CHAPTER 1: INTRODUCTION
I.
-
II.
INTRODUCTION
Secured transaction: debtor owes an obligation to a creditor and creditor takes security interest in some/all
debtor's personal property to secure the obligation.
Personal property subject to PPSAs, creditor with security interest called secured creditor.
PPSAs based on Article 9 of UCC, Ontario enacted first PPSA in 1967.
Objective of PPSAs (common with Article 9): replace prior patchwork system with unified regime for all transactions
that were in substance security agreements to be subject to same rules, regardless of transaction form.
AN OVERVIEW OF CREDITORS’ REMEDIES
A. THE FUNCTION OF CREDIT
-
Credit refers to the agreed deferred payment of a debt, which includes loans of money and the supply of goods
and services on a deferred payment basis, regardless of the length of the credit period.
Credit is important for both industrial and economic development of a country, as well as for consumers to acquire
goods and services.
Financial economists distinguish between short-term, medium-term, and long-term credit based on the duration
of the credit period.
Short-term credit is often provided by suppliers of goods and services and may be unsecured.
Revolving lines of credit made available by banks and other lenders are a common credit facility for day-to-day
expenses of the business and are often secured by a security interest on inventory or an assignment of receivables.
Medium-term credit is often used to acquire capital items such as equipment, machinery, and vehicles, and is
frequently secured by the goods being acquired.
Long-term credit is used for more expensive assets, and lenders may demand a second-ranking security interest in
all of the debtor's other assets.
Credit facilities of any term may be secured or unsecured, each with pros and cons.
B. UNSECURED CREDIT
-
-
Unsecured credit refers to a loan where the creditor does not have a direct claim on the debtor's property.
If the debtor fails to repay the loan, the creditor can sue for the amount owed, but this is a personal remedy and
does not give the creditor a direct claim on the debtor's property.
Various methods exist for the enforcement of judgment debts, including execution against the debtor's goods or
other personal property, execution against land, garnishment, charging orders, and receivership.
Execution against goods involves seizing the debtor's goods and selling them to pay off the debt, but this can be
time-consuming, expensive, and uncertain if other creditors also have claims on the debtor's property.
Overall, remedies for unsecured creditors can be slow, costly, and uncertain in their success.
C.
SECURED CREDIT
-
In secured credit, the creditor has the right to enforce their security interest in the debtor's asset in case of default.
The security agreement gives the creditor another option besides suing the debtor for the outstanding loan
balance, which is to seize the asset and sell it to pay down the outstanding loan balance plus costs.
A secured creditor does not need to worry about other creditors having prior rights to the asset, nor do they need
to share the proceeds with unsecured creditors.
If the sale proceeds are insufficient to cover the debt, the creditor can still sue the debtor for the shortfall as an
unsecured creditor.
In bankruptcy, secured creditors can enforce their security interest, whereas unsecured creditors have to share the
bankruptcy distribution on a pari passu basis.
A security interest is a property right that gives the secured party priority over unsecured creditors, provides a selfhelp remedy, and can be used as a form of discipline to discourage the debtor from defaulting.
-
-
1
-
Security reduces the secured lender's risk but increases the risk faced by the debtor's unsecured creditors.
in functional terms, a security interest is a property right, which makes available to the creditor one or more of the
debtor’s assets as a source of payment if the debtor defaults.
III.
PRE-PPSA CATEGORIES AND FORMS OF SECURITY INTEREST
I-
CONSENSUAL AND NON-CONSENSUAL SECURITY INTERESTS
-
-
IIIII-
-
IV-
A security interest can be consensual or non-consensual.
A consensual security interest is created by an agreement between the secured party and the security giver.
A non-consensual security interest arises by operation of law, such as the repairer's lien.
o The repairer's lien is created by statute in Ontario under the Repair and Storage Liens Act, but nonconsensual security interests can also arise at common law and by court order.
The distinction between consensual and non-consensual security interests is relevant post-PPSA because the PPSAs
generally apply only to consensual security interests.
REAL AND PERSONAL PROPERTY SECURITY
PPSAs only apply to security interests in personal property, not land.
Personal property includes tangible property (goods, documents of title, instruments) and intangible property
(accounts, intellectual property, statutory and contractual licenses).
PPSAs apply to all forms of personal property and define and classify each type of personal property.
POSSESSORY AND NON-POSSESSORY SECURITY INTERESTS
Possessory security interest involves transfer of possession of tangible property coupled with the right of sale if
the pledgor defaults.
o Documentary pledges involving negotiable instruments, corporate securities, or documents of title are
common in short-term financing.
Non-possessory security interest involves transfer of title or some lesser proprietary interest, but not possession,
on the understanding that the secured party may take control of the collateral if the debtor defaults.
The distinction between possessory and non-possessory security interests is reflected in the different methods of
perfection recognized by the PPSA.
o Possession and registration are alternative methods of perfection.
o Possession publicizes a security interest, while registration gives third parties a means of confirming
whether or not the debtor has clear title to its assets.
o If the secured party has perfected its security interest by possession, there is no need for it to also perfect
by registration.
o If the secured party has perfected by registration, it can leave the collateral in the debtor's hands at least
until the debtor is in default.
MORTGAGES AND HYPOTHECATIONS
A mortgage involves the transfer of title from the debtor (mortgagor) to the secured party (mortgagee), with the
condition that the mortgagee will transfer the collateral back once the mortgage debt is paid.
During the mortgage period, the mortgagee holds the collateral's title, while the mortgagor has an equity of
redemption.
The equity of redemption is the mortgagor's right to specifically enforce the secured party's covenant to return
the collateral, coupled with the maxim "equity deems as done what ought to be done."
Foreclosure is a court order that extinguishes the equity of redemption, allowing the mortgagee to keep the
collateral in satisfaction of the debt.
The power of sale is an alternative remedy that does not extinguish the mortgage debt, and the mortgagor remains
personally liable for any shortfall.
2
-
V-
-
VI-
-
VII-
A charge does not transfer title to the secured party and is a right in the chargee (secured party) to force a sale of
the collateral if the chargor (debtor) defaults.
The chargor retains title, and the chargee's natural remedy is the power of sale, which derives from the parties'
agreement and not ownership.
The PPSA replaces the old forms of security interest with a generic security interest, which acts as an encumbrance
in the secured party's favor giving them a claim on the collateral if the debtor defaults.
The enforcement provisions in Part V of the PPSAs are inspired by mortgage law, giving the debtor a statutory
equivalent of the mortgagor's right of redemption and the secured party a statutory right of foreclosure as an
alternative to the power of sale.
LEGAL AND EQUITABLE SECURITY INTERESTS
A mortgage can be either legal or equitable.
A legal mortgage involves the transfer of legal title to the collateral, while an equitable mortgage may be created
in various ways.
Pre-PPSA, the distinction between legal and equitable security interests was important in determining priority
disputes involving competing third-party claims to the collateral.
The basic rule in common law was nemo dat quod non habet ("one cannot give what one does not have").
o In Example 3, the mortgagor has already transferred legal title to SP1, so they cannot transfer it again to
SP2. All the mortgagor has left to give SP2 is their equity of redemption.
The PPSA context does not distinguish between legal and equitable interests.
Instead, the statute enacts detailed priority rules for priority disputes, which do not turn on the nature of the
secured party's interest.
PPSA priority rules turn instead on variables such as whether the secured party perfected their security interests
by registration or by a method other than registration, and the order of the perfecting events.
TRANSFER-BASED SECURITY INTERESTS AND TITLE RETENTION
Transfer-based security interests include mortgage, pledge, and charge
Conditional sale agreement is a transaction where the seller retains title to the goods until the buyer has paid all
the installments. It is a close functional equivalent of the mortgage or charge but is not a security interest in the
strict sense.
The distinction between security interests and title retention arrangements is reflected in earlier statutory
initiatives such as bills of sale legislation, the Corporation Securities Registration Act, and the Conditional Sales Act.
The transaction in Example 5, where a car is rented with an option to buy at the end of the term, is not a conditional
sale agreement but is in substance the same as a conditional sale agreement.
A lease that is in substance a conditional sale is typically referred to as a "security lease."
The true lease is a lease where the parties have no expectation at the outset that the lessee will end up buying the
goods.
FIXED AND FLOATING SECURITY INTERESTS
Circulating assets, such as inventory and accounts receivable, can be used as collateral for a loan.
Ex. SP wants to lend money to a retailing business, which has fixed assets such as plant and equipment, and
circulating assets such as inventory and accounts receivable.
Before the PPSA, circulating assets raised two potential problems for security interests: the after-acquired property
problem and the right of disposal problem.
1.
The After-Acquired Property Problem
-
The after-acquired property problem arises when a security interest must cover not just the assets that the debtor
presently owns but also future assets.
Under common law, a security interest cannot be granted in future or after-acquired property because the seller
or mortgagor does not yet own the property.
-
3
-
-
-
However, under equity, a security interest may be granted in after-acquired property if the debtor promises to
grant a security interest in the property and the creditor gives value in exchange for the promise.
Under the PPSA in Ontario, a security interest in after-acquired property is allowed and automatically attaches
when the debtor acquires the asset in question, with certain exceptions.
The after-acquired property problem arises because SP's security interest must cover not just the inventory and
accounts receivable Debtor has at the date of the security agreement, but also future ones. At common law, the
nemo dat rule posed a major obstacle to dealings in future or after-acquired property.
Equity overcomes this problem, as SP may acquire an interest in future inventory and accounts receivable as soon
as they come into Debtor's hands, provided it has given value in exchange for Debtor's promise of a security
interest. This attracts the maxim "equity deems as done what ought to be done," and the court will enforce the
parties' bargain.
Post-PPSA, the PPSA specifically permits a security interest in after-acquired property, and the security interest
"attaches" automatically when Debtor acquires the asset in question.
2.
The Right of Disposal Problem
-
When collateral is circulating assets (e.g. inventory), the security agreement must give the debtor a right to
dispose of the collateral in the ordinary course of business to maintain the circulating character of the asset and
avoid hindering the debtor's business operations.
In non-notification receivables financing agreements, a transfer of property that reserves a right of disposal to the
transferor is void against a debtor's creditors under the fraudulent conveyance laws.
o The standard practice in non-notification receivables financing was for the assignor to remit the collection
proceeds daily to the assignee and take them back at a later date to avoid the issue of right of disposal.
The floating charge is an equitable charge over assets such as inventory and accounts and their proceeds.
o Until the debtor defaults, the charge does not attach to any particular asset and instead "floats" over the
debtor's shifting mass of assets.
o After default, the floating charge crystallizes and becomes a fixed charge over whatever collateral the
debtor owns at that point. The debtor loses the freedom to deal with the collateral, and the usual remedy
for the secured party is to appoint a receiver to collect and liquidate the collateral.
The PPSA abolished the need for the floating charge concept, and a security interest in circulating assets (e.g.
inventory or accounts) takes effect as a fixed security interest coupled with an express or implied license for the
debtor to deal with the asset in the ordinary course of business.
o The security interest:
▪
attaches to each item of new collateral as the debtor acquires it,
▪ becomes unattached when the debtor disposes of the assets in the ordinary course of business,
and;
▪ attaches simultaneously to the disposal proceeds.
Relevant sections of the OPPSA: section 30 (security interest in accounts), section 31 (security interest in chattel
paper), section 32 (security interest in goods), and section 43 (effect of security interest in proceeds).
-
-
-
-
IV.
-
-
LEGISLATIVE OBJECTIVES
The PPSA contains an elaborate and detailed system for the regulation of personal property security transactions
in Ontario.
The PPSA is not just a consolidation of prior law, it employs new concepts and legislative approaches, and includes
important policy choices that affect credit grantors, credit users, unsecured creditors, and buyers dealing with
credit users.
The PPSA provides structural integration, conceptual unity, comprehensiveness, legal predictability, and
accommodation of modern business financing techniques.
The PPSA includes detailed regulation of default rights and remedies.
The comparison with the prior law highlights the PPSA's most important features.
A. STRUCTURAL INTEGRATION
4
-
The PPSA replaces the disparate and sometimes conflicting structures of common law, equity, and statutory law
relating to security agreements.
The PPSA prescribes a single system of law for security agreements, leaving little scope for continued recognition
of differences between traditional types of security agreements.
The PPSA does not completely pre-empt common law and equitable principles.
B. CONCEPTUAL UNITY
-
-
The PPSA recognizes a single generic concept as the central feature of all security agreements that provide an
interest in property to secure an obligation.
Common law and equity had different mechanisms for securing obligations, resulting in differences among security
devices and inconsistent development of personal property security law.
The PPSA applies to any transaction that creates or provides for an interest in personal property to secure payment
or performance of an obligation, regardless of the form or locus of title (OPPSA, ss 1(1) "security agreement" and
"security interest," and 2).
The PPSA does distinguish between types of transactions based on functional considerations, such as purchasemoney security interests (PMSIs) and security interests in chattel paper, which are given special priority status if
certain conditions are met (OPPSA, ss 1(1) "purchase-money security interest," 20(3), and 33).
C.
COMPREHENSIVENESS
-
The PPSA is not a self-contained code of law, but it is much more complete than previous personal property security
law.
The OPPSA covers various aspects of personal property security transactions, including the form of security
agreements, creation of security interests, perfection of security interests, registration rules, priority rules, rights
and remedies of the secured party in case of default, and choice of law rules for foreign security interests.
The previous personal property security law mainly focused on public disclosure of security interests and left
priority issues to be resolved by common law and equity principles.
-
-
D. LEGAL PREDICTABILITY
-
Legal predictability is important for credit grantors when considering whether to rely on a security interest.
Prior to the PPSA, the lack of a single, integrated system of priority rules meant that legal uncertainty surrounded
the outcome of priority disputes involving collateral.
The PPSA introduced a much more complete priority system that ensures greater consistency in court decisions
and facilitates more accurate assessment of legal risks when granting credit.
The PPSA priority rules provide a predictable order of priority for competing claims to the same collateral (OPPSA,
ss 27-37).
E.
ACCOMMODATION OF MODERN BUSINESS FINANCING
-
The PPSA was designed to bring the law abreast of the needs of modern business financing.
The PPSA allows parties to a security agreement a large measure of freedom to tailor their agreement to fit their
particular circumstances (OPPSA, s 9).
A security interest can be taken in a revolving line of inventory (OPPSA, s 12).
A line of credit can be secured without fear of loss of priority to intervening interests (OPPSA, ss 13, 30(3), and
30(4), discussed in Chapter 6, Section VI).
Special priority rules are included to deal with the distinctive features of the purchase and sale of chattel paper
(OPPSA, s 28(3)).
The notice filing registration system (OPPSA, Part IV, discussed in Chapter 5) provides flexibility to accommodate
modern business financing needs
-
F.
REGULATION OF DEFAULT RIGHTS AND REMEDIES
5
-
Under prior law, the relative rights of the secured party and debtor in the event of default depended on the type
of security agreement and its terms.
The PPSA provides a detailed system for the regulation of default rights and remedies to ensure consistency and
fairness in the enforcement of security interests.
This is covered under Part V of the OPPSA.
CHAPTER 2: SCOPE OF PPSA LEGISLATION
I.
-
II.
-
-
III.
Introduction
Section 2 PPSA establishes the scope of the statute.
o According to Section 2(a), the act applies to every transaction, regardless of its form, that creates a security
interest in personal property to secure payment or performance of an obligation.
o The provisions state that for the statute to apply, there must be a transaction that in substance creates a
security interest in personal property.
Section 2(b) of the act extends the scope of the statute to the transfer of accounts or chattel paper, even if the
transfer doesn't secure payment or performance of an obligation.
Similarly, Section 2(c) applies to leases of goods for a term of over a year, even if the lease doesn't secure payment
or performance of an obligation.
Section 4 of the act lists various instances where the PPSA does not apply, which is an exception to Section 2.
Transactions
Section 2(a) of the PPSA limits the statute to "transactions", which refers to security interests created by contract,
meaning they must be consensual.
Section 4(1)(a) and (b) further reinforce this limitation by stating that the statute does not apply to non-consensual
security interests such as liens and statutory deemed trusts.
However, certain provisions in the Act do apply to liens and statutory deemed trusts, such as sections 20(1)(a)(i)
and 31.
A "security agreement" is a contract that creates a security interest, and it is defined in section 1(1).
The parties to a security agreement are the "secured party" and "debtor", while the subject matter is "collateral".
Section 11 details the requirements for creating a security interest, and the debtor must sign a security agreement
describing the collateral for the security interest to attach. This requirement supports the limitation to consensual
security interests in Section 2(a).
BRIEF: The parties to a security agreement are the secured party and the debtor, and the subject matter is the
collateral. The statute only applies if there is a security agreement, which must be signed by the debtor and describe
the collateral for a security interest to attach. This requirement is consistent with the reference to transactions in
Section 2.
Personal Property
A. INTRODUCTION
- The OPPSA statute applies to transactions that create a security interest in personal property, which refers to all
property except for land.
- "Personal property" is defined in the statute as including chattel paper, documents of title, goods, instruments,
intangibles, money, and investment property, as well as fixtures but not building materials.
Section 4(1)(e) of the statute excludes interests in land from the scope of the statute
B. THE STATUTORY CLASSIFICATION OF PERSONAL PROPERTY
1.
Goods
6
-
-
s 1(1: Goods are defined as tangible personal property, excluding certain types such as money and documents, that
can be possessed and delivered.
o The definition excludes items like documents of title, money, and investment property.
o The definition is meant to avoid overlap with other terms in the statute and is divided into three subcategories:
▪ (1) consumer goods,
▪ (2) inventory,
▪ (3) and equipment.
o Different provisions in the statute apply to each sub-category, and there are special registration
requirements for consumer goods.
“Consumer goods" means goods that are used or acquired primarily for personal, family or household purposes."
"Inventory” means goods that are held by a person for sale or lease or that have been leased or that are to be
furnished or have been furnished under a contract of service. or that are raw materials, work in process or materials
used or consumed in a business or profession
"Equipment" means "goods that are not inventory or consumer goods."
2.
Chattel Paper
-
Chattel paper is a record that shows a monetary obligation and a security interest in specific goods, such as a
conditional sale document for a car → It can be transferred or used as collateral by the dealer.
Chattel paper financing is a method of financing large consumer items by enlisting a third-party financial institution
to purchase the dealer's chattel paper.
o However, issues may arise if the dealer has given a security interest in its inventory or personal property
to another party. OPPSA, s 28(3) resolves disputes of this nature.
Chattel paper is a form of personal property in its own right, separate from the goods it relates to. This means that
chattel paper can be transferred or used as collateral by the dealer.
Examples of chattel paper include conditional sale agreements, lease agreements, and chattel mortgages.
The customer's obligation and security interest are usually in the same document, but in chattel mortgages, there
may be separate agreements.
-
-
-
3.
Documents of Title
-
Documents of title are transferable documents that give the holder the right to claim goods from the carrier.
They are similar to negotiable instruments in that they evidence ownership of goods.
An example is an order bill of lading issued by a shipping company. These documents are considered personal
property and can be used as collateral independently of the goods they relate to.
The document of title's main distinguishing features is (1) it gives the holder the right to claim from the bailee (that
is, the carrier) the goods to which the document relates and (2) it is transferable, with a transfer of the document
giving the transferee the right to delivery of the underlying goods.
-
4.
Instruments
-
Instruments refer to negotiable documents such as cheques, bills of exchange, and promissory notes, which
establish a payment obligation. They can be in order form or bearer form and can be transferred through various
methods.
Instruments may be used as collateral, and in some cases, a security interest in cheques may arise if they are
proceeds of inventory sales or part of the debtor's original collateral.
-
5.
Investment Property
-
The term "investment property" is defined in the OPPSA to mean a security, whether certificated or uncertificated,
security entitlement, securities account, futures contract or futures account.
The provisions governing investment property are meant to be read in conjunction with the Securities Transfer Act.
-
7
-
There are two types of investment holding systems in Canada: the direct holding system and the indirect holding
system.
The OPPSA rules governing attachment, perfection, and priority of a security interest in investment property vary
depending on the nature of the investment property.
Futures contracts and futures accounts are included in the definition of investment property to facilitate the taking
of security interests in these types of collateral.
John Cameron, "Secured Transactions Under Ontario's Securities Transfer Act, 2006"
o Direct and Indirect Holding Systems
▪ Securities in Canada and the United States are held under either the direct holding system or the
indirect holding system. The direct holding system applies to the direct relationship between an
issuer and an investor, such as a private company and its shareholders. On the other hand, the
indirect holding system applies to the relationship between an issuer and an investor who holds
securities through a securities intermediary. The direct holding system is used for secured lending
transactions, while the indirect holding system has new rules for securing interests through a
"control agreement" between the securities intermediary, the secured party, and the investor.
o Direct Holding System
▪ The Direct Holding System applies to direct dealings in a security, whether represented by a
certificate or not. The definition of security in the STA focuses on an "obligation" of an issuer or
a "share, participation, or other interest" rather than a document, and issuer is broadly defined
to include individuals, partnerships, trusts, corporations, governments, and other legal or
commercial entities. To qualify as a security, the obligation or interest must be fully transferable,
part of a class or series, or divisible, and traded on securities markets or exchanges. However, the
issuer can opt-in to specify that the obligation or interest is a security. Section 12 excludes
interests in partnerships and limited liability companies unless they are traded on securities
markets or exchanges, but an issuer can opt-in to classify them as securities. Shares of private
companies qualify as securities, and excluded obligations or interests can still qualify as financial
assets for the purposes of the indirect holding system if held in a securities account.
o The indirect holding system
▪ The indirect holding system is a mechanism in which a securities intermediary holds securities
and other financial assets in a securities account for a person. This bundle of property and other
rights is known as a "security entitlement," which is at the heart of the indirect holding system.
A securities intermediary is a person that maintains securities accounts for others and is acting in
that capacity. Securities accounts are defined as accounts to which a financial asset may be
credited, and the holder of the financial asset is entitled to exercise the rights that constitute it.
Financial assets are defined as any security, any share or obligation traded in financial markets,
any property held in a securities account agreed to be treated as a financial asset, or a credit
balance in a securities account agreed to be treated as a financial asset. The "rights and property
interests" enjoyed by the person for whom the securities account is maintained are defined in
Part VI of the STA, and a securities account will exist where those rights and property interests
are appropriate for that relationship.
o Security entitlements
▪ The Security Entitlement is defined as the rights and property interest of an entitlement holder
in relation to a financial asset specified in Part VI of the STA. It is created when a securities
intermediary credits a financial asset to a person's securities account. The Security Entitlement
includes a property interest in the underlying security or other financial asset held by the
intermediary, as well as in personam rights against the intermediary.
o In Personam Rights
▪ five core duties of a securities intermediary in relation to in personam rights. The first duty is to
maintain the financial assets and ensure they correspond to the aggregate of all security
entitlements established by the securities intermediary. The second duty is to obtain payments
or distributions made by the issuer of a financial asset and to account for them to the entitlement
holder. The third duty is to exercise the rights of the entitlement holder as directed. The fourth
duty is to change a security entitlement into another available form of holding or transfer it to
another securities account of the entitlement holder with another securities intermediary. The
8
o
passage highlights the importance of in personam rights in securing transactions in personal
property.
Property Rights and Cut-off Rules
▪ A security entitlement includes property rights and cut-off rules. The basic principle is that
financial assets held by a securities intermediary are held for its customers. The entitlement
holder has a proportionate property interest in all of the financial assets held by the securities
intermediary, and the property interest may only be enforced against the securities intermediary
through the last four core in personam rights. Unsecured creditors of a securities intermediary
cannot reach the financial assets held by the intermediary. Secured creditors of a securities
intermediary cannot reach those financial assets to the extent that the intermediary needs them
to satisfy the related security entitlements against it, except for two significant exceptions
▪ The two significant exceptions are as follows: (i) A secured creditor who has a security interest in
a financial asset held by a securities intermediary and who has control over that financial asset
has priority over the claims under the related security entitlements. (ii) A creditor of a clearing
agency (e.g., CDS) has priority over the claims of entitlement holders.
6.
Intangibles
-
Intangibles are a residual category of intangible personal property that do not fall into any other category.
Examples of intangibles include accounts, intellectual property, and licenses.
Accounts are defined as a monetary obligation, whether earned by performance or not. They include accounts
receivable, credit card receivables, and bank deposits.
Accounts are different from chattel paper, which has a security interest component in addition to the monetary
obligation.
Credit card receivables are also considered accounts, as they represent a monetary obligation owed by the
customer to the card issuer.
An anti-assignment clause in a contract creating an account may prohibit the creditor from assigning the account
to a third party. Such a provision may be valid at common law, but it is unenforceable against third parties under
OPPSA s.40(4).
Intellectual property (patents, trademarks, copyrights, etc.) also falls under the category of intangibles since they
do not fit any other category of personal property. The holder of an intellectual property right may license a third
party to use the patent.
-
-
7.
Money
-
The definition of "money" is limited to forms of exchange authorized by government authorities.
Cheques and deposit accounts are not considered money, but instruments and accounts, respectively.
Coin collections and similar items are not considered money, but rather goods.
Cryptocurrencies like Bitcoin are not considered money or investment property under the OPPSA.
A secured party may claim cash in a debtor's possession as proceeds of original collateral.
8.
Original Collateral and Proceeds Collateral
-
Original collateral refers to the property that the debtor agreed to give the secured party as collateral.
Proceeds, on the other hand, refer to personal property that derives from a dealing with the original collateral.
The security interest in the original collateral continues unless the secured party authorized the dealing free of the
security interest.
Additionally, the security interest extends to the proceeds of the original collateral.
An example is given where the debtor gives the secured party a security interest in their computer, and later sells
it to a buyer. The money received from the sale, the printer received in trade, and the cheque deposited into the
bank account are all considered proceeds of the original collateral, and the security interest extends to them.
-
C.
WHAT IS "PROPERTY"?
9
-
-
IV.
-
-
The PPSA statute limits its scope to security interests in personal property, without defining what constitutes
personal property.
Transferability is the key variable that determines whether an entitlement is considered personal property, as it
allows for the creation and enforcement of a security interest.
Anti-assignment provisions may prevent an account from being used as collateral, but s 40(4) overrides most of
these provisions.
The status of a statutory or contractual license as personal property depends on the governing statute's
transferability provisions. The license may be required for a business undertaking, and its transferability affects a
lender's ability to sell the business in the event of default.
Saulnier v Royal Bank of Canada 2008 sec 58
o Facts: Saulnier holds four commercial fishing licenses in Nova Scotia. To finance his fishing business, he
signed a General Security Agreement ("GSA") with a bank, as well as a guarantee for the debts of his
company. The GSAs gave the bank a security interest in "all ... present and after acquired personal property
including ... Intangibles ... and in all proceeds and renewals thereof". In 2004, the fishing business faltered
and Saulnier made an assignment in bankruptcy. The following year, the receiver and the trustee in
bankruptcy signed an agreement to sell the four licenses and other assets to a third party for $630,000,
but Saulnier refused to sign the necessary documents. The trustee in bankruptcy and the bank brought an
application for declaratory relief. Saulnier claimed that the commercial fishing licenses did not constitute
"property" available to a trustee under the federal Bankruptcy and Insolvency Act, or to a creditor who
has registered a GSA under the Nova Scotia Personal Property Security Act.
o Issue: Do commercial fishing licenses constitute “property” under the Bankruptcy and Insolvency Act and
Personal Property Security Act?
o DECISION: APPEAL DENIED.
o REASONS: A fishing license gives the holder exclusive right to fishery and a proprietary right in both the
fish harvested and the resulting earnings which is directly analogous to profit à prendre, which is
undeniably a property right - they are current commercial realities. The license serves as precondition for
unlocking the appellant's other marine assets; since the value of the appellant's other business equipment
is conditional upon acquisition of a fishing license, it follows that the trustee was entitled to require
Saulnier to transfer his fishing licenses to a third-party purchaser
o RATIO: Having control over how something can be used is an important factor in deciding whether or not
the thing at issue is indeed private property.
IN SUBSTANCE SECURITY INTERESTS
Section 2(a) of the PPSA states that the statute applies to all transactions that create a security interest in
substance, regardless of their form.
The PPSA eliminates the need to specify the form of transaction in the security agreement. If parties do not
explicitly state their intention to create a security interest, the court will determine their intentions from the
agreement as a whole.
356447 British Columbia Ltd v Canadian Imperial Bank of Commerce 1988 Canlll 6244, 157 DLR (4th) 682 (BCCA)
o Issue: Did the trial judge err in finding that the agreement between the parties did not create a security
interest in the inventory of the borrower?
o Rule: The PPSA governs transactions that create security interests in personal property. Section 1(1) of the
PPSA defines a "security interest" as an interest in personal property that secures payment or performance
of an obligation, regardless of the form of the transaction creating the interest. Section 2(a) of the PPSA
provides that the statute applies to every transaction that in substance creates a security interest without
regard to its form.
o Analysis: The trial judge found that the agreement between the parties did not create a security interest
because it did not use language typically associated with security agreements. However, the form of the
transaction is not determinative of whether a security interest was created. The question is whether the
transaction in substance creates a security interest, as defined by the PPSA.
▪ In this case, the agreement between the parties provided that the borrower would grant a charge
to the bank over all of its present and after-acquired personal property, including inventory, as
security for its indebtedness. This is precisely the type of agreement that creates a security
interest under the PPSA.
10
▪
-
V.
Therefore, the trial judge erred in finding that the agreement did not create a security interest in
the inventory of the borrower.
o Conclusion: The appellate court should reverse the decision of the trial judge and find that the agreement
between the parties created a security interest in the inventory of the borrower.
Caisse populaire Desjardins de l'Est de Drummond v Canada, 2009 SCC 29
o Find summary
DEEMED SECURITY INTERESTS
A. TRANSFERS OF ACCOUNTS AND CHATTEL PAPER
-
The PPSA applies to the sale of an account or chattel paper even if it does not secure payment or performance of
an obligation.
This is because the PPSA requires registration of assignments of book debts, both security and non-security.
Additionally, third-party deception is a concern in both security and non-security transfers, so bringing outright
transfers under the statute gives third parties a way to find out about them.
The distribution of risk is different in security transfers and outright transfers, but with-recourse outright transfers
are functionally similar to security transfers and should be subject to the PPSA.
Finally, the distinction between outright assignments and security assignments remains relevant in the context of
default, rights, and remedies under Part V of the PPSA.
B. LEASES
-
-
-
-
PPSA’s apply to any transaction that creates a security interest, regardless of its form.
This includes conditional sale agreements, where the seller retains title to goods sold on credit as security for
payment.
o Such transactions are treated as if the seller had sold the goods and taken back a security interest.
o Under the PPSAs, ownership of the goods is presumed to pass to the buyer, and the seller holds only a
security interest.
o Conditional sale agreements typically provide that ownership of the goods passes to the buyer upon
payment of the final instalment.
