment.
○ lessor got deposit from CAG, fixed lease rates, and got payments directly from
CAG if BCT stopped paying.
○ CAG and lessor named as owners in the registration, described as “leasee and
leassor” respectively.
○ no one perfected
● CAG goes bankrupt.
● G appointed trustee
● Lessor seizes car, sells with G permission
○ G wants proceeds of sale
● TJ found that because L’s SI was unperfected, the SI was of no effect as against G.
Analysis
● the CA focused on whether G could be said to have tite;
○ found that since lesee had no proprietary interest in the car, and since G
acquires this property, G could not have a proprietary interest in the car
○ this was an error, because the PPSA is intended to set aside traditional concepts
of title and ownership.
○
●
●
●
●
●
●
●
●
Ratio:
●
●
●
●
the notionis underpinning the PPSA do not depend on the form of transaction or
upon traditional questions of title.
This was clearly a SI- PPSA explicitly includes leases of more than one year into the
definition of a security interest
G, as trustee, is vested with all the property of CAG- the bankrupt party
○ the right to use the car is such a property for the purposes of the bankruptcy act.
since CAG had a proprietary right in the car, G acquired this right on bankruptcy.
In order to give effect to SI, must perfect, in order to prevent innocent third parties from
granting credit ot the debtor or otherwise acquiring interests in the collateral.
trustees are given the right to defeat unperfected interests as they are representatives of
the unsecured creditors
○ prior to bankrupcy, these creditors could have gotten judgments against the
debtor
○ but once bankruptcy begins, they must look to the trustee instead.
○ basically the unsecured creditors get the same priority as the unperfected SI
PPSA is clear that an unperfected SI is ineffective as against a trustee in bankruptcy.
○ the effective of this is that the trustee takes the leased car free and clear.
○ this violates traditional concepts of bankruptcy: a trustee cannot receive a greater
interest in the property than the bankrupt had at the tiem of bankruptcy
■the PPSA overwrites this interest.
the general rule remains that the trustee takes no greater interest than the bankrupt
party has, but the PPSA explicitly sets up an exception to this rule.
○ it is a policty choice of the legislature that an unsecured creditor’s position, as
represented by the trustee, is more meretorious than the unperfected security
interest of a secured creditor.
since the SI is ineffective against the trustee, the trustee can therefore sell the car and
give good title.
an unperfected SI in a collateral is ineffective against a trustee in bankruptcy
this may allow the trustee to get a better title than the bankrupt party actually had
trustee can then sell the collateral free and clear.
the unperfected SP is treated like any other secured party.
6. Competition with Transferees of Collateral and Buyers and Leasees of Goods
● SI may often come into competion with a tranferee’s interest.
○ typically the other party is not a SP, and is often a buyer
○ there are a number of rules the buyer could you to attempt to defeat the security
interest
6(1) Transferees where Security Interests Unperfected
● at common law, nemo dat applies
○ if the D has a limited interest in the goods, the most he can give to a buyer is that
limited interest.
● PPSA changes this principle in many siuations
●
●
●
s. 20 sets out rules which allow Sp to lose its interests in faovr to a transferee, and to
some unsecured creditors.
the statute says that an SI in chattel paper, document of title, instrument, omney or
goods is subordinate to the interest of a transferee who aquires an interest under a
transaction that is not a SA, gives value, and acquires the interest without knowledge of
theSi
○ there must be a transfer
○ the transfer must be for value: consdieration inlcuding past consideration, or a
seal
○ the transferee must not have knowledge of the SI
■registration of a FS does not by itesefl constitute express, constructive or
implied notice
■what actually constitute knowledge is ofte the subject of litigation.
basically s. 20 prefers the non-secured interest to an unperfected SI
○ if the non-SI is a trustee or a liquidator, then the SI is ineffective
○ if the non-sI is a judgment creditor, then the SI is subordinate to the non-SI
PPSA: sections 1(1) “consumer goods”, “value”, 1(2), 20(c), 30
● consumer goods are goods that are used or acquired for use primiarly for personal,
family, or household purposes
● value includes consideration plus past consideration
● 1(2) says a person or partnership has knowledge when information is acquired by the
person under circumstances in which a reasonable person would take cognizance of it.
● 20(c) says a security interest in collateral is subordinate to the interests of a transferee
who takes
○ under a transaction that is not a SA
○ gives value
○ acquires interest without knowledge of the security interrst and before the SI is
perfected
● s. 30 is protection for the buyer or leasee of goods. (we will not be tested on this)
○ a buyer or leasee of goods in the ordinary course of business takes free of any
perfected or unperfected SI in the goods given by the sellor or lessor, whether or
not the buyer or lessor knows of the SA, unless the buyer/lessor knows that the
sale constitutes a breache of the SA
○ abuyer or leaser who aquires consumer goods takes free from an SI in the goods
(unperfected or perfected) if they give value and quires without knowledge of the
SI
■doesn’t apply to goods worth over a thousand dollars, or fixtures.
○ a bueyr takes free from a SI that is temprorily perfected
■temporarily perfected due to temporarily in D’s possession
■temporarily perfected as proceeds
■termpoarily perfected as returned goods
■if the B gives value and bus without knowledge of the SI
○
○
a buyer takes free from any interest in goods perfected under 25 (perfection by
registration)
■if the goods are bought without knowledge ofthe SI, and the goods were not
described by serial number., but only if the goods are equiment and are
supposed to be registered by serial number.
sales for the purpose of s. 30 may be for cash or credit, or exchange of property,
but not the transfer of a security to pay back a past debt.
Royal Bank of Canada v. Dawson Motors (Guelph) Ltd. (1981) Ontario County Court
Issue
● What constitutes “value” for the purposes of s. 20(c)?
Facts
● RBC loaned LW 5K to purchase car, taking a chattel mortage on the car as collateral
○ terms inlcuded that LW could not dispose of the car without permission
■FS filed on the 16th of august
● but on the 15th of August, LW sold the car to DM in exchange for a car and cash
○ so DM took ownership of the car
○ prior to take possession, DM did a search of the registry and found nothing
■search on the 16th would not disclose registration that happened on the
same day.
■the whole reason DM took possession a day after the sale was because he
wanted to do a search of the PPC
Analysis
● so at the time that DM took title, the SI was uneprefected.
● an unperfected SI is subordinate to the itnerests of a transferee who is not a SP, but who
gave value before perfection and without knowledge.
● the issue here is that while the agreement was made on the 15th between DM and LW,
they didn’t actually exchange goods for money until the 16th (pass value)
● the TJ here finds value didn’t pass until the 16th
○ the DM says the promise is value enough
○ but if DM delayed payment to check the registry, this implies that it wouldn’t pay if
it found title to be encumbered
○ which suggests that there was no binding promise, thus no value.
○ if DM is right, and the promise was enough, had DM found the record on the
registry on the 16th it could still have completed the transactin, since the promise
was made before notice.
● so a whlly executory promise without any passing of an actual interest is not enough to
constitute value.
Ratio
● according to this case, value only passes where there is some change in position, some
kind of change in actual interests
○ a purely executory promise is not enough
● but this is inconsistent with the wording of the PSPA so I think the outcome here is
doubtful, and Macdougall says so as well
6(2) Authorised Dealing Free from Security Interest
● normlaly 28 says that if collateral is dealt with or otherwise gives rise to proceeds, the SI
continues unless the SP expressly or implicity authorizes the dealing
● according to 28(1)(a), a SP can expressly or impliedly authorise that the collateral be
dealt with free of the SP interest
○ this authorization could take any form, and could be given either to the D or to
the third party who seeks to take free
○ even if SP has said something specific, the authorization may be implied by the
surrounding circumstances
● Meaning of dealing
○ could be deither by the D or any other party
○ dealing is not defined, and any sort of transaction -- including sale lease and
licensing --- is included
● by defaul Nemo Dat applies - the debtor should only be able to give as good an interest
as he actually has- and that interest is subject to the SP
● but if the SP authorizes the dealing, the D can give a larger interest
○ the SP itself can permit its interest not to continue when the collateral is dealt
with
○ this may be done by express authorization, perhaps in the SA itself
● but it may also be due to Implied Authorization- A license to deal
○ where the SP is an inventory financiner and the D is a retailer, it will common that
the D has license to deal in the goods
■the SP with an interst in invenotry wants the D to be able to contiue doing
business from of the encumberance
○ once the inventory is dealt with, the SI in the inventory ceases but carries on in
the proceeds
● if the collateral is described as “inventory” In the SA, that description is enough for
writing rqeuirements, and thus attachment and perfection, but only while the goods are
held as inventory
○ if the inventory is dealt with, the SI detaches since it is no longer describable as
“inventory”
● the license theory is that when the owner allows its property to be in the possession of
the non-owner, it gives the non-owner a license to deal with the property free of the SI,
proviidng tha tthe party who takes possession of the goods takes by way of possession
○ basically requires a bona fide purchaser for value, who takes without notice, does
so with a clear titile.
● so if you are a SP, and you hold an SI in goods where the person who is in possesion of
the goods would ordinarily be selling those goods to parties who would be buying them
as sellers, you are deemd to have given authority to the person in possession to sell.
PPSA: section 28(1)(a)
● says that if the collateral is dealt with or otherwise gives rise to proceeds, teh SI
continues in the colltareal unless the SP expressly or impliedly authorizes the dealing
●
●
●
it will be rare that an implied authorization will be found outside the ordinary course of
business.
and if the SP explicitly revokesl the authorization, a 3P cannot take an interest.
since goods sold in the ordinary course of business are effectively always inventory, the
implied license really applies only to inventory
○ but this means that if you have an SI in inventory, you must be aware that you
have implicitly given your D a license to deal
The Queen v. Royal Bank of Canada [“Sparrow Electric Corp.](1997) SCC
Issue
● What is the basis for an implied permission to sell?
Facts
● RBC has a fixed and specific SI
Analysis
● the dissent has an approach to SI in inventory called the license theory
○ this is that the creditor who has granted a license to sell invonetory has
consented to subordinate his SI ot other obligations that may arise in the course
of business
● this is not what a license to sell does
○ the possiblility that the SI in inventory may be sold under the SA with the consent
of the SP does not lessen its value as security while it is held as inventory
○ when invenotry subjec to an SI in inventory is sold, it is passed unecumbered
with the SI, and the proceeds of the sale are subject to the security interest of the
SP
○ so the sale of inventory creates an interest in proceeds; that interest may be
defeated if the D uses it to pay back a third-party debt, but until it does so the SI
remains.
● in this case the D didn’t actuallly sell the inventory, so the possibility that the SI may
have come detached is irrelevant.
○ what the D might have done with the license to sell is irrelevant
● otherwise there would be no point in having an interest in inventory
○ the D could always plausibly use the money to pay back a D, so it could always
say look, there’s not SI because the license to deal includes busienss expenses
like paying of debts.
Ratio
● while an interst in inventory is presumed to entail a license to deal, the SI in the
inventory doesn’t actually detach until the goods are actually sold, nor does the SI in the
proceeds authomiatically detach just because there is a prospect of the proceeds being
used to pay back debts (or other business expenses).
6(3) Buyer (or Lessee) in the Ordinary Course of Business
● Section 30 changes nemo dat by allowing buyers and lessees to take free of an SI in
certain situations
○
●
●
●
this basically prevents the SP from removing the 28(1)(a) license to deal in
certain situations
○ 30(2) says that a buyer of goods subject to the an SI given by the seller who
purchases goods from the seller in the ordinary course of business takes free of
any SI, perfected or otherwise, unless the buyer knows that taking the goods
would violate the SA
■this section is frequently used
■again, probably only applies to inventory since its hard to image a sale of
non-inventory goods being in “the ordinary course of business”
■however, 30(2) only applies to dealings between the D and the BF 3P, and it
MUST be a sale.
■and if the 3P knows that the sale breaches teh SA, it cannot take advantage
of 30(2)
○ 30(3) takes free of any SI in goods, but only consumer goods worth less than 1K
■this includes SI not given by the D, but any SI at all
■does not apply where the purchaser has knowledge of the SI
■may be on exam
○ 30(6) lets the buyer take free of any SI that was supposed to be described by
serial number but were not
■but only if there is no knolwedge of the SI
■only applies to goods that are equipmentand could have been registered by
serial number
● often you can perfect numbered goods without filling the serial
number, but this opens you to vulnerability under 30(6)
● may also apply to serial numbered inventory, and you are worried
the inventory may turn into equipment
●
all of these are affected by actual knowledge on the part fo the buyer or lessee of the SI
generally s. 30(2) says that the buyer of goods in the ordinary course of business takes
free of any SI in the goods given by the D, whether or not the buyer knows of the SI,
unless the buyer knows that the SA does not allow dealing
○ limited to buyers or lessees of goosd
■buyers is sometimes limited to the Sale of Goods conception
■buyers is sometimes approached more broadly, which is probably the better
view
○ payment may be in a vairety of forms, but not a transfer for the purposes of
satisfying a past debt
○ this will apply to any lease situation as well
○ this only covers goods,
it must be in the ordianry course of buisness, looking to:
○ agancy: a sale in the ordinary course of business could be through agency
○ or through auction
○ but not through a private sale
○
●
●
●
●
a first time dealing may or may not be in the ordinary course of business,
depending on the cirucmstances.
○ a company that has gone bankrupt is not in the ordinary course of business
the buyer must also be able to show that it did not know the dealing broke the SA
○ but just because they know the SI exists does not prevent them from dealing
this all applies only to interests given by the D; not SI in the goods given by a different
debtor.
Compariosn bettween 20(c), 28(1)(a), and 30(2)
○ 20(c) and 30(2) are designed to provect third parties and will be used by those
parties
○ 28(1)(a) arises through implied or express consent, so its not worded from the
perspective of the third party, but it might be used by them as well
■of course it is under the control of the SP- it is up to them to consent
○ 20(c) is also in control of the SP, in that it merely needs to perfect to defeat the
third party claim
○ 30(2) is outside the hands of the SP in that it relates to the behavior of the D and
the Third party
■it may be hard for SP to ensure third parties know that dealing in the goods is
contrary to the SA
○ 30(2) is limited to goods and to buyers and lessees
○ 28(1)(a) is not limited in terms of types of collateral or third-party beneficiaries,
but usually a license to deal is sued for inventory
○ 20(c) is limited to certain types of inventory and only unperfected SI- and it
merely subordinates rather than detaches the SI
a third party only needs to fit into one- several may apply, but typically any one will do.
PPSA: Section: 1(2), 20(c), 30
● 1(2) says a person only has knolwedge where information is acquired under
circumstances in which a reasonable person would take cognizance of it
● 20(c) says an interest in chattel paper, document of titile, an instrument, money, an
intangible, or goods is subordinate to the interests of a transferee who acquires the
interest under a transaction that is not a SA, who gives value, and who aquires the
interest without knowledge of it and before perfection
● 30(2) says that a buyer in the ordinary course of business takes free of an ySI whether
or not the buyer knows of it, unless the buyer knows the sale constitutes a breach of the
SA
Royal Bank of Canada v. Wheaton Pontiac Buick Cadillac GMC Ltd. (1990) SKQB
Issue
● Does section 30(2) allow a buyer to take free only of SI given by her seller?
Facts
● RB took an SI in KWM inventory, including the collatearl F
○ the SI was in the “inventory”, so F did not need to be registered by serial number
● KWM goes bankrupt, but still had the F in inventory
○ they were sent to AM for auction
● KRA enteres into SA with KWM to purhcase vehicles.
○ KRA searched the cars by serial number but found no interest
● KRA had a relationship selling cars in need of repair to D, who would fix them up, sell
them, and they would split the profits
● D sells to WP, WP sells to SM warranting clear title
● RBC seizes the F from SM for the SI
○ WP had to pay off the bank so SM could get the car back
Analysis
●
● was the transaction between KWM and KRA made in the ordinary course of busienss?
○ a buyer of goods in the ordinary course of business takes free of any SI,
perfected or otherwise, and whether or not the buyer knows of the interest unless
they know the sale is a breach of SA
● a sale in the ordinary course of business is a sale consistent with general commercial
prcatice, and is a questio nof fact depending on the circumstnaces of the sale
○ invntory sold between sellers may be sales in the ordinary course of business,
even if the sellers mainly see to the public.
● at the time of the sale
○ KWM had no place of buisness
○ most of the inventory was up to auction
○ KRA did not have a license to sell cars, nor was it in the buisness of doing so
(mainly a repair shop).
○ the sale fo the cars was not to the public at large, nor made in the general
commercial practice
● so when KRA bought the cars, they did so subject to RBC’s interest.
● and you cannot use the “ordinary course of business” sections to detach an interest
given by someone other than the seller.
● while this puts the risk on the buyer, who may not know that the goods are subject to an
interest, that is simply how the statute works, and it is up to the legislature to remedy
this.