Leases and sales are different in form because a lease does not promise the sale of goods, but it may include an
option to purchase the goods at the end of the term.
o If the lease payments are close to the cash price of the goods and the option price is nominal, the
transaction is similar in substance to a conditional sale, creating a financial incentive for the lessee to buy
the goods.
o This type of lease is called a "security lease" and is subject to the PPSA because it creates a security
interest.
o The PPSA applies to security leases and conditional sales on the same basis.
True lease v. security lease: Despite similar legal forms, a true lease and a security lease serve different functions.
o A true lease is a type of bailment where the lessee has possession and use of goods for a limited time and
has no further interest in the goods beyond that. Rental payments are made in exchange for possession
and use.
o In a security lease, the lessee has possession, use, and an expectation of ownership or economic benefits
of ownership. Rental payments are essentially installments of the purchase price, and the lessor retains
ownership to secure the lessee's payment obligations.
▪ In a true lease, the lessor retains ownership because the transaction is for temporary possession
and enjoyment only,
▪ while in a security lease, ownership is retained for the purpose of securing payment.
Difficulty in distinguishing between security leases and true leases due to formal similarities
Presence of option to purchase not conclusive in distinguishing between the two
OPPSA initially only applied to security leases, leading to litigation
Other provinces included leases for term over one year that do not secure payment or performance
Ontario adopted similar formulation in 2007 to reduce litigation
11
-
2007 amendments excluded true leases from enforcement provisions in Part V of PPSA
True leases subject to PPSA registration requirements to address ostensible ownership concerns
Lessors of longer-term true leases must register a financing statement to perfect their deemed security interest
Perfection provides protection against competing claims and makes lessor as well protected as at general law
PPSAs treat lessor's interest as purchase-money security interest (PMSI)
PMSI has priority over prior perfected security interest if lessor complies with timely registration and notice
requirements in ss 33(1) and (2)
C. CONSIGNMENTS
-
-
-
-
-
The OPPSA applies to consignments that secure payment or performance of an obligation, but the term
"consignment" is not clearly defined in the PPSAs. In commercial circles, the term is used loosely.
Definition: A consignment is essentially an arrangement where the owner sends goods to another for the purpose
of selling to a third party and remitting the proceeds to the owner after deducting compensation for effecting the
sale.
While a conditional sale agreement involves a retention of title element and is intended to secure payment or
performance of an obligation, a true consignment agreement does not have this intention.
In a consignment agreement, the owner (Importer) sends goods to another party (Dealer) to sell to a third party
and remit the proceeds to the owner after deducting the compensation for effecting the sale. If the Dealer cannot
sell the goods, they will return them to the Importer.
The purpose of the retention of title in a consignment agreement is to facilitate the return of the goods, not to
secure payment or performance of an obligation.
The arrangement allows the Dealer to acquire inventory without the risk of being left with surplus stock and gives
the Importer access to the Dealer's customer base and market knowledge without the risk of Dealer's insolvency.
cash International Inc v Elliot Lake and North Shore Corp for Business Development. The Court identified the
following characteristics as being relevant to the distinction:
o the merchant is the agent of the supplier.
o title to the goods remains in the supplier.
o title passes directly from the supplier to the ultimate purchaser and does not pass through the merchant.
o the merchant has no obligation to pay for the goods until they are sold to a third party.
o the supplier has the right to demand the return of the goods at any time.
o the merchant has the right to return unsold goods to the supplier.
o the merchant is required to segregate the supplier's goods from his own.
o the merchant is required to maintain separate books and records in respect of the supplier's goods.
o the merchant is required to hold sale proceeds in trust for the supplier; ...
o the goods are shown as an asset in the books and records of the supplier and are not shown as an asset in
the books and records of the merchant. ...
o the supplier has the right to stipulate a fixed price or a floor price for the goods.
importance of distinguishing between a consignment and an outright sale under the PPSA:
o If a transaction is an outright sale and not a consignment, the OPPSA does not apply, and the supplier
cannot hold a security interest.
o In the event of the dealer's bankruptcy, the supplier will be an unsecured creditor.
o The OPPSA only applies to a consignment that secures payment or performance of an obligation, and a
true consignment does not have this characteristic.
o In a true consignment, the dealer is not liable for payment until the goods are sold to a customer, and
there is no money owing and no security in place for unsold goods.
The characterization of a transaction as a consignment or sale depends on whether the consignee is obligated to
pay an amount equivalent to the price regardless of whether the goods are sold or not.
o The OPPSA applies only to consignments that secure payment or performance of an obligation.
o However, in other provinces, the statute applies to both security consignments and commercial
consignments, which are defined as consignments where the consignor reserves an interest in the goods
after delivery, and the consignee deals in goods of that description in the ordinary course of their business.
o The purpose of the commercial consignment provisions is to avoid litigation and address ostensible
ownership concerns. The provisions are limited to cases where the consignment is part of the consignor's
business and do not apply to one-off consignments.
12
VI.
EXCLUSIONS FROM THE SCOPE OF THE ACT
A. OVERVIEW
-
The OPPSA has exclusions listed in section 4, which are based on various rationales.
Exclusions (a), (b), (h), (i), and some parts of exclusion (2) are related to transactions without a security agreement.
Exclusions (c), (d), and (f), and some parts of exclusion (2) are based on being dealt with in other legislation or being
commercially unimportant.
Exclusion (e) is due to involving a security interest or assignment of rights in real property.
B. LIENS GIVEN BY STATUTE OR RULE OF LAW (SECTION 4(1)(A))
-
-
Section 2 OPPSA limits the scope of the statute to consensual security interests.
Section 4(1)(a) excludes liens given by statute or rule of law, which means that the statute does not apply to nonconsensual security interests.
Examples of liens given by law include a landlord's right of distress, repairer's lien, innkeeper's lien,
warehouseman's lien, stockbroker's lien, solicitor's lien, and a lien given to a utility for unpaid debts.
The OPPSA does not regulate priorities between non-consensual and consensual security interests, except for
two exceptions.
o (1) The first exception is in section 20(1)(a)(i), which provides that an unperfected security interest is
subordinate to a person who has a lien given under any other Act or by a rule of law.
o (2) The second exception is in section 31, which applies to a lien in respect of materials or services
furnished by a person with respect to goods in the ordinary course of business and provides that the lien
has priority over a perfected security interest unless the lien is given by an Act that provides that the lien
does not have such priority.
Commercial Credit Corp Ltd v Harry D Shields Ltd 1981 Canlll 1840, 32 OR (2d) 703 (CA)
o Dispute over priority between a chattel mortgagee and a landlord who had distrained for arrears of rent.
The court held that the landlord's right of distress for unpaid rent was a lien given by statute or rule of
law, exempted from PPSA under section 3(1)(a) (now s 4(1)(a)). As a result, the landlord did not need to
register their rights under the PPSA, and the provisions of the Act did not prevail over the landlord's right
of distress. The court also noted that the landlord had priority over the mortgagee under section 31(2) of
the Landlord and Tenant Act because the mortgagee's title was derived by way of mortgage, which did
not benefit from the limitation on the landlord's right of distress under that section.
C.
DEEMED TRUSTS (SECTION 4(1)(B))
-
Section 4(1)(b) of the OPPSA refers to deemed trusts, which are not consensual agreements, but rather a
mechanism used by governments to ensure that money collected on behalf of employees or the government is
properly remitted and separated from the remitter's other funds.
D. INSURANCE CONTRACTS AND ANNUITIES (SECTION 4(1)(C))
-
-
Section 4(1)(C) excludes security interests in insurance policies and contracts of annuity
An annuity contract is a contract where a stated sum of money is payable at regular intervals from a fund or source
in which the annuitant has no further property beyond the right to claim payment.
It was held in Re Rektor that a security interest in an annuity contract issued by a trust company is not subject to
the OPPSA and does not require perfection. However, the OPPSA still applies to a security interest in an insurance
payout as proceeds of the secured party's original collateral.
In Stelco Inc (Bankruptcy), Re, the Ontario Court of Appeal → ruled that insurance premium financing
arrangements fall under Section 4(1)(c). Insurance premium financing is a way of financing an insurance policy's
premium by taking a security interest in the premium refund entitlement. The insured pays a down payment, and
the financier pays the balance, and the insured agrees to repay the financier by instalments over the life of the
policy. If the insured defaults, the financier may cancel the policy and claim the premium refund. The Court held
13
-
-
-
that the premium financing agreement was a transfer of an interest under a policy of insurance, which is the
insured's right to terminate the policy and claim a premium refund.
Section 4(1)(c) of the OPPSA excludes security interests in insurance policies and contracts of annuity from the
scope of the statute.
o This means that security interests in these types of property cannot be perfected or enforced under the
OPPSA.
o However, the definition of "proceeds" in section 1(1) of the OPPSA includes insurance payouts, which
means that a security interest in an insurance payout may still be subject to the OPPSA as proceeds of the
secured party's original collateral.
It is important to note that the scope of the exclusion of insurance policies and annuities from the OPPSA is not
absolute. In Ste/co Inc (Bankruptcy), Re, the Ontario Court of Appeal held that insurance premium financing
arrangements fall within section 4(1)(c) of the OPPSA, as they involve a transfer of the insured's right to terminate
the policy and claim a premium refund.
In GE Canada Equipment Financing GP v ING Insurance Company of Canada, the court considered the application
of OPPSA Section 4(1)(c) in a case where an insurer paid out on a policy for stolen trucks and then claimed the
recovered trucks as salvage.
o The court held that Section 4(1)(c) only applies when the transfer gives rise to a security interest in the
disputed policy or claim, and since the insurer's transfer was in exercise of its salvage rights, it did not fit
this description.
o The court concluded that OPPSA applied, and treated OPPSA Section 9(1) as establishing a priorities rule
in favor of GE Canada. The court could have reached the same result by relying on the doctrine of
subrogation, which holds that when an insurer pays out on a claim, it is subrogated to the insured's rights
in the property insured.
E.
PAWNBROKING (SECTION 4(1)(D))
-
Section 4(1)(d) excludes pawnbroking transactions from the Act's entirety, including perfection and priority
provisions.
The 2019 legislation amended the section to reflect the repeal of the Pawnbrokers Act, but it has not yet come into
force.
The provision is unique compared to other PPSAs, which exclude pawnbroking only from the enforcement
provisions.
The Ontario drafters justified the provision by arguing that the registration provisions would be unnecessary since
possession is delivered to the pawnbroker to affect a security interest. However, there is still potential for priority
disputes between a pawnbroker and a competing secured party. In Ontario, given that the OPPSA does not apply,
the solution must be found elsewhere.
-
F.
REALTY TRANSACTIONS (SECTION 4(1)(E))
-
Section 4(1)(e) excludes the creation or transfer of interests in real property from the Act, except for interests in
fixtures and certain assignments of rights to payment under a mortgage, charge, or lease.
Allows for a security interest in a right to payment under a mortgage, charge, or lease to be subject to a special
priority rule in section 36, which requires registration in the land registry office. This provision aims to make it
easier to secure payment rights separately from the associated real property rights.
-
G. ASSIGNMENTS FOR THE GENERAL BENEFIT OF CREDITORS (SECTION 4(1)(F))
-
Section 4(1)(f) excludes assignments for the general benefit of creditors under the Assignments and Preferences
Act, which is an old type of insolvency proceeding that has been replaced by federal bankruptcy law. This exclusion
is obvious because such assignments are not like security agreements in form or substance.
H. ASSIGNMENT OF ACCOUNTS OR CHATTEL PAPER AS PART OF THE SALE OF A BUSINESS (SECTION 4(1)(G))
14
-
Section 4(1)(g) applies when a business is sold, and the buyer also takes over the seller's accounts or chattel
paper.
The law says that in this situation, the buyer doesn't need to register their ownership of these assets in the Personal
Property Security Register. This is because there is less potential for confusion or deception, unless the seller
continues to control the business in some way.
I.
ASSIGNMENT OF ACCOUNTS FOR COLLECTION (SECTION 4(1)(H))
-
Section 4(1)(h) deals with the assignment of accounts for collection.
This provision states that an assignment of accounts for the purpose of collecting them is not considered a security
interest and is therefore excluded from the Act.
In simpler terms, if someone assigns their accounts to another person just to collect the money owed, it's not
considered a security interest under this law.
-
J.
ASSIGNMENT OF AN UNEARNED RIGHT TO PAYMENT TO AN ASSIGNEE WHO IS TO PERFORM ASSIGNOR'S OBLIGATIONS UNDER THE
CONTRACT (SECTION 4(1)(I))
-
Exclusion added out of abundance of caution
Two justifications for exclusion:
o No prejudice to assignor's creditors since assignor not entitled to claim payment for future work
o Once right to complete contract is assigned, there is no longer a future account for assignor, so nothing
left to which the Act could apply.
K. RIGHTS OF BUYERS AND SELLERS UNDER THE SALE OF GOODS ACT (SECTION 4(2))
-
Unpaid sellers have rights under the Sale of Goods Act (SGA) to sell goods and receive payment.
The provisions apply when the seller still has possession of the goods or has handed them over to a carrier, but
they have not yet reached the buyer.
The seller can reclaim the goods to sell them in certain cases.
These rights are similar to a security interest in the goods.
These provisions are excluded from the PPSA because they only apply if the seller remains in possession of the
goods, indicating their interest to third parties.
CHAPTER 3: EFFECTIVENESS OF THE SECURITY AGREEMENT AND ATTACHMENT OF THE SECURITY INTEREST
Introduction
-
Enforcing a security interest against third parties, such as other secured parties, buyers, or trustees in bankruptcy,
requires certain steps to be taken.
The OPPSA defines a "security agreement" as an agreement that creates a security interest.
The OPPSA applies to any transaction that creates a security interest.
Creating a security interest is the same as attachment, and the requirements for attachment are outlined in section
11 PPSA.
OVERVIEW OF ATTACHMENT
-
Attachment is the process by which a security interest in collateral is created or arises.
The Alberta Personal Property Security Act (APPSA) provides that a security interest attaches when the creditor
provides value, the debtor has rights in the collateral or the power to transfer rights, and the security interest
becomes enforceable within the meaning of section 10, except for enforcing rights between the parties to the
15
-
-
-
-
security agreement. Section 10 of the APPSA addresses what is needed to make the security interest enforceable
against third parties. This approach is taken in all other PPSAs except Ontario.
In the OPPSA, attachment is the process by which a security interest in collateral is created and becomes
enforceable.
Attachment requires :
o (1) a security agreement,
o (2) value given by the secured party,
o (3) the debtor having rights in the collateral or power to transfer those rights to the secured party, and
(4) a written agreement signed by the debtor and containing a sufficient description of the collateral or
the collateral being in the possession of the secured party or its agent.
The OPPSA merges the concepts of attachment and enforceability against third parties, which are separated in
other PPSAs. The Alberta Personal Property Security Act, for example, requires value to be given, the debtor to
have rights in the collateral or the power to transfer those rights, and the security interest to become enforceable
within the meaning of section 10, with additional steps required to make the security interest enforceable against
third parties.
In the OPPSA, these two concepts are merged into the one attachment provision: s 11.
Section 11(2) sets out four requirements to achieve attachment:
o 1. there must be a security agreement (agreement that creates or provides for a security interest);
▪ The first requirement is necessary because the OPPSA primarily applies to consensual security
interests, which require an agreement.
o 2. the secured party must give value;
▪ The second requirement is related to the first, as a security agreement cannot exist without value
given.
o 3. the debtor must have rights in the collateral (or the power to transfer rights in the collateral to a
secured party); and
▪ The third requirement ensures that the debtor has something to give the secured party in
exchange for the security interest and is expressed through the Latin maxim nemo dat quod non
habet ("you cannot give what you do not have").
o 4. (a) if the security agreement is in writing, it must be signed by the debtor and contain a sufficient
description of the collateral; or (b) if the security agreement is not in writing, the collateral must be in
the possession of the secured party or its agent.
▪ The fourth requirement serves as a Statute of Frauds-type measure to provide sufficient evidence
of the existence of a security agreement.
o Requirements 1-3 are referred to as the "creation requirements," while requirement 4 is referred to as
the "evidentiary requirement."
Section 11(1) of the OPPSA states that a security interest is not enforceable against a third party unless it has
attached.
o However, this is misleading because non-compliance with the creation requirements means that the
secured party does not have a security interest at all, and therefore has no enforceable rights even against
the debtor.
o If the security interest has failed to attach due to non-compliance with the evidentiary requirement, it is
unenforceable against third parties but remains effective between the parties themselves.
o Additionally, attachment alone only gives limited enforceability against third parties.
o For the security interest to be fully enforceable against third parties, the OPPSA requires both attachment
and perfection.
SECTION 9(1) AND EFFECTIVENESS OF SECURITY AGREEMENT
-
OPPSA. s 9(1) Except as otherwise provided by this or any other Act, a security agreement is effective according
to its terms between the parties to it and against third parties.
The term "effective" means that the agreement has been created in compliance with the requirements to form a
contract, and the terms are enforceable against the parties, subject to certain qualifications.
The terms "enforceability" and "validity" in OPPSA primarily indicate the presence of a security interest that can
be enforced against third parties.
16
-
-
The effectiveness of a security agreement turns on various matters such as consideration and capacity of the parties
but is more required in the case of a security agreement than for contracts.
OPPSA s 9(1) reinforces the principle of freedom of contract for security agreements, but its interpretation has
raised some difficult issues.
o The contractual freedom is limited by contrary provisions in "this or any other Act," with restrictions
appearing throughout the Act, including requirements for attachment, perfection, and enforcement of
security interests.
o Limitations specific to consumer transactions or goods are also present in OPPSA.
o Catzman et al claim that s 9(1) is superfluous, as s 73 gives paramountcy to OPPSA in the event of a conflict
with another Act.
▪ However, s 9(1) applies to the paramountcy of laws concerning the effectiveness of security
agreements, while s 73 applies to all other restrictions.
o Common law restrictions on the validity of security agreements continue to apply, except where they are
inconsistent with the express provisions of the OPPSA.
Section 9(1) also refers to the effectiveness of security agreements against third parties.
o However, the opening words of the section state that this is subject to other provisions in the Act.
o Sections 11(a) and 20 of the OPPSA state that more than just having an effective security agreement is
needed for it to impact third parties.
o The phrase "effective against third parties" refers to the proprietary effect of the security agreement, not
the contractual effect on third parties.
o This means that the security interest is presumptively valid against third parties, but this is subject to other
provisions in the Act governing attachment, perfection, and priorities, as well as other laws that may affect
the validity of the security interest against competing claims.
CREATION REQUIREMENTS
-
creation requirements for attachment: (1) there must be a security agreement, (2) the secured party must give
value, and (3) the debtor must have rights in the collateral.
A. NEED FOR A SECURITY AGREEMENT
- This requirement is implied by section 11(2)(a) OPPSA.
- A security agreement is a consensual agreement between a creditor and a debtor that creates or provides for a
security interest in personal property.
- This agreement is necessary to establish a consensual security interest, as opposed to a security interest that arises
by operation of law or a lien.
- Without a security agreement, there cannot be a consensual security interest.
- This requirement for a security agreement is supported by the definition of a security agreement in the OPPSA,
which defines it as an agreement that creates or provides for a security interest. Therefore, to attach a security
interest to personal property in Ontario, a security agreement between the creditor and debtor is necessary.
- Atlas Industries v Federal Business Development Bank: SKTN Farm and Truck Equipment Ltd
o Atlas Industries had delivered equipment to the debtor on unsecured credit terms. However, the debtor's
bank decided to realize on its security and Atlas attempted to create a security interest by delivering four
invoices to the bank's receiver, stating that title to the property was retained by the vendor until payment
in full and the vendor had the right of repossession on default. Atlas argued that it had a security interest
in the equipment, but the court rejected the argument.
o The court held that a valid security agreement requires the debtor's agreement to give a security interest
in the property. The unilateral delivery of invoices could not create a security agreement without the
debtor's agreement. In this case, the debtor never agreed to give Atlas a security interest, so Atlas had no
valid security interest in the equipment.
o This case illustrates the importance of having a valid security agreement to create a security interest in
personal property. A security agreement requires the debtor's agreement to give a security interest and
cannot be unilaterally imposed by the creditor after the fact.
B. VALUE
17
-
-
-
The second requirement for attachment is that the secured party must give "value" to the debtor.
This requirement is based on the common law concept of consideration, but is modified by the OPPSA.
Under the OPPSA, "value" is defined as "any consideration sufficient to support a simple contract and includes
an antecedent debt or liability."
This means that value is the PPSA proxy for consideration, and the OPPSA expands the common law concept of
consideration to include past consideration. This is different from the common law, where past consideration is
generally not considered valid consideration.
The question of who must receive the value is also important.
o As a matter of general contract law, there must be consideration on both sides.
o In the context of a security interest, the value referred to in section 11(2) of the OPPSA is the consideration
provided by the secured party to the debtor in return for the security interest.
o The consideration moving from the debtor to the secured party is typically the security interest,
although there may be other consideration involved, such as the debtor's promise to repay the secured
obligation.
BRIEF: the second requirement for attachment under the OPPSA is that the secured party must give "value" to the
debtor, which is the consideration provided in return for the security interest. Value is defined broadly to include
past consideration, and consideration must be present on both sides of the transaction.
C.
RIGHTS IN THE COLLATERAL
1.
-
Introduction
The third requirement for attachment of a security interest is that the debtor must have some sort of rights in
the collateral, or at least the power to transfer such rights.
This is because without such rights, the debtor has nothing to give to the secured party.
The question then arises as to whether the debtor must own the collateral outright or not.
According to the Supreme Court of Canada's decision in i Trade Finance Inc v Bank of Montreal, it is not necessary
for the debtor to have full ownership of the collateral, but a lesser interest may suffice.
i Trade Finance Inc v Bank of Montreal 2011 scc 26
o Facts:
▪ i Trade is in the loan business
▪ A convinces i Trade to loan $11k to A's company, Webworx, by lying about Webworx service
contracts
▪ A and co then take a bunch of money out of Webworx (via salary, loans, etc), use it to buy shares,
then use shares as collateral to get a large credit limit from BMO
▪ i Trade wants their money back
o Decision: BMO's security interest is good, i Trade is SOL
▪ A and co's rights in the collateral were voidable, having been fraudulently obtained, but not yet
void, so they counted
▪ Also BMO is bona fide purchaser for value without notice
o If D obtained collateral by fraud, D has voidable rights in collateral and thus SI can still attach
994814 Ontario Inc v RSL Canada Ltd and En-Plas Inc
o Facts:
▪ En-Plas delivered machines to RSL but retained title
▪ Two of the machines were not usable in Ontario yet and RSL had not been invoiced for them
▪ Appellant was secured creditor and GSA gave them security over inventory and equipment
o Issues: Are the machines considered part of the inventory and equipment of the security interest?
o Held: No – RSL had not yet acquired an interest in the machines
o Reasons:
▪ A security interest in equipment cannot attach until a transaction occurs which gives the debtor
rights in the equipment.
▪ RSL and En-Plaas had not recorded the transaction in their accounting records so as to create a
debtor-creditor relation. The obligation was still pending to RSL and RSL was still in a position to
reject the goods. En-Plas was not in a position to demand payment.
-
-
18
▪
o
RSL acquired nothing until the machines were Electrical Safety Approved and En-Plas had made
them operational. Since this never occurred, RSL never became a debtor and never acquired any
rights in three machines, a prerequisite for the creation of a security interest.
RATIO: While the PPSA applies to conditional sales agreements, the security agreement needs to have all
condition precedents fulfilled for title to pass and for the PPSA to apply to the security interest. Delivery
alone (naked possession) is not sufficient.
2.
After-Acquired Property
-
Section 12 of the OPPSA allows for a security interest to cover property that the debtor may acquire in the future,
which is known as after-acquired property, with certain exceptions for crops and consumer goods.
o To take a security interest in after-acquired property, all that is required is for the security agreement
to include a provision that specifies that the collateral includes after-acquired property.
o For example, the provision could state that the collateral includes "Debtor's present and after-acquired
factory equipment," "Debtor's present and after-acquired accounts receivable," or "all personal property
acquired by the debtor after the date hereof."
Section 12(2)(a) deals with crops
o based on Section 9-204(4)(a) of the Uniform Commercial Code (UCC), specifically the 1962 version.
o This provision was inspired by the limitations on after-acquired property clauses in crop mortgages that
were common in pre-Code US state law. However, there have been no significant issues with afteracquired property clauses in Canadian crop mortgages, although the reason for this is not entirely clear.
One possibility is the prominent role of Canadian banks in providing financing for current crops under
Section 427 of the Bank Act.
Section 12(2)(b) deals with consumer goods
o also based on Section 9-204(4)(b) of the Uniform Commercial Code (UCC), specifically the 1962 version.
o This provision was originally part of a plan to include consumer finance in Article 9 of the UCC, but was
later abandoned.
o It is intended to prevent lenders from including "add-on" clauses in consumer security agreements.
o However, there is debate over whether it is better to prohibit security interests altogether on household
goods, rather than restricting after-acquired property clauses.
o It is also unclear whether a distinction should be drawn between purchase-money security interests in
consumer goods and other security interests.
o Section 12(2)(b) only applies to consumer goods, so consumers are free to pledge their future rights under
an RRSP, trust, or will. However, wage assignments are generally prohibited under separate legislation in
most provinces, except for assignments to a credit union or similar cooperative.
There are also unsettled issues regarding how security in after-acquired property operates when a debtor
amalgamates with another corporation to form a successor corporation.
-
-
-
3.
Postponement of Attachment
-
Under PPSA Section 11(3), parties to a security agreement have the option to postpone the time for attachment.
A similar provision applies under Section 11.1(3) for investment property.
However, in practice, parties rarely use this feature, and secured parties usually want to negate any intention to
postpone.
It is common to include a provision expressing the parties' intention not to postpone attachment in a security
agreement.
-
4.
The Floating Charge
-
S 11(2) OPPSA: a security interest can attach to a debtor's property, including a floating charge, when certain
requirements are met.
A floating charge is a mechanism developed by English courts to secure circulating assets, like inventory and
accounts receivable.
-
19
-
-
-
However, the OPPSA eliminates the need for floating charges.
Instead, parties can simply specify in the security agreement that the debtor gives the secured party a security
interest in the debtor's present and after-acquired inventory, accounts, or all personal property. It must be made
clear that the debtor is free to deal with the collateral in the ordinary course of its business unless they default
on their obligations.
courts will typically allow debtors to sell inventory collateral in the ordinary course of business, unless the security
agreement explicitly prohibits it.
OPPSA, s 25(1) states that the security interest in collateral continues unless the secured party authorizes the
disposal of the collateral free of the security interest.
The security interest also extends to the proceeds of the collateral.
o If a debtor sells inventory to a customer in the ordinary course of business, the customer takes the item
free of the security interest, but the secured party acquires a security interest in the customer's account
as proceeds of the inventory. The security interest in the account attaches at the point of customer's
purchase, as stated in OPPSA, s 11(2).
Note: a secured party (SP) obtains a fixed security interest in a debtor's property, not a floating interest. When the
debtor sells inventory to a customer, the SP's security interest in the inventory item is replaced with a security
interest in the customer's account. If the debtor collects on the account and uses the funds to buy new inventory,
the SP loses its security interest in the account and obtains a security interest in the new inventory item. This
process is governed by s 11(2) of the OPPSA. Parties can use the OPPSA to create security interests in circulating
assets without using floating charge language, although they can still use such documentation if they wish.
SECURITY AGREEMENTS
A. OVERVIEW
-
-
-
a security agreement creates or provides for a security interest in personal property that secures payment or
performance of an obligation.
There are two types of security interest, namely conventional and deemed security interests.
A conventional security interest is an interest in personal property that secures payment or performance of an
obligation. An agreement creates a conventional security interest by describing the collateral and granting the
secured party an interest in the collateral. The agreement must be in writing and signed by the debtor to be
enforceable against third parties.
A conventional security interest must include:
o (1) words evidencing the intention to create or provide for the interest,
o (2) identification of the personal property to which the interest attaches, and
o (3) identification of the obligation that is secured by the interest.
Security agreements can take various forms, but at a minimum, they must include a clause that accomplishes the
three steps described above, called a charging or granting clause.
Security agreements can be in writing or verbal, but verbal security agreements are rare and can be challenging to
enforce due to evidentiary issues and enforceability against third parties.
B. THE CHARGING CLAUSE
-
-
In order for a security agreement to be valid, it must include a charging clause that evidences the intention to
create the interest, identifies the personal property to which the interest applies, and identifies the obligation
that is secured by the interest.
The specific wording of the charging clause is not as important as the intention of the parties as found in the words
used.
The language used in pre-PPSA forms of security agreements, such as chattel mortgages and conditional sales, is
still sufficient to create a security interest. Title retention can also be used as a security device.
EX. As security for the repayment by Debtor to Secured Party of the $100 loaned on the date hereof by Secured
Party to Debtor, Debtor grants Secured Party a security interest in the equipment described in Schedule A.
o This clause evidences the intention to create the interest through the phrase "Debtor grants secured Party
a security interest."
20
o
o
It identifies the personal property to which the interest applies in the phrase "the equipment described
in Schedule A."
It also identifies the obligation that is secured by the interest in the phrase "As security for the repayment
by Debtor to Secured Party of the $100 loaned on the date hereof by Secured Party to Debtor."
C.
FUTURE ADVANCES AND PAST ADVANCES
-
A security interest can secure both present and future obligations, and the OPPSA expressly allows a security
agreement to secure future advances.
Additionally, the definition of "value" in the OPPSA includes "an antecedent debt or liability," which allows for
securing past advances.
However, providing security for past advances may raise issues outside of the OPPSA, such as potential challenges
under the BIA and provincial preferential assignments and fraudulent conveyances legislation.
the issue of whether an unsecured creditor can become a secured creditor by taking an assignment of someone
else's security interest is addressed in the Eagle Eye Investments case, which highlights the freedom of contract
philosophy that informs the OPPSA.
Eagle Eye Investments Inc. v. CPC Networks [2012] SKCA
o an unsecured creditor taking an assignment of a perfected security position cannot thereby secure its
own previously unsecured debt; it can only get the debt due and owing to the assignor that was
previously secured.
o Facts: Eagle Eye, whose president is also the sole director and beneficial owner, alleged that it loaned
money to CPC Networks (CPCN). CPCN had already entered into a loan agreement with Business
Development Bank of Canada (BDC) and received a general security agreement (GSA), which made BDC a
secured creditor of CPCN. Eagle Eye commenced an action to recover the loan, leading to the removal of
A as an officer of CPCN, and B, another initial shareholder and director, resigning and incorporating a new
company (B Company) that took an assignment of the BDC Loan and GSA. An oppression remedy was then
filed against CPCN but was dismissed. Later, B Company assigned the BDC Loan and GSA to Eagle Eye,
which immediately demanded payment and requested significant financial and other information. CPCN
asked for a payout statement to pay out the BDC Loan, which included the alleged loan by Eagle Eye, costs,
and significant interest. CPCN filed an application before the Court to determine the amount owing on the
BDC Loan and to discharge the GSA.
o Issue: The issue in the case was whether an unsecured creditor, Eagle Eye, can take an assignment of a
perfected security position, the general security agreement (GSA), and thereby secure its unsecured debt.