Ratio
● a sale in the ordinary course of business is consistent with general commercial practiec,
and is a question of fact depending on the circumstnaces of the sale
○ even sales between dealers may be in the ordinary course of business
● consider: where the sale occured, the means of sale (sale to the public?), the
businesses of the seller and purchaser, and so on
● the ordinary course of business provision will not serve to detach an interest given by a
debtor other than the seller.
○ this limits the operation of 30(2) to dealings between the buyer and the Debtor
Fairline Boats Ltd. v. Leger et al. (1980) ONSC
Issue
● What constitutes the “ordinary course of business”
Facts
● FB built a big boat, and sold to BMM by conditional sale, with the contract assigned to
FAP (financing organization)
● BMM had financing arrangment with FAP covering all boats at the place of business
○ registered and perfected
● BBM defaulted to FAP
○ FAP told TB to repossess the boat
○ FB did so, but somehow BMM got it back
● BMM sold it to L, who won’t give it up saying he legally purchased it fro 15K.
Analysis
● the key question is whether the sale between BMM and L was in the ordinary course of
business, because if so, L took clear title even though the SI was registered
○ if not, L took subject to the SI
● the objective of the ordinary course of business section is to allow commerce to proceed
without the neeed of purchasers of goods to check into the titles of sellers in the ordinary
course of their business
○ buyers can rely that the seller will use the proceeds to repay any debt
○ to require buyers to constantly look behind title would stifle commercial
transactions
● when is a sale in the ordinary course of business?
○ the sellor must be engaged ina business
○ the business must involve the dealings in things of the same class as the
colltareal being dealt with
○ the term of sale must be the normaly kind of sale for that type of good.
● the courts must consider all of the circumstances of the sale
○ this is a questio nof fact.
● factors
○ if it is as the place of business, more likely to be in ordinary course
■if away, less likely, particularly if it is in suspicious circumstances
○ party to sale may be of some help
■ordinary consumers are moer likley to be in ordinary course of business as
compatred to dealers or financial institutions
○ quantity of goods is relevant
■if only a few goods sold in the ordinary way, the cour is more likley to find this
in the ordinary course of business
■a laerge or bulk sale perhaps constitutting a susbtantial part of the seller’s
stock is less likley to be in the ordinary course
○ price very important
■if outside market price, probably not in ordianry costs
● this was not in the ordinary course of business
○ sale between dealers is ordinary, not exceptional
○ sale was outside of teh place of business, and somewhere very unsualrestaurant
○ price was unusually loaw
○
●
BMM was in serious financial difficulties, and L must have known this given the
unusually low price.
since this was not in the ordinary course of business, the FB’s interest remains attached
and the goods are reattached
Ratio
● whether or not a sale occurs in the ordinary course of business is a question of fact that
must be addressed on all the circumstances
● consider
○ location of sale
○ parties of sale
○ means of sale (private vs. public)
○ quantity of goods sold (is this a defacto liquidation)
○ price of goods sold
Royal Bank of Canada v. 216200 Alberta Ltd. et al. (1986) SKCA
Issue
● Who is a “buyer in the ordinary course of business”?
Facts
● 216 owned and operated Sofa Store, sold retailes
● RBC had GSA in all pAAP
● 216 goes into receivership
○ but prior to this a number of consumers had paid all or part of the purchase price
of furniture they intended to get from 216
○ sometimes the furniture was in possession of 216, and in other cases it had been
ordered but had yet to arrive at the time of receivership
● 4 classes of transaction
○ full price paid, property not in hands of 216
○ part price paid, property in possession of 216
○ part price piad, property not in possession
○ cash refunds owed
● for class 1 and 3, it was found that the money was being held in trust and so took priority
Analysis
● generally the holder of a perfected SI has an interest in the colatteral and proceeds in
priority as opposed to other debtors, and any subsequent purhcasers of the property
take subejct to the secuirty agreement
○ but there is an exception to this in the sale of goods in the ordinary course of
business.
● the question is whether someone who pays in installments with the goods staying with
the seller is a buyer in the ordinary course of business, or is merely an unsecured
creditor
● the act does not define “sale” or “buyer in the ordinary course of business”
○ title is irrelevant for the purposes of the act
○ but title may well be relevant in defining buyers, which is what RBC contends
○
●
●
●
RBC says “sale” means a commpleted sale under the SGA, and that title must
pass
○ and ordinarily title does not pass until delivery made, which did not occur here.
○ while this has been found in some courts in the US, other courts have found that
this technical approach to sale should not be used to defeat the claim of the
buyer in the ordinary course of business
before a buyer can take property free of the SI, he must establish there has been a sale
and that he is a buyer in the ordinary course of business
○ goods are sold when title passess, as per the SGA
■no title passes until the goods are ascertained and appropriated
■when ther eis a sale of specific or ascertained goods, title passes when the
parties intend, and normally at delivery
in the situation where there was an agreement to buy furniture of a particular type, that
furniture had to be ascertained and appropriated to the contract
○ this had not occured
○ so therew as no sale
a sale in the ordinary course of business includes a sale to the public at large, of the the
type normally made in a retail setting and consistent with the general commercial
practice
○ it does not include private sales between individual buyers
Ratio
● this case stands for the proposition that in order for a sale to occur, title must have
passed
○ and title cannot pass until the goods are unconditionally apporpriated to the
contract
○ basically uses the SGA to define sale, and unless the sale is complete, the buyer
in the ordinary course of business exception will not apply.
Spittlehouse v. Northshore Marine Inc. (Receiver of) (1994) ONCA
Issue
● should the Sale of Goods Act determine when there is a sale?
Facts
● S entered into a K with NM to buy a boat
○ S has paid 90%, willing to pay the rest on delivery of the boat
● TCFC has a perfected SI in all NM assets, including boat
● K for sale provided that title would not pass until payment in full.
● prior to the delivery of the boat, NM defaulted, and TCFC took the boat.
● TCFC say they have a perfected SI, the P’s have no title and are only unsecured
creditors
Analysis
● this is clearly a situation where ordinary course of business ought to apply
● the seller was a dealer in boats, and the S boat a boat from im
○ S had no knowledge of the SA, or whether the dealing was a breach of that SA
● the arrangment here was a sale with title withheld until the purchase price paid
●
Contrary to the court’s finding in 216, the SGA does not apply in this case.
○ the SGA may affect the time when property in the goods passes, but it cannot
change what is clearly a sale in another Act into something it is not.
○ title is inconsistent with the purpose of the PPSA
Ratio
● basically the court is not going to use the SGA to defeat the intent of the ordinary course
of business provision
● if it looks like a sale, its a sale, and technicalities be damned.
● not clear whether this case or the furniture case would be preferred in BC
Ford Motor Credit Co. of Canada Ltd. v. Centre Motors of Brampton Ltd. (1982) Ont. High. Ct.
Jus.
Issue
● What is the relationship between sections30(2) and 28(1)? Can the parties themselves
designate a transaction to be in the ordinary course of businses?
Facts
● FMC is a wholesale financier
● CM is a used car dealer
● GMC has an SA with MMS, who is another car dealer, which was perfected
● under the SA, FMC got interest in A, B, and C
○ these were purhcsaed as new cars, financed by FMC, for around 5K per car.
○ MMC sold these cars at a small loss to CM
○ CM sold for a slight profit, but still less than what was paid by FMC
● MMC goes into receivership
● CM admits that FMC hada perfected SI in the cars at the time of sale
Analysis
● a perfected SI in the cars can be defeated by
○ sale in the ordinary course of busienss
○ dealing in the goods being implicitly or expressly consented to by the SP
○ the SI becomes unperfected
● was the sale in the ordinary course of business? if so, CM took free of any SI
● the PPSA makes a difference between dealings that are consented to and dealings int
he ordinary course of business
○ dealings consented to surround ths relationship between the D and the SP
■the third party only has protection to the extent of the license to deal
○ ordinary course of business surrounds the relationship between D and the third
party
■in this case the third party has protection no matter what the terms of the SA
were
■so goods sold in the ordinary course of business mean the third party
purchaser takes free of the SI, no matter what the terms of the SA
actually were.
● whether or not a transaction is in the ordinary course of business is an objective
question of fact
○
●
and parties to a SA cannot define by the agreement what is meant by “ordinary
course of busienss”
since the goods were sold in the ordinary course of business, it actually doesn’t matter
whether or not there was a license to deal
Ratio
● s. 30(2) applies in any situation where goods are sold in the ordinary course of business,
regardless of the content of the SA and regardless of the feelings of the SP
○ assessed objectively based on all the facts, though fraud may defeat this
○ so only protects buyers, perfection doesn’t matter, and knowledge of the
existence of the SA is unimportant.
● s. 28(1) applies to the relationship between the D and the SP, and is abotu whether or
not there was a license to deal in the goods.
○ covers any collateral, perfection doesn’t matter
○ if the authorization is express, then it applies to anyone consented to, and
knowledge on the part o fthe 3P is irrelevant
○ if the authorization is implied/common law, then it applies only to buyers, only to
goods (not intangibles), and protects only buyers (not leaseees, etc.)
● s. 20(c) protects any transferee, and applies to any tangible, but only where the SI is
unperfected
Northwest equipment Inc. v. Daewoo Heavy Industries America Corp. 2002 ABCA 79
Issue
● can a buyer who takes subject to a SI subsequently take steps to take precedence over
the holder of an SI?
Facts
● TB, a BC company bought an excavator, and DH got an SI in it
○ TB was not supposed to sell without DH consent, unless it was in the ordianry
course of business
■DH perfects
○ but then it was soldt to NW, and moved to Washington State without DH’s
knowledge
■NW believed the excavator was unencumbered based on NW represetnation
■NW did not search registry
■NW was to loan money and shares to TB, which never occured
○ then to Albtera, leased to a third party, and then seized by DH
● NW says it purchased free of SI, since the sale was in the ordinary course of busienss?
Analysis
● BC law applies because the PPSA of both BC and Alberta provide that this kind of
dispute is governed by the law of the jurisdction where the D was located when the
seuciryt interest attached.
● DH clearly had a perfected SI in the excavator prior to the sale
○ so normally NW woudl have to take subject to DH interest
○ but 30(2) can apply where the sale is in the ordinary course of business to
defaeat this.
●
●
●
●
●
●
●
●
●
●
a sale in the ordinary course of business means the buyer takes free of any IS in the
goods given by the seller
○ aim is to avoid disruption in commerce and to protect unsuspecting buyers
○ ordinary course of business applies whether or not the buyer knows of the
secuirty interest, unless thebuyer knows the purchase is in breach of the SA
this sale was not in the ordinary course of business
○ it was a share purhcase agreement, not a cash sale (TB normally dealt in cash)
○ it was a private, unusual transaction (shares and loans back to the purchaser)
○ the purchaser was another dealer, not a consumer
○ the sale involved ¼ of TB inventory,
○ the sale was prive and not advertised
○ the sale was concluded right before bankruptcy
○ no consideration was actually tendered.
NW further submists that the sale was expressly or impliedly authorised under 28(1)(a)
○ NW says DH consented because TB discusesed the restructuring of business
operations with DH
there was no consent to the transaction
○ the restructuring proposal did not deal with the share transaction
○ the restructuring proposal did not contemplate the transfer of equipment to the
US
○ the proposal conetemplated rental atgreement, not outright sale
○ DH swears it did not consent
○ there was no evidence of written consnent
○ NW failed to establish that DH knew of the transaction until months later
NW had the onus to prove that DH consented, but did not do so
so anyways, then the excavaotr moves to Washington, withiut notice to DH
○ once DH found out, it registered its interest in Washington and attempted to
repossess
○ NW says that the transfer of the excavator to WA defeateding DH SI, because
DH SI became unperfected by late reigstration in washington
Perfection is a method of providing disclosure of prior security interests to third parties
○ normally accomplished by registration
○ normally perfection is govenrned by the law of the jurisdiction in whch the ogods
were situated at the time the SI attached, since this is the locaiton where a third
party would search the reigstriry
but some kinds of goods move between jrusidctions, and so it can be hard fo r athird
party to search
so the PPSA provides that the validity of SI in these types of moveable poperty is
governed by the law of the jurisdiction in which the D, rather than the collateral, was
located at the time the SI attached.
○ so a search will have to be made where the D is located.
where the D moves as well, to protect third parties, the SI must be publicly disclosed in
the new jrusidction
○
●
●
●
●
●
●
●
●
●
●
●
●
●
the transfer by a D of an interest in itinerant property to someone in another
jurisdiction triggers a perfection requirement in the jurisidciotn.
○ if prefection occurs within the time limit, it is deemed continously perfected, if not,
it is unperfected.
basically if the D relocates or transfers the interest to a person in another jurisdiction, the
SP gets
○ 60 days to to perfect
○ or if the SP has knowledge that the D has moved, 15 days after the time of
knowledge
○ this applies to goods are normlally used in multiple jurisdictions, and is inventory
leased or held for lease.
this applies to the excavator, since often used in multplie jrusidctions
○ so DH had to perfect within 60 days, but did not do so
○ so lost perfection in BC
NW says that by taking possession, it perfected by possession
or that when a SI becomes unperfected, it basically detaches.
No, NW did not take an SI- it took ownership outright
and loss of perfection does not defeat a SI- the SI continues, but is merely unperfected
there is a further exception that NW may be able to take advantage of
○ a transferee for value who takes an interest wihtout knowledge of the prior SI and
before the SI is perfected, acquires the goods free from the SI (must give value).
but here, when NW actually took the goods they were still perfected
○ they only lapsed later
○ the fact that they later lapsed doesn’t retrospecitvely eliminate the interest
○ this is because we are trying to protect third parties, not trying to just help NW get
unencumbered
so a loss of perfection neither extinguishes a SI nor invalidates existing priorities
○ it might lead to a battle with a third party who acquired the goods, but it does not
improve the title of the party who acquired the goods subejct to the perfected
charge
so then the goods go to Alberta, and are leased to WM
○ then NW registers in the Alberta PPSA
○ DH was not notified again
■once it learned of the move, it registred its SI in Alberta
■then it repoed
○ NW says it has a perfected SI, and that DHs interest was unperfected, so NW
had priority
Registration of a FS does nothing if the underlying agreement did not create a SI
○ the AB PPSA restricts its application tro transactions that secure payment or
performance ofa n obligation, regardless of form
○ it applies to security lease, or true leases - but only true leases over a year are
deemed to be SI
so what did the lease between WM and NW look like?
it was a lease on a montnly bsais
●
●
●
●
○ if it actually lasted over a year, it could have become a deemed SI and be valid
○ or it it was actually a true SI in disguise- option to purchase, etc.
○ the it would be a conditional sale
○ but there is no such option here
Since NW didn’t have an SI with respect to the excevator, it cannot have priority.
Finally, NW tries to use s. 35- the residual priority rule
○ if no other method exists, a perfected SI has priority over an unperfected SI
but the whole point of perfection is to give notice to third parties, and NW doesn’t need
notice here
○ it knew about the claim
○ besides, PPSA imports a requirement for commercial resonableness and good
faith
commercial reality also suggests NW must lose
○ creditors would have trouble ledning money if a valid charge could be defeated
by moving the collateral to a different jurisidction, adn creating a SI there.
Ratio
● findful of public policy, courts are going to try and avoid a conclusion whereby a thirdparty takes the collateral knowing of the prioir interest, and takes steps to try and remove
that priority.
● loss of perfection does not remove the interest
● here though, it seems at least plausible that had the NW been able to show a purchase
in the ordinary course of business, it might have prevailed
7. Two-Debtor Situations
● where two SI in competition are derived from the same collateral but are derived from
different debtors, the priority rules in the PPSA don’t always work happily
○ it may be as a result of the collateral being transferred by the D and then the
trasnferee grants new SIs in what is now its property
● two-debtor siuations may also arise where the transferee made a pre-transfer promise to
give an interst in all after-aquired property (this is dealt with in 35(8_
● two-debtors situations may arise where debtors amalgamate, and each has its secured
parties with interests in after-aquired property, now in competition for their interests in
the same collateral.
● example
○ A takes a GSA from DA, in all PAAP, later, party B gets an interest in collateral X
from DB
○ B checks the registry, waits for any grace period to expire beofre advancing
money
○ DB then sells X to DA, and Bs interest cotinues
■so now A has an interest in X as a result of all PAAP
○ since A filed statement first, iit will win out under the residual rules
● The rules seem to allow this to happen- there is nothing in the rules to say 35(1)
residiaul rule should not be used in two-debtor situations.
●
●
●
●
●
this problme most likley applies where an interest in collatral is tranferred from one
debtor to another
○ the transferor having already given away the interest, and the interest must have
remained attached (So no license, no ordinary course of business)
■the transferee may have already given the interest, or many after quiring
○ the same thing may occur where a Debtor gives an interest to A, then changes
name, and gives the same interest to B
the PPSA has two sets of rules here
○ one set deals with prioirty competitions between a SI granted by a transferor and
a SI interest granted by a transferee before the transfer 35(8)
○ the other set deals with the competition between the SI granted bythe transferor
and a SI granted by the transferee after the transfer 51
○ these special rules will not necessarily apply in every two-debtor situation, since
they have certain preconditions, and you should never strain to fit analogous
situations into the rules.
Generally speaking, to be secure in its priority position, a SP must reregister against the
name of a new debtor when it knows of or consents to the transfer of collateral that
remains subject to its SI on the transfer, or where there is known to be a name change
by the D
○ this requirement is aimed at preserving the integrity of the reistry
○ the rules operate to protect a SP who obtains an interest after transfer or name
change, even if that SP was not actually misled by the failure of the original SP to
amend its registration
where the SI granted by the transferror is in competition with the interest granted by the
transferee before the transfer, the general rules is that the interest granted by the
transferor has priority, including to all advances made by either party
○ however, the PPSA expects that if the SP of the transferor learns fo the transfer,
and that the transferee is in the wide category of persons who might be a debtor,
the SP will amend its registration to add the new trasnferee as its own debtor
■to notif other parties
○ the PPSA gives 15 days to do this
■if the SP fails to amend if 15 days, this prioirty rule does not apply to the
extent of any advanced made by the SP of the transferee after the 15-day
grace period, and before the SP of the transferor does make the
amendment
○ so for any advance made by the SP of the transferee after the 15 days, but
before amendment by the SP of the transferor of the trigstration, another priority
rule will be sued
■probably the residual rule: first to fil.e
○ note- the 15 day grace period is not retrospective.
an amalgamation of a debtor does not createa new debtor, but there still might need to
be a new filling or amendemnt
○ it’s not clear what happens in the event of amalgamation, but probably residual
rule will apply
PPSA: Sections 35(8), 35(9), 51
● 35(8): if a D transfers an interest in collateral which is subject to a perfected SI, that SI
has priority over any other SI granted by the transferee before the transfer
○ except for advances made by the SP of the transferee after the expiry of 15 days
from the day the SP of the transferor has knowledge of the information required
to register a FS statement disclosing the transferee, and before the SP amends
the reistration to disclose the name of the transferee
○ so this applies where the new debotr has given out an all PAAP or something
○ so, advances made between 15 days after the SP transferor and the date at
which the FS is actually amended are not necessarily subordinate to the interest
of the SP transferor
■residual rule will apply - first to file
● basically what this does is that once a transfer between one debtor to the new debtor
occurs, the original SP has priority over any SI of the new debtor that arose before the
interest past
○ so fi the new debtor gave an all PAAP to SP2, that all PAAP is subordinate to the
SP1 SI in teh goods that arose prior to transfer
○ however, once SP1 gets knowledge of the transfer it has 15 days to amend the
FS
■any advances made by SP2 after this period and before teh SP1 actually
amends the FS take priority over the SP1 SI
● 35(9) says this doesn’t apply if the transferee aquired the D’s interest free of the interst
granted by the Doriginal - no duh!
Rule 51
● 51(1) If the SI has been perfected by registration, and the D transfers its interest in the
collateral with the prior consent of the SP, the SI in the transferred collateral is
subordinate to
○ any interest other than an SI that arises between the 15th day after the transfer
and the time when the reigstration is reperfected
○ a perfected SI arising in the tranferred collateral arising between the 15th day
and the reperfection
○ a perfected SI in the transferred collateral reigstred or perfected after the
transfer, and before the expiry of the 15 days, providing the original SP does not
reperfect by registration or possession within the grace period
■basically, makes a lapse retrospective
● 51(2) If the SI has been perfected by registraion, and the SP aquries knowledge of the
transfer and the name of the new debotr, the SI is subordinate to
○ any non-SI interest arising from the expiry of the 15 day after the acquisition of
knolwedge up to the date of reperfection
○ a perfected SI interest arisign between the expirty of the 15 days and
reperfection
○
●
a perfected SI interest arising between the date of knowledge and the end of the
15 days, if the orignal SP does not reperfect by registration or possession within
the grace period
■makes a lapse retrospective
all of 51 applies only where the SP fails to amend the FS within the time period
○ if it does so, then the grace period will give it continuous perfection and the other
interests are out of luck.
Re Yustin Construction Ltd. (1986) SC Ont.
Issue
● Is the debtor who amlagamates analagous to a Debtor who changes names?
Facts
● Shiba and Yustin 1 amalgamated
Analysis
● the question is whether the Banks failure to register financing change statements within
15 days of aquiring knowledge of the amalgamation invalidated the bank’s security as
against the other unsecured creditors?
● the PPSA says that where an SI has been perfected by registration, and the SP learns
that the debtor has changed name, the SI becomes unperfected and the registration
ceases to constitute notice if the SP doesn’t remedy matters by change the fiancing
statement within 15 days.
● when companies are amalgamated, the component parts are not extinguished but
continue in the amalgamated corporation
○ the obligations continue
○ the amalgamated corporation has all the property, rights, libailities, debts, etc.
● the amalgamtation here did change Shiba’s name
● since the company’s name changed, the SP ouhgt to have filed a change of financing
statement within 15 days, and didn’t do that, so it became unperfected
● but the bank later did file a FS statement, registering its interest, and before any other
party got an interest
○ no one perfected a SI in the collateral in the period when the bank’s SI was
unperfected.
● so the bank keeps its priority
Ratio
● an amalgamation is basically treated as a name change
● the SP has 15 days after aquiring knowledge of the change to change the financing
statement, or its interest will lapse.
○ any interest arising in the lapsed period may take priority, if they perfect an SI in
the collateral in the period where the SI was unperfected.
Heidelberg Canada Graphic Equipment Ltd. v. Arthur Anderson Inc. (1992) Ont Ct. Just.
Issue
● What is the effect of the amalgamation on the SP of one of the original entities?
Facts
●
KPP amalgamted with its parent company BLU
○ BLU had no liabilites, and its only asset were shares in KPP
● the name of the amalgamated company is the same as KPP
Analysis
● two questions: first, was the transfer of the collateral from the old KPP to the new KPP
sufficient to constitute “transfer” and thus require the fincancing statement be changed in
order to keep perfection?
● Does the bank have any secuirty over accounts receivable generated by the
amalgamted compnay, when its SA was signed only by KPP as debtor? Nor did bank
ever file against the new KPP as debtor.
● AA says that the original debtor comapny can give secuirty over its own future accounts
receivable, but it cannot grant security over the future accounts receivable of another
company
● amalgamating companies are not extinguished, but exist within the amalgamated
company
○ there is no “New” company created or “old” comapny destroyed
○ there is no transfer of the assets fromt the old to the new- psosession merely
“continues”
○ there is no transfer of assets or liabilites, and therefore there is no transfer by the
debtor of its interest in the secured collateral upon amalgamation.
○ the company is the same, only the name has changed.
○ this is consistent with how we deal with companies generally
■they are privy to all the contracts of the component companies.
● so here we have the same named company, it has just changed a little
○ there was no need to file a financing change statement
○ and the SA applies to the whole of the assets
ratio
● When companies amalgamate, the parties are treated as continuing within the larger
company, with all the same obligations and rights as they had before
○ an SI granted against one of the compnies applies against the whole of the new
amalgamted company
● I htink you only will need to file a new FS or change the FS if the names have changed,
in order to ensure notice.
8. Competition with Holders of Interests Given after Transfer of Collateral
● Even if the SA forbids it, s. 33 alows the D to transfer the rights in the collateral
○ if this happens, s. 28 or s. 30 may allow the transferee to take free of the SI given
by the original debtor before the transfer
○ but sometimes these “taking free” proviisons do not apply, and the SI continues
in the collateral
○ then the transferee may give an SI of its own after the transfer
● where the original debotr passes the collateral to the transferee, the new transferee
becomes the “debtor” of the original party, even though it has no obligations
○
●
the SP must then register its interest against the name fo the transferee if the
origianl SP has consented to or has knolwedge of the transfer
○ if the SP fails to do so, then its interests will be suboridnate to somethird parties
who derive their interest through the new D transferee
■could be SP, or non-secured creditors, or the trustee in bankruptcy if that
interest arose in the lapsed period.
similar issue arises when the D changes its name and a SP has a SI given before the
name change
○ other parties who obtain an interes tin the collateral after the name change may
be taken unawares by the SI, even if they check the registry, unless the SP is
required to amend its registration to reflect the name change.
Rules relating to third-parties who are non-secured parties who have an interest arising after the
transfer of collateral
● rules operate even if the third parties were not actulally misled by the SP’s failure to
register.
● If the SP has consented to the transfer, the SP is supposed to go to the registry and
make a financing change statement adding the transferee as its own debtor
○ if the SP has not made the amendment within the 15 day grace period, any
interest granted by the transferee after the 15 day period and before eventual
filling will have priority over the SI granted by the transferor
● if the SP has not consented to the transfer, but later learns of it, the 15-day grace period
does not begin until knowledge is actually aquired, whcih may be some time.
○ if their are several transfers before the SP gets knowledge, the SP only needs to
modify the FS to reveal the name of the ultimate transferee, not any intermediate
transferees
● with name changes, the clock starts running once the SP learngs of the name change
● all of the above may result in circularity problems
○ eg.
■if there are two SI of the tranferor that surive the tranfer, and both SP have
knowledge of the transfer but only the junior party reigsters the
amendment, there is a circularity problem
● the Senior party has priority over the junior party as ar result of 35first to file
● the junior party has priority over the new interest as having
registered the change within the grace period
● the interest arisign from the transferee has priority over the senior
party since the senior party didn’t reregister in the grace period.
● amalgamations do not create a new D, but might result in a change of name
○ in that case, the SP must file against the new name once it learns of the change.
Competition with Security interests granted after tTransfer
● the rules differentiate between two situations: one where the SP consents, the other
where he does not conensent but acquires knowledge of the transfer
●
●
●
●
●
●
with both sets of rules, the effect is taht a SP is given 15 days to amend its registration to
prevent its itnerests being subordinate to the interests of the new SP of the transferee
Consent to transfer
○ where an SP has consented to a transfer, they are expect to amendt hef iling
statement to reflect the new D and give notice to others of the existence fo the
itnerest
○ if the SP does not file the amendment in the 15 day grace period, then any SP of
the transferee who gets an interest within the 15-day period will have prioirty
over the original SI
○ further, any security interest made after the 15 day period and before the
eventual ammendment has priority over the original security itnerest.
Knowledge of Transfer
○ similar, but the 15-day period only begins on acquiring knowledge.
○ in the period after the transfer but before the knowledge, the rule doesn’t apply
■so residual rule, first to file, applies.
this applies as well wehre the has been a name change, where the time starts at the
moment the SP learns of the name change
Circularity problem
○ if two SI survive the transfer, and both SP learn of the transfer but only the junior
SP registeres the amendment, there will be a circularity problme
■the Senior party has priority over the junior party by residual rule
■the junior part has priority over the secured party of the transferee (the new
SP) by amending in grace period
■the transferee has priority over the senior party because the senior party let
perfection lapse.
Amalgamations may lead to name changes requiring fililng of an amendment
PPSA: 28(1)(a), 30, 33, 35(8), 51
● 28(1)(a) the Si in collateral dealt with continues in the collateral unless the SP expressly
or impliedly authorizes the dealing.
● 30 delas with the various ways the buyer may take the collateral free fo any security
interest
● 33 says that no matter what the SA says, the D may transfer the interest in the collateral,
though doing so may constitute breach of the SA
● 35(8) says that if the D transfers an interst in collateral that is subject to a perfected SI,
that SI has priority over any other SI granted by the transferee before the transfer,
except to the extent that the SI granted by the trasnferee secures advances made after
the expiration of the grace period following knolwedge and before the SP amends the
registration to dislcose the name fo the transferee
○ so basically, advances made by a SI granted by the transferee before the getting
the collateral may take priority over the transferor SP’s SI during the period
between the lapse of the grace period and the re-perfection
● s. 51
○
○
If a SI has been perfected by registration, and the D transfers the collateral with
consent of the secured party, the SI in the transferred collatearl is subject to:
■any interest other than a security interest in the collateral which arises in the
period between the expiry of the 15 days to the day the goods are
properly registered/re-possessed
■a perfected security interest in the transferred collateral that was reigstered or
perfecetd in the period after the 15 days but before the re-registration/repossession
■a perfected security interest in the transfered collateral that was perfected
after the transfer and BEFORE the expiry of the grace period, if before
the expiry of the grace period
● the reigstration of SI of the transferor is not amended to dislcose
the transferee of the interest as the new debtor, or there is no repossession
● so basically if the original SP doesn’t amend before the expiry of
the grace period, the grace period is of no retrospective effect
if a SI is perfected by reigstration, and the SP has knowledge of the transfere as
the new debtor, the SI in the collateral transferred is subordinate to
■an interest that is not a security interest which arises in the period between
the end of the grace period and the amended registration/repossession
■a perfected security interest in the collateral registered or perfected in the
period between the end of the grace period and the amended
registration/repossession
■a perfected SI that is registered or perfected after the SI has knowledge of
teh transfer and before the end of the grace period, if before the expiry of
the grace period the original SP doesn’t reregister or take repossession
● so basically if the original SP doesn’t amend before the expiry of
the grace period, the grace period is of no retrospective effect
■you only need to register against the ultimate transferree, not any
intermediaries
Orion Truck Centre Ltd. (Re.) 2003 BCSC
Issue
● Does 51(2)(b) Apply to a sbordinate a SP’s interest to that of a trustee in bankruptcy?
facts
● Trustee is applying for a delcaration that the interest of CIT has against collateral is
voidand unenforceable
● OWS executed a SA with PM, creating an SI in all inventory
● PM registered, transfered to NC
● OWS cahnged name to OT, and NC became aware quite quickly
○ NC amalgamated into CIT
● in the same time period, OW gave SA in all inventory of trucks to WS
○ registered
○ WS also quickly learned of name change
○ transfered all rights to CIT anyways
● OT goes bankrupt
● after bankruptcy, CIT filed financing change staement to refelct the name change
● the trustee says this occured after the date of bankruptcy, so this has no effect
● all the trucks were sold
Analysis
● The issue is wehther it was necessary for WS and NC to file financing change
statements in order to maintain the validity of their secuirty
○ the Trustee says any priority that might have existed is gone, since there was no
registration of a FS change statement prior to bankruptcy, and CIT knew of the
name change well before teh bankruptcy
● in order to perserve priority, the PPSA requires the SP to amend its reigstration by filling
a financing change statement dislcosing the new name of the D, once the knowledge of
the new name is made avaliable to the SP
○ the SI of a SP who fails to file a FS within 15 days of the knowledge of the new
name is subordiate to an interest arising in the period after the expiry of the grace
period and the eventual correct/re-registration.
○ the failure to do so is seriously misleading for third parties, so the interest will be
subordinate to any interests arising between the lapse and the reperfection
● but does the trustee’s interest count as an “interst” for the PPSA?
○ 51(2)(c) includes any interest other than a secuirty interest
○ trustees do have an interest in the collateral, since teh assets vest in the trustee
at bankruptcy
■this is what the trustee says at any rate
○ CIT says that the failure to change the name was not seriously misleading
○ that if the Legislature wanted the 51(2)(c) section to apply to trustees, it could
have said so
○ finally that the Trustee is not the kind of party that is affected by a failure to
regiseter.
● In Giffen, the SCC dealt with the interest of a bankrupcy trustee
○ the trustee assumes the bankrupt’s psosessory interest, so as to be able to claim
the boog
○ public disclosure is required to protect third parties, but the trustee is not an
innocent party that needs protection
■he succeeds to the interests of the bankrupt
■unsecured creditors then look to the trustee in bankruptcy to assert their
claims.
● so here the trustee assumes the possessory interst in the vehicles under the SI
○ he does have an interest in the cars
○ this interst arose on the date of the bankruptcy, because it is only then that the
trustee assumes the representative capacity
○ this is not just the same interest the bankrupt had; its also the interest the
Trsutee must advance on behlaf of the creditors of the bankrupt
○ so this is the date teh trustee’s interest arises.
○
it is not necessary for the trustee to show it was cseriously misled in order to take
advantage of section 51, whcih clearly gives priority to itnerests “other than SI” and thus the trustee’s interest in bankruptcy - which arise between the lapse and
the eventual registration
Ratio
● Section 51(2)(b) may well apply to subordinate a lapsed SI in collateral to the interest of
a trustee which arises on bankruptcy
9. Competition with transferees of Negotiable or Quasi-Negotiable Collateral or Intangibles
● PPSA goes out of its way to protect those who take possession fo negotiable or quasinegotiable personal property
○ if the personal property is subject to a SI, according to the s. 31, the SI may lose
out to whoever takes possession
○ this means the best way to take an SI in this kind of goods is through possession
● accounts follow no special rules, so the residual rules apply, except that you cannot take
superpriority of a PMSI in accounts as proceeds, if there is a competing SI in accounts
which was given for new value. (new considerations, not payment of past debts)
● SI in chattel paper operate in a similar way as assignments of account
○ the usual way to perfect SI in chattel paper is by possesion of the chattel paper
○ this prevents the D from transferring the chattel paper to a purchaser, who could
take possession of the chattel paper free of the SI
○ of course, the SP also needs to worry about the SI in the chattel paper itself, so
you need to make sure the SI in the chattel paper is perfected (through
possession, probably) and the SI in the underlying collatera (through reigstration,
probably)
Accounts
● this is the main type of intangible category
● an account is a monetary obligation not put in a chattel paper or instrument
● where there is a debt between the debtor and the creditor that is a monetary obligation,
that’s an account
○ the accound creditor “owns” the account
● an obligation to pay money is great collateral since it is immediately useful and valuable.