Eagle Eye argued that it had stepped into the shoes of BDC and had all the rights and remedies that BDC
had under the GSA, which covered all liabilities owed by CPCN to BDC (now Eagle Eye) whether incurred
prior to or after the signing of the GSA. CPCN countered with the obligation of Eagle Eye to act in good
faith, the duty of fairness under the Saskatchewan Personal Property Security Act, and the restriction on
the ability of an assignee of a secured debt to transform pre-existing, unrelated and unsecured debt into
secured debt.
o Analysis: The court determined that the loan agreement took precedence over the general security
agreement, as it specifically referred to a loan of $150,000 plus interest, and it would be contrary to the
loan agreement to allow Eagle Eye to add its previously unsecured shareholders' loans to the amount
owing under the original loan agreement. The court also noted that there was nothing in the (PPSA)
specifically dealing with the ability of an assignee of a security agreement to enforce not only the debt
secured by the general security agreement but also other debts owed by the debtor to the assignee. The
court reviewed the case law and noted that courts have been unwilling to permit an assignee to claim the
benefit of an all obligations clause in respect of obligations incurred by the assignee before the
assignment.
-
-
EVIDENTIARY (STATUTE OF FRAUDS) REQUIREMENTS
A. INTRODUCTION
-
The evidentiary requirements are in OPPSA, ss 11(2)(a)-(e).
21
-
-
-
-
In summary, the requirements are that, unless para (b) (c) (d) or (e) applies and the secured party takes possession
or delivery or has control of the collateral, the security agreement must be in writing and signed by the debtor
and must contain a description of the collateral sufficient to identify it.
Failure to comply means that the security interest is unenforceable against third parties.
According to the Electronic Commerce Act, 2000, an electronic agreement can satisfy the writing requirement for
a security agreement as long as it is accessible and usable for subsequent reference. An electronic signature can
also satisfy the legal requirement for a signature.
The policy behind the OPPSA evidentiary requirements is to prevent parties from falsely asserting the existence of
a security agreement. The writing requirement serves to corroborate the parties' assertion of a security agreement,
with possession, delivery, or control serving as an alternative form of corroboration.
Even if a financing statement is registered, this is not conclusive proof of a security agreement's existence, as
registration only serves as a warning to third parties.
There is no need for a written agreement if possession, delivery, or control apply.
The function of the writing requirements is to corroborate the parties assertion that there is a security agreement
B. WHAT IS A SUFFICIENT DESCRIPTION?
-
-
-
-
-
OPPSA Section 11: The document must contain a description of the collateral sufficient to enable it to be
identified.
A non-specific description such as "truck" may not be sufficient, and if the parties have not agreed on which
specific truck is being offered as collateral, the security agreement will fail for uncertainty of subject matter.
There is limited authority on the sufficiency of non-specific descriptions.
GE Capital Canada Acquisitions Inc v Dix Performance
o The document containing the collateral description must enable the collateral to be identified. In the GE
Capital Canada Acquisitions Inc v Dix Performance (Trustee of) case, the description "shelving" was argued
to be insufficient under OPPSA, s 11 because it did not provide enough details for a third party to identify
the collateral. The argument implied that a specific identification of the collateral should be possible by
looking only at the security agreement. The Court rejected this argument, stating that OPPSA's statutory
procedure for follow-up inquiries to the secured party signaled a low threshold for identifying collateral.
The Court also suggested that simplicity and certainty should be the objectives of interpreting commercial
legislation, and a liberal approach should be taken when assessing the adequacy of a collateral
description to prevent technical arguments from defeating the secured party's interest.
In Clark Equipment of Canada Ltd v Bank of Montreal, the security agreement used a broad description of "all
products" which was defined to include all new and used equipment and machinery of the same general type. The
Court found this description adequate despite further inquiries being necessary to identify the specific goods.
In New World Screen Printing Ltd v Xerox Canada Ltd, the collateral was described as "all present and future office
equipment and software supplied or financed" by the secured party. The Court also found this description adequate
The case of Business Development Bank of Canada v D'Eon Fisheries Limited provides a useful survey of cases
related to collateral descriptions in financing statements under the Nova Scotia Personal Property Security Act
(NSPPSA).
o The NSPPSA requires collateral to be described "by item or kind" in both security agreements and
financing statements, which is similar to the wording in OPPSA, s 11(2).
o In D'Eon, the Court of Appeal held that a collateral description that referred to a fishing license was
sufficient to cover a quota as well.
o The court noted the need to strike a balance between requiring sufficient detail in collateral descriptions
and avoiding technicalities that could impede credit availability. The case provides guidance on how
Ontario courts might interpret OPPSA, s 11(2).
OPPSA, s 11(2)(a)(ii) requires a more specific collateral description for security entitlements, securities accounts,
or futures accounts.
o The description may use these terms or describe the investment property or underlying financial
asset/futures contract.
o Other provinces' PPSAs provide more detailed descriptions for greater certainty than OPPSA.
Under OPPSA, a collateral description that only refers to "consumer goods" or "equipment" without further detail
is inadequate (PPSA, s 10(3)).
Similarly, describing collateral as "inventory" is only adequate while it's held by the debtor as such (PPSA, s 10(4)).
22
C.
AGREEMENTS THAT ARE PARTLY ORAL AND PARTLY IN WRITING
-
OPPSA section 11(2)(a), a security agreement may be partly oral and partly in writing.
In the case of MacEwen Agricentre, the court found that a security agreement was created between a farmer and
a supplier primarily through oral communication, but also partially through written documents. The court examined
whether the written documents were sufficient to comply with OPPSA s 11(2)(a) evidentiary requirements, which
require identification of the parties and confirmation of the security interest.
o The court found that while the written documents provided a clear description of the collateral, they did
not explicitly confirm the existence of a security interest.
o As a result, the security interest did not attach as required under OPPSA s 11(1) to be enforceable against
third parties.
D. ELECTRONIC CHATTEL PAPER
-
Section 11(2)(e) applies when the collateral is electronic chattel paper, and the evidentiary requirement is met if
the secured party gains control under Section 1(3).
Control in this case is distinct from control in the context of investment property and is described in Chapter 4,
Section II in relation to perfection.
INVESTMENT PROPERTY
-
-
Attachment in Direct Holding System
o Under the direct holding system, a security interest attaches to collateral only when three conditions are
met.
▪ Firstly, value must be given.
▪ Secondly, the debtor must have rights in the collateral or the power to transfer rights in the
collateral to a secured party.
▪ Thirdly, the debtor must have signed a security agreement containing a description of the
collateral sufficient to enable it to be identified, or the certificated security has been delivered to
the secured party in accordance with section 68 of the STA, or the secured party has obtained
"control" under the debtor's security agreement in the case of investment property which
includes a security.
o This applies unless there is a statutorily created security interest of very limited application. The PPSA
defines "value" as "any consideration sufficient to support a simple contract and includes an antecedent
debt or liability.".
o Section 68(1) of the STA provides for delivery of a certificated security to a "purchaser" by the secured
party acquiring possession of the security certificate, or by another person acquiring possession of the
security certificate on behalf of the secured party.
▪ There is also a provision allowing for a securities intermediary to acquire possession of a security
certificate on behalf of a secured party, but only under certain conditions. Unlike other types of
collateral, there is no rule precluding perfection through an agent of the debtor.
o Section 11.1(2) of the PPSA creates a security interest in a certificated security that is delivered for
payment between persons in the business of dealing in securities, in order to secure the obligation to
make payment.
▪ The rule applies when the security is transferred in the ordinary course of business, with
necessary endorsements or assignments, and under an agreement that requires delivery against
payment.
▪ This rule usually does not affect secured lending transactions where the secured party seeks to
obtain "control" of the securities.
Attachment in Indirect Holding System
o When a security interest is attached to a securities account, it also applies to the security entitlements
held within that account.
o The PPSA acknowledges the broker's lien, and Section 11.1(1) creates a security interest in favor of a
securities intermediary, which applies to a customer's security entitlement if they purchase a financial
23
o
asset through the intermediary and are required to pay the purchase price to the intermediary. The
security interest secures the customer's obligation to pay for the financial asset.
As with the direct holding system, the rules for attachment of a security interest in proceeds of any
collateral {including investment property) remain unchanged.
CHAPTER FOUR: PERFECTION
Introduction
-
attachment is the first of two steps needed to make a security interest enforceable against third parties.
second of the two steps: perfection.
Perfection provides priority rights as against most third parties.
A perfected security interest will defeat an unperfected security interest and certain other third parties, but in a
contest between two perfected security interests in the same collateral, the priority of one over the other will turn
on the OPPSA priority rules
The concept of perfection in relation to security interests in personal property refers to the publication of the
security interest.
Possession is a method of publication, and the pledge is the oldest form of security device that is built on this idea.
Twyne's Case established that if the debtor transfers ownership but not possession, it creates a presumption of
intention to defeat creditors, which prevents non-possessory security interests. Registration was developed to
reconcile the need to facilitate non-possessory secured lending with the need to protect third parties from being
misled. The publicity concern that underpins Twyne’s Case applies to all forms of collateral, including intangibles,
and Dearle v Hall was an early attempt to facilitate dealings in intangibles by providing a rule for priority between
competing assignees of the same chose in action. Legislation providing for the registration of assignments of book
debts was enacted in England in the 19th century to supplement the rule in Dearle v Hall, and similar legislation
was enacted in Canada in the early part of the 20th century.
Possession is one method of publication and the pledge is the oldest form of security device, based on the idea
that the transfer of possession to the pledgee gives sufficient notice of the pledge to the pledgor's creditors.
However, in Twyne's Case, it was held that a transfer of ownership without possession creates a presumption of
intention to defeat creditors, making non-possessory security interests difficult. This led to the development of
registration as a means of reconciling the need for non-possessory secured lending with the need to protect third
parties from being misled. The rule in Dearle v Hall facilitated dealings in intangibles, but only worked for the
assignment of an existing debt. Legislation providing for the registration of assignments of book debts was enacted
in England and Canada to supplement the rule, and the PPSAs are the modern-day successors of these earlier laws.
-
-
How to perfect
T HE F O UR W AY S
OF
P E RF E CTI NG
Perfection (defined in OPPSA, s. 19) relates to the publication of a security interest (note perfection is both the
steps required (see OPPSA, ss. 21-24, 30 & 45) and the end result (OPPSA, ss. 20, 28 & 33-35)). The logic
of Twyne’s Casediscussed (see (1601), 3 Co. Rep. 806, 75 E.R. 809 (S.C.)) [qua goods] and Dearle v. Hall (1823) 3
Russ. 1 [qua intangibles (notice of assignment to debtor)].
It can be accomplished in several ways:
1.
2.
3.
4.
Through taking possession (OPPSA, s 22);
Registration (OPPSA s. 23);
Control (OPPSA, s. 22.1); or
Temporary perfection (OPPSA, s. 24; see also ss. 5(2), 6(2), 7(2), 20(3), 25(4), 48(2), and 48(3)).
Where more than one method is permitted, the secured party is free to switch from one method to the other
without interrupting the continuity of perfection (OPPSA, s. 21).
24
-
-
-
-
-
s 19 OPPSA, “a security interest is perfected when (a) it has attached; and (b) all steps required for perfection
under any provision of this Act have been completed.”
o The provision has two meanings:
▪ the procedural sense, which refers to the steps required to give public notice of an existing or
future security interest, and
▪ the status sense, which describes the status of a security interest that has attached and meets
the procedural requirements.
The OPPSA recognizes five types of perfection: (1) perfection by possession, (2) perfection by delivery, (3)
perfection by registration, (4) perfection by control, and (5) temporary perfection.
Each method of perfection involves different steps.
Perfection by registration is available for any type of collateral. The other methods of perfection are only available
for particular types of collateral.
Not all forms of perfection are equal— some may provide better rights in certain circumstances.
(1) Perfection by possession, s 22(1).
o governed by OPPSA, s 22(1).
o only tangible collateral can be perfected by possession.
o The most obvious example of tangible collateral is “goods”, but other examples include documents such
as tangible chattel paper (but not electronic chattel paper), instruments (including bills, notes, and letters
of credit), negotiable documents of title, and money.
o Under s 28, a “purchaser” who takes possession of tangible chattel paper (s 28(3)), or a purchaser who
takes possession of instruments or negotiable documents of title (s 28(4)), will have better rights to the
asset than any other secured party so long as they satisfy certain other tests as set out in those sections.
o Section 1(1) defines “purchaser” as including both a secured party and a buyer.
(2) Perfection by delivery: ss 22(2) and (3)
o applies only to certificated securities, although for the most part, “delivery” is synonymous with
“possession.”
o Delivery for this purpose must be delivery under s 68 of the STA.
o Sections 68(1)(a) and (b) of the STA provide that:
▪ (1) Delivery of a certificated security to a purchaser occurs when,
• (a) the purchaser acquires possession of the security certificate, or
• (b) another person, other than a securities intermediary, either
o (i) acquires possession of the security certificate on behalf of the purchaser, or
o (ii) having previously acquired possession of the security certificate,
acknowledges that the person holds the security certificate for the purchaser.
o S 22(2) states that a secured party may perfect a security interest in a certificated security by taking
delivery of the certificated security under s 68 of the Securities Transfer Act
o In Kallis v. First Capital Management Ltd. [2011] ABQB, the court held that the debtor, by setting the
certificates aside and holding them for the secured party (i.e. not actually delivering them to the SP),
sufficiently perfected the secured party’s interest
(3) Perfection by registration
o OPPSA, s 23 provides that “Registration perfects a security interest in any type of collateral.”
(4) Perfection by control.
o A secured party can perfect by control for both investment property and electronic chattel paper, but the
control concepts for each are different.
o Control for investment property: the secured party has the ability to transfer the investment property
without further action by the debtor.
o Control for electronic chattel paper: control is defined in s 1(3), and in effect means that a custodian
maintains the electronic record in a manner that identifies the holder and restricts transfers except in
compliance with certain procedures as outlined in the provision
o Advantage of perfection by control: trumps other forms of perfection, including by registration.
(5) Temporary perfection
o A security interest may be perfected on a temporary basis, even though:
▪ (1) in some cases, no financing statement has been registered, and the secured party is not in
possession of the collateral; or
25
▪
-
(2) in other cases, there has been a change in circumstances that within a specified period will
result in the security interest becoming unperfected.
o EX. OPPSA, s 24 applies where a secured party holds a possessory security interest in an instrument, a
certificated security, a negotiable document of title or goods and releases the collateral to the debtor so
that the debtor can deal with it in any of the ways the section specifies. The section provides in effect that,
even though the secured party has given up possession, the security interest remains temporarily
perfected for a period of ten days after the debtor obtains possession.
Where more than one method of perfection is permissible, the secured party is free to switch from one method to
the other without interrupting the continuity of perfection: see OPPSA, s 21.
Possession, Repossession, and Constructive Possession
A. WHAT IS POSSESSION?
-
-
-
S.22 of the OPPSA states: “22 (1) Possession or repossession of the collateral by the secured party, or on the secured
party’s behalf by a person other than the debtor or the debtor’s agent, perfects a security interest in,
o (a) tangible chattel paper;
o (b) goods;
o (c) instruments;
o (d) negotiable documents of title; and
o (e) money,
but ONLY while it is actually held as collateral.
o Possession must be for the purpose of holding the collateral as security for the obligation in question.
o It doesn’t work for intangibles then, only chose in possession.
o When does it stop being perfected? When you give up possession or hold it in a different capacity.
By delivery (2) A secured party may perfect a security interest in a certificated security by taking delivery of the
certificated security under section 68 of the Securities Transfer Act, 2006. (Bonds and shares)
In other words, perfection can be explained in the following way. If A has possession of a good, you need (1)
physical control and (2) the intention.
Sperry Inc. v. Canadian Imperial Bank of Commerce et al., 1985 CanLII 1934 (ON CA)
o Issue: Can the fact that CIBC appointed a receiver be the equivalent of possession? Did the receiver take
possession of the goods?
o Rule: In order to perfect a security interest, a creditor must have possession or control of the collateral.
o Analysis: CIBC had the ability to take security over the inventory, but they did not perfect their security
interest. When CIBC appointed a receiver, it did not result in CIBC taking possession or control of the
collateral. In their contract, CIBC stated that the receiver was an agent of the debtor, not an agent of CIBC.
Therefore, CIBC did not take possession of the collateral and did not perfect their security interest.
o Conclusion: CIBC did not have a perfected security interest in the collateral, and Sperry has a better claim
to the goods to satisfy its outstanding debt.
B. REPOSSESSION
-
C.
"Perfection by possession" is recognized in the PPSAs, but Ontario's OPPSA also includes repossession as a means
of perfecting a security interest in collateral.
Other provinces, except Manitoba, have the reverse rule, where possession does not perfect a security interest if
it's a result of seizure or repossession.
Section 11(2)(b) of the OPPSA waives the requirement for a written security agreement if the secured party is in
possession of the collateral, and it's implied that repossession would also satisfy this requirement.
Evidentiary requirements (writing or possession) are a condition of attachment under s 11(2), and attachment is a
condition of perfection under s 19. Allowing perfection by repossession but disallowing repossession for s 11(2)
wouldn't make sense
CONSTRUCTIVE POSSESSION
26
-
-
Constructive possession is a legal fiction that deems a party who has control of property to be in possession of
it, even though the property is in the actual possession of someone else
Section 62(1)(b) of the OPPSA provides an example of constructive possession, which applies when the collateral
is equipment, the debtor is in default, and the secured party wants to repossess the collateral but cannot move it.
The secured party may "render the equipment unusable" without removing it from the premises, and it "shall
thereupon be deemed to have taken possession of [the] equipment."
o while the debtor remains in actual possession, the secured party has constructive possession of the
equipment.
However, the question of whether constructive possession constitutes "possession" of the collateral within the
meaning of Section 22 and can perfect a security interest was considered in Re Darzinskas.
o Court held that the secured party had constructive possession of the heavy manufacturing equipment by
taking steps to enforce its security interest and alerting the debtor and the debtor's landlords of its
intentions, even though the equipment was not physically removed from the premises.
o Concluded that constructive possession does not perfect a security interest: s 22 of the OPPSA requires
actual physical possession to be taken and the goods held by the secured party to perfect his security
interest in order to give notice to all persons dealing therewith.
o The decision is consistent with the policy underlying s 22 of the OPPSA, which is to provide public notice
of a security interest.
o In Re Darzinskas, the equipment remained at all times in the debtor’s actual possession, and there was
nothing to alert third parties to the existence of the secured party’s claim.
Perfection of a Security Interest in Investment Property
-
John Cameron, “Secured Transactions Under Ontario’s Securities Transfer Act, 2006”
2.2 REGISTRATION (S. 23 OPPSA)
S. 23 OPPSA states that: “23 Registration perfects a security interest in ANY type of collateral.”
Thus, we use a database to place information on our security interest. We register a security statement as well as the details
on the asset, etc. thus letting the world know about it.
What if you register and you are sloppy, mistaken, have error, etc.? This is a much more important issue than people not
registering at all. The one benefit of registration is that you can register Any type of collateral. It works with intangibles
AND chose in possession.
Important: Since registration enables us to register any personal property, it gives us an advantage over possession (doesn’t
work on intangibles).
2.3 CONTROL (S. 22.1 OPPSA)
S. 22.1 OPPSA helps us deal with securities and other financial instruments. These are assets with much wealth and
therefore we want to create security within them.
“22.1 (1) A security interest in investment property may be perfected by control of the collateral under subsection
1 (2)” → ONLY in investment property!
(2) A security interest in investment property is perfected by control under subsection 1 (2) from the time the
secured party obtains control and remains perfected by control until,
(a) the secured party does not have control; AND
(b) one of the following occurs:
(i) if the collateral is a certificated security, the debtor has or acquires possession of the security
certificate,
Certified security is like a bare bond or bare share. You need the certificate.
(ii) if the collateral is an uncertificated security, the issuer has registered or registers the debtor
as the registered owner, OR
27
You switch from being a debtor to being an owner. You register in the electronic
warehouses of shares.
(iii) if the collateral is a security entitlement, the debtor is or becomes the entitlement holder.
You become the equivalent of an owner.
Meaning of “Control”: In essence, “control” means the secured party has the ability to transfer the investment property
without further action by the debtor.
You gain the right to dispose of the collateral without anybody interfering with you. As a creditor, you want to know you
can sell shares or bonds without any obstacles. Control gives you the fundamental right to sell OR not. Here, we’re talking
about investment property.
It becomes even more complicated when we speak of S.22.2 OPPSA: “Perfection by control of electronic chattel paper 22.2
(1) A security interest in electronic chattel paper may be perfected by control of the collateral under subsection 1 (3).”
Electronic chattel paper is a short-term debt obligations/ bonds / asset back debt under a year, short term bonds,
etc.
Section 22.1 of the Act specifically deals with security interests in investment property, which refers to certain types of
financial assets, such as stocks, bonds, and other securities.
According to subsection (1) of section 22.1, a security interest in investment property can be perfected by control of the
collateral under subsection 1 (2). This means that the security interest can be made valid and enforceable against third
parties, such as other creditors or buyers of the collateral, by obtaining control over the investment property.
Subsection (2) of section 22.1 outlines the requirements for perfecting a security interest in investment property by control.
Specifically, it states that once the secured party obtains control over the investment property, the security interest remains
perfected by control until either (a) the secured party loses control over the collateral, or (b) one of three specific events
occurs, depending on the nature of the collateral.
-
If the collateral is a certificated security, meaning a security that is represented by a physical certificate, the security
interest remains perfected by control until the debtor acquires possession of the certificate. This means that the
secured party must maintain control over the certificate until the debtor takes possession of it.
-
If the collateral is an uncertificated security, meaning a security that is not represented by a physical certificate but
is registered with a central securities depository or similar system, the security interest remains perfected by
control until the issuer registers the debtor as the registered owner. This means that the secured party must
maintain control over the registration process until the debtor is registered as the owner of the security.
-
Finally, if the collateral is a security entitlement, meaning a claim against a securities intermediary for the transfer
or redemption of a security, the security interest remains perfected by control until the debtor becomes the
entitlement holder. This means that the secured party must maintain control over the securities intermediary until
the debtor becomes the holder of the entitlement.
It is important to note that these rules only apply to security interests in investment property, not to security interests in
other types of personal property.
2.4 TEMPORARY PERFECTION (S. 24 OPPSA)
You have registration so long as it is registered. You have possession so long as you have it and same for control. Thus, what
is temporary perfection?
This deals with unusual instruments. It is provided at s. 24 OPPSA:
“(2) A security interest perfected by possession in,
(a) an instrument or a certificated security that a secured party delivers to the debtor for,
(i) ultimate sale or exchange,
28
(ii) presentation, collection or renewal, or
(iii) registration of transfer; or
(b) a negotiable document of title or goods held by a bailee that are not covered by a negotiable document of title,
which document of title or goods the secured party makes available to the debtor for the purpose of,
(i) ultimate sale or exchange,
(ii) loading, unloading, storing, shipping or trans-shipping, or
(iii) manufacturing, processing, packaging or otherwise dealing with goods in manner preliminary to their
sale or exchange, remains perfected for the first ten days after the collateral comes under the control of
the debtor.
Section 24 of the Ontario Personal Property Security Act (OPPSA) deals with security interests that are perfected by
possession of certain types of collateral, specifically instruments, certificated securities, negotiable documents of title, and
goods held by a bailee.
Subsection (2) of section 24 outlines the circumstances in which a security interest perfected by possession in such collateral
will remain perfected for the first ten days after the collateral comes under the control of the debtor.
Paragraph (a) of subsection (2) applies to instruments or certificated securities that are delivered to the debtor by the
secured party for various purposes, including ultimate sale or exchange, presentation, collection or renewal, or registration
of transfer. In such cases, the security interest will remain perfected for the first ten days after the debtor takes possession
of the collateral.
Paragraph (b) of subsection (2) applies to negotiable documents of title or goods held by a bailee that are not covered by a
negotiable document of title, which the secured party makes available to the debtor for the purpose of ultimate sale or
exchange, loading, unloading, storing, shipping, trans-shipping, manufacturing, processing, packaging or otherwise dealing
with goods in a manner preliminary to their sale or exchange. In such cases, the security interest will remain perfected for
the first ten days after the debtor comes into control of the collateral.
Giffen (Re), 1998 CanLII 844 (SCC), [1998] 1 SCR 91
Facts: This is a dispute over 10 000$, the residual value of a 1993 Saturn car. It is between a creditor and a bank.
• We have Carol Anne Giffen, the employee of BC Tel.
• As part of her job, BC Tel would rent a car for her and pay the rental fees while she was employed.
Evidently, upon termination, they would stop paying the fees.
• BC Tel entered a contract with Creditor (Creditor 1), the company that leases to BC Tel. They lease the
car to BC Tel and BC Tel sub-leases it to Giffen.
• Thus, the creditor is an owner OR maintains a residual property interest here.
The other key issue here is the length of the lease. Because it is longer than 1 year, in order for it to be opposable
against parties, you need to register it. They didn’t register it.
Note: Registering is the only way of perfecting it. It can’t take possession because it is giving it to someone else.
They can’t do control because it isn’t a financial asset, it’s a car. Thus, the only path was registration. They have
a security interest that isn’t perfected here.
Giffen has other creditors. She doesn’t pay them off. They petition her into bankruptcy. This means that the
creditors have a right to appoint a bankruptcy trustee and thus take the property and sell it + use the proceeds
for the benefit for all creditors.
→ Why would the Creditor 1 not want to be one of these creditors? It would have to share the value of the car
with the other creditors. Thus, Creditor 1 is objecting to this. The Creditor also leases many cars, so it wants this
to work in their favor to create a precedent for them and get the right result.
Time goes on and the bank trustee takes possession of the car before the perfection. Thus, the issue is, what is
the effect of it here?
29
Judge Iacobucci says that The Locus of Title Is Not Determinative. If you ask the question who owns the car, it is
clear that the Creditor does, he is the owner. He wants to say that for the purposes of secured transaction,
whoever owns it doesn’t matter. We need to look at who has the best priority in the interest of the asset. This
might not be the owner.
Iacobucci says that the value of the security interest here is a property right created by statute. Thus, it is a
creature of statute. If you want to understand its strength, you need to see the statute, because it gives it meaning
and content.
• 28: “The Court of Appeal in the present appeal did not look past the traditional concepts of title and
ownership. But this dispute cannot be resolved through the determination of who has title to the car
because the dispute is one of priority to the car and not ownership in it. It is in this context that the PPSA
must be given its intended effect and it is to this question that I now wish to turn.”
The next step is to look at what a Security Interest is. Its substance over form:
“ 30. The PPSA applies to “every transaction that in substance creates a security interest, without regard to its
form and without regard to the person who has title to the collateral” (s. 2(1)(a)).”
“32 A security interest is valid and enforceable when it attaches to personal property. Section 12(1)(b) of the PPSA
provides that a security interest “attaches” when the debtor acquires “rights in the collateral”. Section 12(2) states
explicitly that “a debtor has rights in goods leased to the debtor . . . when he obtains possession of them in
accordance with the lease”. Thus, upon delivery of the car to the bankrupt, the lessor had a valid security interest
in the car that could be asserted against the lessee and against a third party claiming a right in the car.
However, the lessor’s security interest remained vulnerable to the claims of third parties who obtain an interest in
the car through the lessee including, trustees in bankruptcy. In order to protect its security interest from such
claims, the lessor must therefore perfect its interest through registration of its interest (s. 25), or repossession
of the collateral (s. 24). The lessor did not have possession of the car, and it did not register its security interest.
Thus, prior to the bankruptcy, the lessor held an unperfected security interest in the car”
You need to give value for the security interest. As well, the debtor must have property rights in the car as well.
This would’ve only happened when there was delivery of the car gives possession.
From a Bankruptcy perspective now, the rights that Giffen had shift from her having possession to the Bankruptcy
trustee having it (this is called vesting) (section 20(1)(b) of the Bankruptcy Act).
Therefore, since the trustee perfects its security interest, it has a security interest which trumps the creditors security
interest which is not perfected and any claim to its ownership. Thus, the trustee can confer clear title. This means
that it can sell the car to somebody else and the person who acquires the car will get it free and clear of any
interest that the Creditor had in the car.
• Note: The Bankruptcy trustee perfected the security of the creditors for whom it was acting.
The final thing to look at here is to look at: how do you get the system to work smoothly if part of the rules are
drafted by the federal gov and the others are drafted by the provincial government? We have the BIA and the PPSA.
The answer in Giffen is that they don’t need to answer this because the rules don’t conflict. The BIA rules would
likely trump according to Adamski.
IMPORTANT: Unlike in Sperry, in Giffen the bankruptcy trustee is clearly an agent and acts for the benefit of the
creditors and not the debtor and thus, when the bankruptcy trustee took over the car, it perfected the security
interest of the creditors for whom it was acting. At that point, this interest trumps the unperfected security
interest of the creditors.
EXTRA NOTES
The leasor leased a car to BCT who in turn leased it to an employee. Nobody perfected their interest. The
employee becomes bankrupt and the leasor seizes and sells the car. The trustee in bankruptcy claims the proceeds
under the PPSA (unperfected claim is subordinate to the interest of the trustee in bankruptcy). The leasor claims
30
the bankrupt never owned the car and under the BIA the trustee cannot have more rights than the bankrupt
party.
Held: The PPSA can modify the principle found in the BIA. The BIA does not spell out what the secured parties
rights are, the PPSA does. The lessor’s unperfected interest is ineffective against the trustee in bankruptcy.
Giffen (Re), 1998 CanLII 844 (SCC), [1998] 1 SCR 91
Facts: Lessor leased a car to a company that in turn leased it to an employee (the bankrupt). The term of the lease was more
than one year (true lease). The lease gave the bankrupt the option to purchase the vehicle. Both lessors had not registered
their financing statements and therefore held unperfected security interests. The vehicle was sold after bankruptcy. The
trustee sought to claim the proceeds of the sale.
Issue: Who has priority?
Held: The trustee. Section 20 of the PPSA states that an unperfected security interest is not effective against a trustee in
bankruptcy.
Reasoning: Section 71(2) of the Bankruptcy and Insolvency Act provides that the bankrupt’s property vests with the trustee.
The lease gave the bankrupt a proprietary interest in the car. Section 20(1)(b) of the PPSA provides an unperfected security
interest is not effective against a trustee in bankruptcy. Therefore, the trustee acquires full rights to property that was
previously subject to unperfected security interest. The unperfected secured creditor has the same status as other
unsecured creditors. Note that the trustee in bankruptcy cannot take a greater interest in property than the bankrupt had.
Ratios:
Section 20(1)(b) of the PPSA permits the trustee to defeat the unperfected security interest.
Unsecured creditors have the same status as secured creditors who have not perfected their security interests.
Section 20 alters the principle that the trustee cannot acquire more rights than the debtor had. The PPSA and the BIA must
be read in conjunction. The PPSA serves “to define the rights of the parties involved in a bankruptcy”.
30(1): The following priority rules apply to security interests in the same collateral.
1. Between two interests perfected by registration: Order or registration, regardless of order of perfection. Note:
Registration is possible before attachment.
2. Between one perfected by registration and another perfected otherwise:
a. The registered has priority, if it was registered before the perfection of the other interest.
b. The nonregistered has priority, if it was perfected before the registration of the financing statement of the
other.
3. Between two interests perfected otherwise than registration: Order of perfection.
4. Between two unperfected interests: Order of attachment.
30(5): For proceeds, the date of registration and perfection of the collateral applies to the proceeds.
Note: There is no need to claim accounts in the registration for 30(5) to apply. If the collateral changes into proceeds, 30(5)
still applies.
•
It is bilateral system. It does not provide absolute rules.
Continuity Of Perfection
A. CHANGE IN PERFECTION METHODS
31
-
Section 21(1): If a security interest is originally perfected in any way permitted under this Act and is again perfected
in some way under this Act without an intermediate period when it was unperfected, the security interest shall be
deemed to be perfected continuously for the purposes of this Act.
o Explained: if a secured party perfects their security interest in a collateral, then later re-perfects it without
any gap in time, the security interest is considered to have been perfected continuously, and the secured
party's priority over competing security interests will be preserved.
-
Section 30 (2): a continuously perfected security interest shall be treated at all times as if perfected by registration,
if it was originally so perfected, and it shall be treated at all times as if perfected otherwise than by registration if
it was originally perfected otherwise than by registration.
o Section 30(2) of the Ontario PPSA states that a security interest that is continuously perfected (as per
Section 21) will be treated as if it was always perfected in the same way as it was originally perfected.
o If the security interest was initially perfected by registration, then it will be treated as if it was always
perfected by registration, even if it was re-perfected in some other way later on.
o Similarly, if the security interest was originally perfected in some way other than registration, then it will
be treated as if it was always perfected in that same way, even if it was re-perfected by registration later
on.
o This rule helps to ensure that a secured party's priority over competing security interests remains intact,
even if the method of perfection changes over time.
B. GAPS IN PERFECTION
-
-
s 30(6): Where a security interest that is perfected by registration becomes unperfected and is again perfected by
registration, the security interest shall be deemed to have been continuously perfected from the time of first
perfection.
s 30(1), rule 1, which provides, more or less, that in a competition between two security interests, both perfected
by registration, the first to register wins.
C.
-
PERFECTION FOLLOWING ASSIGNMENT BY SECURED PARTY
Section 21(2) provides that an assignee of a security interest succeeds insofar as its perfection is concerned to the
position of the assignor at the time of the assignment.
CONSEQUENCES OF NON-PERFECTION
A. INTRODUCTION
-
Non-perfection does not result in the security interest being invalid altogether.
Instead, an unperfected security interest will be “subordinate to” or “ineffective against” the categories of
claimants listed in s 20(1), namely, (1) a person holding a perfected security interest in the same collateral, (2)
lienholders and persons having priority under any other Act, (3) execution creditors and the like, (4) a trustee in
bankruptcy and other creditors’ representatives, and (5) a transferee of the collateral.
B. LIENHOLDERS
-
-
“lienholder” means a person holding a non-consensual security interest; in other words, a security interest given
under a statute or rule of law.
“Lien” = the right to retain or seize all or some of the debtor’s assets and to sell them to satisfy the debtor’s
obligation to the lienholder.
Section 20(1)(a) provides that, subject to the exception contained in s 20(3), an unperfected security interest in
collateral is subordinate to (1) a perfected security interest in the same collateral, and (2) lienholders and similar
persons with rights to the collateral.
Liens are normally called possessory security interests in most cases. Ex. mechanic’s lien, construction lien,
solicitor’s lien, etc.
32
-
They are usually created by statutes other than the PPSA.
C.
TRUSTEE IN BANKRUPTCY : (SECTION 20(1)(B))
-
Section 20(1)(b) provides that an unperfected security interest is not effective against a person who represents
the creditors of the debtor, including an assignee for the benefit of creditors and a trustee in bankruptcy.
Re Giffen, [1998] 1 SCR 91:
o Section 20(1)(b) of the PPSA permits the trustee to defeat the unperfected security interest.
o Unsecured creditors have the same status as secured creditors who have not perfected their security
interests.
o Section 20 alters the principle that the trustee cannot acquire more rights than the debtor had. The PPSA
and the BIA must be read in conjunction. The PPSA serves “to define the rights of the parties involved in a
bankruptcy”.
-
D. RECEIVERS
-
-
In corporate settings, if there is default, there is no trustee in bankruptcy that is appointed, but rather a receiver
(a third party that takes some level of control over the debtors’ assets)
In corporate settings, a receiver is appointed in cases of default, rather than a trustee in bankruptcy.
A court-appointed receiver represents the interests of creditors, while a privately appointed receiver does not.
Section 20(1)(b) of the Ontario Personal Property Security Act (OPPSA) governs the priority of security interests in
situations where the debtor has granted security interests to multiple creditors and has become bankrupt or
insolvent.
An unperfected security interest is subordinate to the interests of a person who represents the creditors of the
debtor, including a trustee in bankruptcy.
The OPPSA does not apply to a receivership, whether the receiver is privately or court-appointed, and a receiver
does not have the same property rights as a trustee in bankruptcy.
.
1231640 Ontario Inc (Re), 2007 ONCA 810: authority for the proposition that OPPSA, s.20(1)(b) does not apply in
a receivership and it makes no difference whether the receiver is privately or court appointed
E.
TRANSFEREE OF COLLATERAL
1.
General
-
-
OPPSA, ss 20(1)(c) and (d) provide that an unperfected security interest:
(c) in chattel paper, documents of title, instruments or goods is not effective against a transferee thereof who
takes under a transaction that does not secure payment or performance of an obligation and who gives value and
receives delivery thereof without knowledge of the security interest;
(d) in intangibles other than accounts is not effective against a transferee thereof who takes under a transaction
that does not secure payment or performance of an obligation and who gives value without knowledge of the
security interest.
Sections 20(1)(c) and (d) of the OPPSA deal with situations where a creditor has a security interest in property such
as chattel paper, documents of title, instruments, goods or intangibles (except for accounts) but has not properly
registered it (i.e., it is "unperfected"). These sections state that the unperfected security interest will not be
effective against someone who buys the property without knowing about the security interest and without taking
on any obligation to pay the creditor.
In other words, if a third party buys the property and meets these conditions, the creditor cannot claim the property
as collateral for their debt, even if they have a security interest in it.
This protects buyers who purchase property in good faith and without knowledge of any existing security interests.
2.
Accounts
-
-
-
33
-
-
Section 20(1)(d) applies to all intangibles except accounts.
Section 20(1)(d) relates to security interests in "intangibles" other than accounts.
Intangibles are property that do not have a physical form, such as intellectual property or a right to receive
payment.
Accounts are a specific type of intangible property that represent a debtor's right to payment for goods or
services provided.
This section states that if a creditor has a security interest in an intangible property other than accounts, and the
security interest is not properly registered (i.e., it is "unperfected"), then it will not be effective against a third party
who buys the intangible property without knowledge of the security interest and without taking on any obligation
to pay the creditor.
o In other words, the creditor cannot claim the intangible property as collateral for their debt if the buyer
meets these conditions. This protects buyers who purchase intangible property in good faith and without
knowledge of any existing security interests.
Section 20(1)(d) of the OPPSA applies to intangibles other than accounts.
This means that if a debtor assigns their accounts to another party who registers a financing statement, the priority
of the security interest over those accounts is determined by section 20(1)(a)(i), which gives priority to the party
who has registered a financing statement.
If both parties register, the first to register gets priority.
However, if section 20(1)(d) applied, the party who takes the accounts without knowledge of the unperfected
security interest would get priority regardless of whether they registered or not.
Accounts are excluded from section 20(1)(d) to avoid potentially contradictory outcomes with section 20(1)(a)(i).
3.
Chattel paper
-
This section discusses an example where a debtor assigns their tangible chattel paper to another party who claims
ownership over it.
In this scenario, both section 20(1)(a)(i) and section 20(1)(c) of the OPPSA apply, and they potentially lead to
different outcomes.
Section 20(1)(a)(i) gives priority to the party who has perfected their security interest,
while section 20(1)(c) gives priority to the party who received delivery of the chattel paper without knowledge
of the unperfected security interest.
The statute fails to indicate which provision takes precedence.
It is suggested that section 20(1)(c) should explicitly exclude chattel paper like how section 20(1)(d) excludes
accounts
-
-
-
-
4.
Knowledge
-
EX: SP holds an unperfected security interest in Debtor’s pickup truck. Debtor sells the pickup truck to T. Both SP
and T claim the truck.
Section 20(1)(c) of the OPPSA applies because the collateral is goods and the transaction between Debtor and T
does not secure payment or performance of an obligation.
T has priority only if it receives delivery of the pickup truck without knowledge of SP’s security interest.
Knowledge of the security interest is not required when determining priority in disputes between competing
secured parties (OPPSA, s 20(1)(a)(i)), but it is required in disputes between secured parties and third-party buyers
(OPPSA, s 20(1)(c)).
In the case of a dispute between competing secured parties, priority turns on the first to perfect, regardless of
knowledge.
A lack of knowledge requirement would reduce the incentive to perfect by diluting the consequences of nonperfection and increase litigation costs.
Section 52 of the New Zealand Personal Property Securities Act 1999 omits the reference to the transferee's state
of knowledge, and the policy considerations stated apply equally to disputes between a secured party and a thirdparty buyer.
The CCPPSL Report recommends deleting the reference to knowledge in OPPSA, s 20(1)(c), and the corresponding
provision in other provinces.
-
-
-
34
-
Saskatchewan is the only province to have enacted the reform: SPPSA, s 20(3).
Section 69 of the OPPSA addresses when a person learns or knows of something.
5.
-
Value
SP holds an unperfected security interest in Debtor's pickup truck. Debtor agrees to sell the truck to T on June 1,
with payment due on June 8. On June 3, SP registers a financing statement. T tenders payment on June 8.
"Value" is defined as any consideration sufficient to support a simple contract under PPSA, s 1(1).
T's promise to pay made on June 1 is "value" under s 1(1).
However, for the purposes of s 20(1)(c), "value" means executed consideration, and T does not give value in this
sense until June 8, when T tenders payment.
Since SP is perfected by that point, s 20(1)(c) does not apply, and T takes the truck subject to SP's security interest.
The decision in Royal Bank of Canada v Dawson Motors (Guelph) Ltd. puts the onus on T to search the register a
second time before making payment.
OPPSA, s 46(5)(a) now provides that registration does not constitute constructive notice or knowledge of a
security interest, while s 69 defines knowledge in a way that seems to preclude constructive notice.
The decision in Dawson Motors case now only matters in the case where T acquires actual knowledge of SP's
security interest before the payment date.
The s 1(1) definition applies when interpreting s 20(1)(a)(i) in relation to a priority dispute between a perfected
secured party and an unperfected secured party.
The appropriate solution in cases like Example 10 would be to allow T to complete the purchase on paying the
balance of the agreed consideration to SP.
-
F.
WHEN TO DETERMINE IF SECURED PARTY IS UNPERFECTED
-
The relevant date for determining whether a security interest is perfected or unperfected for the purposes of
section 20(1) varies depending on which paragraph of the provision is in issue.
Under section 20(2)(a) for statutory lienholders, the relevant date is either the effective date of the debtor’s
bankruptcy or when the lienholder has taken possession or done everything necessary to make the lien
enforceable.
Under section 20(2)(b) for a trustee in bankruptcy, the relevant date is the date from which the person’s
representative status takes effect.
For cases involving the rights of a transferee under paragraph (c) or (d), the relevant date in most cases will be the
date of the transfer.
In cases involving the rights of an execution creditor under section 20(1)(a)(ii), the relevant date is the date the
execution becomes effective.
In cases involving the rights of a common law lienholder, the relevant date is the date when the claim of the
lienholder accrues.
In cases involving a competing perfected security interest under section 20(1)(a)(i), the relevant date for
determining priorities between competing security interests is the date the interests come into conflict, that is,
when one of the parties takes steps to enforce its security interest.
-
-
CHAPTER 5: REGISTRATION
-
-
I.
INTRODUCTION
Methods of perfecting through registration, mechanics, background. In most cases, the person who will have to
register is the person who is lending money and securing an interest, as they have the biggest incentive to do so.
When does registration occur? Registration (and therefore perfection) can occur at any time after the agreement
has been created. It would be very difficult to do it before the creation of the agreement because it would be hard
to know what one is registering. However, we don’t have to wait until the security attaches to register (ex. I will
lend you money next week, the will be secured by some of your assets, and I register it today – we have an
agreement, but no money has yet been lent).
Priorities come in play to know when the security interest is created, who has the best right in something.
Finally, two views are opposed regarding the meaning of registration: for some, it only means that a security
interest exists, for others it is only a notice that there might be a security interest.
35
-
-
In Quebec under civil law, when a right is registered, it is deemed to exist. Some Common law systems follow the
same logic, but the traditional view of CL is that the purpose of registration is to give you a notice or warning that
something might (or might not exist), rather than guarantee it (dumb).
Before the PPSA, there were many databases (which weren’t online), which made the whole process extremely
difficult and not user friendly. Registration benefits to all creditors. It benefits to unsecured creditors, because it
notifies them before lending money that some assets are secured (warn others), but also secured creditors, as they
know they are capable of getting security in an asset that is free of other security interest (confidence you have a
security). It is not useful to create multiple security interests in the same chattel because the value that we can
realize in the asset in which we have a security interest will not be sufficient, as opposed to in real estate.
II.
SOME BASIC CONCEPTS
A. STRUCTURAL UNITY OF SUBSTANTIVE PERSONAL PROPERTY SECURITY LAW
-
Regardless of the nature of the security agreement, all registrations under the PPSAs are subject to substantially
the same requirements. Similarly, a single search will, with few exceptions, disclose all consensual charges against
the name of the debtor or against certain types of property.
B. NOTICE OF REGISTRATION
-
-
-
PPSAs introduced notice registration as a substitute for docu ment filing (see OPPSA, s 45).
registration of a simple notice (called a “financing statement”) containing skeletal information about existing or
potential security interests granted by one or more debtors to one or more se- cured parties. (See OPPSA, ss 46(1)(2) and Minister’s Order, ss 2-3.)
OPPSA financing statements provide limited information about the secured party's transaction with the debtor,
only indicating the possibility of a security interest in specified collateral.
o Requesting further information from the secured party is necessary.
o Financing statements under other PPSAs provide slightly more information about the collateral, but are
still basic.
Notice filing is advantageous over document filing because it reduces the need for paper storage and maintains
business confidentiality. It also allows a secured party to register before the security agreement is completed and
to perfect multiple security interests with one filing. OPPSA section 45 addresses these features, allowing
registration before or after the security agreement is signed, except for consumer goods. Priority turns on the
respective dates of registration under OPPSA section 30(1), rule 1. Similar rules apply in other PPSAs, but they do
not exclude consumer goods.
C.
ELECTRONIC REGISTRATION SYSTEMS
-
PPSA registers in all provinces are now computerized
Most filings and search requests are made electronically
Some provinces still permit paper forms for registration or search requests
Ontario has had an entirely electronic registration system since 2006
Certified search results in Ontario are still produced on paper
Time lags in paper filing can lead to inaccuracies in the system
BLAC Report 2017 describes Ontario search reporting system as electronic, with data sent by registrants and stored
electronically.
When a search is ordered, data is printed on paper and often scanned back into digital form for storage.
The OPPSA system is outdated and needs modernization to align with other provinces.
In 2006, a PPSL Committee recommendation to amend collateral description requirements was not implemented
because it would require changing the software.
Government has not committed funding for modernization, creating an obstacle to substantive law reforms.
-
D. DEBTOR’S NAME-BASED REGISTRATION AND SERIAL NUMBER REGISTRATION
36
-
Two basic forms of register for personal property security interests: searchable against debtor's name or searchable
against collateral itself (e.g. serial number)
Serial number registration only feasible for serial-numbered collateral like vehicles, trailers, and aircraft
For other collateral like accounts, crops, and raw materials, debtor's name registration is the only option
PPSAs combine both systems
In Ontario, the serial number index is limited to motor vehicles, while in other PPSA jurisdictions it extends to other
types of serial-numbered goods such as tractors, mobile equipment, mobile homes, boats, trailers, and aircraft.
In Canada, provinces never adopted certificate of title systems for motor vehicles, so security interests in motor
vehicles must be registered in public registries for third parties to be protected.
Ontario legislation requires the VIN to be included in the financing statement if the collateral comprises a motor
vehicle that is consumer goods, but it is optional if the motor vehicle is equipment or inventory.
The legislation also provides for registration and search against both name and serial number to achieve the best
of both worlds from the searcher's perspective.
A debtor's name registration system retrieves all security interests given by the debtor in its personal property,
while a search in the debtor's name index will not retrieve a security interest given by a prior owner.
E.
EXACT MATCH AND CLOSE MATCH RETRIEVAL SYSTEMS
-
The Ontario name index register uses an exact match retrieval system, which means that a search will only retrieve
an entry if there is no difference at all between the debtor's name in the financing statement and the name being
searched.
The case of Fairbanx Corp v Royal Bank of Canada illustrates the implications of Ontario's exact match system,
where a registration can be invalidated by a materially misleading error in the financing statement that makes the
registration unsearchable against the correct search criterion.
Registers in other provinces use a close similar match system, which is forgiving of minor errors but can result in a
noisier search result.
The main benefit of a close similar match system is the tolerance it allows for user error, but the cost is a potentially
noisier search result.
The OBA 1998 Submission recommended against moving to a close similar match system in Ontario.
-
-
III.
REGISTRATION PROCESS
A. INTRODUCTION
-
-
-
A financing statement must be registered by the secured party to establish a security interest. The financing
statement must contain required information presented in electronic form. (OPPSA, ss 45(1) and 46(1); Minister’s
Order, s 2)
The registration is made through direct electronic transmission to the registry database, and only authorized
persons may submit registrations. (OPPSA, s 46 (2) and (3)).
A financing statement may also be submitted in batches stored on an electronic storage device.
Direct electronic transmission is advantageous because the registration is effective immediately, while the
registration through electronic storage device takes a few days to be transferred to the registry database and
become effective.
A financing statement can be registered in advance of the security agreement, except for consumer goods
collateral. (s 45(2) and (3))
A single registration can be relied on to perfect successive security interests in the same type of collateral, except
for consumer goods collateral.
A financing statement can be registered for a period of 1 to 25 years or in perpetuity, as per section 51(1) of OPPSA.
The registration period starts on the date assigned by the registrar and ends when the registration period expires
or when the registration is discharged, as per section 51(3) of OPPSA.
The registration period can be reduced or extended by registration of a financing change statement
When an individual financing statement is registered by direct electronic transmission, the time of registration is
automatically assigned as soon as the information is received.
In the case of financing statements submitted on an electronic storage device, the time of registration is assigned
to the financing statements individually as they are processed.
37
-
Registrants pay a fee to file a financing statement, which varies depending on the length of the registration period.
The fee structure gives the secured party an incentive to select only the period it actually needs, although many
registrants will add one or two extra years to the registration period in case the period for performance of the
underlying obligation is extended.
B. FORM AND CONTENT OF FINANCING STATEMENT
1.
INTRODUCTION
-
The contents of the financing statement are prescribed in s 3 of the Minister’s Order and are driven by the search
capabilities of the personal property security (PPS) search system.
The following information must be set out in the designated part of the financing statement form (see s 3.1 of the
Minister’s Order): "P" to indicate registration under the OPPSA, number of years for registration period, debtor's
name (set out in the manner required by s 16 of the Minister's Order) and date of birth (if a natural person), debtor's
address, secured party's name and address, classification of collateral, indication of motor vehicle inclusion or
attachment of motor vehicle schedule, principal amount and maturity date (if applicable).
Additional requirements for completion of the financing statement are set out in sections 3.2 to 3.13, including the
name and address of at least one secured party if there is more than one, and indication of a caution filing if
collateral is brought into Ontario from another jurisdiction.
The most important items in the financing statement are the debtor's name and date of birth (if a natural person),
collateral classification, and VIN if collateral is a motor vehicle, as these are central to the search function.
For example, if the financing statement omits or misstates the debtor’s name, a search under the debtor’s correct
name will not retrieve the registration; if the collateral is a motor vehicle and the financing statement omits or
misstates the VIN, a search under the correct VIN will not retrieve the registration; while if the financing statement
misdescribes the collateral, a searcher may be misled as to the scope of the security interest. As a result, an error
or omission in any of these fields may wholly or partly invalidate the registration
-
-
-
2.
DEBTORS NAME
a.
-
-
Introduction
The debtor's name is a crucial piece of information in a financing statement, as it is central to the search function.
Ontario's search system is an exact match system, meaning that a search against one name may not reveal filings
against other versions of that name, impairing the integrity of the search system.
Section 16 of the Minister's Order sets out a common set of name rules for registrants and searchers to follow in
order to facilitate searches.
Section 16 deals separately with natural persons and artificial persons.
The name rules for artificial persons are considerably more detailed than those for natural persons.
b.
Natural person
-
Minister's Order, sections 3.1.c and 16.1.
A financing statement for a natural person debtor must include their first given name, the initial of their second
given name, and their surname, along with their date of birth.
If a debtor goes by different names, the courts have held that the name on their birth certificate should be used
for registration and search purposes.
For a Canadian born outside of Canada, their Canadian citizenship certificate is the governing document to
determine their name for registration and search purposes.
Ontario does not provide guidance on which name to use for registration and search purposes for a debtor with
different names, leaving it to the courts to decide.
In other provinces, the Canadian Conference on Personal Property Security Law (CCPPSL) Rules set out a detailed
set of rules for determining the debtor's name for registration and search purposes, including best to worst sources
to rely on.
-
-
38
-
-
If a natural person carries on business under a trade name, the secured party may include that name as an
additional debtor name on the designated line, but it is not a substitute for following the rules for the debtor's legal
name.
If the secured party knows that the debtor goes by some other name, it may be prudent to include that other name
as an additional debtor name on the designated line in addition to the debtor's legal name.
c.
Artificial entities
-
-
Financing statements for artificial entities must include the debtor's name in accordance with the rules set out in
Section 16.4 of the Minister's Order (see line 3 in the sample financing statement in Appendix C).
The Minister's Order provides detailed rules for identifying an artificial entity's correct name for registration and
search purposes.
In the case of a corporation, the required name is the incorporated name of the corporation, which can be
determined by obtaining government-certified copies of the corporation's formation documents, a governmentissued certificate of status, compliance, or good standing, or a corporate profile report.
Section 16.4 also specifies the name that must be used where the debtor is a partnership (general or limited), an
unincorporated association (including a joint venture, church, or other religious organization), a deceased natural
person (that is, their estate), a trade union, a trust, a bankrupt estate, or some other type of artificial body.
The Minister's Order does not provide guidance on which name to use if an artificial entity goes by different names,
and it has been left to the courts to formulate appropriate tests.
When registering against an artificial body as a debtor, it is important to identify the specific rules for that type of
entity as set out in section 16.4 of the OPPSA.
Using the wrong rule may result in misstating the debtor's name, which may cause the registration to be invalid.
The name to use for registration may be different from the name that appears on the entity's cheques, letterhead,
financial statements, or similar informal documents.
Artificial entities may carry on business under a trade name, which may be added as an additional debtor name on
the designated line.
If the debtor is a corporation with both English and French names, the financing statement must set out both names
on separate lines (section 17 of the Minister's Order).
Failure to set out both names separately will invalidate the registration, so it may be prudent to register against all
possibilities as separate debtors.
The proper legal name for a corporation with a combined English French name is the combined name.
3.
COLLATERAL CLASSIFICATION
a.
Introduction
-
The financing statement must include the collateral classification, and the requirements for classification are
rudimentary except when the collateral is a motor vehicle.
The collateral classification field on the financing statement form has five boxes labelled: consumer goods,
inventory, equipment, accounts, and other, and the secured party must check off the appropriate box or boxes.
The "other" box is used to identify collateral that is not consumer goods, inventory, equipment, or accounts or any
combination thereof, such as an intangible that is not an account, like a license.
The "other" box should not be misused to identify a claim to proceeds, which is a statutory right in Ontario and
does not need to be separately identified in the financing statement.
When in doubt, it is prudent to check more boxes, except when the security agreement charges all of the debtor's
present and after-acquired property, in which case the secured party should check off all the boxes other than
consumer goods.
-
-
-
-
b.
Consumer goods
-
When classifying collateral as consumer goods, the principal amount and maturity date of the debt must be
included in the financing statement, or an indication that there is no fixed maturity date.
Additional requirements apply if the collateral is a motor vehicle.
-
39
c.
General collateral description
-
A financing statement includes an optional "general collateral description."
Providing a collateral description in this section may unintentionally narrow the scope of the registration, and thus
limit the secured party's ability to claim a security interest.
Section 46(2.1) OPPSA provides that a collateral description may limit the scope of the classification of collateral.
A general collateral description may also limit the ability of the secured party to shelter future security interests
under a filing.
If a secured party provides a general collateral description that limits the scope of its security interest, its
registration may be ineffective to perfect a security interest in other collateral.
However, providing a general collateral description can help other parties rely on the filing without the need for
further information from the secured party.
-
d.
Motor vehicles
-
-
Collateral classification requirements for motor vehicles are more detailed.
If the collateral includes a motor vehicle, the financing statement must indicate that by checking the box in Section
2, line 10.
If the collateral is a consumer goods motor vehicle, the financing statement must also contain a description of the
motor vehicle on lines 11 or 12 or on a motor vehicle schedule, including its VIN, model year, make, and model.
If the motor vehicle description is in the general collateral description (lines 13, 14, and 15), it will not be valid as it
is not a searchable field.
For motor vehicles not classified as consumer goods, the secured party is not required to include the VIN or any
other description, but it is incentivized to do so.
An optional motor vehicle description (including the VIN) can be inserted in the designated spot at lines 11 or 12
(or in a motor vehicle schedule).
"Motor vehicle" includes automobiles, motorcycles, and motorized snow vehicles but excludes streetcars or other
vehicles running solely upon rails, farm tractors, implements of husbandry, machines acquired or used as a roadbuilding machine, or crafts intended for use in the air or in or upon the water.
The test for whether an item is a motor vehicle is objective, focusing on the typical or normal use of the item.
e.
Other PPSA’s
-
Other PPSAs require a collateral description "by item or kind" or in narrative form, in contrast to Ontario's checkbox
system for collateral classification.
The lack of harmonization between Ontario and other provinces is a potential source of confusion for system users,
which led to the PPSL Committee's recommendation in 2006 that Ontario switch to the item or kind approach.
The proposal would require a collateral description along the following lines: (a) a description of the collateral by
item or kind or as "goods," "chattel paper," "securities," "documents of title," "instruments," "money" or
"intangibles"; (b) a statement indicating that a security interest is taken in all of the debtor's present and afteracquired personal property; (c) a statement indicating that a security interest is taken in all of the debtor's present
and after-acquired personal property except specified items or kinds of personal property or except personal
property described as "goods," "chattel paper," "securities," "documents of title," "instruments," "money" or
"intangibles"; or (d) a description of the collateral as inventory.
The government has accepted the recommendation in principle but has not acted on it yet due to the need for
changes to the registry computer program and funding.
Other PPSA jurisdictions require registration against serial numbers for "serial-numbered goods," including motor
vehicles, tractors, mobile equipment, mobile homes, boats, trailers, and aircraft.
-
-
-
4.
OTHER INFORMATION
-
The OPPSA does not enact rules for determining the debtor’s address or the name or address of the secured party.
By contrast, the other PPSAs do contain detailed rules for determining the name of the secured party, similar to
the rules that apply for determining the debtor’s name
40
IV.
REGISTRATION AMENDMENTS, RENEWALS, AND DISCHARGE
A. INTRODUCTION
-
-
A registration can be amended by registering a financing change statement, which must be in an electronic format
approved by the Registrar.
Some amendments are mandatory and must be registered within certain time frames, or the entire registration
will become invalid and cease to perfect any security interest.
Examples of amendments that can be made include: assignment of a security interest to another secured party,
transfer of collateral by the debtor without cutting off the security interest, change of debtor name, subordination
of a security interest to a competing secured party, renewal of an existing registration, and discharge of a
registration.
A financing change statement can also be registered to correct an error or omission in the financing statement, or
for any other amendment not specifically provided for in Part IV of the OPPSA.
B. CORRECTING ERRORS
C.
A financing change statement can be used to correct errors or omissions in a financing statement, but only while
the registration is still current (OPPSA s 49).
If the registration period has expired, a new financing statement must be registered.
A financing change statement is effective from the time assigned to its registration and is not retroactive (OPPSA s
53).
If a security interest is claimed by multiple parties, the one who registered first has priority (OPPSA s 30(1), rule 1).
CHANGES TO REGISTRATION PERIOD
-
Section 51(2) of the OPPSA allows for a registration period to be reduced by registering a financing change
statement under s 49 or extended by registering a financing change statement under s 52(1).
The financing change statement must be registered before the original registration ceases to be effective, as stated
in s 52(1).
If a financing change statement extends the registration period, the original registration remains effective until the
new registration period expires, as seen in Example 5.
If the financing change statement is registered after the original registration has expired, it is ineffective and the
security interest becomes unperfected, as seen in the changed facts of Example 5.
To reperfect the security interest, the secured party must register a new financing statement under s 52(2).
The break in perfection due to an ineffective financing change statement does not affect the priority of the security
interest, as clarified in s 30(6) of the OPPSA.
D. INADVERTENT REGISTRATION DISCHARGES
-
A secured party may inadvertently allow its registration to lapse.
A related scenario is where the secured party accidentally discharges all or part of its registration
Heidelberg Canada Graphic Equipment Ltd v Arthur Andersen Inc (1992), 7 BLR (2d) 236, 4 PPSAC (2d) 116 (Ont
Gen Div)
o (a financing change statement is enough to re-perfect an interest that was only partially, not completely,
discharged)
o The bank registers a financing statement and checks all classes of collateral (even equipment). Later
another party loans money (only on accounts) and asks the bank to remove the registration on accounts.
The bank sends a financing change statement (FCS1) to remove accounts. They later realize, they do in
fact have an interest in accounts and file another financing change statement (FCS2) to reinstate accounts.
No interest arose between FCS1 and FCS2. When the debtor becomes bankrupt, the second lender attacks
the validity of the bank’s security in accounts.
41
o
E.
ASSIGNMENT BY SECURED PARTY
-
-
F.
Held: FCS1 only amended their registration. It did not discharge it. There is no need for a new financing
statement to re-perfect an interest, if it was discharged. The lapse of perfection between FCS1 and FCS2
does not affect the priority of the two lenders.
Section 47 OPPSA applies when a secured party assigns its security interest.