● there are two types of interests you can get from an account creditor
○ when the account creditor sells the interest, this is an assignment
○ it may be absolute, or conditional
○ in a conditional assignemnt, if the D defaults, the assignment becomes absolute.
○ then the SP notifies the account debtor, and then the account debtor pays the
obligation to the SP directly, as assignee of the account
● the PPSA deems an transfer in accounts or chattel paper as a SI, whether conditional or
absolute
○ though only conditional assignments are “true” SI.
○ still, all assignments are deemed SI, so should perfect by writing requirement.
○
●
●
●
●
●
●
●
since part 5 has little applicatoin to intangibles, the difference between an
deemed SI in accounts and a true SI in accounts is less important
competitions in accounts may arise
○ the D may give several SPs conditional assignments in the same accoutns
○ or the SI in the account may arise as proceeds, or as a result of an all PAAP SI
s. 41 sets out what you can do with an SI in accounts
○ you give the account debtor notice, and then they make payments to you directly
○ prior to noice, the account debtor makes payments to the account creditor
s. 41 also says that once an account has been assigned, any defence the account
debtor could have raised against the account creditor can now be raised against the
assignee
○ so, for example you can use recission against the SP who has taken an interest
in the account, even though the SP is a third-party
s. 41 says a payment from the account debtor to the SP by assignment reduces the
obligation of the account debtor to the extent of the payment
s. 41(9) eliminates the effectiveness of a non-assignment clause
○ at CL, you can create a clause in a K which prevents the assignment of
obligations
■often the account debtor wouldn’t want to owe sjust anyone
○ 41(9) says that a third party can take an assignment of a money debt,
notwithstanding the existence of a non-assignment cluase
■although the account creditor may still be liable for breach of contract
the priority rules for accounts are straightforward and follow the ordianry rules
○ mostly the residual rules
○ due to the nature of accounts, any perfection will be by registration
However 34(5) does create some new wrinkles
○ a non-proceeds SI in accounts, which is given for new value, has priority over a
PMSI in the accounts as proceeds of the sale of inventory, as long as the nonproceeds PMSI has a FS filed prior to perfection of the PMSI
Money
● the holder of money has priority over a SI in money perfected by the filing of a financing
statement, or temporary perfection by rpoceeds, if the holder acquired the money
without knowledge that it was a SI, or if they acquired the money for value (even if they
knew it was subject to SI)
Instruments
● a creditor who receives an instrument created by D and delivered in payment of a debt
owed to the at collateral has priority over a SI in the instrument, whether or not the
creditor had knowledge in the instrument
○ the creditor must know of the instrument, however
●
a purchaser of an instrument has priority over an SI that is perfected by registration, if
the purchaser took the interest by value, and quired without knoledge of teh secuirty,
and took ppossession
○ this means knowledge that the transfer of the instrument violates the SA, not
mere knowledge of the existence of the SI
○ curiously, 20(c) says that you cannot take priority over an unperfected interest in
an instrument if you even have knowledge of the existence of the SI, even if you
don’t know it violates SA
■so it may be easier to defeat the perfected interest than the unperfected!
Negotiable Document of title
● a holder of a negotiable document of title has priority ovr a SI in the document of title that
is perfected by the filling of the financing statement, if the holder gave value and aquired
the document wihout knowledge that it was subject to a SI and knowledge that dealing in
the document was against the SA
● a perfected SI in a negotiable document of title takes priority over a SI in the goods
themselves after the goods became subject to the document of title.
● see above with respect to 20(c)
Chattel Paper
● a purchaser of chattel paper who takes possession of the chattel paper in the ordinary
course of business and for new value has priority over any security interest in it that
○ was perfected by the filing of a FS, if the purchaser does not know at the time of
taking possessing that the chattel paper is subject to a SI, or
○ has attached to proceeds of ienventory, whatever the extent of the purchaser’s
knowledge
● must give new value to use this rules
Knowledge
● knowledge is relevant in these provisions, reliating to negotiables, instruments, and so
on.
PPSA 1(2), 31, 29, 34(5), 41, 57
● 1(2) says knowledge exists where information is acquired such that a reasonable person
would take congizance of it
● 31 deals with the protection of transferees of negotiable and quasi-negotiable collateral
○ a holder of money has priority over a SI in money perfected by reigstration, or
deemd perfected as proceeds,
■if the holder aquired the interest wihtout knowledge that it was subject to a SI,
or
■if the holder of money aquired for value
○ a creditor who is paid by an instrument made or drawn by the debtor in
satisfaction of a debt has prioirty over the instrument whether or not the creditor
had knowledg of the SI
○
●
●
●
●
the purchaser of an instrment has priority over an SI perfected by registration or
deemed perfected, if the purchaser
■gave value, aquired without knowledge that the SA forbid dealing, and the
purchaser took possession
○ bill of title and chattel paper see above.
29 deals with SI in returned or repossessed goods
○ if a sale or lease of goods creates an account or chattel paper, and the account
or chattel paper is transferred to a SP, and the goods are returned to or are
seized or repossesed by the debtor or transferee of the chattel paper, the
transferee of the acocoutn or chattel paper has a SI in the goods that attaches
when the goods are returend, seized, or preossessed.
■then deemed perfected for 16 days unless the good are registered or take
possession.
○ some more rules on chattel paper
34(5) allows tacking on, saying that the residual rules apply to all advances made under
the SI, and subject to advances made before the SP aquires knowledge of the itnerests
of other persons like judgment creditos, etc.
41 deals with assignmnets of intangibles or chattel paper (not going to cover)
57 deals with the collection of payments under intangibles or chattel paper.
Indian Head Credit Union v. Andrew; Royal Bank of Canada, Garnishee (1992) SKCA
Issue
● when is an instrument acqured without notice of a SI in it?
Facts
● CA granted a SA to IHC giving an SI in all livestock and proceeds, perfected
○ CA’s herd got sick and was destroyed
■CA directed the authorities that they pay him and IHC
○ a cheque was issued, but payable to CA only
○ CA deposited it into an account at RBC, and negotiated a loan secured by the
account
■the bank knew that CA was in debt to IHC
■CA told the bank the cheque did not represent proceeds from the
dedstruction
■he said he was to receive two cheques from the government, and the cheque
representing the compensation for the destroyed cattle would be payable
to CA and IHC
● IHC discovered the proceeds had been paid out
○ IHC sued CA for the proceeds, and garnisheed RBC
○ RBC used the account to pay off the loan issued to CA
Analysis
● RBC says the SI of the IHC is defeated by 31(1) of the act
○ when CA cashed the cheque, the RBC became a holder of money and had
priority over the interest of the IHc
●
●
■a person who acquires money for value with or without notice of an SI takes
free of a prior interest
■but this doesn’t apply here, since the IHC’s collateral was not in money, but in
proceeds of the car
RBC says that it takes priority over the IHC, because the RBC “purchased” an
instrument
○ RBC says it purchased the cheque to secure teh debt of CA
○ the deposit made by the cheque is proeeds of proceeds, so IHC SI carries over.
○ RBC says it took an interest in personal property (the account into which the
cheque was deposited) under the loan agreement
■RBC gave value (loan) and took possession of the account without
knowwledge of the SI interest of the IHC
○ but RBC clearly knew of the existence of the IHC SI
○ affidavits from managers and CA’s history with the bank madke it clear that the
bank knew of the IHC SI
■the information given by A to the manager was under such information that a
reasonable person would take congizance
Since the bank had notice of the SI of the IHC, it was therefore not a purchaser of an
instrument without notice, so doesn’t take priority.
Ratio
● in this case the court finds that in order to purchase an instrument free of any SI, the
purchaser must give value and purchase without knowledge of the interest
○ knowledge of the existence of the SI is enough to prevent the free-and-clear
taking.
Canadian Western Bank v. Gescan Ltd.
Issue:
● Should the recipient of money or an instrument be expected to ask questions about it?
Facts
● GPL gave CWB an assignment of book debts, registered
● GPL owedmoney to Ge
○ GPL assigned a speicfic account owing to Ge in order to satisfy that debt
○ this account was not registered
○ Ge ordered the acount debtor to pay up, which the account debtor did
○ CWB says this money belongs to it, and that Ge needs to give it the money
● Ge says the payment from the account debtor was in the ordinary course, so he doesn’t
need to pay up.
● CWB says it has priority over all of the book debts, and that Ge was not paid in the
ordinary course of business, but was rather paid via a security, and that security was
junior to the CWB SI.
Analysis
● both Ge and CWB have an SI in the same account
○ CWB has an SI in all book debts, which were registered under the PPSA and
perfeceted
●
●
●
●
●
●
●
○ GE has an SI in the one book debt, which was never registered or perfected.
sinec CWB’s interest was perfected, it takes priority under s. 35, the residual rule
Ge says it should take priority because it was paid in money
○ just because Ge received payment in money does not by itself establish a priority
s. 31 covers payments made in money, and is an exception to the ordinary rules of the
PPSA in the interests of ensuirng negotiability
this was not an interest in money, but an interest in a book debt
○ this was registered, and Ge could easily have searcehd the PPSA
○ then D demanded and was paid in money
■this was not a payment in the ordinary course of business
■Nor did the payment constitute a transfer of money
When the accoutn debteor paid off Ge, the debt was discharged.
○ account debtor didn’t know its account had already been acquired by CWB
Ge received payment subject to the prior claim of another secuiryt holder (CWB) and is
thus subject to the P
so the payment of the account WAS in the ordianry course of business, but GE’s
acquisition and demand for payment was not.
Ratio
● just because you are paid in money out of a book debt does not extinguished any
competing interests in that book debt.
● where you acquire a book debt, then demand payment, the money coming out of it is not
acquired in the ordinary course of business.
10. Competition with Purchasers of Investment Property
● an SI might be in one or more forms of investment property
● these interests are subject to the rules in the Securities Transfer Act and PPSA itself
● these are rather complicated rules, giving highest priority to the party who has “control”
● Protections for purchasers of a seucirty
○ a purchase of a security, other than an SP, who gives value and does not know
that the transaction constitutes a breach of a SA granting an SI to a secured
party that does not have control of the security, and who aquires control aquires
the investment proeprty free of the security interest.
● there’s more on pages 268-270 and 295-296, but I am not going to look at it since we
dno’t cover investment property
PPSA: sections 30, 31.1
11. Competition with Holders of Interests in a Fixture or Crops
● s. 36 attempts to regulate priorities between a holder of a personal interest in a fixture
and a holder of a real property interest in the same fixture
○ the personal proeprty interset may gain priority in some circumstances by
attaching to goods that will become fixtures
○ in other cases, the hodler of the personal property SI will have to file a notice in
the LTO to gain priority
●
●
●
●
○ this leads to secret priorities and circularity of priorities
fixtures are not defined, so must be defined by CL
Fxitures are covered by the PPSA because they are sort of a mid-point between land
and personal proeprty
leads to a lot of problems,
○ fixtures start life as goods, then turn into real interests once affixed
○ someone could have a personal itnerest in the goods, but what happens when
those goods turn into an interest in land?
○ the LTA says that any interest not registered in the LTO should be ignored, but
the PPSA disagrees, and protects the SI
■so what happens.
building materials are not counted as fixtures, nor are buidlings
PPSA: sections 1(1) “building materials”, “fixture”, “goods”, 30(1) and (2), 36, 49, 73, 74
● building materiasl are materials that are incorporate into a building and includes goods
where removal from that building would lead to damage or destruction, but doesn’t
include heating and air condition or conveyance devices, or machinery installed in a
building to carry on some activitiy
● fixtures do not include buidling materials
● goods include fixtures and crops
● 30(1) says a buyer of goods includes a person who obtains rights in goods because
those goods become part of that person’s property as a result of affixment or accession.
● 30(2) says tahat a person who buys goods in the ordinary course of business takes free
of any SI unless they know that buying the goods is contrary to the SA
36 deals with a security interest in fixtures when in competition with an interest in land
● a secuirty interest in goods that attaches before or at the time the goods become
fixtures has prioirty to the goods over a claim made by a person with an interest in
the land.
○ however, this doesn’t apply to a person who acquires for value an interest in the
land after the goods become fixtures who takes without fraud and before the
interest is registered in the LTO
○ nor does it apply to a person with a mortgage against the land who makes an
advance after the godos become fixtures (but then the interest in the fixture taken
by the mortgagee is only the amount of the advance), onec again without fraud
and before the interest is registered in the LTO.
○ perfection is rrelevant here - only attachment matters, which means it may
produce a secret lien
■but in order to protect the goods against later dealings, you really do have to
register in the LTO
● an SI in goods that attaches after the goods become fixtures is subordinate to the
interests of a preson who has an interest in the land at the time the goods become
fixtures, and has:
●
●
●
●
●
○ not consented to the SI
○ not disclaimed any itnerest in the goods or fixtures
○ not been esopped from denying the interest.
an SI in goods that attaches after the goods become fixtures is subordinate to the inrests
of a person who aquires an interest in the land after the goods become fixtures if the
interest is acquired without fraud and before the notice of the SI is filed in the LTO
there are some rules for removal as well
49 deals with registration in the LTO
73 says that in terms of conflicts among Acts, the PPSA prevails
74 limits this where the other act is a consumer protection act, and the Land Title Act
specifically
Manning et al v. Furnasman Heating Ltd. (1985) MBQB
Issue
● How can the fixtures section lead to secret liens, and how are they to be avoided
Facts
● M made agreement with CCH (builder) for the building of a home, including heating
equipment, at a fixed price
● CCH made an agreement with F to supply and install heating equitpment
● F installed but retained title until the equipment was paid for
● CCH never paid, since got into difficulties, but M had already paid CCH in full
● F had no idea f the outstanding SI, and the SI was not reigstered in the PPSA or in the
LTA
● F registered an FS 5 months later, and failed against the LTO claiming the price of the
furnace and the accrued interest
○ then F told M that unless they paid, the furnace would be removed
Analsyis
● F was well secured, knowing that M would pay the buidler, but there was no way any
third party could be alerted to any actual or potential claim by F, since at the time of
building there was no registration or filing to deifne the claim
○ F could have registered the FS at practically any time, and then M could have
used s. 20 of the act to discover their exposure to F’s claim.
● by failing to give public notice,F gave third parties reasonable grounds for conlcuding it
had no SI, or that if it had an SI it was going to be as against CCH, not against M
○ just because the SA said otherwise shouldn’t make a difference, if there was no
way for a third party to ascertain the content or existence of the SA
● F went and installed all the equpment without the slightest effort to make its position or
claim known to the M, and did this knowing that M had hired the builder and intended to
pay the builder for the heating system
○ no steps take to provide knowledge or means of knowledg eof its interest
● so F is going to be taken to have authorized CCH to take the apyment from M in favor of
F
○ F made CCH the agent for the purpose of collecting payment.
●
●
●
●
●
●
●
M tried to use ordinary course of business, but of course one doesn’t normally buy
heating equipment from builders so it doesn’t really apply here.
F relies on 35(2) of the act
○ an SI that attached to goods before they became fixture has priority as to the
goods over the claim of any preson who has an interest in the real proeprty
○ the purpose of this section is to favour the fixtures financier becuase he provided
new value to be added to the real estate interest, and thereofre should have first
claim to it.
○ this makses sense where the eprson with the interest in the land is the debtor,
and the SI has already attached to the chattel
○ but here it risks doing ambush becuase it amounts to a secrete lien against the M
■the automatic priority is hatched in the privacy of attachment, and is
guaranteed indefinitely against the existing owner of the proprty
the contract for F was a conditional sale, but it was also an agreement to supply and
install fixtures
○ as between F and CCH, the goods were supplied for use only as fixtures- their
purpose and character clearly makes the removable fixtures.
○ only upon installation did CCH get what it contracted for.