Section 47(1) applies when the secured party had already perfected its security interest by registration at the time
of the assignment.
o Either the assignor or the assignee may register a financing change statement to show the assignee as the
new secured party, but it is not mandatory.
o If a financing change statement is not registered, the assignor will remain the secured party of record, and
inquiries and notices may be sent to the wrong party.
Section 47(2) applies when the security interest was not perfected by registration prior to the assignment.
o A financing statement may be registered naming either the assignor or the assignee as the secured party.
Upon the filing of a financing change statement under s 47(1) or a financing statement under s 47(2), the assignee
becomes the "secured party of record."
TRANSFER BY DEBTOR AND DEBTOR NAME CHANGE
-
-
-
-
Registration of a security interest in collateral must be amended if the debtor transfers its interest to a new party,
or the registration will not be discoverable by a searcher who conducts a search against the new party's name.
Section 48(1) applies when the secured party consents to the transfer, and the security interest in the collateral
transferred becomes unperfected after 15 days unless a financing change statement is registered within that time
period.
Section 48(2) applies when the secured party does not consent to the transfer, and the security interest in the
collateral transferred becomes unperfected after 30 days unless a financing change statement is registered, or the
secured party takes possession of the collateral within that time period.
If the debtor changes its name, the registration must be amended to maintain the perfection of the security
interest within 30 days of the secured party learning of the name change (Section 48(3)).
Section 48(4) applies to successive transfers of collateral without the secured party's consent before the secured
party learns the name of the transferee in possession of the collateral. The secured party is deemed to have
complied with subsection (2) if they register a financing change statement within 30 days of learning the name of
the transferee.
A secured party who fails to file within the time periods contemplated by Section 48 only becomes unperfected at
the expiry of the time period.
Financing change statements can only be filed during the currency of the related financing statement, otherwise,
a new financing statement must be filed to reperfect the security interest (Section 48(5)).
Section 69 of the OPPSA defines when a person learns of or has knowledge of information when served with a
notice in accordance with Section 68 or in other circumstances.
G. DISCHARGE OF REGISTRATION
1. General
-
Section 55 of the OPPSA allows for a registration to be discharged or partially discharged by registering a
financing change statement.
Reasons for discharge may include that the secured obligation has been performed, the registration was done in
error, or the secured party agrees to release some or all of the collateral.
Discharge of a registration under Section 55 only discharges the registration, not the security interest itself.
The security interest is discharged only when the secured obligation has been performed or when the parties agree.
A discharged registration makes the security interest unperfected, but it can be reperfected by filing a new
financing statement.
Partial discharge of a registration is also possible, which may be appropriate where the secured party has agreed
to release some but not all of the collateral.
42
-
A partial discharge can be corrected by registering a financing change statement during the currency of the original
registration.
If a registration is discharged by mistake, it cannot be renewed by registering a financing change statement. The
only option is to register a new financing statement under Section 52(2).
If a registration has been fully or partially discharged, and the secured party later reregisters, Section 30(6) may
provide continuous perfection subject to intervening rights.
2.
Demand for discharge of registration
-
Section 56(1) and (2) allow the debtor or an interested party to demand discharge of a registration if the secured
obligation has been performed, if the secured party has agreed to release part of the collateral on partial
performance of the secured obligation, or if the secured party has not acquired a security interest.
o A written notice must be sent to the secured party for the demand to be made.
o If the secured party fails to comply within ten days without a reasonable excuse, they are liable for a $500
penalty and any resulting damages.
Section 56(5)(b) allows the debtor to apply for a court order directing the registrar to make the change.
Section 56(2.1) and (2.2) provide for a demand to amend the collateral description where the collateral
classification in the financing statement does not match the collateral provided for in the security agreement or
the collateral description refers to collateral in which the secured party has not acquired a security interest.
o The secured party must respond to the demand by registering a financing change statement under s 49 to
amend the collateral classification, and failure to comply has the same consequences as a failure to comply
with a demand to file a discharge.
Section 56(2.3) provides for a demand to amend a registration by adding words in the general collateral description
field of the financing change statement to limit the collateral classification boxes that have been marked by the
secured party.
o If the secured party fails to comply within ten days without a reasonable excuse, they are liable for a $500
penalty and any resulting damages.
-
-
3.
Mandatory Discharge
-
Section 57 of the OPPSA applies to consumer goods and requires the secured party to discharge the registration
within 30 days after the secured obligation has been performed.
Failure to discharge the registration within 30 days attracts a $500 penalty payable to the debtor, and the secured
party is also liable for any resulting loss or damage.
The secured party's duty to discharge the registration arises automatically as soon as the debtor has performed the
secured obligation and does not depend on receiving a demand.
The rationale for this provision is that a consumer debtor may not realize that the registration should be discharged
and may be unaware of the demand procedure in Section 56.
Bullet points for Problem 5.1:
o The secured party (SP) sold two refrigerators to the debtor under a conditional sale agreement, with one
for home use and one for office use.
o The SP registered a financing statement for both refrigerators as consumer goods and equipment.
o The security agreement provides for monthly payments to be allocated first to the home refrigerator and
second to the office refrigerator.
o The debtor completed payments on the home refrigerator but still has payments to make on the office
refrigerator.
o It is unclear whether Section 57 applies.
o It is not specified whether registering two separate financing statements would make a difference.
-
V. SEARCHING THE REGISTER
A. THE SEARCH PROCESS
-
A person is entitled to conduct a register search under the OPPSA, revealing all OPPSA registrations against a
particular named person or a particular motor vehicle.
43
-
-
Certified and uncertified searches are available.
Certified searches are provided for by s 43 of the OPPSA and are produced on a paper form that is usually printed
the business day after the search request.
Uncertified searches can be ordered by phone or online and produce real-time results, but the disadvantage is that
they do not provide access to the Assurance Fund in the case of an error or omission in the results.
OPPSA search will not show everything that may be of interest to a prospective creditor or purchaser, such as
security interests perfected by possession or control or whether the debtor actually owns the collateral in question.
An OPPSA search will only reveal registrations against the name searched, and if the debtor has previous names or
has predecessor entities with different names, registrations made against those other names may not appear in
the search against the debtor (s 48(3)).
Delay in receiving search certificate may result in loss or damage and therefore not protected by the Assurance
Fund.
SP1 could have protected itself by doing an uncertified search before advancing funds or by registering before
applying for a certified search.
o
TYPES OF SEARCH
1.
Introduction
-
Section 43(1) of the OPPSA identifies three types of search: individual debtor's name, business debtor's name, and
motor vehicle identification.
The individual debtor's name search is divided into an individual specific and non-specific name search.
The debtor's name search facility is available regardless of collateral type.
The motor vehicle identification (VIN) search facility is available only if the collateral is a motor vehicle.
The searcher can choose between a debtor name search and a VIN search if the collateral is a motor vehicle, but it
is usually wise to conduct both types of searches.
-
2.
Individual Debtor’s Name Search
-
The individual debtor’s name index is used for natural persons, whether consumer or non-consumer
There are two types of individual debtor name search: individual-specific and non-specific
For a specific name search, the searcher must provide the debtor's first name, second name initial, and date of
birth;
For a non-specific search, the debtor's first and last names are required
A specific name search narrows the range of registrations, while a non-specific search expands it
An individual may have different names, and the same name used in the financing statement must be used for a
successful search
Even if a debtor carries on business under a trade name, a searcher should always search against the name of the
debtor required for the financing statement
-
3.
Business Debtor’s Name Search
-
The business debtor's name index is used for debtors that are artificial bodies, such as corporations, partnerships,
unincorporated associations, or trusts.
The names required to be used for each entity when filing are outlined in Section III.B.2.c.
A searcher should search against the required names but can also search against additional names, such as a trade
name.
-
4.
VIN SEARCHES
-
A VIN search is possible only if the collateral is a motor vehicle.
The searcher has a choice between searching in the debtor's name index, the VIN index, or both.
44
-
For a motor vehicle that is consumer goods, the searcher should always search against the VIN, even if it also
searches against the debtor's name.
For a motor vehicle that is equipment or inventory, the searcher should always search against the debtor's name,
even if it also searches against the VIN.
C. THE USED VEHICLE INFORMATION PACKAGE
-
-
Section 43.1 of the OPPSA protects buyers in situations where they unknowingly purchase a used vehicle with a
security interest registered against it.
Section 11.1 of the Highway Traffic Act requires sellers of used motor vehicles to provide prospective buyers with
a used vehicle information package (UVIP) containing details about the vehicle's history, including an abbreviated
PPS search certificate disclosing any registered security interests against the vehicle's VIN.
The UVIP must be provided to the buyer before the sale.
In Example 8, the buyer should receive a UVIP from the debtor before the sale, which should alert them to the
security interest registered against the vehicle's VIN and prevent them from proceeding with the transaction
without a release from the secured party.
D. SEARCH RESULTS
-
The appearance of a search result depends on whether it is a certified or uncertified search, and it may also vary
based on the format used by the third-party search house.
The information provided by a search result includes:
o The date of the search.
o A list of financing statements filed against the debtor, grouped into families and given separate file
numbers.
o Information regarding each financing statement, including debtor name, secured party name, collateral
classifications, details of motor vehicles included in the collateral, required information for consumer
goods collateral, and any general collateral description.
o Registration number for each financing statement or financing change statement.
o Other information, such as RSLA filings, filings under the former Corporation Securities Registration Act,
and certain governmental liens.
E. SECTION 18 INQUIRIES
-
-
Section 18 of the OPPSA has two purposes:
o (1) to allow the debtor to obtain statements of account from the secured party and
o (2) to enable third parties to obtain fuller information about the security interest and the terms of the
security agreement.
The financing statement only contains basic information, so follow-up inquiries may be necessary to obtain more
details.
Persons who can request information under s 18(1) include the debtor, a judgment creditor, and a person with an
interest in the collateral (which includes other secured parties and purchasers of collateral).
A qualified inquirer can obtain information about the secured obligation and the nature of the collateral, including
a copy of the security agreement.
Secured parties who fail to comply with a proper request under s 18 within 15 days may be exposed to a damages
claim.
If a secured party has assigned its position, it can satisfy its obligations under s 18 by providing information about
the assignee within 15 days.
Secured parties that have assigned their security interest may wish to make an optional filing under s 47 to show
the assignee as a secured party.
VI. ERRORS AND OMISSIONS IN FINANCING STATEMENT
A. INTRODUCTION
45
-
-
Section 46(4) of the OPPSA states that an error or omission in a financing statement or financing change
statement does not invalidate it or impair its effect, unless it would materially mislead a reasonable person.
An error or omission that materially misleads a reasonable person can invalidate the financing statement or
financing change statement, making the registration ineffective and the security interest unperfected.
Section 20(1) outlines the potential consequences of an unperfected security interest, which can include losing
priority to other creditors.
Given the frequency of errors in registrations, s 46(4) is an important provision to be aware of in order to avoid
invalidating a financing statement or financing change statement.
The test in Section 46(4) is objective, meaning that it does not require proof that anyone was actually misled by the
error.
Proof that a party was not misled will not save the registration if the court finds that a reasonable person would
have been misled by the error.
In cases where the debtor is bankrupt and the trustee wants to challenge the validity of a registration, the objective
character of the test means that the trustee does not have to prove that they were themselves misled or that
anyone else was misled, but only needs to establish the misleading effect of the error.
The meaning of "misled materially" in s 46(4) is that the error would likely prevent a reasonable searcher from
discovering the registration.
In Ontario's exact match registration and search system, even a minor error in the debtor's name or VIN could
invalidate the registration.
The Fairbanx case illustrates this point, where a minor spelling mistake in the debtor's name prevented a search
from retrieving the registration.
Fairbanx: if 3P knows correct debtor name and can’t find SP’s registration, error is seriously misleading (even if
only off by one letter)
B. IMPACT OF DUAL SEARCH CRITERIA
-
The OPPSA allows for a searcher to conduct a debtor's name search, a VIN search, or both when searching for a
motor vehicle's registration.
If a secured party incorrectly states the debtor's name in the financing statement, but correctly includes the VIN, a
debtor's name search would not reveal the registration, but a VIN search would.
The question arises as to whether the correctly stated VIN can cure the error in the debtor's name. This issue was
addressed in Lambert (Re) (In Bankruptcy) 1994 CanLII 10576, 20 OR (3d) 108 (CA)
Lambert (Re) (In Bankruptcy) 1994 CanLII 10576, 20 OR (3d) 108 (CA)
o Issue: When will an error in the contents of a financing statement render this statement invalid and the
security interest it represents unperfected as against third parties? (s.46(4)) PPSA.
o Rule: Section 46(4) of the PPSA provides that an error in a financing statement will not invalidate it unless
the error would be likely to mislead a reasonable person searching the registration system and would
prevent the registration from being discovered.
o Analysis: In this case, GMAC’s financing statement did not comply with section 16 of the Regulation as it
incorrectly stated Lambert’s first name and middle initial. However, section 46(4) sets an objective test
that looks to the broader class of persons who may have cause to use the search facilities of the
registration system. The inquiry must determine not the existence of actual prejudice but the probability
of some member of that class of persons being materially misled by the error. In this case, a reasonable
person would not likely be materially misled by the error in the financing statement as it accurately set
out the VIN.
o Conclusion: The error in the financing statement did not materially mislead a reasonable person, and
therefore the financing statement is not invalidated. GMAC’s security interest in the motor vehicle is
perfected.
C. CLOSE SIMILAR MATCH SYSTEMS
-
Close similar match system: a name or serial number error in the financing statement won't necessarily prevent
the security interest from showing up on a search certificate.
The degree of tolerance built into the system determines whether the security interest will appear on the search
certificate or not.
46
-
The appearance of the security interest on the search certificate, despite the error, doesn't automatically mean
that the error is not invalidating.
The question of whether the error is invalidating or not depends on the degree of tolerance built into the system.
The case below further explores this issue.
Coates v General Motors Acceptance Corporation of Canada Ltd 1999 CanLII 5426, 10 CBR (4th) 116 (BCSC)
o Facts: General Motors Acceptance Corporation (GMAC) had taken security from debtors against a dump
truck and registered a financing statement with an incorrect vehicle serial number. Instead of listing the
correct VIN, it listed a VIN with a few errors. Subsequently, Mr. Coates also took security from the same
debtors against the same dump truck. When Mr. Coates tried to seize the truck, a local GM dealership
informed him that GMAC had a prior charge against the vehicle, which was effective notwithstanding the
faulty registration, and refused to give it up.
o Issue: Whether the registration of the incorrect serial number was seriously misleading?
o Rule:
▪ A registration is seriously misleading if it is likely to mislead a reasonable person searching the
register.
▪ Whether a registration is seriously misleading is an objective test.
▪ The degree of misleading must be assessed from the perspective of a reasonable searcher using
the search parameters that the register specifies.
▪ A seriously misleading registration is one that (a) would prevent a reasonable search from
disclosing the registration or (b) would cause a reasonable person to conclude that the search
was not revealing the same chattel or the same debtor.
o Analysis: The court found that the registration of the incorrect serial number was seriously misleading
because it prevented a reasonable search from disclosing the registration.
o Conclusion: The court held that the registration of the incorrect serial number was seriously misleading
and therefore, the security interest granted to GMAC was invalid. Mr. Coates was entitled to possession
of the dump truck.
D. COLLATERAL CLASSIFICATION ERRORS
-
Errors in collateral classification may cause a searcher to wrongly conclude that the security interest does not
extend to the collateral they are inquiring about.
This can be misleading, even if the error does not make the registration unsearchable.
For example, if the collateral is inventory but the secured party checks off the equipment box, a searcher may
conclude that the secured party has no claim to the debtor's inventory.
Section 46(1) of the OPPSA provides that a financing statement is seriously misleading if it contains a seriously
misleading error in the collateral description.
Section 46(2) of the OPPSA provides that a financing statement is not seriously misleading solely because it contains
an error in the collateral description that is not seriously misleading.
The determination of whether an error is seriously misleading depends on the circumstances of the case, including
whether the error would cause a reasonable person to consider the financing statement misleading.
Adelaide Capital Corp v. Integrated Transportation Finance Inc, 1994, Ont GD
o The first creditor trying to secure trailers, checks everything except inventory for the collateral
classification when registering. They are in fact inventory. A second creditor also checks equipment, but
describes them as “inventory” in the description section.
o Can an error in collateral classification, which is corrected under s.46(4), be relied upon as the “root of
title” for subsequent registrations?
o Held: (Blair) A reasonable searcher of the registry is deemed to read the description field. Therefore even
though the wrong collateral classification is checked, they would not be misled and so the registration
does perfect the security interest. Under s.45(4), one properly filed registration will cover multiple security
interests.
E. OTHER ERRORS
-
The financing statement must include the secured party's name and address for follow-up inquiries under section
18 of the OPPSA.
47
-
-
Errors in the secured party's name and address do not invalidate the registration because it is not a searchable
field.
However, an error in the secured party's name and address could potentially mislead a searcher into sending an
inquiry to the wrong address.
Section 18 of the OPPSA provides a remedy for errors in the secured party's name and address by holding the
secured party liable for any loss or damage suffered as a result of failing to respond to a section 18 inquiry without
reasonable excuse.
If the secured party changes its name or address and fails to update the registration, it could also be liable for any
loss or damage suffered as a result.
CHAPTER 6: GENERAL PRIORITY RULES
I. INTRODUCTION
-
-
-
-
-
-
-
Priorities allow creditors to be aligned in some order as they try to get paid on default.
Sometimes, they will not matter: (i) if the debts are paid off (the securities remain in place, but they don’t have any
more function, as they don’t have any more liability they need to secure, they are theoretical rather than practical),
(ii)
Priorities come in place if there isn’t performance (default), and the creditors take action against the debtor. The
question of priorities is simply the question of how and in which order can the creditors go against the debtor’s
assets. The default position is that all creditors are equal, but one can order their priorities, so they are not treated
equally.
First of all, the creditors can be divided between secured and unsecured creditors, the secured creditors, coming
first (the assets are first used to pay the secured creditors). But it isn’t so easy: this is subject to the notion of
attachments (when a security interest, which is a property right, attaches to the assets of the debtor and therefore
is created) and perfection (when in law are people aware of this interest, concept of notice publicity which can
happen in several ways), meaning the secured interest might only cover some and not all of the assets.
Therefore, secured creditors do come before unsecured creditors, but only with respect to the assets in which
they have a security interest in; with respect to the other assets, they are treated as an unsecured creditor.
o Ex. A is owed 100$ and has an asset security worth 80$. He can use it to get paid, but there will be 20$
left. With respect to the 80$, A is a secured creditor, and with respect to the 20$, he is an unsecured one.
It is possible to create a security interest in all the assets of the debtor, current and future, the only restriction
being that there cannot be any attachment (and therefore any security interest) until the debtor acquire property
rights (the assets move from being future to being current ones).
Secured creditors always trump unsecured creditors, UNLESS the default priorities rules are switched by agreement
(subrogation agreement, somebody who has a better priority will give it up by consensual dealing).
The rules that exist in the PPSA don’t really deal with the secured – unsecured rule, but rather with the disputes
about priorities amongst secured creditors.
o Ex. Debtor (D) has Assets A1, A2 and A3, and owes money to Secured Creditor SC1, SC2 and SC3. SC1 has
interest in A1, SC2 has interest in A2, but SC3 has interest in all of D’s assets (A1-3). With respect to A3,
SC3 will be ranked #1, but with respect to A1 and A2, he might be in conflict with SC1 and SC2.
If both of the security interest are perfected, the rules of s.30 PPSA will apply.
II. SECTION 30 AND THE GENERAL PRIORITY RULES
-
-
The general priority rules are set out in s 30 of the OPPSA
The rules in s 30(1) may be paraphrased as follows:
1. Rule of first to register. If the competing security interests have all been perfected by registration, then the order
of registration determines the order of priority (s 30(1), rule 1).
o The time of attachment or perfection of the security interests is not relevant.
2. Rule of first to register or to perfect by other means. If one security interest is perfected by registration and the
other security interest is perfected by other means, then:
48
o
-
-
-
-
(a) if registration occurs before the perfection of the other security interest, the security interest perfected
by registration will take priority (s 30(1), rule 2(i)), and
o (b) if the perfection of the security interest perfected by other means precedes the registration, the
security interest perfected by other means will take priority (s 30(1), rule 2(ii)).
o Under this rule, the relevant date for the security interest perfected by other means is the date of
perfection, not the date of the perfecting event,
▪ Ex. if the secured party takes possession on Day 1 but attachment does not occur until Day 2, Day
2 is the relevant date, not Day 1, since perfection only occurs on Day 2.
3. Rule of first to perfect. If both security interests are perfected otherwise than by registration, then the security
interest that is perfected first takes priority (s 30(1), rule 3).
4. Rule of first to attach. If all of the competing security interests are unperfected, they rank according to the order
of attachment (s 30(1), rule 4).
These rules are based on the principle of first in time and determine the order of priority among competing security
interests.
o Rule 1 looks to first in time to register,
o Rule 2 looks to first in time between registration and perfection by other means,
o Rule 3 looks to first to perfect, and;
o Rule 4 looks to first to attach.
The OPPSA generally rewards the party who is first in time on the basis that, as long as a party contemplating a
grant of credit can ascertain if there is already a creditor with security, the creditor who is subsequent in time
should accept the risk of lower priority.
Section 30(1), rule 3.1 allows priority rules to be created by regulation for prescribed classes of collateral, but no
classes of collateral have been prescribed yet.
Section 30.1 contains special priority rules for security interests in investment property. The key rules are as
follows:
o 1. Control trumps non-control. A security interest perfected by control has priority over another security
interest perfected otherwise than by control.
o 2. Two security interests perfected by control. If two or more security interests are perfected by control,
they rank in priority by first in time to obtain control.
o 3. Securities intermediary priority. Despite the above rules, in the indirect holding system, a securities
intermediary with a security interest in a security entitlement or a securities account maintained by the
securities intermediary has priority over other secured parties, unless the intermediary otherwise agrees.
In summary, the general rules for contests between two secured parties for collateral, other than investment
property, are as follows (again, in each case subject to various exceptions):
o 1. Perfected vs Perfected (both by registration). See s 30(1), rule 1.
2. Perfected vs Perfected (one by registration and one not). See s 30(1), rule 2.
o 3. Perfected vs Perfected (both not by registration). See s 30(1), rule 3.
o 4. Unperfected vs Unperfected. See s 30(1), rule 4.
o 5. Unperfected vs Perfected. See s 20(1)(a)(i).
III. IS KNOWLEDGE RELEVANT?
-
Robert Simpson Co Ltd v Shadlock 1981 CanLII 1789, 31 OR (2d) 612 (H Ct J)
o Issue: In a contest between two security interests over the same collateral, can knowledge of a prior
security interest defeat a claim to priority based on prior registration or perfection?
o Rule: The PPSA provides for a test of priorities where priority is determined by the order of registration if
the security interests have been perfected by registration (s. 30(1), rule 1). An unperfected security
interest is subordinate to the interest of a person who is entitled to priority under the PPSA or any other
act (s. 20).
o Analysis: The plaintiff had an unperfected security interest in chattels sold to the debtor under conditional
sale contracts. The defendant had a security interest in the same chattels, which was perfected by
registration. The plaintiff argued that the defendant's knowledge of its prior security interest should
defeat the defendant's claim to priority. The defendant argued that the PPSA provides for priority based
on registration and perfection and that knowledge should not be relevant.
49
o
-
-
Conclusion: The court did not decide the issue, as the legislation was new and there were conflicting policy
arguments. The court noted that the PPSA does not explicitly abolish the doctrine of actual notice, but it
also does not provide for it. The court reserved judgment on the matter.
The fact that one knows that there is an unperfected security interest does not make any difference, the key is
whether there was a perfected one before. If there isn’t one and I perfect mine, I have priority even if I knew about
it.
Knowledge doesn’t matter because (i) the PPSA superseded any other rules that might have stated otherwise, (ii)
the mere fact that one knows something doesn’t imply any sort of fraud, and (iii) they want to encourage people
to properly register; if the Courts started accepting exceptions to the Rules of the PPSA for unperfected claims,
they would be undermining the system and allowing the fact of having a security interest even though it isn’t
registered, perfected, and the rules of the PPSA have not been followed.
IV. PRIOR LENDER’S COMPETITIVE ADVANTAGE
-
-
Secured parties in Ontario and other Canadian PPSA jurisdictions typically perfect their security interests by
registration, except for investment property and chattel paper.
Most contests between secured parties are resolved by applying s 30(1), rule 1 (first to register) under the PPSA.
The first to register priority rule gives the prior secured lender a significant advantage, especially in light of s 30(3)
(priority for future advances), s 45(3) (registration in advance of security agreement), and s 45(4) (use of a
financing statement to perfect multiple security interests in the same collateral type).
Example 2:
o Example 2 involves two secured parties (SP1 and SP2) with competing security interests in a delivery truck.
o SP1 loaned $25,000 to the debtor and obtained a security interest in the truck, which it properly registered
within 10 days.
o After the loan was repaid, SP1 did not discharge its filing.
o Later, the debtor obtained a credit facility from SP2, which also obtained a security interest in the truck
and properly registered within 30 days.
o SP2 saw SP1's filing but was told by the debtor that the loan was repaid and saw the "Repaid" notation on
the security agreement.
o SP1 then made a new loan to the debtor on the same truck and entered into a new security agreement.
o Questions:
o Who has priority between SP1 and SP2 with respect to the truck?
▪ SP1 wins based on s 30(1), rule 1 (first to register) because the collateral is not consumer goods.
SP1 can rely on its filing even though it was initially made for a different loan that was repaid (s
45(4)). The older registration is available to shelter later transactions.
• s 45(4: One financing statement can be used to perfect one or more security interests
created in one or more security agreements, as long as the collateral is not consumer
goods. The security interests and agreements do not have to be part of the same
transaction or related transactions, and the security agreements can be signed by the
debtor before the financing statement is registered.
o Would it make a difference to the answer if the truck was driven by the debtor mostly for personal use?
▪ If the truck were driven mostly for personal use, it would be "consumer goods," and s 45(4) would
not apply.
▪ SP1 would have been unperfected, and therefore, SP2 would have won based on s 20(1)(a)(i).
▪ Once the debtor has performed all of their obligations, s 57 requires SP1 to file a discharge of its
OPPSA registration within 30 days without the need for a request from the debtor.
o Would it make a difference to the answer if, on Day 30, SP2 had asked SP1 for a statement of the amount
owing and SP1 had returned the copy of the security agreement marked "Repaid"?
▪ SP2 was entitled to request a statement of the amount owing from SP1 under s 18. SP1 complied
with the request, and its reply was accurate as of the date of the reply. SP2 might argue that SP1
is subordinated or estopped from relying on its filing, but it would probably not succeed unless
SP1 had said more than the facts suggest.
o What should SP2 have done to avoid the risks this example highlights?
▪ SP2 should have conducted a search of the Personal Property Security Register shortly before
entering into the security agreement and, if necessary, requested a discharge from SP1 before
50
relying on the "Repaid" notation on the security agreement. SP2 should have also obtained a
subordination agreement or an acknowledgement from SP1 that its filing did not perfect a
security interest in the truck.
V. TIME FOR DETERMINING PRIORITIES
-
-
-
-
In cases involving competition between unperfected security interests, at least one secured party may realize their
security interest is unperfected and register a financing statement or otherwise perfect their interest.
If one secured party perfects their interest, but the other does not, OPPSA Section 20(1)(a)(i) applies to govern the
dispute.
If both secured parties perfect their interests, the general priority rules in OPPSA Section 30(1) apply
o Unless a special priority rule such as OPPSA Section 33 (which governs the priority of purchase-money
security interests) applies.
Timing is crucial in determining priority between competing security interests, and the snapshot is taken when the
security interests come into conflict.
In Sperry Inc v Canadian Imperial Bank of Commerce, SP1 and SP2 held competing unperfected security interests
in the debtor's farm equipment. SP1 enforced its security interest by appointing a receiver, and 11 days later, SP2
registered a financing statement. The Court held that the priority issue should be resolved by reference to the time
at which the security interests came into conflict, which occurred when SP1 enforced its security interest or when
Sperry attempted to remove the collateral.
Looking to when the security interests come into conflict can lead to uncertainty, as in Sperry the conflict could
have arisen on two different dates.
o The uncertainty can be resolved by the unperfected secured party taking steps to perfect as soon as they
discover the issue, giving them at least a prior position as against a trustee in bankruptcy.
The CCPPSL Report outlines competing policy considerations and recommends a different approach.
Canadian Conference on Personal Property Security Law, Report on Proposals for Changes to the Personal
Property Security Acts, Part II(6):
o Priority among security interests is usually determined when a secured party enforces its security interest
after the debtor defaults.
o The priority ranking determines the distribution of funds generated by the collateral and the title of a
person who buys the collateral in the enforcement proceedings.
o Priority is fixed at the date enforcement measures are initiated, even if the security interest loses
perfection subsequently.
o Priority is determined as at the date of enforcement action and not affected by subsequent registry
changes.
o The judicial view that priorities are established at the date of enforcement action is inconsistent with the
approach to priority embodied in the explicit rules of the PPSA.
o The priority of a security interest depends on the fact and time of attachment and perfection.
o Perfection plays a critical role in the priority system because it is the condition that allows third parties
who might deal with a debtor to ascertain that the debtor’s property is subject to a property interest that
might otherwise be unknown.
o A secured party can control the risk of subordination to competing claims by ensuring that its interest is
properly registered and that the registration is maintained.
o A secured creditor whose registration lapses is given some measure of protection by SPPSA s 35(7).
o A potential change in priority ranking after enforcement measures have been taken by a secured party
can have very serious consequences, particularly where a receivership is involved.
o A secured party who undertakes enforcement may incur very substantial expenses through a potentially
extended process of disposing of the collateral.
o A party whose security interest loses priority during the process of enforcement as a result of an
inadvertent lapse in registration may find themselves unable to complete the process of sale without
paying out others whose interests have correspondingly assumed priority over their own, potentially
defeating the enforcing creditor’s expectation of recovering some or all of the secured debt as well as the
expenses incurred in enforcement.
o A party who knew or was in a position to know that their interest was subordinate to that of the enforcing
creditor when they chose to extend funds or credit may be viewed as having garnered an undeserved
51
windfall if they are thrust into a priority position through a clerical error or inadvertence on the part of
the creditor who initially enjoyed priority.
VII. SECURITY FOR FUTURE ADVANCES
A. INTRODUCTION
-
-
-
-
-
Future advances of funds: funds provided to a debtor based upon an existing lending agreement. This is common
when a debtor establishes a line of credit with a lender. The lender will advance funds to the debtor when
requested. Generally, a security agreement will provide that the lender is secured by any collateral securing a future
advance or new collateral acquired with the advanced funds.
Example 3: SP1 opens a line of credit in Debtor's favor secured by a security interest in Debtor's inventory on June
1 and registers a financing statement. Debtor draws down $60 on the same date. SP2 and Debtor enter into a
security agreement on July 1, giving SP2 a security interest in the same inventory. SP2 registers a financing
statement and makes a loan of $30 to Debtor. Debtor draws an additional $50 on its line of credit with SP1 on
August 1. On September 1, Debtor defaults against SP1 and SP2 and the value of Debtor's inventory is $100. SP1
claims the inventory for its June 1 and August 1 advances. SP2 argues that its claim to the inventory in relation to
SP2's July 1 advance has priority over SP1's claim to the inventory in relation to SP1's August 1 advance.