○ and only at that poitn did CCH become the D of F
○ so the SI only attached after they became fixtures
s. 36(3) says an SI that attaches to goods after they become fixtures has priority over
the claim of any person who subsequently aquired an interest in the real property, but
NOT over any person who had a reigstered interest in the real porperty at the time the SI
attached to the goods and who did not consent in writing to the security interest, or
disclaim an interest in the goods as fixture
○ so in order to obtain prioirty over M, who had a registered interest in the real
property when the SI attached, F needed consent in writing, which it failed to
acquire
further, M were going to have the building transferred from CCH to them (in a way, but
not really)
and an unperfected SI (as F’s was) is subordinate to the interests of a transferee who is
not a SP that gives value without knowledge of teh SI, and before it is perfected, wheere
the transaction is for goods and not in the ordinary course of business
○ since F was not registered, and the M were not secured party, they take priority
this gives effect to the purposes fo the PPSA: if the goods are not registered and are
dealt with outside the ordinary course of business, the transferee has no way of finding
out about the SI
○ since the buyer can’t find out, they shouldn’t be harmed by it.Appeal
Appeal
● the Appeal just looks at the terms of the contract for supply and installation of the fixtures
○ it doesn’t look like a conditional sales contract
○ so F can’t use the PPSA anayways
Ratio
● courts may take various approaches to avoid secret liens- they really hate them
●
●
●
they may look at the contract of sale and determine it did not create a SI in the first
place.
they may use 36(3) [CHECK] to find that while there was affixment, the S attahced after
the affixment requiring the would-be SP to consult with the property owner
could use a transaction in the ordinary course of business to defeat the SI
GSM Securities & Appraisals Ltd. v. Rich-Wood Kitchens Ltd and National Trust Co. (1995)
ONCA
Issue
● how can the rules in s. 36 lead to circular priority?
Facts
● O buys land
● mortgages land to NT for a series of advances
● second mortgage to Darcon
● Rich-Wood delivers cabients, gets SI in cabinets
○ cabinets become fixtures
● third mortgage to GMS, registered withiout notice of Rich Woods interest. (GMS treated
as 2nd mortgage in the case).
● then Rich-Wood registerest SI
● NTattempts to sell
Analysis
● NT is prior to RW, because NT had the prior encumberance over the land before RW
affixed the cabinets, and the security interest of a creditor with a prior encumberance
that has been registered is prior to the SI of goods that are affixed.
● GMS is also prior to RW, because while RW had the prior interest in the cabinets, GMS
aquired the second mortgage for value without notice.
○ so at this point, NT-> GMS -> RW
● but RW’s interest in the goods is an SI which attached before they became fixtures is
prior to the claim of anyone who has an interest in the real property, so it has priority
over the last advance
○ so we have a circulatiry problem
●
●
●
there is no way of resolving the circularity without breaking one of the statutes.
could make rich-Wood go last, because it was late in registering its interest
○ but the PPSA does not require registration unless it want’s to be prior to
subsquent interests, so it’s not like RW was WRONG in not registering
○ s. 69 makes PPSA prior to any other act in case of conflict.
○ but could argue that not a true conflict here, because PPSA does not address
conflict between prior mortgagee and a subsequent mortgagee for value without
notice.
Solution
○ basically, RW could have removed fixtures prior to a sale to a third party, but
instead NT sold
●
■NT sold subject to the RW interest, and kept money back to pay off that’s
interest.
■so NT should pay out RW, but GMS has prioirty by way of 36(3)(a)(only in
Ontario Act I guess)
basically it looks like the court tries to give effect to the priorities implied by the PPSA
and the reigstry system of priority registration, but keeping in mind the reasonable
commercial expectations of the party.
Ratio
● a circularity problem may arise when dealing with fixtures because the fixture may take
priority to the rpevious interest in land, but if it is not registered, it is subordinate to a
subsequent interest in land, but that substequent interest in land will be subordinate to
the original interest in land.
12. Competition with Holders of Interests in Accession
● a accession is a smaller object affixed to a larger (called “the whole”).
○ typically it is an element that can be remove
○ something that is attached and can’t be removed is “comingled”, and typically the
interest is lost.
● the SI in goods does not disappear when the goods become an accession.
○ however, upon affixation, whoever has an interest in the whole will also get an
interst in the accession
○ this can lead to a competition
● competitions between multiple people with an interest in the accession are dealt with
under normal PPSA rules, as are competitions with multiple people over the whole
● s. 38 deals with competitions between an accession interest and an other goods/whole
goods interests.
● generally s. 38 favours the holder of a SI in goods that have become an accesssion,
providing the SI attached before affixation of the goods.
● so to resolve priority we must know whether the party with the interest in the accession
got the interest before or after the time at which the interest was affixed, and it is
necessary to know whether the party with the interest in “the whole” got it before or after
the accession was affixed
● a SI in accessions is subordinate to the interest of a creditor or of a sheriff who has
seized or cuased the whole to enforce a judgment, if the SI is not perfected at the date of
the seizure.
○ a holder in accessions by PMSI gets a 15 day grace period, starting when the
goods become an accession
● the structure and function of the rules for accessions are very close to those of fixtures,
so the same issues of secret liens and circularilty problems arise.
Interest in Accession Pre-Existing (Competition with non-secured parties)
● If A gets SI before or at the time the collateral is an accession, and B has an interest in
the whole that predates the accession, then A will have priority over B just by virtue of
attachmnet
●
●
○ no need to perfect
○ secret lien!
However, if A failes to perfect its interest, it will lose priority to a third party © who
aquires an interest in the collateral as a whole after accession but before A has
registered its interest, if C does not know of the interest.
○ and A will also be subordinate to any advances made by B after accession but
before perfection
this can lead to circularity
○ A has priority over B, because A had the SI in the accession prior to affixment
○ but C has priority over A, because A failed to register
○ but B has priority over C, because B registered before C did.
Subsequent SI in Accession (competition with non-secured parties)
● if A’s interest in the accession is taken after the collateral is already an accession, then
there are different rules
○ in competition with a person who has an existing interest in the other goods when
the goods become an accession, A’s SI will be subordinate, unless B consents
and disclaims any interest in the accession
○ in competition with a person who acquires an interest in the whole after the
goods become an accession, A’s SI will be subordinate if the other person
aquired the interest before A’s SI is perfected
Competition with another secuirty interest: ACcessions
● the PPSA allows a SI in goods that have become an accession to continue even after
the accession is attached to the other goods
○ most of the time the interest in “the whole” is a non-SI, and dealt with above
● there may be two SP who have interests in the accessions alone, but no particular
priority rule applies
○ go to residual rules- first to file.
PPSA: sectiosn1(1) “accession”, 38
● an accession means goods taht are installed or affixed to other goods
● s. 38 says that
○ in general an SI in goods that attaches before or at the time the goods become
an accession have priority with respect to a claim over the accession based on
an interst in the whole (whether or not perfected)
■but this is subordinate to the interests of
● a person who aquires for value an interest in the whole after the
goods become an accession, if they aquire the interest without
knowledge of the SI, and before it is perfected
● a person with a perfected SI who makes an advance under the
secuirty agreement after the goods become accessions, but only
with respect to the advance
●
○
○
○
a person with a perfected SI who aquires the right to retain the
whole in satisfaction of the obligation secured (the SP who is
realizing on collateral)
an SI in goods that attaches AFTER the goods become an accession is
subordinate to the interests of another person who
■has an interest in the other goods before accession and has not consented to
the SI
■or who aquire an interest in the whole after the goods become an accesion, if
this interest is aquired without knowledge and before teh SI is perfected.
an SI in accession that is not perfected is subordinate to the interests of a
judgment creditor who seizes the other goods.
there are rules for de-attaching the interest.
Kulchyski v. Shuswap Ventures Corporation 1994 BCSC
Issue
● when does the accession section apply?
Facts
● K obtained default judgment against H
● SVC is a SP of H, who loaned H money for purhcasing a tractor
○ the loan was secured by a tractor with an attached backhoe and loader
● the tractor, backhoe and loader was sold pursuand to K’s judgment
○ K says it has pririty, becuase SVC improperly registered.
Analsyis
● accessions are goods that are installed or affixed to other goods
○ SVC claims an interst in the backhoe and loader which may be detached from
teht ractor, even though it did not register its interest in those items
● s. 38 of the PPSA does two basic things
○ it reverses the common law presumption that once goods are attached to other
goods, the seperate goods lose their individual identity and become part of the
goods to which they are attached
○ it provides a system through which persons acquiring intersts in godos can be
forewarned of the existence of a SI in goods that have become accesions, in
which they are aquiring the interest.
● s. 38 only aplies where the accession goods retain their sepearte identity so that they
may be removed from the goods to which they are attached
○ if the goods are comingled, s. 38 is inapplicable and s. 39 may be applicable.
● here the backhoe and loader could be easily detached, so they were not comingled but
truly accessions
○ they retained their own identity
○ SVC did not register either of them by serial number or by description
● s. 38(5) sets out the priority beteween an unperfected SI in the accession, anda seizing
creditor
○ a SI in accessions is subordinate to the judgment creditor, if the seizure occurs
lawfully and the interest was not perfected
● since SVC did not register the interests, it loses out.
Ratio
● the sections on accessions apply to goods which are added to other goods without
losing their separate identity and becoming co mingled.
○ if the goods are detachable, they are accessions.
○ if they cannot be detached, they are comingledd and s.39 applies instead
Pratt and Whitney Canada Leasing Inc. v. Ellis Air Inc.(2002) BCSC
Issue
● When would a lessor of the whole “aquire the right to retain the whole in satisfaction of
the obligation secured”, so as to come within s. 38(3)(b)(ii)?
Facts
● E and G leased a helicopter to NM
○ E and GB filed a FS for the SI in the helicopter
● PW leased a helicopter engine to NM, which was installed in the helicopter and thereby
became an accession.
○ PW agreed to sell by conditional sale, but was not perfected
● NM went bankrupt
● E and GB repossessed the helicopter including the engine
○ they credited NM with the full value of the time reimaing on the engine
○ the helicopter with engine has since been leased again.
● then PW filed a FS, well after bankruptcy, and told E and GB about its claim.
● so which interest takes priority- EGB in the helicopter, or PW in the engine?
Analysis
● the engigne was clearly an accession which retained its sepearate identity
● E and GB say they fall into 38(3)(b)(ii), as people with a perfected SI in the whole who
have acquried the right to take the whole in satisfaction of the obligation secured, without
knowledge of PW’s SI, and before that SI was perfected.
● PW says that in order for EGB to take the collateral in satisfaction of the whole, they
would have had to proceed by foreclosure, and this would require EGB giving notice to
all interests in the collateral.
● the judgment order gave EGB the right to take the helicopter and the order, but it was
silent as to prorities
○ it did not say EGB was to take the helicopter free of all other interests or
encumberances
○ it did not say the helicopter was being taken in satisfaction fo the debt secured.
Ratio
● It appears in order to access 38(3)(b)(iii) the creditor must foreclose on the collateral
such that it is clear it is taking the collateral in sataisfaction of ALL debts secured, in the
very language of the PPSA
○ unless it is clear that this is the case, any interest in the accession will not be
defeated.
● here, there were serial numbered goods, which needed to be perfected by numbers
○ the “other goods” reigstration had not included the serial number of the acession
○
so the perfection of the “other goods” does not flow into the accession if the
accession is registerable under its own number
13. Competition with other Lienholders
● a lien is an interest in property that a person has because that person is owed something
by the person who has rights to the property
● an SI is a type of lien
● but liens are reated by various statutes, and out of the common law.
● there can be competitions between lienholders and the PPSA
○ generally, the PPSA takes precedence in case of conflict with another statute
○ statutory schemes in other legislation may necessarily affect other interests
■so the courts have inferred that abuilder’s lien may take priority even over a
perfected SI
■the SGA gives a buyer’s lien priority over any other Si
● and according to the SGA, the buyer’s lien is actually a SI, and it
has prioirty over “other secureity interests”, without any need for
perfection.
● if the lien is not governed by the PPSA because it is excluded by section 4(a), then
common law principles should apply to establish priority
● however, s. 32 gives priority over a SI to a lien on goods that arises in the ordinary
course of business from the provision of materials or services in respect fo the goods- a
repairer’s lien - unless the statute governing the lien explicitly gives priority to the SI
interest
PPSA: sections 4(a), 32, 73, 74
● 4(a) says the act does not apply to liens, charges and other interests given by a rule of
law or by an enactment, unless the act specifically says the PPSA applies
○ and except where the PPSA itself says explicitly otherwise
● s. 32 says that a lien on goods that arises from the provision in the ordinary course of
business of materials or serivces in respect of goods takes priority over an SI (perfected
or unperfected), unless the act governing the lien says otherwise
○ eg. a repair man’s lien
● 73 says that in the case of conflicts between the PPSA and other acts, the PPSA will
prevail unless the other act specifies otherwise
● 74 says that the LTA and the consumer protection acts take precedence over the PPSA.
Chapter VII: DEFAULT AND REMEDIES
● when the SP and D enter into an SA, they both hope it will not have to be relied on
○ both parties hope D will be able to meet its obligation
○ but the PPSA exists to set out what happens in the case of default
1. Default
● if the D does not meet its obligations under the SA, then it is under default
○ it is up to the parties and the SA to determined what constitutes default
○
○
●
●
●
●
default fulfills the condition precedent to use the interest in the property
the SP will almost always want non-payment to constitute default, and the D’s
insolvency/bankrupcy to constitute default
○ but other conditions may also constitute default
■the D not retaining certain financial state
■the D defaulting under another SA with a different SP
■failuer to ensure the SP’s interest remains senior position could be default
○ if a SA sets out no specific time at which payment is to be made, then the load is
probably payable on demand.
Under the PPSA, the debotr retains the right to transfer the collateral, but this does not
necessarily extinguish the SP’s interest, nor does it preclude SP from broceeding
against the Debtor for breach
○ usually unless the SI is detached, teh Sp will be able to proceed against the
collateral in the hands of the transferee
if there is a default, the SP does not necessarily have to realise - he may waive the
default
○ it is possible, but not likely, that repeated waiver could constitute an estoppel
an Sp who proceeds gainst collateral when there has not in fact been default will be
liable in damages to the D
○ could be in K, or tort, or even in PPSA if there was a breach of statutory duty
what is due on default depends on the SA
○ we have to know whether and what has attached to something, and how much it
secures
○ tyhpically an SI secures teh advancement of money or credit ot the debtor
■the remedies against the collateral is to recover payment or compensation for
the amount due
■how much is due isimportant in order to determine how much of the proceeds
from any dispostion the SP may actually keep
PPSA: Sections 1(1) “default”, 56(2)
● Default means the failure to pay or otherwise perform the obligation secured when that
obligation is due, or the occurence of an event or set of circumstances that under the
temrs of the SA cause the SI to become enforceable.
● 56(2) says that if the D defauls, the SP has only the remedies
○ provided in the SA
○ provided in Part 5 of the PPSA and sections 36 to 38
○ and if the SP is in possession, the emedies and obligations in s. 17 and 17.1
2. Remedies
● It is possible for the D to fail to meet obligations from one SP, and not the other
● or only one of the SP may wish to take any action on default
○ but usually the D defaults to pretty much everyone at once
○ this is insolvency
○
●
●
●
●
●
●
●
●
●
which can lead to bankruptcy, were a trsutee is apointed to pay of creditors in
accordance with the Bankruptcy and Insolvency Act
in the event of a default, an SP has various remedies which may be set out in the PPSA
or in the SA
○ most o the Remedies are in Part 5
■part 5 remedies do not apply to deemed security itnerests,
■but they still may affect these deemed interests, for example where the
deemed interest is subordinate to a normal SI, the normal SI may
foreclose and take free of the junior deemed interest.
the two major remedies are
○ the collaection of payments under intangibles (including accounts)
○ the seizure of the collateral followed by the collatera’s sale or the seizure of the
collateral followed by foreclosure
these are self-help remedies- the SP does not need a court order
the SP may also appoint a receiver to operate the business of the D, often as a
preliminary step to windingup the business
○ if the SP chooses this step, he is only doing what any unsecured creditor would
do
the point of the remedy is to cure the failure by hte D to honour its obligations that are
secured.
if the execise of the remedies related to the collateral does not fetch enough to satisy the
obligations owing to the SP, the SP may sue for the deficiency
the SP is also a creditor, and so may take any steps available generally to creditors
○ it can get judgment and proceed as a judment creditor, in addition to relying on
the collateral
○ typically the SP goes against the collaeral, exhausts it , then sues as a general
creditor for any amount remaining (the defiicency)
○ relying on the defiiciency may be denied if the SP proceeded agasint the
collateral improperly, by failing to send out requried notices and so on.
the SP may also have contractual remedies under the SA
any SP who has an interest in collateral where there has been a default on the obligation
secured can proceed against the collateral.
○ the SP can take control over any proceeds to which it is entitled, even if it is not
the senior party
○ however in practife a junior party will not be able to get much value out of the
collateral, and so it will either not proceed, or try to convince the senior party to
release the interest.