Prior to the enactment of the PPSAs, the equitable doctrine of "tacking" governed such disputes. The rule was that
SP1 had priority over SP2 for the August 1 advance unless SP1 had notice of SP2's July 1 loan. "Notice" meant actual
knowledge of SP2's security interest, not constructive notice from SP2's registration.
The PPSAs replace the tacking doctrine with statutory rules. OPPSA s 13 read in conjunction with s 30(3) govern
such disputes.
o Section 13 provides that a security agreement may secure future advances,
o while s 30(3) provides that a security interest perfected at the time of future advances has the same
priority as it has with respect to the first advance.
SP1's state of knowledge of the other security interest is irrelevant under OPPSA s 30(3), although see discussion
below on s 30(4).
OPPSA s 1(1) defines "future advance" to mean "the advance of money, credit, or other value secured by a security
agreement whether or not such advance is given pursuant to commitment."
In Example 3, SP1 does not have the discretion to refuse the August 1 advance, so it is given pursuant to
commitment and is a "future advance" under OPPSA. Even if the agreement between SP1 and Debtor had given
SP1 the option to decline further credit, SP1's August 1 advance would still be a "future advance" under OPPSA s
1(1).
B. THE LAW
-
Prior to the PPSAs, the doctrine of "tacking" governed disputes where two or more secured parties had conflicting
security interests in the same collateral.
The rule was that the first secured party (SP1) had priority over the second secured party (SP2) for an advance
made on a certain date, unless SP1 had notice of SP2's earlier loan.
The PPSAs replace the tacking doctrine with statutory rules. In Ontario, the relevant provisions are OPPSA sections
13 and 30(3).
Section 13 allows a security agreement to secure future advances.
Section 30(3) provides that a security interest perfected before a future advance has the same priority with respect
to each future advance as it has with respect to the first advance.
SP1's knowledge of SP2's security interest is irrelevant for the purpose of determining priority under sections 13
and 30(3).
The definition of "future advance" in section 1(1) includes advances made pursuant to commitment and those
made at the discretion of the secured party.
Even if the security agreement gives the secured party the option to decline to provide further credit, the advance
is still a "future advance" and subject to sections 13 and 30(3).
Subsequent security agreements
o 45 (4) Except where the collateral is consumer goods, one financing statement may perfect one or more
security interests created or provided for in one or more security agreements between the parties,
52
whether or not, the security interests or security agreements are part of the same transaction or related
transactions; or the security agreements are signed by the debtor before the financing statement is
registered.
▪ allows for one financing statement to be used to cover multiple security interests that are created
or provided for in one or more security agreements between the parties, regardless of whether
they are part of the same or related transactions.
▪ This means that a creditor can register one financing statement to cover multiple security
agreements, rather than having to register a separate financing statement for each agreement.
It also means that the financing statement can be registered before the debtor signs the security
agreement, which gives more flexibility in the process of creating and perfecting security
interests.
▪ However, this provision only applies when the collateral is not consumer goods. For consumer
goods, separate financing statements are required for each security interest created or provided
for in a security agreement.
C. POLICY CONSIDERATIONS
D. FUTURE ADVANCES AND EXECUTION CREDITORS
-
-
Section 30(3) OPPSA sets out the general rule that a future advance made by a secured party will have priority
over any subsequently perfected security interest in the same collateral, as long as the advance is made before
the subsequent security interest is perfected.
Exceptions: However, there are exceptions to this rule under section 30(4) in the context of a contest between the
creditor making the future advance and certain third parties, including execution creditors and others entitled to
share in their recoveries under section 20(1)(a)(ii) or (iii).
o If the future advance is made after the secured party receives written notification of the interest of any
such person, the advance will be subordinate to that interest, unless the advance is made to pay
reasonable expenses or under a commitment to advance.
o The commitment exception applies even if the commitment has fallen away due to "a subsequent event
of default or other event not within the secured party's control" which has relieved the secured party from
the commitment.
o These rules differ significantly from section 30(3), as they turn back to both knowledge as well as the
presence of a commitment.
VIII. PRIORITY OF REPERFECTED SECURITY INTERESTS
-
-
OPPSA Section 30(6): when a security interest that is perfected by registration becomes unperfected and is again
perfected by registration, it shall be deemed to have been continuously perfected from the time of first
perfection, except if a person acquired rights in all or part of the collateral during the period of unperfection.
If a subsequent secured party (SP2) acquires rights during the gap period where the prior security interest (SP1)
was unperfected, SP2 may have priority over SP1 to the extent of the rights acquired.
However, if SP2 did not acquire any rights during the gap period, then SP1 retains priority under s 30(1) rule 1.
The protection under s 30(6) is not limited to other secured parties and may extend to other persons, such as a
trustee in bankruptcy.
The Heidelberg Canada Graphic Equipment case suggests that s 30(6) only protects a creditor who acquires new
rights in the collateral during the unperfected period.
There are unanswered questions about the interpretation of s 30(6), such as whether it applies to after-acquired
property clauses, and whether it applies if the security interest was originally perfected by possession.
Other questions include whether s 30(6) applies where the original registration occurred outside Ontario and
whether there should be a limit on the time between discharge or lapse and reperfection.
A. SUBORDINATION AGREEMENTS
53
-
-
-
-
-
-
-
Subordination agreements = agreements between prior secured parties and subsequent secured parties where
the prior secured parties agree to subordinate their security interest to the security interest of the subsequent
secured parties.
o This benefits the prior secured parties by allowing the debtor access to other sources of credit that will
only be made available if there is a subordination.
Subordinations are common in the context of shareholder loans.
In situations where secured parties are uncertain about their priority positions, a subordination agreement may
also be entered into to resolve the uncertainty in advance and reduce the risk of subsequent litigation.
A subordination clause is a provision in the security agreement (or perhaps some other agreement) between the
secured party and the debtor by which the secured party subordinates its security interest to one or more other
secured parties.
The OPPSA, s 38 provides that “a secured party may, in the security agreement or otherwise, subordinate the
secured party’s security interest to any other security interest and such subordination is effective according to its
terms”
This reinforces the point that the OPPSA priority rules are default rules and that the parties can contract for a
different priority order if they want to.
In addition, given the phrase “in the security agreement or otherwise,” secured parties may deal directly via a
subordination agreement or indirectly, via a subordination clause in the security agreement (or some other
agreement) between the prior secured party and the debtor.
o Since, in the latter case, the subsequent secured party is typically not a party to the agreement containing
the subordination clause, s 38 must be intended to override the normal privity requirements.
Euroclean Canada Inc v Forest Glade Investments Ltd, where the Ontario Court of Appeal held that OPPSA, s 38
creates an exception to the privity doctrine. The corresponding provision in the other provinces makes the point
explicitly; for example, SPPSA, s 40(1) provides that the subordination provision may be enforced by a third party
“if the third party is the person ... for whose benefit the subordination was intended.”
Accordingly, if a security agreement has a clause stating that the security interest being granted shall be
subordinate to any (or certain) security interests that may be granted to another secured party, then the
subsequent secured party can rely on and enforce the subordination in the event of a contest between the prior
and subsequent secured parties, even though the subsequent secured party is not a party to the prior secured
party’s security agreement or other agreement with the debtor.
A subordination agreement acknowledges that one party’s claim or interest is superior to that of another party in
the event that the borrower's assets must be liquidated to repay the debts.
The subordinated party will only collect on a debt owed when and if the obligation to the primary lender has been
fully satisfied in the event of foreclosure and liquidation
B. POSTPONEMENT V. SUBORDINATION AGREEMENTS
-
-
Section 40(2) of the PPSA pertains to agreements or undertakings to postpone or subordinate.
o "Postponement" refers to an agreement where the debtor's obligations to one creditor will be performed
only after its obligations to another creditor have been performed.
▪ Section 40(2)(a) pertains to postponements
o "Subordination" refers to subordination of a security interest.
▪ s 40(2)(b) pertains to subordinations.
Postponement provisions are often found in subordination agreements to obtain both subordination of security
and postponement of debt obligations.
Postponements of debt may prohibit all debt payments or allow interest payments only until the new creditor's
debt is fully repaid, among other variations.
Postponements of debt may also be found in guarantees with a turnover clause, which may create a security
interest and require registration.
C. SUBROGATION VS SUBORDINATION
-
Subrogation and subordination have different meanings.
Subrogation is the substitution of one person for another with regard to a lawful claim, demand, or right.
o Subrogation is recognized in OPPSA s. 63(11) and s. 72 preserves the general principles of common law.
54
o
-
Subrogation is a remedy to prevent unjust enrichment and is available to junior secured parties that pay
off senior secured parties in default.
Subordination agreements commonly contain a subrogation clause that provides expressly for the subordinating
creditor’s right of subrogation.
Subrogation is a derivative right that gives the beneficiary no larger claim than the original party.
Unperfected security interests are not effective against the trustee (OPPSA, s. 20(1)(b)).
E. ESTOPPEL LETTERS
-
A filing under OPPSA may not provide sufficient information about the nature of the security interest being claimed.
Searchers can request further information under s 18, but the secured party could still later rely on its filing to claim
a broader pool of collateral.
Obtaining an estoppel letter can be a common precaution against this risk.
An estoppel letter is a communication from one secured party to another committing to certain statements
about its security interest, often identifying the exact nature and extent of its collateral.
The aim is to create an estoppel in the second secured party's favor that would prevent the first secured party from
claiming its security interest extends beyond the limits specified in the letter.
IX. CIRCULAR PRIORITIES
-
A circular priority situation arises when there are three or more parties with competing claims to the same asset
and there is no clear ranking of priority among them.
Under OPPSA Section 30(1), the general rule is that the first to perfect their security interest has priority over laterperfected security interests.
Royal Bank of Canada v General Motors Acceptance Corporation of Canada Ltd 2006 NLCA 45
o Issue: What is the legal effect of the subordination agreement between Royal Bank of Canada (RBC) and
Canadian Imperial Bank of Commerce (CIBC), and how (if at all) does this affect priority as between RBC
and General Motors Acceptance Corporation (GMAC) to the proceeds of sale of eight units of heavy
equipment owned by Hickman Equipment Limited (HEL)?
o Rule: The perfection date of a security interest determines priority among secured creditors. Perfection
dates are determined by the date of creation of the security interest.
o Application: The Court found that RBC and CIBC had entered into a subordination agreement that
subordinated RBC’s security interest to CIBC’s security interest. However, the agreement did not clearly
indicate how the proceeds of sale were to be distributed. As such, the Court had to determine the
perfection dates of the security interests held by RBC and GMAC to determine priority. The perfection
date of GMAC’s security interest was earlier than that of RBC’s security interest. Therefore, GMAC had
priority to the proceeds of sale.
o Conclusion: The Court held that GMAC had priority to the proceeds of sale of the eight units of heavy
equipment owned by HEL over RBC, as GMAC’s security interest had an earlier perfection date.
o Issue: The issue at hand is whether RBC moves up to stand in the place of CIBC and gains priority over
GMAC or if, while CIBC ranks in priority behind RBC, GMAC retains its priority over RBC, after CIBC
subordinated its security interests in eight units to RBC's security interest in them.
o Rule: Section 41(1) of the PPSA states that a secured party can subordinate their security interest to any
other interest. Subordination is effective according to its terms between the parties and may be enforced
by a third party if the third party is the person or one of the class of persons for whose benefit the
subordination was intended.
X. THE DOUBLE DEBTOR ISSUE
-
The double debtor issue arises when a debtor transfers collateral to another party, with or without the secured
party's consent.
The OPPSA deals with this issue in subsections 48(1) and (2).
If the collateral transfer takes place with the secured party's consent or the secured party has prior knowledge of
the transfer, the secured party has a grace period within which to register a financing change statement,
substituting the new debtor.
55
-
-
-
o If the secured party does not register within the grace period, its security interest becomes unperfected.
Assuming the secured party has registered within the grace period, its security interest remains perfected and is in
competition with the security interest of the new secured party.
There are two views on whether the priority rules in OPPSA apply where the competing security interests are given
by different debtors.
o One view is that the priority rules only apply where the security interests are given by the same debtor,
and the common law nemo dat rule applies in cases where the security interests are given by different
debtors.
o The other view is that the priority rules do apply, and the first to register has priority.
The better view is that the priority rules in OPPSA apply even where the security interests are given by different
debtors. The provisions of subsections 48(1) and (2) are drafted on this assumption, and the provisions would be
redundant if the nemo dat rule applied instead. This view is supported by the case of Lisec America Inc. v. Barber
Suffolk Ltd, where the court held that the priority rules in OPPSA applied in a double debtor dispute, and the
secured party who registered first had priority.
However, the application of the priority rules in OPPSA to cases like Example [2], where the first secured party
complied with the statute by registering a financing change statement within the grace period, is problematic. In
such cases, the first secured party is intuitively entitled to priority, but the priority rules in OPPSA would give priority
to the new secured party who registered first.
CHAPTER SEVEN: PURCHASE-MONEY SECURITY INTERESTS
I. INTRODUCTION
-
PMSI: “Purchase Money Security Interest” defined in Section 1(1). “purchase-money security interest” means,
o (a) a security interest taken or reserved in collateral, other than investment property, to secure payment
of all or part of its price
▪ Imagine there is creditor 1/seller. The debtor/buyer wants to buy asset 2 (contract of sale). It
could do it one of two ways: the buyer could just buy the asset and pay the price (no need for
security), but the seller could transfer the possession to the debtor before the debtor pays the
price. At that point, the seller can ask for security. It could ask security over all the assets (so asset
2 + all the other assets, or just a SI in asset 2). The key thing about PMSI is that it would only apply
if it was ONLY FOR ASSET 2, NOT for a SI in ALL THE ASSETS.
▪ Ex: C1 has security over all the assets of the debtor, A1 and A2. Debtor acquires A3 with the
financing of C2. Usually, C1 could also have security over A3, but since Debtor could not have
acquired A3 without C2’s financing and not giving C1 priority with A3 does not really harm him,
we let C2 have the security over A3. C2 = PMSI super priority.
o (b) a security interest taken in collateral, other than investment property, by a person who gives value
for the purpose of enabling the debtor to acquire rights in or to the collateral, to the extent that the
value is applied to acquire the rights, or
▪ In (a), it is the creditor/seller transferring possession of the good to the debtor.
▪ In (b), you have a seller, but the creditor is a separate party. You have a seller who transfers
possession of the good, and then the creditor pays the seller and then effectively has a right. You
have one person selling, another person financing.
▪ Value = in the sense that it is not gratuitous, any consideration sufficient to support a contract.
▪ The purpose of the loan has to be to acquire the additional assets and the money has to be used
to acquire that asset.
o (c) the interest of a lessor of goods under a lease for a term of more than one year,
▪ If you are leasing a personal property for more than one year, we saw that that has to be
registered, but how do we protect a lessor, who is deemed to be an owner of the good from
having their priority in the good be swamped by others, we say that they have a PMSI interest,
even though technically they aren’t selling it.
o but DOES NOT INCLUDE a transaction of sale by and lease back to the seller; (“sûreté en garantie du prix
d’acquisition”)
▪ This type of transaction is excluded.
56
▪
-
-
-
-
We like PMSIs because we are bringing in new assets. But a sale and lease back is that I am taking
an existing asset and inventory, and then selling it back to the buyer and then automatically I get
those goods leased back to me. Have I increased the amount of assets? No. You haven’t put
additional assets into the pool which would justify the additional super-priority.
Purchase-Money Security Interests (PMSIs) are defined as security interests taken to facilitate the debtor's
purchase of the collateral.
PMSIs have special priority rules under the OPPSA, specifically in Section 33.
o i.e. someone lends money to someone else to buy something and takes a security interest in that thing to
make sure they get their money back.
There are two types of PMSIs: seller's PMSI and lender's PMSI.
In a seller's PMSI, the secured party sells goods to the debtor on conditional sale terms or outright and makes the
debtor a loan to finance the purchase, taking a security interest in the goods to secure the debtor's payment
obligation.
o i.e. In a seller's PMSI, the person selling the thing also gives the buyer a loan and takes a security interest
in the thing.
In a lender's PMSI, the seller sells goods or other property to the debtor outright, the debtor obtains a loan from a
third-party lender to finance the purchase, and the financer takes a security interest in the goods to secure the
loan.
o I.e. In a lender's PMSI, the person selling the thing gets paid upfront, but the buyer gets a loan from a
third party and the lender takes a security interest in the thing.
Section 33 of OPPSA provides that a PMSI has priority over a non-PMSI in the same collateral, subject to certain
conditions, even if the competing non-PMSI was perfected before the PMSI. In case of default by the debtor, both
the general lender (usually a bank) and the PMSI holder can claim the collateral, and s 33 applies to resolve the
dispute.
o Section 33 of OPPSA says that if there is a dispute over the collateral and both the PMSI holder and a
general lender (usually a bank) have an interest in it, the PMSI holder gets priority if certain conditions are
met, even if the general lender registered their interest first.
II. THE DEFINITION OF “PURCHASE-MONEY SECURITY INTEREST”
A. PARAGRAPHS (A) AND (B)
1. Introduction
- The definition of "purchase-money security interest" in OPPSA includes two paragraphs: (a) and (b).
- Paragraph (a) covers the two-party form of the transaction, where a security interest is taken or reserved in
collateral to secure payment of all or part of its price.
- Paragraph (b) covers the three-party form of the transaction, where a security interest is given by a person who
gives value for the purpose of enabling the debtor to acquire rights in or to the collateral, to the extent that the
value is applied to acquire the rights.
- Most of the case law has focused on the interpretation of the words "gives value for the purpose of enabling the
debtor to acquire rights in or to the collateral" in paragraph (b).
2. Giving Value to Acquire Rights in Collateral
-
North Platte State Bank v Production Credit Ass’n 200 NW 2d 1, 189 Neb 44 (S Ct 1972)
o Issue: Did North Platte State Bank (North Platte) have a Purchase Money Security Interest (PMSI) in the
cattle, which took priority over Production Credit Ass’n’s (PCA) perfected security interest?
o Rule: Under the Uniform Commercial Code (UCC), a security interest cannot become a PMSI unless it is
taken by a person who, by making advances or incurring an obligation, gives value to enable the debtor to
acquire rights in or the use of collateral if such value is in fact so used.
o Analysis: In this case, Tucker had an operating loan from PCA that contained an after-acquired property
clause, which applied PCA's security interest to all livestock owned or acquired by the debtor, whether by
purchase, natural increase, or otherwise. PCA perfected its security interest by properly filing a financing
statement that covered all of Tucker's livestock and all subsequent transactions between PCA and Tucker.
57
o
o
However, Tucker purchased cattle from D.M. Mann and took possession of them before he drew a check
for the total purchase price. When Tucker subsequently drew a check on North Platte for the purchase
price of the cattle, North Platte acknowledged that a loan to Tucker had been discussed and that if Tucker
would come in to complete the necessary papers, the loan would be granted. A note advancing $20,000
to Tucker and a security agreement were executed, and the check was honored. After North Platte filed a
financing statement, it claimed a security interest in the cattle, which PCA eventually became aware of,
leading to the present lawsuit.
The court ruled that North Platte did not have a PMSI in the cattle, which took priority over PCA's perfected
security interest. According to the UCC, title passes to the buyer at the time and place at which the seller
completes their performance with reference to the physical delivery of the goods, despite any reservation
of a security interest. Thus, title to the cattle passed to Tucker when they reached his ranch, and he
received the actual physical possession of them. At this point, the seller had no enforceable security
interest in the cattle, and title and possession were merged in Tucker. Therefore, North Platte's money
advanced to Tucker enabled him to pay the price to the seller for the cattle, but it was not used by Tucker
to acquire any rights in the cattle. Tucker already had all the possible rights in the cattle with both
possession and title.
Conclusion: The court concluded that North Platte did not have a PMSI in the cattle, as its money was not
used by Tucker to acquire rights in or the use of the cattle. Therefore, PCA's perfected security interest
took priority over North Platte's security interest.
-
Agricultural Credit Corp of Saskatchewan v Pettyjohn 1991 CanLII 7979, 79 DLR (4th) 22 (Sask CA)
o Facts: Pettyjohn obtained a loan from Agricultural Credit Corporation of Saskatchewan (ACCS) to buy cattle
and gave ACCS a mortgage that included the new cattle. Later, he obtained an additional loan for more
cattle and an SA was executed providing for an interest in whatever is purchased with the loan. Before he
received the money, Pettyjohn purchased the cattle and obtained a receipt from the seller. ACCS took the
receipt and issued a cheque to the seller that was jointly payable to themselves and Pettyjohn. Pettyjohn
also borrowed cash from BMO and arranged to have ACCS issue a cheque to cover it. Both the mortgage
and the SA provided that the cattle wouldn’t be sold by Pettyjohn without the consent of ACCS. Pettyjohn
later sold the cows without consent and then defaulted. ACCS tried to realize its security, and Pettyjohn
declared bankruptcy and claimed that their present cattle couldn’t be seized unless ACCS had a PMSI in
the cattle under a Saskatchewan statute.
o Issue: Whether ACCS has a Purchase Money Security Interest (PMSI) in the cattle purchased by Pettyjohn,
thereby enabling them to seize the present cattle as security for the unpaid loan amount.
o Rule: Three requirements are necessary for PMSI. Firstly, the lender must have a Security Interest (SI) in
the property. Secondly, the lender must have given value for the purpose of enabling the debtor to acquire
rights in the property. This includes a binding promise to give cash or extend credit, even if the loan had
not occurred yet. Lastly, the value given must have been used to acquire those rights.
o Analysis: In this case, ACCS had an SI and value was given in the form of the promise to advance shown by
the letter to obtain the rights in the cattle. The monies advanced were used to acquire rights when the
purchase had already taken place, and the rights already acquired were ignored because the court said
there was no need to divide transactions minutely since they knew where the cash was coming from due
to the nature of the transaction.
o Conclusion: ACCS has a PMSI in the cattle purchased by Pettyjohn as they fulfilled all three requirements
necessary for a PMSI. Thus, ACCS can seize the present cattle as security for the unpaid loan amount.
-
Unisource Canada Inc v Laurentian Bank of Canada 2000 CanLII 5671, 47 OR (3d) 616 (CA)
o Issue: Did Laurentian Bank of Canada have a purchase money security interest (PMSI) in the printing press,
which would give it priority over Unisource Canada, Inc.'s security interest in the same asset?
o Rule: To establish a PMSI, three requirements must be satisfied: (1) the lender must have a security
interest in the property; (2) the lender must have given value for the purpose of enabling the debtor to
acquire rights in the property; and (3) the value given by the lender must have been used to acquire
those rights.
o Application: Laurentian Bank of Canada (D) argued that it had a PMSI in the printing press, even though it
had only refinanced the debtor's existing obligation to RBC, which held a security interest in the press. The
court found that the act of refinancing the debtor's prior obligation was enough to allow the debtor to
58
o
o
acquire rights in or to the collateral. The debtor was able to acquire title to the printing press that it
previously did not have, satisfying the requirement for a PMSI.
Conclusion: Therefore, the court granted Laurentian Bank of Canada a PMSI in the printing press, giving it
priority over Unisource Canada, Inc.'s security interest in the same asset.
Reasoning: LB’s financing did not merely alter the manner in which the debtor financed the press. It
enabled Printer’s Group to acquire further rights in the press that it previously did not have. Printer’s
Group was able to acquire title to the equipment. It is not the case that once a debtor has possession of
an asset, it cannot acquire more rights
B. PARAGRAPH (C)
-
-
Paragraph (c) refers to the interest of a lessor of goods under a lease for a term of more than one year.
Paragraph (c) was added in 2007 at the same time as s 2(c), which brings true leases within the scope of the OPPSA
if the term is for more than one year.
Example 2 illustrates the application of the provision.
The example involves a debtor in the road construction business, SP1, a bank, with a security interest perfected by
registration in all debtor’s present and after-acquired personal property, and SP2, who sells and rents industrial
equipment.
Debtor rents a piece of earthmoving equipment from SP2 for two years, the expected duration of the project, and
SP2 registers a financing statement before delivering the equipment to debtor.
Subsequently, debtor gets into financial difficulty, and SP1 claims debtor’s assets, including the leased equipment.
But for para (c) of the PMSI definition, the dispute between SP1 and SP2 would be governed by the general priority
rules in OPPSA, s 30, and SP1 would have priority since their financing statement was registered before SP2's.
However, this outcome is contrary to the parties' expectations because it increases the risk to SP2 of carrying on
its business, making it harder and more expensive for customers like debtor to rent equipment.
Paragraph (c) of the definition achieves this result by deeming SP2’s interest to be a PMSI, so qualifying SP2 for
super-priority status, provided SP2 perfects within the period that s 33(2) prescribes.
The OPPSA, s 1(1) definition of a “lease for a term of more than one year” is not limited to “true leases.” It also
applies to a “security lease” that is for a term of more than one year.
Accordingly, any security lease that is a “lease for a term of more than one year” will also qualify as a PMSI under
para (c).
C. SALE AND LEASEBACKS
-
-
-
The OPPSA, s 1(1) PMSI definition includes a provision that excludes a transaction of sale by and lease back to the
seller from being considered a PMSI.
Example 3 illustrates the application of this provision where a debtor sells a machine to SP for $100 and leases it
back for a three-year term. SP has a security interest but does not have PMSI status due to the sale and leaseback
exception.
The sale and leaseback exception is explained by the new money theory, where the transaction does not bring in
any new assets to offset the new debt, making it similar to a debtor borrowing money and giving a security interest
in an asset they already own.
If SP resells the machine to Debtor on conditional sale terms instead of leasing it back, it is still considered a sale
and leaseback transaction, and the security interest is not a PMSI according to court rulings in Wheatland Industries
(1990) Ltd v Bacshuk and Re 1151162 Ontario Ltd.
o Purpose of PMSI : grant special priority to creditor where creditor allowed debtor to buy something new/
to enhance their asset pool (Wheatland)
D. MIXED PMSIS AND NON-PMSIS
-
A PMSI security agreement can have a cross-collateralization clause that secures a debtor's obligation to pay for
the collateral as well as other accounts, regardless of whether they are purchase-money obligations.
To be considered a PMSI, the security interest must secure a purchase-money obligation.
If a security interest secures non-purchase-money obligations through a cross-collateralization clause, it is not
considered a PMSI.
59
-
-
However, courts have held that a security interest does not lose its PMSI status even if it also secures non-purchasemoney obligations.
Revised Article 9 expressly addresses this issue in the PMSI definition, and the CCPPSL Report recommended the
adoption of a similar provision in the Canadian PPSAs.
The reforms also address cases where collateral other than purchase-money collateral secures the purchase-money
obligation.
Can you have a security interest, or more important a financing statement, that covers both PMSI and non-PMSI
security interests? The same financing statement can cover more than one agreement. Can you have a financing
statement that covers both? The answer is yes, why not, so long as you respect the requirements for a PMSI
registration.
If you register properly, but you don’t satisfy the PMSI requirement, you still have a perfected security interest, you
just don’t have a super-priority.
E. ALLOCATION OF PAYMENTS
-
-
-
Allocation of payments is important in determining the extent of Dealer's PMSI when Debtor makes payments to
Dealer without specifying which obligation the payments relate to.
At common law, the position is uncertain, but there may be a provision in the agreement between Dealer and
Debtor specifying how payments are to be allocated.
In the absence of any such provision, Debtor's intention at the time of making the payment becomes relevant. If
Debtor's intention is unclear, the courts might address the problem by applying the rule in Clayton's Case,
otherwise known as the "first-in, first-out rule."
As an alternative to the rule in Clayton's Case, a court might decide to apportion Debtor payments between the
contracts pro rata according to the obligations secured.
Revised Article 9, s 9-103(e) enacts a set of statutory rules to provide greater certainty.
The rules, in cascading order, provide for the allocation of payments: (1) in accordance with the parties' agreed
method; (2) in accordance with the debtor's intention at the time of the payment; and (3)
o (a) to obligations that are not secured; and
o (b) if more than one obligation is secured, to obligations secured by purchase-money security interests in
the order in which those obligations were incurred.
The Australian PPSA provides for the payment of non-purchase money obligations ahead of purchase money
obligations.
The CCPPSL Report recommends the adoption in the Canadian PPSAs of a provision comparable to the Australian
version, but to date, Saskatchewan is the only province to have adopted it.
III. THE SECTION 33 PRIORITY RULES
A. INTRODUCTION
-
Section 33 of the OPPSA contains priority rules for disputes involving one or more purchase-money security
interests (PMSIs).
Section 33(1) applies in cases where the dispute is between a PMSI and a non-PMSI security interest, and the
collateral involved is inventory or its proceeds.
Section 33(2) applies in cases where the dispute is between a PMSI and a non-PMSI security interest, and the
collateral involved is equipment or its proceeds.
Section 33(3) gives priority to a PMSI held by a seller over other PMSIs in the same collateral.
B. INVENTORY: SECTION 33(1)
1. Introduction
-
Section 33(1) of the OPPSA provides special priority rules for disputes involving PMSIs and non-PMSI security
interests in inventory.
To have priority under s 33(1), three requirements must be met:
60
o
o
o
1) The PMSI and the competing non-PMSI security interest must be given by the same debtor.
2) The PMSI must be perfected at the time the debtor, or a third party obtained possession of the
collateral.
3) Before the debtor obtains possession of the collateral, the PMSI-holder must serve a notice on any party
holding a security interest in the debtor’s inventory or accounts perfected by registration.
2. Same debtor
-
Section 33(1) and (2) are limited to cases where the PMSI and non-PMSI security interests are given by the same
debtor.
The reason for this limitation is because the policy arguments in support of PMSI super-priority rules presuppose a
single debtor.
If the PMSI is given by a different debtor, s 33(1) and (2) do not apply. Instead, the general priority rules in ss
20(1)(a)(i) and 30(1), read in combination with s 48, will govern the dispute.
3. Time of perfection:
-
A PMSI must be perfected at the time the debtor obtained possession or a third party obtained possession at
the debtor's request in order to have priority over other creditors.
Perfection can be achieved through various methods, but registration is typically used.
The PMSI-holder must register before the inventory is delivered to the debtor.
Attachment is a requirement for perfection under section 19 of the OPPSA.
Therefore, in addition to registration, the PMSI must have attached to the collateral at the relevant time in order
to be considered perfected and have priority over other creditors.
4. The notice requirement
-
-
The Notice Requirement states that in addition to timely registration, the PMSI-holder must notify prior
competing claim holders that it expects to acquire a PMSI in the debtor's inventory.
The purpose of the notice requirement is to give prior claim holders warning of the PMSI so that they can make
informed decisions about further advances.
The notice must be given to every secured party that has registered a financing statement describing the collateral
as, or including, inventory or accounts.