PPSA 55, 56
● s. 55
○ Part 5 does not apply to deemed Si
○ if the same oblgiation is secured by an interest in land and an interst in PP, if you
proceed against the land you extinguish your debt in the goods
● 56 sets out the rights and remedies, which are determined by the PPSA and the SA
○
the rights of the debtor and the obligations of the SP cannot generally be waived
in the SA
2 (1) Statutory versus Other remedies
● The SP and the debtor may add special remedies to the SA, which will generally be
enforceable as the parties specify.
● however, if the remedy is close to one of the PPSA remedies, teh courts will be vigilant
to ensure the parties do not attempt to contract out of procedural protections for the
debtor.
○ the statute precludes the waiver or variation fo certain provisions which give
rights to a D or impose obligations on the SP
■mostly deal with the oblgiations of the SP with respect to porperty in
possession.
● none of the Part 5 remedies apply to deemed interests, but there are interests outside of
part 5 which still do apply.
○ for example, there is a provision allowing a leasor or consignor to sue for
damages equal to t he value of the leased or consigned goods the money lost
through bankruptcy
● the statutory remedies are:
○ the possible appointment of a receiver/receiver -manager
○ collection of payments through an interest in an intangible or chattel paper
○ the seizure of the collateral
■normally a precursor to disposal or foreclosure, but may be a suffiicent threat
to encourage repayment of the oblgiation
○ after seizure, disposal of the collatareal - the main remedy for the SP
■hte proceeds from the disposition are applied in a particular order, inlduign
the payment of the indebtedness of the D to the SP
● typically this does not preclude further action from the SP
○ after seizure, foreclosre and keeping of collateral in satisfaction of the amount
secured
■if this is used, the oblgiation sis deemed satisfied and any further action is
precluded
● The SA may contain further remedies
○ the abliity to appoint a receiver wihtout a court order
○ the right of another party to value and sell shares
○ but most contractual remedies are variations on the statutory remedies to the
extent taht the PPSA allows
■eg, the SA may allow the SP to delay taking action on a sttutory remedy for a
particular period, or otherwise give the D additional rights
● such enhancements of the D’s interests ARE enforceable
● but the statute does prohibit the variation of several procedural points relating to the
remedies, typically where the remedies give rights to the D or impose obligations on teh
SP
○
○
if the parties createa non-statutory remedey that is similar to the remedies
regulated by thePPSA, a court will probably not allow the use ofthe non-statutory
remedy
it is possible to apply to the court under the statute to have some of the
procedures in the statue varied, but the court will be careful to ensure it does not
eliminate a remedy for the SP, or deny the D or third-parties any important rights
or protections
Andrews and Trotchie v. Mack Financial Canada Ltd. (1987) SK CA
Issue
● To what extent can a contract remedy mirror a statutory remedy?
Facts
● SMS sold a truck to A, then assigned the interest to MFC
○ A was to pay for the truck on installment, with MFC keepin gtitle until the truck is
paid off in full
○ A was not to sell without prior consent
○ T bought the truck, alledgedly with MFC’s consent
○ MFC says it did not know or consent to the sale, so the SA is in default
■MFC says it only learned of teh sale much later, and after all payments were
made by A
○ then, the truck was in an accident andneeded repairs worth about half its value
■at the time A, was in arrears for about 5K
○ T told A about the acident, and they didcussed wha tto do.
■MFC required the arrears to be paid in full before anythign could be done
■AT told MFC that it could not pay the arrears.
○ T took off with the trucks, and would not dislcose its location
■T told MFC he was intendeding to strip it for parts and sell it, returining only
the frame
● So MFC applied for a court order that AT return the truck as per the SA and thePPSA
○ AT refused to comply, so hit with treat of contempt
○ ultimately disclosed teh trucks location
○ now MFC wants to realize on its collateral
○ while AT wants a court order preventing realisation
● the chambers judge set aside the seizure, and extended the time AT had to pay
Analysis
● does the court have the power to set aside a seizure made under a SA and under s. 58
of the act?
● Does the court have the power or authority to order an alteration of the terms of a SA,
including the dates of payment?
● MFC concedes that s. 63 does give broad rights to intervene in Part 5 remedies, but
says this should be limited and exceptional, to ensure that the scheme of rights,
rpriorities and remedies
○ the intent of the intervention should be to protect parties, not deprive them of
their rights.
●
●
basically, wehre any right of possession under a contract coincides with the right of
possession under the PPSA, the contractual right is treated as thePPSA right
○ the contract right is just an affirmation of the PPSA right, not an independent right
○ to the extent that the contract right does not agree with the PPSA, the stauttory
right continues
■you cannot waive a statutory right or obligation in the remedies section.
parties are precluded from terating contractual rights in any other way that an affirmation
of the statutory right.
Ratio
● where a contractual right in a SA resembles a statutory right under the PPSA, the
contractual right is treated as merely affirming the PPSA
○ it cannot act to vary or waive the statuttuory right.
2(2) Preliminary Notice
● before proceeding to the remedies related to collateral, the SP must give notice (by
commonlaw) to the D, giving the D a last chance to meet obligations prior to action being
taken against the collateral
○ the length of notice is based on the surrounding circumstnaces.
● this is based on the idea that unless parties agree otherwise, the time of payment is not
of the essence in a contract
○ notice makes pay ment on a particular date of the essence
● anyways, its really more about fairness: an SP should not be able to just swoop in and
seize property- the D should be given a last chance to make payment.
○ clauses which remove the need for notice have been held to be invlaid
● the period of notice is based on the circumstances
○ a short period might be acceptable if there was some danger to the collateral, or
if there is absolutely no way the D is going to be able to make payment.
○ but on the other hand, the point of notice is that last chance- the D should be
given a reasonable period to come up with the funds
● Factors impacting on the period of notice
○ the amount of the loand
○ the risk to the creditor of losign the collateral
○ the length of the relationship between the D and the SP
○ the character and reputation fo the D
○ the potential ability to rasie the needed money in a short period
○ the circumstances surrounding the demand for payment.
PPSA: 68(1)
● retains the principles of common law, equity, and the law merchant except where
inconsistent with the PPSA
○ this is how the common law doctrine of notice applies to remedies under the
PPSA
Waldron v. Royal Bank of Canada [1994] BCCA
Issue
● What notice must hte SP give before seizing collateral?
Facts
● P says that the bank came into the P’s business to seize goods without notice, seized
goods that were not subejct to the SA.
Analysis
● a person from who goods are seized under an SI is entitled to reasonable notice, based
on all the circumstances
○ this applies to all sitautions where a person’s property may be taken away by a
secured party.
● the aim is to avoid the risk that the debtor might suffer serious harm from an unanticipate
seizure that was not necessary
● it doesn’t matter what form of collateral we are talking about- the realization of any SI
raises the issue of fairness.
● this mirrors the concerns covered by s. 8 of the Charter
● some of the factors to be considered are
○ the risk to the creditor of losing his money and security
○ the potential ability of the D to raise money required ina short period
● where there is no reasonable gruond for thinking the D is dishonest, and the SI is not in
any danger of immediate risk, the D should be given a few days notice
● even where D is dishonest, the collateral at risk, and D is unlikely to pay, there should
still be a momentary pause to allow the D to rasie the money.
Ratio
● any seizure of collateral, no matter the nature of the colateral or the secuirty agreement,
will require notice
● consdier the risk to the creditor of losign the collateral and the potential fo the D to raise
the money.
2(3) Receivers and Managers
● the SA may provide that the SP can appoint a receiver in the event of a default or
another condition
○ the SP may go to the court and apply for receivership even if the SA doesn’t
provide for it
■but there is no right to have a court appoint a receiver
■usually the SP must show some peril to the preoperty will likely result if a
receiver-manager is not put in possession of it.
○ a receiver appointed by the K will be able to take control more quickly, but one
appointed by the court has more legitimacy
■there is no reason why once a receiver is apointed under the K, it cannot be
confirmed by the court, and this may often be the case.
● the receiver is the agent of the D, not the SP, so the SP does not come into “possession
of the collateral”.
○
●
●
●
●
the SP does not step into the place of the D in the way a trustee in bankruptcy
steps into the place of the D
There are a number of restrictions on who can be a receiver
○ must be over 18, mentally competent, cannot be a corpoartion, an undischarged
bankrupt, someone closely connected with the D, a person with a criminal record,
or a non-resident
the receiver is a person who takes over the business
○ usulaly for the purpose of winding it up
○ the receiver may only collect money, pay debts, and realize on SI
○ however a receiver manager may be appointed, who has a greater ability to run
the business
■and they may be able to get the business back on its feet for the D to run
the receiver is often appointed in order to make it easer to assert the real remedies, and
to ensure the D will not do anything to jeapordize the collateral.
a receiver has a fair amount of discretion in carrying out its duties
○ but there are certain actions set out in the PPSA, usually in connection with
notice and reocrd-keeping
○ further, the court may remove a receiver and give directions and general
supervision over receivers, whether court appointed or otherwise.
PPSA: sections 1(1) “receiver”, 64, 65, 66
● receiver includes a receiver manager.
● 64 says that a SA may call for the appointment of a receiver, and sets out the
qualifications of a receiver
○ it says a person who appoints a receiver or acts as a receiver, who is not actually
qualified, is liable in damages.
● 65 sets out the obligations of a receiver
○ including giving notice of receivership, taking collateral into custody, keeping
records, an so on.
● 66 sets out that the court may supervise and gives orders to receivers, inclduign
appointing, removing, and giving directions to a receiver.
Royal Bank of Canada v. White Cross Proeprties Ltd. et al. (1984) SKQB
Issue
● In what circumstances will a court appoint a receiver?
Facts
● WC gave RBC a GSA on all PAAP
○ the SA allowed RBC to appoint a receiver-manager, and one was appointed by
the bank
● the bank now wants an order appointing the receiver, presumably for added legitimacy
Analysis
● there are many sitautions where the court may be justiified in ordering a receivership
where one already exists
○ where it is encessary for the receiver to more efficiently carry out its duties
●
●
the courts may appoint a receiver to enable creditors who have rights over proeprty to
obtain the benefit of those rights and preserve the property pending realization, where
ordinary legal remedies are defective, and where there is some danger to the collateral
but here, the bank has not established that any normal legal remedies are defective, and
has not identified any specific porblems where its legal remedies would be deficient
Ratio
● a court may order a receiver where one already exists, but only where the SP can show
some inability to exercise its legal right, some danger to the collateral, or can identify
some specific problem where its legal remedies would be deficient
● basically, it seems like the court prefers the SP to try and hep itself first.
2(4) collection of Payments under Intangibles or Chattel Paper after Defaul
● since the oblgiation secured is usually money, intangibles and chattel paper are very
valuale since they can directly generate money payments to pay down the obligation
● on default, the SP can change its conditional assignment in this property into an
absolute assignment, and so become the accoutn creditor
○ then the SP notifies teh account debtor to make payments to the SP directly as
the new account creditor
● the SP must give the D 15 days notice after the SP gives notice to the account debtor
PPSA: sections 41, 57
● 41 deals with the assignments of intangibles or chttel paper.
○ sets out that the Sp may have the account debtor pay the Sp directly once giving
notice of the assignment
● 57 says that in the case of default, the SP can ntoifiyy the account debtor to make
payments to the SP directly, to take control of any proceeds to which the SP is entitled,
and to apply any money taken as collateral as satsifaction of the debt secured
○ the SP may deduct reaosnable collection expesnes from amount collected from
debtors by intangibles or chattel paper, or money held as collateral
○ the SP must ntoify the D within 15 days fter giving notice to the accoutn debtor.
2(5) Seizure of Collateral
● the value of the collateral to the SP comes from thea bility to reposess or seize the
collateral in tehevent of default
○ any SP, regardless of priroity, may repsosses the SI
● seizure itself does little- it is just a preliminary step to disposing of the colltareal or
disposing of ti.
○ but seizure may scare the D into paying up.
○ or, another junior SP may want to redeem the collateral and pay the seizing SP
ot release its interest in the collateral, and return it to D.
● in order to determine waht to seize, the SP must ascertain what is owing and in default,
as well as the existence of other interests in the collateral
○ in general, an SP with a prior interes tin the collateral will not have that interest
affected by the seizure or other remedies, so the collateral will not be of much
●
●
●
●
●
●
●
●
worth to the seizing party, since no buyer would be willing to purchase the
encumbered collateral
■the SP may have to negotiate with the senior SP
■or perhaps get marshalling.
the PPSA says that if there is a default, the SP has the right to take possession, but if
the SP absues this right it may be come a trespasser
if the colltareal is consumer goods, and the D has paid at least ⅔ of the obligation, the
SP may not seize the consumer goods without court order
probably best to seize intangibles first since they usually lead to a money payment
special care must be taken when seizing accessions
○ if you repossess accessions, you must do so without causing damage to the
other goods or putting the party with the interest in the other goods to any
inconvenience that is greater that strictly necessary
○ otherwise, the SP will have to reimburse the party with the interest in the other
goods for the damage done to the other goods (but not the loss of value caused
by the removal of the accession)
similar rules apply to fixtures
○ a SP who removes fixtures from land must do so in a way which causes no
greater damage or injurty or inconvenience than is strictly necessary
■the SP will have to reimburse fot he damage to the interest in land, but not
the loss of value caused by the removal of the fixture
■you must give notice to do so
while the goods are in the SP’s possession, the SP has a number of obligations
○ must use reasonable care in the custody and preservation of collateral
■in the case of intangibles, securities, and chattel paer, reasonable care
inlduces taking necessary steps to preserve teh rights against other
persons.
○ the SP may use the collateral to the extent allowed in the SA, and offset any
profits (other than money) against the obligation owed by D.
usually possession by seizure will be actual possession, but constructive and symbolic
possession may be appropriate in certain cases
○ if the goods cannot readily be removed from the premises, or cannot readily be
stored, they may be left on the D’s presmise but still count as seized
○ if the collateral is a document of title, the Sp may proceed agains tthe document
of title or the goods covered by it
the collateral seized may be the original collateral, or the proceeds, or both
○ proceeds may be particularly valuable by way of explosion of collateral
○ if both proceeds and collateral are seized against, the amount secured by the SI
in the proceeds and the collateral is limited to the market value of the collateral at
the date of the dealing
PPSA: sections 17, 17.1, 24, 58
● 17 says a SP must take reasonable care in the custody and preservation of collateral in
possession
○
●
●
●
reasonable expenses, risk of loss or damage, are all paid for by the D and added
onto the obligation owing
○ the SP may apply any profit from the seized goods to the debt
17.1 does the same for investment property
24 deals with perfectio nby possession, and says that you cannot perfect by possession
through seizure or repossession
s. 58 sets out the right to seize
○ after default, the SP may take the collateral by any means permitted by law
○ alternative possession is allowed where the collateral cannot easily be removed r
stored, but must not cause any greater inconvenience to the D that is necessary
○ if the colalteral is consumer goods that has been ⅔ paid for, the SP may not
reposses without a court order, the court aking into account the value of the
collateral, the ammount that has been paid, the reasons for default, and teh
present and future financial circumstances of the parties.
2(6) Disposition
● once seized, the goods may be disposed of
○ can be by sale or lease, in whole or in parts
○ the disposal must be commercially reasonable
○ the SP must have notified as per s. 59, to the D and other owners of the
collateral, as wells as to subordinate SI in the collateral
■the senior SI does not need to be notiifed, since its interest is unaffected by
the seizure and disposal.
■the purchaser of the colalteral takes free of the D’s interest and subordinate
interests, but not the interests of senior parties.
■so the Senior party could come and seize the property from the purchaser in
the future, if the D defaults on its obligations
■so collateral with prior interests is not likley to be worth much.
● the money paid out from disposal first goest to apy the costs of the seizure and
disposition, then to satissfy the obligations owed to the disposing SI, then to any
subordinate holders of perfected SI in the collateral
○ anything left over goes to the debtor
○ the senior party gets nothing, but the SI still substits in the collateral
● the disposing SP must account for the distrbution of the money
● the sale may be private or public, and may be done in parts or all al at once
● the sale must be commercially reasonable
○ this often requires some small work to be done to put the goods in a marketable
state (small repairs, cleaining) and the cost of this can be recovered from the
proceeds ofthe sale
● Factors of a Commercially reaosnable sale
○ sold wholesle, retail, or by auction
○ whether advertising would help, and if so, where and at what cost
○ whether an appraisal woudl be useful to establish price and to assess condition
○ whether the best place for a sale is
○
●
●
●
●
●
whether cleaning, painiting, or maintenance and repair would help the sale, and
whether the associated costs are justified by the expected appreciation
if these kidns of actions are not taken, it might not be a commercially reasonable sale
○ if a sale is not reasonable, the SP may be denied action for a deficiency and may
be liable in damages to the D or subordinate SPs
so before sale, there should be some valuation by an independent third party,
particularly in the case of a private sale
○ a private sale at less than pmarket value will almost certain be challenged as
commercially unreasonabel
the SP may purchase the goods, but only at a price that is related to the market value of
the collateral
SP must create a written accounting of the disposition, or the sale may be found to be
commercially unreasonable.
the purchaser of the collateral who takes in good faith for value, does so free of any
interst of the D, an interest subordinate to the D, and any itnerest subordinate to the SP
○ a purhcaser will not take free if they were aware of any “skullduggery” on the part
of the other parties involved
Notice of Dispostion
● must be given no later than 20 days before the disposition
○ to the D
○ to the owner if different from D
○ to any creditor or SP with a perfected SI
○ any other person with an interest in the collateral who has notified the seizing SP
of this interest
● notice must contain
○ description of the collatera
○ amoutn required to satisfy the obligation secured by the Si
○ the sum in arrears and the default that occured
○ the expenses involved in seizue
○ a statement that unless the collateral is redeemed, it will be disposed of
○ the time, place, etc of any public sale and the date after which any private
disposition of the collateral may be made.