The notice is necessary in cases where the prior security is in the debtor's present and after-acquired inventory, all
the debtor's present and after-acquired personal property (which includes inventory), and the debtor's present
and future accounts.
The priority rule in section 33(1) applies not just to inventory but also to the proceeds of inventory, which can lead
to potential conflicts between an accounts financer and an inventory financer.
The notice requirement provides a low-cost solution to inform prior claim holders of the PMSI and avoid potential
conflicts over priority.
C. NON-INVENTORY COLLATERAL: SECTION 33(2)
-
-
Section 33(2) of the OPPSA applies to PMSIs in all collateral other than inventory, which includes tangible and
intangible personal property.
The provision applies to equipment financing as well as other types of collateral but excludes investment property
from the definition of PMSI.
o A secured party with a security interest in investment property can achieve super-priority status by taking
control of the collateral.
Unlike Section 33(1), there is no prior notice requirement in Section 33(2) since equipment financing is usually a
one-off transaction.
The grace period of 15 days in which to perfect a security interest starts from the date the debtor obtained
possession of the collateral as a debtor.
61
-
The purpose of the grace period is mainly to accommodate retailing practice, allowing immediate delivery without
waiting for registration of a financing statement.
The OPPSA added the phrase "as a debtor" to address cases where the debtor takes possession of the collateral
before entering into a security agreement with the PMSI financer.
MacPhee Chevrolet Buick GMC Cadillac Ltd v SWS Fuels Ltd: The case dealt with a similar provision in NSPPSA,
where the words "as a debtor" did not appear. However, a court may be prepared to read in the words by
implication in Section 33(1) of the OPPSA.
D. COMPETING PMSIS
-
Section 33(3) of the OPPSA deals with cases where a debtor has given more than one PMSI in the same collateral.
When multiple secured parties hold PMSIs in the same collateral, s 33(2) applies to determine priorities between
the PMSIs and the non-PMSI security interest.
However, s 33(3) determines priorities between the competing PMSIs.
In determining priorities between competing PMSIs, s 33(3) favors the seller over the lender who provides
financing for a portion of the purchase price.
The rationale for this is that the seller may not realize that the debtor is double financing the purchase, whereas
the lender who is not financing the full amount of the purchase price ought to suspect that the debtor may be
double financing the purchase and can protect itself by making inquiries.
E. UNPERFECTED PMSIS
-
-
-
-
Section 20(1)(a)(ii) of the OPPSA states that an unperfected security interest is subordinate to execution creditors.
o The time for determining the perfected or unperfected status of a security interest for the purposes of s
20(1)(a)(ii) is the date the execution becomes effective.
Section 20(1)(b) provides that an unperfected security interest is ineffective against the debtor’s trustee in
bankruptcy or other creditors’ representative.
o The relevant date for determining the perfected or unperfected status of a security interest for the
purposes of s 20(b) is the date the trustee’s (or other representative’s) representative status takes effect.
However, s 20(3) gives a PMSI an extension of time to perfect the security interest.
A PMSI has priority over an execution creditor or the debtor’s trustee in bankruptcy if it is perfected by
registration before or within 15 days after (1) the debtor obtains possession of the collateral (for collateral other
than an intangible), or (2) the attachment of the security interest (for intangible collateral).
Section 20(3) continues the historical tradition of granting a grace period for retailers to register conditional sales
agreements, which was a feature of the old Ontario conditional sales legislation.
However, this provision should only apply if the collateral is equipment or consumer goods and not if it is inventory.
Section 33(2) differs from s 20(3) in that the 15-day grace period does not apply if the collateral is inventory.
IV. SUBORDINATION AGREEMENTS
-
-
Subordination agreements or provisions are effective as per their terms under OPPSA s. 38.
In the case of Euroclean Canada Inc v Forest Glade Investments Ltd, the subordination agreement allowed for
mortgages or liens to be given in connection with property acquisition after the agreement date or to be acquired
with an existing mortgage or lien, which would rank above the charge created by the debenture, but not mortgages
or liens that would rank pari passu with it.
o SP1, in this case, registered a financing statement, while SP2 supplied goods to Debtor under a conditional
sale agreement but failed to register a financing statement. A priority dispute ensued between SP1 and
SP2 over the goods that SP2 had supplied to Debtor. However, the court held that SP2 had priority because
of the express provision in the security agreement.
Similarly, in Chiips Inc v Skyview Hotels Limited, the court held that a statement in the security agreement that
allowed for PMSIs was implicit and gave SP2 priority on that basis.
Contrastingly, in Sperry Inc v Canadian Imperial Bank of Commerce and Kubota Canada Ltd v Case Credit Ltd, the
court held that the provisions were not subordination agreements. In Sperry, the provision merely provided a
warranty of title, while in Kubota, the court held that PMSIs needed to be registered or perfected for priority to
arise or continue.
62
-
Finally, in Engel Canada Inc v TCE Capital Corp, the court held that a warranty provision in the security agreement
explicitly permitted and anticipated PMSIs and was similar to the Chiips provision. Schedule A listed various forms
of PMSI: purchase-money liens, conditional sale agreements, etc.
CHAPTER EIGHT: LIENS ARISING BY STATUTE OR RULE OF LAW
I. INTRODUCTION
-
-
This chapter deals with priority disputes between a consensual and a non-consensual security interest.
Consensual security interest is created by an agreement between parties
Non-consensual security interest is created by statute or operation of law.
Non-consensual creditors can be divided into two groups:
o (1) liens in favour of private creditors
▪ Liens in favour of private creditors are given by common law or statute for services rendered or
materials supplied to the debtor
o (2) government liens.
▪ Government liens are liens and deemed trusts created by statute in favour of federal and
provincial government departments, agencies, and commissions for money owed to them by the
debtor.
Priority disputes between these two groups of creditors are dealt with in the following sections of the OPPSA:
o Liens in favour of private creditors: OPPSA s. 12, 13, 14, 15, 16, and 17.
o Government liens: OPPSA s. 18, 19, 20, 21, and 22.
II. LIENS IN FAVOUR OF PRIVATE CREDITORS
A. INTRODUCTION
-
-
-
A lien is the right of a person in possession of someone else's property to retain it until some charge or demand
due to them is satisfied.
The common law lien only allowed the lienholder to retain possession of the goods until the outstanding obligation
was satisfied, but it did not allow the lienholder to sell the goods if the debtor failed to pay.
Modern statutes have created non-possessory as well as possessory liens and coupled them with a right to seize
and dispose of the collateral.
Non-consensual liens in favor of a private creditor include repairer's lien, warehouse keeper's lien, and innkeeper's
lien.
o repairer’s lien= gives the repairer a property interest in the repaired goods as security for payment of the
repair bill.
o warehouse keeper’s lien= gives the warehouse keeper a property interest in goods it holds in storage as
security for payment of the storage charges.
o innkeeper’s lien= gives hotel owners and the like a proprietary interest in a guest’s belongings to secure
payment of the bill.
A landlord's right to levy distress on its tenant's goods is not regarded as a lien until the right is exercised.
General common law rule: lienholder's rights are subordinate to pre-existing third party interests, such as security
interests, and the lienholder can acquire no greater rights in the goods than the debtor has.
Exceptions to the common law rule:
o When the debtor has express or implied authority to contract for the services giving rise to the lien rights:
General Securities Ltd v Brett's Ltd.
o The innkeeper's lien extends to all goods in the guest's possession, regardless of ownership: Bank of
Montreal v 414031 Ontario Ltd (1983).
o Landlord's right of distress extends to any goods in the tenant's possession, regardless of ownership.
Landlord's Rights and Distress
o In Ontario, s 31(2) of the Commercial Tenancies Act limits the landlord's right of distress to the tenant's
goods and chattels, but exempts from this restriction the claim of a person whose title is derived by
purchase, gift, transfer, or assignment from the tenant or by way of mortgage or otherwise, and the
63
-
-
-
interest of the tenant in any goods or chattels on the premises under a contract for purchase, or by which
the tenant may or is to become the owner thereof upon performance of any condition.
o The Saskatchewan Landlord and Tenant Act contains a similar provision but excludes PMSIs from the
landlord's reach.
o The difference between the CTA and LTA approaches is that s 31(2) of the CTA only excludes one type of
PMSI, the conditional sale agreement, whereas the Saskatchewan provision applies to all PMSIs.
o The Ontario government has not yet extended s 31(2) to all PMSIs.
o The landlord's right to distrain on the tenant's goods is lost if the tenant becomes bankrupt before the
landlord has completed the exercise of its rights.
o Instead, the BIA gives the landlord a "preferred claim" for a maximum amount equal to the lesser of (1)
three months, arrears of rent plus three months, accelerated rent, and (2) the value of the tenant's goods
located on the premises at the date of the bankruptcy.
o A preferred claim is a claim that ranks ahead of the claims of ordinary unsecured creditors but below
secured creditors' claims.
o This feature of the BIA distribution scheme gives a secured creditor the incentive to put the tenant into
bankruptcy as a means of gaining priority over the landlord.
o Outside bankruptcy, the secured creditor risks being subordinated to the landlord's right of distress under
s 31(2) of the CTA (and comparable legislation in other provinces), but inside bankruptcy, the landlord is
subordinated to the secured creditor.
Employees' Liens
o At common law, employees did not have a lien on their employer's assets for unpaid wages or other
benefits.
o This is now provided for in the employment standards legislation and other federal and provincial laws.
o OPPSA, sections 30(7) and (8) provide for the lien
Bankruptcy:
o Section 427(7) of the Bank Act gives employees priority for unpaid wages over a bank's s security interest
in the event of the employer's bankruptcy
o Section 81.3 of the BIA gives employees of a bankrupt employer a claim of up to $2,000 for unpaid wages
earned during the six months before bankruptcy
o The claim is secured by a lien on all the employer's current assets
Unpaid sellers:
o Common law and provincial sale of goods legislation give unpaid sellers a possessory lien and a theoretical
right of stoppage of goods while in transit
o These rights end once the goods reach the buyer, and the seller is limited to suing for the price of the
goods unless they have a consensual security interest
o Federal legislation intervenes to assist unpaid suppliers who cannot adequately protect their own interests
o Bank Act, section 427(7)(b) provides for growers and producers of agricultural products
o BIA, sections 81.1 and 81.2 also provide for unpaid suppliers
B. THE PRIORITY RULES
-
OPPSA Section 4(1)(a) does not apply to liens given by statute or rule of law, except as provided in Section 20(1)(a)(i)
or Section 31.
Section 20(1)(a)(i): an unperfected security interest is subordinate to the interest of a person who has a lien given
under any other Act or by a rule of law.
In 859587 Ontario Ltd v Starmark Property Management Ltd, the Court held that the landlord's right of distress,
once exercised, is a lien given by statute or rule of law within the meaning of OPPSA, Sections 4(1)(a) and 20(1)(a)(i).
Section 31 of the OPPSA governs liens in favor of repairers and any other person who, in the ordinary course of
business, furnishes materials or services with respect to the goods in their possession.
o Section 31 confers priority over a perfected security interest in favor of the lien, "unless the lien is given
by an Act that provides that the lien does not have such priority."
o the presumption is that the lien has priority over any consensual security interest, including a PMSI.
o The purpose of Section 31 is to prevent the secured party from obtaining a windfall at the repairer or other
person's expense and to facilitate repairs and similar services by reducing the risk of non-payment.
64
-
-
General Electric Capital Equipment Finance Inc v Transland Tire Sales & Service Ltd deals with the interaction
between OPPSA, Section 31 and the RSLA.
o Facts: Vendor has security interest in trailers. Repairer repairs trailers and returns possession but is never
paid. Business goes bankrupt.
o Issue: Does the repairer have priority under the RSLA over the secured party who has perfected the
interest?
o Held: The security interest here was not perfected, so repairer has priority with non-possessory lien. But,
assuming it was perfected, lender has priority over the non-possessory lien if the rights were acquired
before the lien was registered. Must determine: 1) When was the non-possessory lien registered? 2)
When did the non-possessory lien arise? 3) When did the lender acquire a right against the article?
o A non-possessory lien arises when the repairer gives up possession. Non-possessory liens allow the
repairer to give up possession and retain a lien + assert it against third-parties. The RSLA states that a nonpossessory lien has priority over everyone (except those with a possessory lien). Therefore, the RLSA with
the PPSA provide the non-possessory lien priority over a perfected security interest.
A secured party may attempt to prevent the creation of liens by providing in the security agreement that the debtor
will be in default if it causes a lien to be placed on the collateral.
Alternatively, the security agreement may provide that causing a lien to be placed on the collateral is not a default
so long as:
o (1) the amount secured by the lien is not overdue for more than a specified period (such as 30 days) or
o (2) the debtor is contesting the lien by appropriate proceedings in good faith, the lienholder has not
enforced its lien against any of the collateral, and the debtor has set aside on its books reserves deemed
adequate to pay the amounts secured by the lien.
C. THE RSLA LIEN
- Scope of RSLA:
o The Repair and Storage Liens Act (RSLA) governs liens in favor of repairers and storers of an article for
unpaid repair and storage bills.
o “Repairer,” “storer,” and “article” are broadly defined in section 1(1) of the Act.
o A repairer or storer does not need to be acting in the course of its business when providing services, nor
does the repair or storage need to enhance the value of the article.
o The Act provides for both possessory and non-possessory liens and deals with creation of the lien, the
amount of the lien, enforcement of the lien, and priorities between the lienholder and competing third
party claimants.
- Possessory liens:
o Repairer’s liens
• Section 3(1) provides for a possessory lien in a repairer’s favor to secure unpaid repairs to an
article.
• The lien may be displaced or modified by written agreement, and it arises when the repair is
commenced (s.3(2)).
• The repairer may sell the article after 60 days from the date the repair bill becomes due or on
which the repair is completed (s.3(3)).
• The possessory lien is then replaced by a non-possessory lien for the unpaid amount, which arises
automatically on surrender of possession [s.7(2)].
• A possessory lien comes to an end and cannot be revived if possession of the article is
surrendered to or lawfully comes into the possession of the owner or other eligible person [s.5].
o Storers’ Liens:
• Section 4 enacts a parallel set of provisions governing storers’ liens, with an additional
requirement that applies in cases where the storer receives the article knowing or with
reasonable cause to believe that the person the storer dealt with was not the owner of the article
or was not acting with the owner’s authority.
• In such cases, the storer must, within 60 days of receiving the article, give written notice to every
person the storer knows or has reason to believe is the owner or has an interest in the article,
including any secured party with a security interest perfected by registration under the OPPSA.
• If the storer fails to comply, the storer’s lien as against the person who should have been given
the notice is limited to the unpaid amount owing in respect of the 60-day period from when the
65
•
article was received, and the storer must surrender possession of the article upon proof that the
other person has a right to possession and payment of the unpaid amount [s.4(4)-(6)].
The possessory lien is then replaced by a non-possessory lien for the unpaid amount, which arises
automatically on the surrender of possession [s.7(2)].
-
Non-possessory liens:
o Section 7 (RSLA) provides for the automatic creation of a non-possessory lien when the lien claimant gives
up possession of the article, subject to obtaining a signed acknowledgement of the indebtedness from the
owner of the article or on the owner’s behalf.
o A non-possessory lien is enforceable against third parties only if it is registered.
o Registration of a non-possessory lien follows the same pattern as PPSA registrations, and the PPS register
doubles up as the register for RSLA purposes.
o Registration is affected by filing a claim for lien, which is identical in form to a PPSA financing statement.
o A claim for lien may relate to more than one article, but a separate claim for lien is required for each repair,
and one lien cannot be tacked on to another lien.
-
Priorities
o A possessory lien has priority over the interests of “all” other persons in the article.
o Non-possessory liens are enforceable against third parties only if they are registered, but priorities do not
turn on the time of registration.
o A non-possessory lien has priority over any other person except the holder of a possessory lien.
o Where more than one non-possessory lien is claimed in the same article, priority turns on the reverse
order in which the competing claimants gave up possession.
o Where a person acquires a right against an article after a non-possessory lien arises, that person has
priority over the lien claimant if a claim for lien was not registered before the person acquired the right.
Buyer Protections:
o The buyer of an article from a seller who sells in the ordinary course of business takes the article free of
any non-possessory lien arising from repairs or storage at the seller’s request unless the buyer signs an
acknowledgment of indebtedness.
o By signing the acknowledgment, the buyer in effect agrees to take over the debt and must pay the amount
owing in order to obtain clear title.
o Section 8(1) applies whether or not a claim for lien is registered at the date of the purchase, but if no claim
for lien is registered at that date, the purchaser will prevail anyway under s.10(1).
o There is an exception to s.8(1) where the buyer is a dealer: s.8(2) provides that “a purchaser purchasing
an article in the ordinary course of the [purchaser’s] business” take free of the lien claim even if it has
signed an acknowledgment of indebtedness.
Enforcement of liens
o Part III of the Act (ss 15-22) governs the lien claimant’s remedies.
o Sections 15 and 16 govern sales.
• Section 15 provides that the lien claimant must serve a notice of intention to sell on the person
from whom the article was received and other interested parties.
• Section 16 governs distribution of the sale proceeds and reflects the priority rules discussed
above.
o If the lien claimant making the sale holds a possessory lien, it is entitled to be paid ahead of any party with
a competing non-possessory lien.
o If the lien claimant making the sale holds a non-possessory lien and there is a competing non-possessory
lien in the same article, the net proceeds are to be distributed in the reverse order in which the claimants
gave up possession.
o Any surplus goes first to the holder of a security interest in the article perfected by registration under the
PPSA and second, to the owner of the article or any other person entitled to the article of whom the lien
claimant has actual knowledge.
-
-
-
General Electric Capital Equipment Finance Inc. v. Transland Tire Sales & Service Ltd. (1991), 6 OR (3d) 131 (Gen.
Div.)
o Facts:
66
•
•
•
•
•
•
•
•
•
•
•
o
o
o
o
o
o
o
On May 1, 1990, the lender sold a trailer to Amber Freight Systems Inc. (Amber).
Amber bought the trailer in a conditional sales agreement using its correct incorporated name,
but registered it under its former corporate name on May 3, 1990.
The repairer performed repairs on the trailer on seven occasions between May 9, 1990, and
October 14, 1990, and each repair was documented by a work order/invoice.
The repairer gave up possession of the trailer to the owner after each repair and the owner never
paid for the repairs, which totalled about $1,500.
On September 1, 1990, the owner defaulted under the security agreement, and the lender
became entitled to repossess the trailer(s).
On October 15, 1990, the repairer discovered through a plate number search that the trailer's
owner was the numbered company (Amber's former corporate name).
On November 22, 1990, the repairer registered a claim for its non-possessory lien under the
Repair and Storage Liens Act (RSLA) against the numbered company and Amber Transport.
On November 28, 1990, the lender repossessed the trailer.
On May 27, 1991, the repairer seized the trailer from the lender's possession.
On August 1, 1991, the repairer issued a notice of sale to the lender claiming $1,500 for repairs,
bailiff's fees, storage fees, GST, interest on lien claim at 24%, and a total of $10,500.05.
On September 5, 1991, the lender obtained an order granting possession of the trailer to the
lender on payment into court of $10,335.27 and restraining both parties from selling it pending
determination of this application.
Issues:
• Can the repairer enforce its non-possessory lien against the lender?
• Assuming registration were valid, would the repairer have priority over the lender?
Section 10(1) of the RSLA applies to determine priority:
• A non-possessory lien is enforceable against third parties only if a claim for lien has been
registered.
• If a person acquires a right against an article after a non-possessory lien arises, the right of the
person has priority over the non-possessory lien to the lien claimant if a claim for lien was not
registered before the person acquired the right.
• The lender has priority over the non-possessory lien if his rights were acquired before the lien
was registered.
Determining the issues:
• The non-possessory lien was registered on November 22, 1990.
• The non-possessory lien arose each time the repairer surrendered possession of the article to the
owner. It is unlikely that the single claim for the aggregate amount of the seven separate liens
would be valid under s.26(1) and (2) of the RSLA.
• The lender acquired its rights against the article when the default occurred under the conditional
sales agreement.
Conclusion: The repairer's lien had not been properly registered, and even if it were, the lender would
have priority over it. The purpose of the RSLA is to provide a mechanism for the repairer to retain his lien
and assert it against third parties, but the repairer's argument was not sufficient to grant priority over the
lender.
I. ISSUE: Whether the repairer has priority under the Repair and Storage Liens Act (RSLA) over the secured
party who has perfected the interest in a lender versus repairer priority contest.
II. RULE: A non-possessory repairer’s lien must be registered under the RSLA. If a lender acquires an
interest after a non-possessory lien arises, but before the lien is registered, the lender has priority over
the lien. However, under section 7(3) of the RSLA with the 31 Personal Property Security Act (PPSA), a nonpossessory lien has priority over a previously perfected security interest, except those with a possessory
lien.
III. ANALYSIS: The repairer repaired the trailers but returned possession and was never paid, resulting in
the repairer claiming a valid registration of a non-possessory repairer’s lien under RSLA. The lender had a
security interest (SI) in the trailers registered under PPSA on June 22, but the repairer made an error in
the debtor’s name when registering the lien, resulting in it not being perfected. A non-possessory lien
arises when the repairer gives up possession, and the lender acquired rights when the agreement was
67
o
signed on May 1, 1990. The lender did not enter the window where they would have priority over the lien,
which is only enforceability and not priority under 10(1) RSLA. However, if the lien had a valid registration,
the repairer’s claim would have priority over the previously perfected SI thanks to 31 PPSA and 7(3) RSLA.
IV. CONCLUSION: The repairer did not have priority over the lender, as the non-possessory lien was not
properly registered. However, if the lien had been registered, it would have had priority over the
previously perfected SI due to 31 PPSA and 7(3) RSLA. Therefore, the court held in favor of the lender,
General Electric Capital Equipment Finance Inc., in this lender versus repairer priority contest.
III. GOVERNMENT LIENS
I. INTRODUCTION
-
-
-
-
-
Government liens are used to enforce the payment of taxes (federal, provincial, or municipal) and give the
government a property interest in the tax debtor's property to secure the payment obligation.
The statutory language used to describe the government's property interest varies from one context to another,
but it may be a "first lien," a "special lien," a "lien and charge," or a "lien payable in priority over all liens, charges
or mortgages."
The statute may include priority rules for cases where a secured creditor or other third party claims a competing
interest in the same collateral. Alternatively, the courts will fall back on the common law nemo dat rule, giving
priority to the interest that came into existence first.
Instead of or as well as giving the government a lien, charge, or security interest, the statute may provide for a
deemed trust in the government's favor over assets under the debtor's control.
The deemed trust is not really a trust, but a charge on the debtor's assets that avoids the usual tracing
requirements. It is commonly used to secure obligations owing to private creditors such as employees and
pensioners.
The statute may expressly or by implication limit the trust to cases where the subject property remains separate
and identifiable in the debtor's hands.
The priority status of government liens and deemed trusts varies depending on whether the debtor is insolvent.
Outside insolvency, the courts will give effect to any priority rule set out in the statute that creates the lien or
deemed trust.
Still, if the debtor is bankrupt, subject to some limited exceptions, the Bankruptcy and Insolvency Act (BIA)
invalidates government ("Crown") security interests, reducing the Crown to the status of an unsecured creditor.
II. THE PRIORITY OF GOVERNMENT SECURITY INTERESTS OUTSIDE INSOLVENCY
-
Leavere v Port Colborne (City)1995 CanLII 715, 22 OR (3d) 44 (CA)
o Facts: The appellant creditors had taken back security agreements from the taxpayers and perfected their
security interests by registration under the Personal Property Security Act (Ont.). The respondents, acting
pursuant to s. 400(2) of the Municipal Act (Ont.), levied the unpaid taxes by distress upon the taxpayers'
chattels by taking possession of them. The chattels were the same chattels to which the creditors'
perfected security interests related. The creditors took the position that their security interests were
perfected by registration before the municipalities levied distress. The municipalities argued that their
distress for business taxes had priority over the creditors' registered security interests. The municipalities
successfully brought motions for declarations that their distress for business taxes had priority over the
creditors' registered security interests. The creditors appealed.
o Issue: Whether the municipalities' claims to arrears of business taxes had priority over the creditors'
registered security interests?
o Holding: Yes, the municipalities' claims to arrears of business taxes had priority over the creditors'
registered security interests. The liens upon the taxpayers' chattels resulting from the municipalities'
distress were not excepted under s. 4(1)(a) or s. 20(1)(a) of the PPSA. Furthermore, even in the absence
of the provisions of the PPSA, s. 400(2) of the Municipal Act gave the municipalities' liens priority over the
creditors' security interests.
o Reasoning: A lien upon chattels comes into existence when the person exercising a right of distress takes
possession of the chattels. The liens upon the taxpayers' chattels resulting from the municipalities' distress
were not excepted under s. 4(1)(a) or s. 20(1)(a) of the PPSA. Furthermore, even in the absence of the
68
provisions of the Personal Property Security Act, s. 400(2) of the Municipal Act gave the municipalities'
liens priority over the creditors' security interests. Therefore, the municipalities' claims to arrears of
business taxes had priority over the creditors' registered security interests.
-
Daimler Chrysler Financial Services (debis) Canada Inc v Mega Pets Ltd 2002 BCCA 242
o Facts:
• Mega Pets, a company in British Columbia, proposed to buy a vehicle through a Chrysler dealer
and sought financing for the purchase.
• The seller agreed to the financing only if Mr. Kenal, Sr. became a joint owner of the vehicle and a
joint obligor under the contract. Mr. Kenal, Sr. agreed, and they signed a conditional sale
agreement for the purchase of a 1998 Plymouth Voyageur.
• The contract was assigned by the seller to DaimlerChrysler, which perfected a PMSI by filing a
financing statement as required by the PPSA.
• The vehicle was registered in the name of Mega Pets but Mr. Kenal, Sr. had keys to the vehicle
and used it frequently, although Mega Pets had "primary possession."
• Mega Pets failed to remit some $45,955 in deductions made by it from employees' wages for
income tax, CPP and EI, and on October 26, 1999, the CCRA had the vehicle seized under a writ
of seizure issued under the Excise Tax Act. Ultimately, CCRA instructed the bailiff to sell the van,
and $15,300 was realized on the sale in November 1999.
• From the time of seizure, no monthly payments were made under the conditional sale
agreement.
• The proceeds of sale of the vehicle are being held in trust pending the resolution of priorities as
between DaimlerChrysler (which is still owed $15,770 under the conditional sale agreement),
CCRA, and Mr. Kenal, Sr.
o Issues:
o The relevant portions of s. 224 and s. 227 of the Income Tax Act are applicable to the case.
o The meaning of "secured creditor" and "security interest" in subsection 224(1.3) of the Income Tax
Act.
o The applicability of subsection 227(4) of the Income Tax Act to the case.
o The rights of CCRA and DaimlerChrysler to the proceeds of sale of the vehicle.
o DaimlerChrysler appeals the ruling of the trial judge that s. 227(4.1) of the Income Tax Act applied to the
conditional sale agreement and that Mega Pets was the "sole owner" of the vehicle. The first ground of
appeal deals with the nature of Mr. Kenal's involvement in the conditional sale transaction. Newbury JA
found that Mega Pets and Mr. Kenal were joint tenants and not tenants in common. Until the joint tenancy
was severed, it could not be said that the vehicle was the "property of" Mega Pets within the meaning of
ITA s 227(4.1) at the time the CCRA seized and sold it. The second ground of appeal deals with the trial
judge's error in interpreting the term "security interest" in s. 224(1.3) of the Income Tax Act. There is no
basis for construing the term "security interest" with reference to the PPSA of British Columbia. The
definition contained in the Income Tax Act is the only one properly considered in determining the meaning
of the term for purposes of s. 227. Conditional sale agreements are not included in the list of security
interests. Although it is arguable that a conditional sale agreement creates an interest in property that
secures the performance of an obligation, conditional vendors or lessors do not have an interest that
"secures payment" as title is retained to secure payment. The interest acquired by the conditional
purchaser does not secure payment of an obligation. The trial judge's proposition that the PPSA cannot
be taken to alter the effect of the Income Tax Act on common law principles was incorrect. The correct
proposition is that whatever the PPSA may provide, it cannot be taken to alter the effect of the Income
Tax Act on common law principles.
III. THE PRIORITY OF GOVERNMENT SECURITY INTERESTS IN INSOLVENCY
-
The BIA (Bankruptcy and Insolvency Act) and CCAA (Companies' Creditors Arrangement Act) limit the priority of
government security interests and deemed trusts in insolvency proceedings.
The Crown (government) is usually relegated to the status of an unsecured creditor in BIA and CCAA proceedings,
except for some exceptions.
69
-
The relevant provisions were enacted in 1992 and implemented recommendations made by the Colter Committee
in 1986.
The reforms were supported by arguments in fairness terms, stating that the burden of unpaid taxes should be
divided among all taxpayers rather than borne by the creditors who have already suffered losses.
The arguments for the reforms mirror the arguments against Crown priority in non-bankruptcy contexts.
Crown priority was considered unfair because it placed the burden of unpaid taxes on creditors who had already
suffered losses rather than being distributed among all taxpayers.
The changes to the BIA and CCAA limit the government's ability to assert priority claims over other creditors in
insolvency proceedings, thereby ensuring a more equitable distribution of losses
Tamara Buckwold & Roderick J Wood, “Priorities”
o I. Priority of Crown Claims in Bankruptcy
• Crown claims were previously characterized as preferred claims, but the 1992 amendments to
the BIA replaced this with a new set of rules determining the priority of Crown claims
• Section 86(1) sets out the basic rule that a claim of the Crown ranks as an ordinary unsecured
claim unless it falls within one of three exceptions
• Section 86(2)(a) recognizes that the Crown may acquire the status of a secured creditor if it
complies with a law of general application
• Section 86(2)(b) addresses non-consensual security interests created specifically to secure Crown
claims, and the Crown will qualify as a secured creditor only if it registers in accordance with
section 87
• Section 86(3) exempts from subsection (1) the statutory garnishment device that secures
amounts owing to the federal Crown in respect of source deductions of income tax, Canada
Pension Plan (CPP), and employment insurance (EI)
• Crown claims, other than those referred to in section 86(3), are registered in the appropriate real
or personal property registry, and several provinces have modified their registration rules to
specifically accommodate these types of registrations
• For the Crown to attain secured creditor status, it must register the security before the date that
a petition for a bankruptcy order is filed or an assignment is made
• The Crown priority provisions also contain a rule governing priority competitions between the
Crown claim and a security interest
• Section 87(2)(a) provides that the Crown’s security is subordinate to competing security interests
in the same property if the secured creditor completed “all steps necessary to make them
effective against other creditors” before registration of the Crown claim
• The secured creditor may therefore attain priority if it has complied with any validity or perfection
requirements imposed by the applicable law governing the security interest
• Section 87(2)(b) limits the ambit of the Crown’s non-consensual security interest by restricting its
validity to amounts owing to Her Majesty or a workers’ compensation body at the time of
registration, plus any interest subsequently accruing on those amounts
• In practice, this means that the Crown claim will be subordinate to competing security interests
because pre-registration of Crown claims is ineffective, and registration of the Crown claim will
most often occur after secured creditors have created and perfected their security interests
o II. Priority of Crown Claims in Receiverships:
• Sections 86 and 87 of the BIA do not apply in a receivership.