● there is no need for notice in some circumstances
○ the colltaeral is perishable
○ there are reasonable grounds to believe the security position will diminish witout
immediate disposition
○ the colalteral is of a type to be disposed of by sale ona organized market
○ the collateral is money
○ the cost of storage and care of the collateral is disporportionate to the value of
the collateral
○ the court is otherwise satisfied that no notice is required.
Distribution of money
●
●
●
●
●
first, pays off the expenses of seizing and disposing of the goods
then to the SP’s obligations secured by the SI
then to a subordinate perfected I
then to other people with interests in the collateral, if they have given notice of the
interest to the SP
remaineder tot he debtor
○ this will count as proceeds of the collateral, so any senior SI will have an interest
in this as well
PPSA: Sections 59, 60
● 59 sets out the procedure for disposition of collateral
○ after seizing, the SP may repair or dispose of it in its existing condition
■and if it repais, it can take the costs out of the disposition
○ dipsosition may be made privatlely or publically, in whole or in parts, and by
lease if the SA so provides
○ the SP must give 20 days notice ot the subordinate SP, the D, and any other
interests who have made their interests known
○ see above for notice requirements
○ when the SP disposes of collateral to a purchaser who in good faith aquires an
interest for value and take possession, the purchaser aquires the collateral free
from subordinate interests, the interest of the D.
○ see above for exemptions from ntoification requirements
● 60 sets out the distribution of the amounts realized from teh dispostion of collateral
● goes first to the Sp who has a SI in the collateral, then to any other interests that have
been made known, then to the D
● the SP must give an accounting of the distribution of the proceeds
Copp v. Medi-Dent Service (1991)
Issue
● What constitutes a commercially reasonable sale?
Facts
● C and P are dentists who shared an office
○ formed a company DAM which held the lease over the buidling and equpment
● their relationship broke down really badly
● P stopped making payment,s and C made them up to keep the lease in good stnading
○ C eventually defaulted as sell
○ so MD, the creditor who owned the equpiment, gave a notice to sell unless
arrears were paid.
● P decided to try and redeem for the amount owing
○ then C wanted to redeem as well, at last minute
○ too late...
● the sale to P was without notice, without appraisal, and without advertisement
○ the sale was for about half of what the goods were actually worth
● C says this was not a commercially reasonable transaction
●
P says it was done in good faith, and C was trying to get the same deal
○ further, that C is barred by laches since he waited to the very last minute to try
and redeem.
● MD says it doesn’t care, it just wants out of this acrimounious dispute.
Analysis
● the big question here is whether this was commercially reasonable
○ there are two baic tests
■the creditor selling must act in good faith
■the creditor must take reasonable care that the proper value is obtained
● not a trustee, but must not be negligent in the sale
● the stringent test will apply: the creditor must take reasonable care that the proper value
is obtained.
● here, the test was not met
○ no advertisement, private sale to a party adverse in interests to the joint debtor
(DAM).
○ there was no attepmt and obtaining the value of the security
○ the amount of sale was simply the amount in arrears, and the best guess is that
was about half of the actual value of the collateral
● the sale was not comercially reasonable, and this is enough to dispose of the application
● but equity has a role here too
○ neither party has perfectly clean hands
○ the realionshi between P and C carries certain moral oblgiations such as not to
allow one to score an unfair victory over the other.
○ P should not be allowed to profit from a private, secret deal
Ratio
● In order for a sale to be commercially reasonable, the creditor must take reasonable
care to ensure that the proper value of the collateral is obtained
○ this may required public sale, advertisement, definiteily evaluation of the value of
the collateral
○ a sale of collateral at way below market price is probably not commercially
reasonable.
○ shows the danger of entering into private sales since they are open to challenge
for being commercially unreasonable
Donnelly v. International Harvester Credit Corporation of Canada (1983) Ont. County Court
Issue
● What happens if the SP does not give notice before disposition and does not makea
commercially reasonable sale?
Facts
● FD is the president of KMS, which runs PTC
● KMS sold vehicles and equipment manufactuerd by IHC
● IHC was financing the sales via retail contract, whereby PT had to pay between 5 and 15
percen to fthe unpaid cash value of any vehicle financed by IHC and later repossessed.
○ in the event of repossesion and sale, not notice was required to be given PT
○ these were SI
● here, at the end of a lease, the lessor was not to retain title, but the leasee was intended
to purchase the vehicle, or PT would have to.
○ so it was a security lease- IHC never intended to get the goods back
○ so teh PPSA applies in full.
● PT counts as a D, since its liability is contingent on someone else not meeting a debt
○ the PT is basically guaranteeing that the customers will pay the lease, and if not,
PT is liable to purchase the vehicle from IHC
● the PPSA requires that an SP give notice to a D prior to sale.
○ IHC did not give notice
○ but IHC still wants to claim the deficiency
● Once IHC repossessed, it went ot the Ottawa branch, where it iwas transfereed to the
parent company for 5K, 2.2K less than its actually worth
Analysis
● if notice is not given, the SP may not claim the defiicency
○ giving notice is easy, and fair to the D
○ the SP has too many incentives to take shortcuts where ntocie is not given
● IHC sold the vehicle as is, and did not take any reaonable steps to make necessary
repairs and make the car available to the public
○ this was not a commercially reasonable way to proceed for the sale of a
repossessed vehicle
○ the SP is entitle to compensation where it spends money fixing up collateral, and
this is such a situation where it ought to have done so
● the sale at 5K had no relationship to market value
○ itw as done so for accounting reasons, and between related companies.
○ it was not commercially reasonable from the perspective of PT
● the sale was not commercially reasonable because
○ the sale was to a related company, by private sale, and in effect an accounting
maneouver
○ there were not efforts made to recondition the vehicle and put it to marketdespite the fact that it sat on the lot for 8 months
○ there was no attempt to adducet he market value
■it was eventually sold to a third party, but no one seems to know how much.
Ratio
● where notice is not given, the SP may not claim the deficiency
● where a sale is not comercially reasonable, the SP may not claim the deficiency
● a sale between related companies is probably not commerciallly reasonable, particularly
where the sale was private and for a price liess than market value, which was done for
accounting reasons
○ in fact, in this case it was probably not a sale at all.
2(7) Foreclosure
● The SP may decide to foreclose on the collateral rather than disposing of it
● if the SP does so, the underlying obligation is deemed to be satisfied
●
●
●
●
○ there can be no claim of deficiency
before the SP can foreclose, it must send a notice ot the D and to the holder of a
perfected, subordinate seucirty interest in the collateral
○ these parties may object, in which case the SP must proceed to dispose of the
collateral rather than foreclosing
○ there is no form of notice
if there is no successful objection to the foreclosure, then the SP takes th collateral free
of the interests of the D and subordinate SPs, but not senior Sps
○ notice of objection must be made in 15 days
○ the SP may apply to the court to determine that the objection to the foreclosure is
for reasons other than the protection of its interests, or that the market value of
the collateral is less than the amount owing to the SP and the costs of disposition
(in which case the other SP would not get any money anyways)
○ if the SP is sucessful, the objection is defeated.
usually foreclosure will only be chosen if the SP wants the collateral itself, and there is
sufficient value in it to satisfy the oblgiation secured
○ the SP may still do this by purchasing the collateral itself by a publci sale of the
collatearl
○ this would preserve the SP’s ability to realize on the deficiency
there are occasions when the SP may have been deemed to have acted in respect of
the collateral after seizure as if it were the SP’s own property, in which case it will be
estopped from denying that it has foreclosed
○ usually the D or other SP would do this so as to satisfy the underlying obligation
○ using the collateral, insuirng it in paritcular ways, and not take the usual
preparatory steps to sell the collateral will be indicators that the Sp has been
deemed to have foreclosed on the collateral
○ mere possession of the collateral is not enough; the SP must be using the
property as if it were the SP’s own for deemed foreclosure to have occured.
PPSA: Section 61
● Voluntary foreclosure
● the SP may propose to take the collateral in satisfaction of all oblgiations secured by it,
and must give a notice of the proposal to the D, other owners of the colltaeral,
subordinate interests
● if no objection in 15 days, the SP has irrevocably elected to retain the collateral in
satsifaction of the obligation secured by it.
○ all subordinate itnerests are gone.
● an objection may be found ineffective on application of the SP if the court deicdes
○ the objection is made for a purpose other than protection the intrest in the
collateral, or the market value of the collateral is less than the totla amount
owinto the SP and the costs of disposition
● a person who purchases the foreclosed goods for value and in good faith and who takes
possession, takes the goods free of subordinate interests even if the SP did not comply
with the requirements of foreclosure.
Angelkovski v. Trans-Canada Foods Ltd. (1986) MBQB
Issue
● what constitutes foreclosure?
Facts
● PC owned and opertaed the RB restuarant
● RB sold to A and partner
○ the balance of the pruchase price was secured by a chattel mortgage over all the
chattels in the restaurant and a promissory note of the same value, plus a
mortgage over the A home
● A defaulted, and PC had a bailiff seize the chattels by padlocking the restuarant
● PC took over the restaurant, and reponed it, redecorated and repaired the chattels
○ later, a fire destroyed the restaurant and the chattels
● A says by taking the chattels, the D had basically foreclosed and therefore the debt was
fully satisfied.
Analysis
● if it can be demosnstrated that a holder of chattel mortage has appropriated the goods
for his own use after a default and seizure, he is deemed to have taken them in full
satisfication of the debts
● but if PC had only reopened the restaurant to sell teh chattels as part of an ongoing
business, in order to increase their sale values and realize on the seucirty
● if PC reopened the business to operate it himself, or of reselling to make a profit, the
court could find the chattels were foreclosed on in full satisfaction of the debt
● here, PC had not really tried to list the restaurant, or much attempt to find a new
purchaser
● there was no negotiation between PC and A about trying to sell the restaurant as an
running business
● PC never told anyone his intention was to sell the busienss as a goign concern
○ in fact, he was treating the assets as if they were his own.
● there was no appraisal of the value of the assets
○ if PC was goign to dispose of hte restaurant, he was obligated to account for the
proceeds, and he couldn’t do so wihtout an appraisal of the goods at the time he
took over
● PC insured the equipment, indicating that he had accepted the chattels as his own
● BUT, on the other hand, under the PPSA to foreclose you must give 15 days notice to
the D and any other interests, and they have the chance to object
○ this was not done.
○ and until there is compliance withj this, the D retains the right to redeem
○ the SP cannot appropriate the collateral for his own use unless this right to
redeem is extinguished by complying with the notice requirements
● so unless the SP complies with the notice requirement, he will not be deemed to have
foreclosed no matter how he treats the collateral
Ratio
●
●
●
according to this case, the SP cannot be deemed to have foreclosed unless he has
given notice to the debtor and any other interests that this is what he intendes to do, an
dthose other parties have the opportunity to object
until this happens, the D has the right to redeem, and the SP cannot be said to have
appropriate the goods himself while D has the right to redeem
thus any foreclosure must be made abundantly clear by notice, at least according to this
case.
Inland Kenworth Ltd. v. Laboucane 2004 BCSC
Issue
● when will a SP be deemed to have elected to keep collateral in satisfaction of the
obligation secured?
Facts
● IK sold L equipment
○ piad for by down payment, some previous rental payment, the rest on credit
● L falls behid, so the agreement is modified
○ if there is another default, all money owed will accelerate and be payable
forthwith
● L defaults again
● IK repossess the equipment asking for payment, L doesn’t pay
○ IK sold the equpipment, and applied the sales proceeds to the amount owing by
L
● the goods were appraised before sale, worth less than what L owes, so IK wants the
deficiency
● L says that since the equipment was returned to IK’s inventory, IK is deemed to have
elected to keep the collateral in full satisfaction of the debt
○ foreclosure
Analysis
● L’s position is based on the voluntary foreclosure section fo the PPSA
○ this says that on default, an SP may propose to keep the collateral in full
satisfaction fo the debt, and must notifiy the other interested parties
○ if the voluntary foreclosure is successful, the SP loses the right to sue for the
defificiency
● In Angelkovski, the court held that you could not be deemed to have foreclosed without
having given notice.
○ and so the SP could proceed against the deficiency
● but other courts have found that you can be deemed to have foreclosed.
○ the SP shouldn’t be able to benefit from failliing to abid by statutory notice
requirements and thus be allowed to continue to proceed against the collateral!
○ in this kind of situation, the court may find that the delay and use of the collateral
means the SP is estopped from going after the collateral
● here the issue is resolved simply by looking at the nature fo the seizure
● IK made some repairs, put the equipment in inventory to sell
○
●
there was no inetntion to keep the collateral, and this is not a situation where the
SP should be estopped from claiming the deficiency
since IK was not intending or behaving as if to keep the collateral simply by placing the
equipment in inventory, it is not deemed ot have foreclosed
Ratio
● it appears in BC that foreclosure could be deemed in certain circumstnaces
● it would be unjust to preserve the SP’s right to the deficiency on the basis tha tthe SP
has failed to comply with the notice provisions which are supposed to be for the benefit
of the D
● the important thing is to look at how the goods are being treated, and whether they
evidence an intent to keep the goods, or an intent to improve and sell them as
satisfcation fo the debt
○ if the SP sells at profit and tries to keep the profit, this may be deemed
foreclsoure.
2(8) Rights of Redemption and Reinstatement
● Before the SP who has seized the collateral has disposed of it or foreclosed on it, the D
or the holder of a subordinate interest in the collateral may redeem the collateral by
tendering fulfilliment of the underlying obligation, plus the costs of seizing the collateral
and getting it ready for disposition
○ usually this is the full amount owing as a result of an acceleration clause
○ it may be the full amount of the obligation due, or it may be limited to the value of
the collateral seized.
○ the right to redeem must be included in the notice SP sends out prior to
dispostion or foreclosure.
● if the collateral is in consumer goods, the D can reinstate the SA by paying the amount
actually in arrears (“eclusive of the operation of an acceleration clause”) plus expense
and thereby curing any default.
○ normally D may only do this twice per year.
● for colalteral other than consumer goods, the D must apply to the court for relief from the
consequences of default or the operation of an acceleration clause
○ the terms of reinstatement are up to the court
○ and a D who wishes reinstatetment may have to show that the collateral is not in
jeapodry
PPSA s. 62
● at any time before the SP has disposed of the collateral or foreclosed, the D or
subordinate intrrests may redeem by tendering fulfillment of the obligations
○ or if the collateral is cosumer goods, the D may reinstate the SA by paying the
amount actually in default exclusive of any acceleration clause
■this can be done no more than twice a year
● must also reimburse for the cost of seizure and preparation for disposition
● on application to the court, a D may have the acceleration clause set aside and the SA
reinstated, but on any condition the court finds advisable.
Angelkovski v. Trans-Canada Foods Ltd. (1986) MBQB
Issue
● Can the redemption provisions be of assistance to a secured party?
Facts
● PC owned and opertaed the RB restuarant
● RB sold to A and partner
○ the balance of the pruchase price was secured by a chattel mortgage over all the
chattels in the restaurant and a promissory note of the same value, plus a
mortgage over the A home
● A defaulted, and PC had a bailiff seize the chattels by padlocking the restuarant
● PC took over the restaurant, and reponed it, redecorated and repaired the chattels
○ later, a fire destroyed the restaurant and the chattels
● A says by taking the chattels, the D had basically foreclosed and therefore the debt was
fully satisfied.
Analysis
● PC insured the equipment, indicating that he had accepted the chattels as his own
● BUT, on the other hand, under the PPSA to foreclose you must give 15 days notice to
the D and any other interests, and they have the chance to object
○ this was not done.
○ and until there is compliance withj this, the D retains the right to redeem
○ the SP cannot appropriate the collateral for his own use unless this right to
redeem is extinguished by complying with the notice requirements
● so unless the SP complies with the notice requirement, he will not be deemed to have
foreclosed no matter how he treats the collateral
Ratio
● The SP may be held not have foreclosed where it has not given notice, since the right of
the D to redeem means that unless the SP gives notice, it cannot appropriate the goods
to itself
● this result is doubtful though, given the Inland case above.
2(9) Monetary Remedies
● an SP is also an ordinary creditor so can always sue for the money owed, in addition to
or instead of realizing on the SI
○ suing for the debt may be a prelimnary step prior to realizing against the
collateral
○ or the SP may sue for the deficiency left after relzing on the collateral
● when suing for the money as an ordinary creditor, the SP gets no special treatment, and
must look to the ordinary law governing debtor-creditory relations.
● however, if it can be shown that the SP has failed to comply with its statutory obligations,
such as:
○ caring for collateral in possession
○ providing information on the SI
○ siezing and disposing of the collateral in accordance with statute
●
the debotr can use these breaches as a defebce in an action for the deficiency
○ but only to the extent that the SP’s breach of duty affected the ablity of the D to
protect its interest in the collateral, or hase made the accurate determination of
teh deficiency impracticable
○ however, it is up to the SP to show that the failure did not make accurate
determination of the deficiency impracticable.
PPSA section 60(5), 69
● 60(5) makes the D liable to pay the deficciency unless provided for in the PPSA or other
statute.
● 69 sets out the consequences of failure to comply with the PPPSA
○ the plaintiff is entitled to recover damages from the defendant for losses that are
reasonably foreseable as being liable to arise from a failure to discharge teh duty
or perform the obligation
○ in an action for deficiency, the D may raise as a defence teh failure of the SP to
comply with its duties under 17, 18, 59, and 60, but the not complianc eonly
limits the rights to the deficiency to the extent that it has affected the abillity to
protect the D’s interest in the collateral, or* has made the accurate determination
fo the collateral impracticable.
■17- obligation of the SP to look after goods in possession
■18 - obligation of the SP to provide information about the sA from the SP
■59 - dipsoing of the collateral (commerically reasonable manner)
■60 - distribution of amounts from disposition
○ the burden lies on the SP to show that the failure to meet duties did not cause
this kindo f prejudice ot the SP
2(10) A Special Case: Consumer Goods
● where an SI in collateral that fits the definition of “consumer goods”, the PPSA goes to
extra lengths to protect the D’s interest
● this does not apply if at the time the SI attached, the D was a corporation or all the
goods were used primiarly for the purposes of an aritficial body.
● consumer goods may be reinstated, as described above in “redemption”
● if there is a default under an SA that provides for an interest in consumer goods, and the
D has already paid off ⅔ of the debt, the SP cannot seize the colalteral without a court
order
● if the SP does not comply with its obligations in respect of consumer goods relating to
possession, seizure or dipsosition, if the D seeks a remedy for non-compliance the onus
is placed on the SP to show that the failure to comply did not affect the D’s ability to
protect his or her interest by attempting to redeem or reinstate
● however, few consumers are going to be willing to brave the compliexities of the PPSA
in order to protect their interests
● consumer goods are particularly unique in that the old doctrine of “seize or sue” is
maintained
○
●
●
●
the SP may proceed against the collateral, accept surrender by the D, or sue for
the amount owing as an unsecured creditor.
■the remedies cannot be combined
■pick one.
○ the court may alter this if the goods have been allowed to deriorate through
negligence or malfesance of the D
○ if after seizing the goods the SP finds out that the D has remevoed an accession
and not replaced it, it may still sue for the value of the accession.
once the consumer goods are proceeded against, the right to sue is eliminated
○ if the SP has seized both consumer goods and other goods, it may revive its right
to sue by returning the consumer goods within 20 days
○ if a SP has a PMSI in consumer goods proceeds with some of those goods but
not others, the extinguishment of obligations applies only to the portion of the
total obligation specifically stated in the SA as relating to the goods actually
seized
○ a D may want to help/force teh SP to sezie, or may make it seems as if the SP
has accepted the surrender of the goods so as to prevent any further remedy
■often the SP won’t want this, since consumer goods are usually of little value
■so the court will look to all the circumstances to determine whether the
possession is truly the result of an option by the SP to seize after default.
The SP can always sue for the amount owing
○ the SI in the goods is then extinguished, and the SP must discharge any
registration related to the goods
○ then if the SP takes any property by way of a judgment and some of that property
used to be collateral, the seizing party is limited to obtaining money from the
value of those goods seized that were in fact its collateral
■I think this means it is sort of deemed to have seized the collateral
○ otherwise the SP is limited to the amount relized from the sale of the goods
seized under the judgment, and any remaining debt is discharged.
the Cour thas teh ability to alter the effect of the consumer goods provision, if it is found
that through wiful or negligent acts the D has damaged or allowed the goods to
deteriorate.
PPSA: Sections 1(1) “consumer goods”, 10(3), 13(2), 30(3), 50(2), 58(3), 62, 67
● consumer goods are goods used or aquired for use primiarly for personal, family or
household purposes
● 10(3) says for teh purposes of the writing requirement, a description of goods as
“consumer goods” or “equipment” is inadequate.
● 13(2) says an interest in AAP does not attach to consumer goods unless the SI is a
PMSI or the goods are a peplacement for collateral described in the SA
● 30(3) says a buyer or lessee of consumer goods takes free of any perfected or
unperfected SI in those goods if the buyer or lessee gives value, bought without
knowledg oef the SI, unless the goods are a fxiture or worth more than 1000$
●
●
●
●
50(2) says that if a registered FS relates to consumer goods, teh SP must discharge the
registration within one month after all obligations under the SA creating the SI are
perfomred
58(3) says if the D who is in default of a SA that provides an SI in consumer goods has
paid ⅔ of the debt, the SP cannot seize the consumer goods.
62 gives the debtor in consumer goods teh right to reinstate a SA twice a year by paying
the amount actually in arrears, disregarding any acceleration clause
67 Rights and remedies; consumer goods
○ where a D is in default under a SA, the SP may:
■seize the goods
■foreclose on the goods
■accept the goods as surrendered
■or bring an ordinary action to recover a judgment as a creditor
○ if the SP seizes, forecloses, or accepts surrender, the D’s obligations udner the
SA are extinguished.
○ if the SP seizes or accepts surrender on colateral that is both consumer goods
and other collateral, the obligations extinguished can be revived if the SP returns
the consumer goods within 20 days.
○ if through wilfull acts or negligence, the D damages the goods or the goods are
allowed to deterioritate, the court may alter the obligations of the D so as to allow
the SP to rpoceed against the deficiency
○ if the SP decides to sue, the SI is extinguished, and the Sp must discharge the
registration within a month.
○ see above for the rest of the little rules.
Whitewater Motors Ltd. v. Amatto (1993) BCSC
Issue
● When will a SP be deemed to have accept the surrender of consumer goods?
Facts
● A and WM had 4 transactions over vehicles
○ A leased a topaz with a buy out option, defaulted
■WM bought out, financed an Escort for A
○ A traded the Escort for a Ranger
● Ranger was good, but wanted a car that could be used as a plow since he did
maintenance for RCMP
● WM persuaded A to test out an F-150 which could take a plow, but A said he couldn’t
afford it.
○ WM offered A a janitorial position to help him pay for it
○ So A accepted
● But then the position was terminated, so A eventually stopped making payments
○ when A was 2 payments in arrears, he talked to an agent of the fiancnier, who
advised him to leave teh truck with WM
● A rbought the truck to WM, gave him the keys and said he couldn’t afford him
○ WM was mad, wanted the papers
○ A signed voer the papers the next day
● A few months later, WM’s lawyer told A that they were not accepting possession, and
they intended to sue for the full amount owing.
○ WM paid the financier and got an assignemtn of the K
ANalsysis
● should WM be deemed to have acepted the surrender of the F-150? If so, the
unperformed obligations of the D are deemed extinguisehd.
● consumer goods are goods used or aquired primairily for personal, family, or household
purposes
○ the Retail contract said the truck was perosnal, and this is what A intended, so it
counted.
● however, WM did not accept surrender
○ the request of the papers was not accetping surrrender
○ WM rejected the return of the truck, and got its lawyer to tell A that in writing
○ WM made no attempt to sell the truck until the D consented
○ WM made no attempt to exercise control over the truck while it sat on his lot.
Ratio
● the SP will be deemed to have accepted the surrender if it objectively appears to have
done so
○ if the SP appears to reject, particularly in writing, this will be strong evidence
○ if the SP exercises no control over the returned collateral, this will be evidence
○ if the SP only sells the truck with consent of the D, this ay also be evidence.
● this is an issue of seeing what the SP intended by the possession
3. Court Variance
● the SCBC has the ability to make various orders in connetion with the PPSA, including
altering remedies
● the party seeking an alteration must show that it is fair and just to make an alteration
● the court should not make an order where the effect of the order would be to
substantially deprive a party of the whole of the protection afforded in the act, or deprive
the Sp of the whole remedy it is entitled to
○ further, fi teh SA contains an agreement surrounding the procedure to be
followed in the case of default, the court should not rewrite the agreement
● on application of the D, SP, creditor, Sheriff or other perosn with an interest in the
collateral, the court may make various orders including
○ binding declarations of rights and injunctive relief
○ an order of dreictions to a person with respect to the exercise ofrights or
discharge of obligations
○ relief from compliance with certain statutory remedies
○ stays for certain rights
○ any other order necessary to protect the interest of any person in the collateral
● the court will consider whether it is equitable to grant relief from forfeiture or an
extension of time, and also consider laches.
●
the court might declare a constructive trust that involves a party or parties to a secured
transaction, even though the statute doesn’t contain this remedy
○ it proabbly won’t do so if this means giving a SP a better prosition that it has after
it failed to take steps to obtain a better position.
PPSA: section 1(1) court, 63, 69, 71
● “court” means the Supreme Court of BC
● 63 covers the court’s superisory jurisdiction, and sets out the various order the court can
make (see above)
● 69 says that person to whom a duty or obligation is owed has a cause of action against
aby person who fails to idscharge that duty or perform the obligation without reasonable
excuse
○ the LGiC may set out prescribed damages in various sitautions wher ea party
fails to comply, presumably in the regulations
○ if the court finds that damages have been prescribed and the defendant is liable
in the cause of action, the court must award the prescribed damages or the
actual damages, whichever is higher
● 71 says that in terms of a few sections dealing with notice periods, teh court may extend
the time for compliance
○ this does not include any of teh 15 day grace periods so I doubt it will be
relevant.
Andrews and Trotchie v. Mack Financial Canada Ltd. (1987) SK CA
Issue
● What is the scope of the court’s right to make orders?
Facts
● SMS sold a truck to A, then assigned the interest to MFC
○ A was to pay for the truck on installment, with MFC keepin gtitle until the truck is
paid off in full
○ A was not to sell without prior consent
○ T bought the truck, alledgedly with MFC’s consent
○ MFC says it did not know or consent to the sale, so the SA is in default
■MFC says it only learned of teh sale much later, and after all payments were
made by A
○ then, the truck was in an accident andneeded repairs worth about half its value
■at the time A, was in arrears for about 5K
○ T told A about the acident, and they didcussed wha tto do.
■MFC required the arrears to be paid in full before anythign could be done
■AT told MFC that it could not pay the arrears.
○ T took off with the trucks, and would not dislcose its location
■T told MFC he was intendeding to strip it for parts and sell it, returining only
the frame
● So MFC applied for a court order that AT return the truck as per the SA and thePPSA
○ AT refused to comply, so hit with treat of contempt
○ ultimately disclosed teh trucks location
○ now MFC wants to realize on its collateral
○ while AT wants a court order preventing realisation
● the chambers judge set aside the seizure, and extended the time AT had to pay
Analysis
● does the court have the power to set aside a seizure made under a SA and under s. 58
of the act?
● Does the court have the power or authority to order an alteration of the terms of a SA,
including the dates of payment?
● MFC concedes that s. 63 does give broad rights to intervene in Part 5 remedies, but
says this should be limited and exceptional, to ensure that the scheme of rights,
rpriorities and remedies
○ the intent of the intervention should be to protect parties, not deprive them of
their rights.
● basically, wehre any right of possession under a contract coincides with the right of
possession under the PPSA, the contractual right is treated as thePPSA right
○ the contract right is just an affirmation of the PPSA right, not an independent right
○ to the extent that the contract right does not agree with the PPSA, the stauttory
right continues
■you cannot waive a statutory right or obligation in the remedies section.
● parties are precluded from terating contractual rights in any other way that an affirmation
of the statutory right.
● s. 63 sets out a mechanism for ensuirng that a commercial just result will be obtained,
and gives the court the power to relieve any party from compliance with the strict
remedial screem, if strict compliance would produce a commercially detrimental result
○ the purpose is for the protection of rights and interests between the SP and the D
● but it does not authorize the court to set aside a seizure properly made in accordance
with the rights granted to the SP
● nor does it authorize the court to insert new terms into the SA or otherwise meddle with
the contract between parteis.
● AT says that 63 can be sued to prevent the SP from realizing on its security, and to give
AT more time to pay
○ they say that 63 is basically intended to give debtors relief.
○ but part V is desigend to protect both D’s and SP’s
○ this would amount to substituting a consumer protection scheme for the PPSA,
and would do so without any stuattory criteria
○ it would give a jduge unfettered discretion to decide whether or not contractual
rights should be altered.
● 63 is not intended to allow a TJ to rewrite or change the substance of the contractual
rights between the parties
○ this does allow the TJ to stay a proceeding against the collateral, since this
doesn’t change the substnace of the colltaeral
■this will be based on an examination of the circumstances of each case.
● here MFC lawfully repossed the truck after AT defaulted.
●
even if the AT had applied for stay in order to get more time, equity wouldn’t suggest
they should get it.
○ they were given an extension before and couldn’t pay then, and there is no
reason to believe they could pay now.
Ratio
● s. 63 is aimed at protecting the rights and interests of both creditors and debtors, and is
not aimed at consumer protection or debtor’s relief
● it is aimed at ensuring that a commercially reasonable outcome results from the secured
transaction
● TJs should not interfere, imply, or read in new terms into the substance of the SA
○ so the court can tinker with the periods and notices involved with the remedy, but
they cannot deprive the SP of the remedy entirely
● a stay on repossession granting the D more time to redeem collateral is acceptable,
since this doesn’t go to the substance of the transaction.
4. Remedies for Non-Compliance with the PPSA
● if the PPSA is not complied with, then a person who suffers a loss as a result of the noncompliance may bring an action for damages under s. 69
○ the party agreived is entitled to such damges are resonably foreseeable from the
breach of duty
○ P has the duty of proving a loss.
● damages may be actual or prescribed, whichever is higher
○ SA may not limit the liability of a party for failing to discharge a duty or obligation
● remedies may be available in other statutes as well
○ equitable relief from forfeiture could be sought under the Law and Equity Act
PPSA: 63, 69, 71
● 63 sets out the ablility of the court to make various orders
● 69 sets out liability in damages for non-compliance with the act
○ sets out the ablity of the LGiC to make prescribed damages
○ says the court may order prescribed or actual damages
○ says that the D may use the failure to abide by a duty to defeat a deficiency, as
long as the failure prejudiced the D’s interest or made accurate determination of
the deficiency impractical
● 71 gives the court the power to extend certain periods of notice, nothing important, see
above.
Osman Auction Inc. v. Murray [1994] ABQB
Issue
● Is the PPSA exhaustive of remedies for breach of a PPSA duty?
Facts
● OA sold a car to a rogue, accepting payment by a cheque
○ by the time the cheque bounced, the car had been sold twice and eneded up in
M’s hands as a bona fide purchaser for value
○ prior to purchase M had checked the registry, and found an SI registered to CC
○ he called CC, who said they had no interest, and advised M to check with OA
○ OA’s agent told M that OA had no interest in the vehicle
○ so M purchased in
● then OA tried to register an SI in the vehicle
● M agreed to sell the car to C on the condition that title was clear, C provided a deposit
● M discovered the SI, told OA to remove it
○ OA refused to
○ M lost the sale and had to refund the deposit
● M took legal action, the SI was eventually removed, and the car was eventually sold, but
at 1.5K less than what C was prepared to buy it for
○ So M wants the difference.
Analysis
● OA says that the PPSA extinguishes the right to sue for slander of title, by replacing the
common law tort with a more limited statutrory system of remedies which does not allow
that remedy
● the Act does not say that it replaces any common law remedy, nor does the
jurisprudence
● when an act creates a new remedy that overlaps with a common law remedy, teh
common law remedy is not extinguished unless the Act says so, or that was clearly the
intent of legislature.
● if the Act created a new right of “slander of title”, then the statute would prevail alone
○ but the Act does not do so.
○ the right to sue for slander of title has existed all along.
● the repeal of a common law remedy should not be implied into the act, nor is it
necessary to give effect to the prupose of the act, nor is slander of title inconsistent with
the act.
○ the fact that there is some overlap does not mean the common law remedy is
repealed
Ratio
● other remedies, in other statutes or in common law, may still apply under the PPSA
● the PPSA will only extinguish remedies that are completely subsumed within it