• The priority between a secured creditor and the Crown in a receivership will depend on the
provisions of the legislation creating the Crown’s non-consensual security interest.
• If the statute creating the Crown interest does not specify its ranking, the Crown’s priority will be
determined by the order of creation of the competing interests.
• If the statute provides an express rule defining the priority of the Crown interest, that provision
will govern.
• Statutory priority rules often give the non-consensual security interest priority over priority or
security interests, without requiring registration.
• Bankruptcy can reverse priorities in a competition between a secured party and a Crown
claimant.
o III. Priority of Crown Claims in Reorganizations:
70
•
•
•
o
o
Federal priority rules apply under both bankruptcy and commercial proposal regimes.
Sections 86 and 87 of the BIA apply to both bankruptcy and commercial proposals.
Sections 38 and 39 of the CCAA apply to Crown claims in the same way as BIA provisions, but the
operative date for testing the validity of the registration of the Crown claim is the date of the
initial application for an order.
• Reorganizations often divide creditors into different classes, with plans or proposals that
distinguish between secured and unsecured creditors.
• Priority provisions determine the class into which the Crown claim will fall and enhance its value
if it is classified as secured.
(c) Deemed Trusts
(i) The Priority of Deemed Trusts in Bankruptcy
• Statutory trusts are created by federal and provincial legislation to secure a number of claims,
including unpaid workers’ compensation assessments, employees’ unpaid wages, and taxes
collected from third parties.
• Deemed trusts are imposed on all assets of the debtor because it is generally inadequate for the
debtor to hold the specified funds in trust.
• Section 67(1)(a) of the BIA provides that trust property is not divisible among the bankrupt's
creditors.
• Statutory deemed trusts lacking the common law attributes of a trust are not regarded as trusts
for the purpose of section 67(1)(a).
• The BIA was amended in 1992 to include additional provisions dealing with deemed trusts in
favour of the Crown, such as source deductions.
• Statutory deemed trusts in favour of the Crown or any other party are fully effective outside of
bankruptcy.
• If the legislation creating the deemed trust does not provide an express priority rule, a priority
competition between a secured party and a deemed trust claimant will be determined according
to the order in which their interests were created
• If the legislation contains a priority rule giving the deemed trust interest priority over competing
secured parties, it will be given effect by the courts
• Section [37] of the CCAA contains provisions that are substantially similar to sections 67(2) and
67(3) of the BIA in respect of deemed trusts in favour of the Crown
• Deemed trusts in favour of the Crown (other than for source deductions) are not operative in
reorganization proceedings.
• Whether deemed trusts in favour of other claimants share a similar fate is uncertain.
• The Excise Tax Act creates a statutory deemed trust in connection with GST, which is declared to
be valid despite the provisions of any other legislation except the BIA.
• Courts have given precedence to the priority rule in the Excise Tax Act over that in the CCAA on
the basis that the most recently enacted provision should be given effect.
CHAPTER NINE: TRANSFERS OF COLLATERAL
I. INTRODUCTION
-
-
The chapter focuses on the interaction between a secured party and a transferee of the collateral.
Example 1 involves a security interest in a computer that is sold without the secured party's permission. The
question is whether the buyer takes the computer free of the security interest or whether the security interest in
the computer is extinguished.
In priority disputes between competing secured parties, the losing secured party's security interest is postponed,
not extinguished.
In Example 1, both the secured party and the buyer are innocent parties, and the question is which party should
bear the risk of loss.
Section 20(1)(c) and (d) of the OPPSA provide that a perfected security interest generally prevails over a
competing transferee's claim.
71
-
If the secured party fails to perfect, typically the transferee will prevail under OPPSA, s 20(1)(c) or (d)
Perfection does not protect the secured party in various circumstances, as outlined in OPPSA, ss 25(1)(a), 28, 28.1,
and 29. These provisions protect the transferee in particular contexts where the policy of facilitating trade is more
important than the policy of facilitating secured transactions.
o Section 25(1)(a) provides that the security interest continues in the collateral unless the secured party
authorized the transfer free of the security interest.
o Section 28 provides that in certain circumstances, a transferee takes the collateral free of any security
interest, even if the security interest is perfected and the secured party did not authorize the transfer.
o Sections 28(1) and (2) deal with sales and leases of goods in the ordinary course of business,
o s 28(3) deals with the transfer of chattel paper,
o s 28(4) deals with the transfer of instruments and documents of title,
o s 28(5) deals with the sale of a motor vehicle that is equipment,
o ss 28(6)-(10) and 28.1 deal with the transfer of securities, and;
o s 29 deals with the transfer of negotiable instruments and money.
II. AUTHORIZED TRANSFERS (SECTION 25(1)(A))
-
-
-
-
-
-
Section 25(1)(a): A security interest in collateral continues unless the secured party has authorized the dealing
with the collateral free of the security interest.
If the secured party has expressly or impliedly authorized the transfer of collateral free of the security interest, the
transferee gets clear title.
The authorization must be for the transfer of collateral free of the security interest, not just the transfer of
collateral.
Inventory is a typical example where authority for transfer is granted, as without it, the debtor's business would
not be viable.
o The court may imply a provision allowing the sale of inventory even if the agreement is silent on the
matter.
Lenders may also authorize the sale of non-inventory collateral such as obsolete or redundant equipment, subject
to a dollar limit.
If the secured party authorizes a dealing under section 25(1)(a), the debtor has a license to deal with the collateral
subject to the terms of the authorization.
o Royal Bank of Canada v Sparrow Electric Corp held that if the secured party authorizes a dealing, it
effectively grants a license to the debtor to deal with the collateral under the terms of the authorization.
The OPPSA only recognizes fixed security interests, and equitable fixed and floating charge have been abolished.
The party averring it must show that an express or implied license was given to the debtor to support the third
party's claim in defeasance of the secured party's interest, provided the secured party had a perfected security
interest.
The Ontario Act does not provide express or implied licenses in the debtor's favor, and every security agreement is
effective according to its terms.
Inventory financing agreements authorize the debtor to dispose of inventory in the ordinary course of business
but require the debtor to hold the proceeds on trust for the secured party.
General security agreements (GSA) provide a broader range of licenses to the debtor, but their scope depends on
various factors. GSAs may authorize the debtor to carry on business generally or limit the power to the disposition
of inventory. The agreement may require the debtor to hold the proceeds on trust for the secured party, even if
the agreement also entitles the debtor to use the proceeds in its business. The court will be called upon to resolve
any conflicting clauses.
The language used to express the power to deal with collateral and its proceeds may make a significant difference.
In Credit Suisse Canada v. 1133 Yonge Street Holdings Ltd., the Ontario Court of Appeal held that the parties'
freedom to fashion the security agreement in accordance with their wishes overrode the secured party's
presumptive entitlement to proceeds under s. 25(1)(b).
If a GSA authorizes the debtor to use proceeds from the disposition of collateral in its business, the proceeds may
be used to pay employee wages and settle any deemed trusts arising under federal or provincial legislation in
respect of deductions and remittances required to be made to the federal or provincial Crowns.
72
-
-
-
-
Once enforcement proceedings are initiated, the debtor loses its authority to disburse any proceeds, and unmet
claims will thereafter be treated as enjoying no priority over the secured party's claim, whether or not the claims
are supported by non-consensual liens under the fiscal legislation.
The existence and scope of any implied license will depend on the character of the security agreement and other
surrounding circumstances. A chattel mortgage that includes inventory gives the debtor an implied license to
continue to realize the inventory since otherwise, the debtor would have no means of repaying the secured
creditor.
An implied license does not extend to the debtor's entitlement to deal with the proceeds of disposition. The license
to use proceeds to meet normal business expenses will be implied much more readily in the case of a GSA because
without this authority, the debtor would have to close its business.
Debts not paid by the debtor before default, even if incurred in the ordinary course of business, will rank as
unsecured claims after default unless controlling legislation provides otherwise. This will be true even if an unpaid
creditor has obtained judgment.
III. SALE OR LEASE OF GOODS IN THE ORDINARY COURSE OF BUSINESS (SECTIONS 28(1) AND (2))
A. INTRODUCTION
-
-
-
Section 28(2):
OPPSA, s 28(1): a BUYER of goods from a seller who sells the goods in the ordinary course of business takes them
free from any security interest given by the seller, even if it is perfected and the buyer knows of it, unless the
buyer knew that the sale constituted a breach of the security agreement.
The main purpose of s 28(1) is to protect retail customers from unpublicized restrictions on the retailer's freedom
to sell its inventory, and it may also apply in the wholesale context as well.
In order for a buyer of goods to obtain clear title under s 28(1), the following requirements must be satisfied:
o There must be a buyer of the goods.
o The seller must sell in the ordinary course of its business.
o The security interest in question must have been given by the seller.
o The buyer must not know that the sale constituted a breach of the security agreement.
Example:
o Debtor is a furniture retailer, and SP has a perfected security interest in Debtor's inventory.
o The security agreement authorizes Debtor to sell inventory in the ordinary course of business free of SP's
security interest, but it goes on to say that SP may withdraw authority by serving notice on Debtor.
o SP serves a notice on Debtor, and shortly afterward, Debtor sells an armchair to B, a retail customer.
o B gets clear title under s 28(1) unless B knew the sale was in breach of the security agreement, which
would be unlikely for an ordinary course purchase transaction.
-
Section 28(2):
o OPPSA, s 28(2): A LESSEE of goods from a lessor who regularly leases goods of that kind takes the goods
free of any security interest therein given by the lessor, even though it is perfected and the lessee knows
of it, unless the lessee knows that the lease constitutes a breach of the security agreement.
o The purpose of s 28(2) is similar to that of s 28(1) in protecting lessees from unpublicized restrictions on
the lessor's freedom to lease its inventory.
o In order for a lessee of goods to obtain clear title under s 28(2), the following requirements must be
satisfied:
• There must be a lessee of the goods.
• The lessor must regularly lease goods of that kind.
• The security interest in question must have been given by the lessor.
• The lessee must not know that the lease constitutes a breach of the security agreement.
B. BUYER
-
Section 28(1): only applies to security interests given by the seller.
A buyer is a type of purchaser, but "purchaser" includes other kinds of transferees as well.
73
-
-
The OPPSA does not define "buyer," but "purchaser" is defined as "a person who takes by purchase," which includes
sales, leases, mortgages, pledges, liens, gifts, and other consensual transactions creating an interest in personal
property.
The terms "buyer," "seller," and "sells" take their meanings from the Sale of Goods Act (SGA).
The SGA applies to contracts of sale of goods, which include transfers of property for a money consideration, called
the price.
"Buyer" is defined as the person who buys or agrees to buy goods, while "seller" is defined as the person who sells
or agrees to sell goods.
A contract is a sale if property is transferred immediately, and it is an agreement to sell if the property transfer is
to take place at a future time or subject to some condition.
In Royal Bank of Canada v 216200 Alberta Ltd, the SPPSA buyer in ordinary course provision only applies if the
contract between the debtor and the buyer is a sale.
C. ORDINARY COURSE OF BUSINESS
-
-
-
-
OPPSA section 28(1) applies only to sales made in the seller's ordinary course of business.
A sale in the ordinary course of business is a sale to the public at large of the type normally made by the vendor in
a particular business, carried out under normal terms and consistent with general commercial practice.
Private party sales and sales by a dealer in unusual circumstances are not sales in the ordinary course of business.
Factors that may indicate a sale is not in the ordinary course of business include: a sale off-premises or outside
normal business hours, a sale at substantially below market value, or a sale comprising an unusually large quantity
of the debtor's stock.
Additional factors include whether the seller advertises that it sells such goods, whether the transaction resembles
a liquidation of assets, and whether the transaction occurred in response to financial difficulties or suspicious
circumstances.
A sale to a related company is not necessarily outside the ordinary course of business, as seen in the Warehouse
Sales case.
o The Court held that the sales to the related company were in the ordinary course of the debtor's business
because the debtor regularly carried on business in this way, and it was "no less a part of [its] ordinary
business ... than the retail sales to customers despite being a small part of the business."
o Applying the shelter principle, the related company's customers also obtained clear title to the goods.
Camco Inc v Olson (Frances) Realty (1979) Ltd 1986 CanLII 3259, 50 Sask R 161 (CA)
o What is ordinary course of business is a factual determination, depends on particular seller
o Facts:
• FOR sells condos equipped with appliances
• Camco has perfected SI in appliances
• FOR goes bankrupt, Camco and buyers both want appliances
o Decision: Buyers get appliances
• Sale in OCOB, buyers take free [s 30(2)]
• Maybe atypical by industry standard but OCOB for this particular seller
• Doesn't matter that appliances were incidental to condo
o ISSUE Whether the buyers of household appliances, who purchased them with their condominium unit,
obtain good title under the Saskatchewan s.30(1) equivalent of the OPPSA sections 28(1) and (2)? Whether
the buyer is a buyer of goods sold “in the ordinary course of business of the seller”?
o FACTS M, a real estate developer, developed a condominium project that was expected to be sold as a tax
shelter with each unit being equipped with four kitchen appliances. The appliances in the units were
purchased by M from Camco, an appliance manufacturer, on conditional sale terms. Camco did not know
that M intended to resell the appliances, and in the conditional sale agreement, there were two main
conditions: which said that the purchaser is not purchasing equipment for the purpose of reselling, and
title shall not pass to the purchaser (remain with the vendor) until the total unpaid purchase price has
been paid. Camco perfected its security interest by registration under PPSA, and the individual buyers of
the units were not aware that the appliances were subject to a conditional sale agreement.
o LAW The main purpose of OPPSA s.28(1) is to protect the buyer against unpublicized restrictions on the
seller’s authority to sell inventory. According to Saskatchewan s.30(1), a buyer who purchases goods “in
74
o
o
o
o
-
the ordinary course of business of the seller” obtains good title to those goods, even if they are subject to
a security interest.
ANALYSIS In this case, the appliances were included in the purchase price, and the passing of title to the
appliances from the seller, M, to each of the respondents was for a stipulated price. The appliances were
also delivered to the respondent buyers prior to M’s default under the agreement with the appellant. The
respondents were not aware of the appellant’s security interest. The question to be determined was
whether the buyers of household appliances obtained good title under Saskatchewan s.30(1).
The Court of Appeal held that section 30(1) is not limited only to security interests in inventory. In deciding
whether a transaction is one that is in the ordinary course of business, the courts must consider all of the
circumstances of the sale, including the location of the sale, parties to the sale, quantity of goods, and
price charged for the goods. The Ontario provision is materially different from the Saskatchewan one
because of the addition in the Saskatchewan provision of the words “of the seller.” The court should give
a generally liberal interpretation of the phrase “buyer of goods sold in the ordinary course of business of
the seller.”
Tallis JA concluded that the learned trial judge's decision was fully supported by the evidence. In this case,
the seller was involved in an economic enterprise, and this was known to the appellant. The mere fact that
the seller was engaged in the selling of appliances as an incident to his primary business in selling
condominium units does not preclude the operation of section 30(1). Thus, the buyers of household
appliances obtained good title under Saskatchewan s.30(1).
CONCLUSION The Court of Appeal found in favour of the respondents, holding that the buyers of
household appliances obtained good title under Saskatchewan s.30(1) since the buyers purchased goods
sold in the ordinary course of business of the seller, even though the goods were subject to a security
interest.
Notes:
o OPPSA, s 28(1) is designed to protect a buyer from undisclosed restrictions on a debtor's authority to sell.
o Camco established that s 28(1) is not limited to inventory, and applies to the sale of equipment in
appropriate circumstances.
o In Camco, Muxlow was selling condominium units on a "systematic basis," which suggests that if the sale
is part of a pattern, the court will likely conclude it is in the ordinary course of business.
o In Agricultural Commodity Corp v Schaus Feedlots Inc., the court made two main points: the frequency
and number of sales are not determinative, and the question must be addressed from the buyer's
perspective (Is there anything to warn the buyer that this sale is out of the ordinary course of business?).
o If there is a prior pattern of sales, that will usually conclude the matter. But even if there is no previous
pattern, the sale may still be in the ordinary course of business if that is what a reasonable buyer would
think.
D. SECURITY INTEREST GIVEN BY SELLER
-
OPPSA, s 28(1) applies only if the security interest is "given by the seller."
Section 25(1)(a) of OPPSA states that a buyer takes subject to a security interest if the sale was in breach of the
security agreement.
In Example 4, Debtor sold an office chair to X, who then sold it to B. SP had a security interest in the chair.
o Since the sale from Debtor to X was in breach of the security agreement, X took the chair subject to SP's
security interest.
o B cannot rely on s 28(1) because the security interest was not given by the seller (Debtor), but by X.
o However, if Debtor's sale to X was in the ordinary course of Debtor's business, s 28(1) would apply and
give X clear title, which B would then inherit through the shelter principle.
o Searching the register may not have helped B because they likely would have searched under X's name,
not Debtor's name, and a search under X's name would not disclose SP's security interest.
E. BUYERS KNOWLEDGE
-
Section 28(1) of the OPPSA only applies if the buyer did not know that the sale was a breach of the security
agreement.
Knowing that goods are subject to a security interest does not displace section 28(1).
75
-
-
The crucial factor is whether the buyer knew that the debtor-seller was not authorized to make the sale.
In Example 5, Debtor gave SP a security interest in its inventory and violated the agreement by selling on Sundays.
B purchased a valuable violin from Debtor on a Sunday. SP claimed the violin from B, but B argues that they have
clear title because they did not know about the breach.
SP could argue that the sale was not in the ordinary course of Debtor’s business since Sunday sales were prohibited,
but this argument is unlikely to succeed.
SP could also argue that B knew about the Sunday sales restriction since it was noted on the financing statement,
but this alone is not enough to prevent section 28(1) from applying.
For the provision not to apply, B must have actually known about the restriction or wilfully disregarded it, which is
not the case in this example.
F. SALES AND AGREEMENTS TO SELL
-
-
-
Property in goods must pass from "a seller" to "a buyer" for s 28(1) to apply.
Sale of goods legislation distinguishes between a "sale" and an "agreement to sell."
A sale occurs when property in the goods passes to the buyer, while an agreement to sell is when property is to
pass at a later time or subject to a condition.
Passing of property depends on the appropriation of goods to the contract, which means that property does not
pass until the seller selects goods to fill the order and delivers them or notifies the buyer that they are available for
collection.
In Royal Bank of Canada v 216200 Alberta Ltd, it was held that OPPSA, s 28(1) only applies if the transaction
between the buyer and seller is a sale as defined in the sale of goods legislation.
o Payment is not a factor in determining whether property has passed.
o The case held that contracts where property had not passed to the buyer were "agreements to sell" and
OPPSA, s 28(1) did not apply.
Michael Burke & Anthony Duggan, “Benjamin Geva and Ontario PPSA Reform”
o The article discusses two cases, Royal Bank of Canada v. 216200 Alberta Ltd and Spittlehouse v. Northshore
Marine Inc, concerning the application of the “buyer in ordinary course” provision of the OPPSA to
conditional sales.
o The Royal Bank case held that the provision does not apply to conditional sales because there is no sale
until property passes to the buyer.
o The Spittlehouse case refused to follow Royal Bank, holding that the provision applies to conditional sales.
o The article suggests that a substance over form approach should be taken, recognizing that a conditional
sale is in substance an outright sale with a security interest, and argues that the 2006 OPPSA amendments,
which clarify that the provision applies even if property has not passed, are limited in protecting
conditional sale buyers because of the bankruptcy laws.
o The article notes that Saskatchewan has recently made comprehensive amendments to the Personal
Property Security Act and the Sale of Goods Act, which provide that a buyer who has paid all or
substantially all of the contract price acquires an equitable interest in the goods immediately on the seller
acquiring the goods, and that a retention of title provision in the sale agreement does not affect the
outcome.
o I. Royal Bank of Canada v. 216200 Alberta Ltd
• Inventory financer seized goods from a retailer, including items not yet appropriated to individual
orders, so property had not passed to customers
• Customers could not rely on buyer in ordinary course provision because until property passes
there is no sale, only an agreement to sell
• Decision suggests provision does not apply to conditional sales because there is no sale until
property passes to buyer
o II. Spittlehouse v. Northshore Marine Inc
• Concerned a contract for construction and supply of a yacht on reservation of title terms
• Buyer had paid around 90% of the price when the yacht was seized by a financer holding a
perfected security interest in the yacht builder’s inventory
• Ontario Court of Appeal held that provision applies to sales in a non-technical sense and that
property not passing to buyer before seizure was immaterial
• At odds with Royal Bank case
76
o
o
III. Substance over form approach
• Conditional sale is in substance an outright sale under which property passes immediately to
buyer with seller taking or reserving security interest to secure payment of price
• 2006 OPPSA amendments clarify that provision applies even if property has not passed but are
limited in protecting conditional sale buyers because of bankruptcy laws
IV. Saskatchewan amendments
• Made to the Personal Property Security Act and the Sale of Goods Act in 2020
• Provide that a buyer who has paid all or substantially all of the contract price acquires an
equitable interest in the goods immediately on the seller acquiring the goods
• Retention of title provision in sale agreement does not affect the outcome
G. LEASES (SECTION 28(2))
-
-
-
-
-
Section 28(2) OPPSA applies to lease transactions and provides that a lessee of goods from a lessor who leases
the goods in the ordinary course of business holds the goods, to the extent of the lessee’s rights under the lease,
free from any security interest given by the lessor even though it is perfected, and the lessee knows of it, unless
the lessee also knew that the lease constituted a breach of the security agreement.
Section 28(2) is a parallel provision to Section 28(1), which applies to sale transactions.
Where Section 28(2) applies, the lessee holds the goods, to the extent of its rights under the lease agreement, free
from the security interest of the secured party (SP). This means that the SP cannot interfere with the lessee’s
possession of the goods during the term of the lease.
However, the secured party does not lose its security interest in the goods altogether. The security interest
continues in the debtor/lessor’s reversionary interest in the goods, and the secured party may exercise its rights
once the lease has come to an end.
To benefit from the protection of Section 28(2), the lease must be in the ordinary course of the debtor/lessor’s
business, and the lessee must not know that the lease constitutes a breach of the security agreement.
If the lessee defaults under the lease agreement, the debtor/lessor can terminate the lease and recover the goods.
In the event of the debtor/lessor's default, the secured party can claim the goods once ownership reverts to the
debtor/lessor.
If the collateral (goods) gives rise to proceeds, the security interest extends to the proceeds under Section
25(1)(b) of the OPPSA.
Sections 28(2.1), (2.2), and (2.3) are parallel provisions to Sections 28(1.1), (1.2), and (1.3) but apply to lease
transactions and take into account structural differences for leases.
H. PRIORITIES WITH RESPECT TO REPOSSESSED OR RETURNED GOODS
-
-
Oppsa section 27 deals with competing interests that arise when a buyer or lessee takes goods free of a security
interest granted by the seller, and the goods are repossessed or returned to the seller by the buyer/lessee.
Section 27(1) and (2) regulate the rights to the returned/repossessed goods between the debtor and the prior
secured party. The security interest reattaches as if no sale or lease had taken place.
Section 27(3) and (4) provide for a similar result with respect to the rights of a transferee of chattel paper or an
account. The transferee is given a security interest in the returned/repossessed goods, temporarily perfected if the
security interest in the accounts or chattel paper was perfected. The temporary perfection falls away after ten days
unless the transferee otherwise perfects before the end of that period.
Section 27(5) indicates when the transferee of an account acquires a perfected security interest in the goods for
the purpose of resolving priority disputes, implicitly referring to the general priority rules in OPPSA, ss 30 and 33.
Section 27(6)(a) regulates contests between the inventory financier and the transferee of chattel paper in terms of
the priority rules applying to the chattel paper itself.
Section 27(6)(b) deals with priority conflicts between the transferee and other secured parties claiming an interest
in the goods.
IV. TRANSFERS OF CHATTEL PAPER
77
A. INTRODUCTION
-
-
-
-
-
Chattel paper is defined in OPPSA, s 1(1) as “one or more than one record that evidences both a monetary
obligation and a security interest in or a lease of specific goods.”
o an instrument that reflects both (i) a monetary obligation and (ii) a secured interest in some tangible good.
There are two types of chattel paper: tangible chattel paper and electronic chattel paper, each as defined in s 1(1).
Typical examples of chattel paper are conditional sale agreements and leases (whether security leases or true
leases).
Section 28(3) enacts special priority rules for competing claims to chattel paper.
o A purchaser of chattel paper has priority over any security interest in it if:
• The purchaser, in the ordinary course of their business and for new value:
• Takes possession of the chattel paper if it is tangible chattel paper, or
• Obtains control of the chattel paper under subsection 1 (3) if it is electronic chattel
paper.
o The chattel paper does not indicate that it has been assigned to an identified assignee other than the
purchaser.
Example 7 illustrates a case where s 28(3) applies.
Example 7:
o Debtor is a motor vehicle dealer. On Date 1, Debtor sells a car to Customer on conditional sale terms and
transfers the chattel paper to SP1, who does not take possession of the chattel paper but registers a
financing statement. On Date 2, Debtor transfers the chattel paper again, this time to SP2, a chattel paper
financier, in exchange for a cash payment. SP2 takes possession of the chattel paper. There is no indication
on the chattel paper that it had previously been transferred to SP1. SP1 and SP2 both claim the chattel
paper.
o In Example 7, there are two competing security interests: SP1’s interest, which is perfected by registration
on Date 1, and SP2’s interest, which is perfected by possession on Date 2.
o Section 28(3) applies because:
• SP2 is a “purchaser”
• SP2 transacted with Debtor in the ordinary course of their business
• SP2 gave new value in exchange for the chattel paper
• SP2 took possession of the chattel paper
• SP1’s interest is not indicated on the chattel paper.
o Section 28(3) provides that SP2 “has priority over” SP1.
o If SP2 had not taken possession of the chattel paper but registered a financing statement instead, s 28(3)
would not apply, and the dispute would turn on s 30(1), rule 1.
Example 8:
o Debtor is a motor vehicle dealer. SP1 holds a security interest in all Debtor's present and after-acquired
personal property perfected by registration on Date 1. On Date 2, Debtor sells a vehicle to Customer on
conditional sale terms. On Date 3, Debtor transfers the chattel paper to SP2, a chattel paper financier, on
the same terms as in Example 7. Debtor defaults against SP1. SP1 and SP2 both claim the chattel paper.
o SP2 is deemed to hold a security interest in the chattel paper under the OPPSA, even though it purchased
it outright.
o Without s 28(3), s 30(1), rule 2 would apply, giving priority to SP1.
o Section 28(3) displaces s 30(1) in this case, giving priority to SP2.
Example 9:
o Debtor is a motor vehicle dealer. SP1 holds a security interest in Debtor's inventory perfected by
registration on Date 1. On Date 2, Debtor sells a vehicle to Customer on conditional sale terms. On Date
3, Debtor transfers the chattel paper to SP2, a chattel paper financier, on the same terms as in Examples
7 and 8. Debtor defaults against SP1. SP1 and SP2 both claim the chattel paper.
o SP1's security interest does not continue in the vehicle under s 25(1)(a) but extends to the chattel paper
as proceeds under s 25(1)(b).
o SP1's security interest in the chattel paper continues following the transfer to SP2, unless SP1 authorized
the transfer.
o If the security agreement authorized chattel paper transfers, SP1's security interest does not continue in
the chattel paper, and SP2 is the only claimant.
78
o
o
o
o
If the security agreement did not authorize chattel paper transfers, SP1's security interest continues in the
chattel paper, and there is a competition between SP1 and SP2.
Section 28(3) displaces s 30(1) in this case, giving priority to SP2.
The outcome can be justified on the basis that Debtor needs the freedom to transfer its chattel paper to
carry on business, and SP1 is unlikely to oppose giving SP2 priority.
SP1 can avoid the effect of s 28(3) by indicating its interest on the chattel paper or taking possession of
the chattel paper itself.
B. PURCHASER
-
Section 28(3) applies to a chattel paper transferee who is a "purchaser" in contrast to s 28(1) which applies only
if the transferee is a "buyer."
The definitions of "purchase" and "purchaser" in s 1(1) cover a wide range of transactions, including taking by lien
and any other consensual transaction creating a security interest in personal property.
A person who takes a security interest in chattel paper is a "purchaser" for the purposes of s 28(3).
C. ORDINARY COURSE OF BUSINESS
-
Section 28(3) only applies if the purchase is in the ordinary course of the purchaser's business. This is different
from s 28(1), where the reference is to the ordinary course of the seller's business.
D. NEW VALUE
-
To qualify for protection under s 28(3), the purchaser must give "new value."
This means the purchaser must provide the dealer with a payment in some form which necessarily will be new
value
E. POSSESSION
-
Section 28(3)(a)(i) provides that if the chattel paper is tangible, the purchaser must take possession of it in order
to qualify for priority.
Possession must be taken by the secured party or its agent and not by the debtor or its agent.
The possession must also be of the original of the chattel paper.
F. CONTROL
-
For electronic chattel paper, "control" is defined in s 1(3).
Control means that a custodian maintains the electronic record for the electronic chattel paper in a manner that
identifies the holder and restricts transfers except in compliance with certain procedures as outlined in the
provision.
G. MEANING OF “INDICATION” (SECTION 28(3)(B))
-
Section 28(3)(b) does not apply if the chattel paper indicates the prior competing interest.
The purpose of the requirement for an indication is to alert a prospective purchaser to the earlier security interest,
so they do not have to conduct a register search before transacting with the debtor.
The indication must state that the chattel paper has been assigned and name the assignee.
If the arrangement between the secured party and the dealer is ongoing, it may be simpler for the parties to
incorporate the indication in the dealer’s standard forms.
For electronic chattel paper, the purchaser must obtain control to have priority under s 28(3), and the authoritative
record must identify the purchaser as the transferee of the record.
The presence of the indication is what matters for s 28(3)(b), not whether the prospective purchaser knows about
it.
A prospective purchaser should check the chattel paper for any s 28(3)(b) indication to benefit from the section.
79
-
If the purchaser is buying hundreds or thousands of contracts, examination of each separate contract may be
impractical, and the purchaser may have to rely on representations from the dealer, an examination of standard
forms, and possibly a review of random samplings of contracts.
H. CONTESTS BETWEEN PURCHASERS OF TANGIBLE CHATTEL PAPER AND ELECTRONIC COPIES
-
-
Section 28(3.1) deals with contests between purchasers of tangible chattel paper and electronic copies.
In Example 10, Debtor sells its conditional sale contracts to SP1 on Day 1 and delivers electronic versions, then sells
the same contracts to SP2 on Day 50 and delivers tangible versions.
Both SP1 and SP2 give new value and purchase in the ordinary course of their business, and none of the contracts
contain an indication.
In a contest between SP1 and SP2, the purchaser of the tangible chattel paper (SP2) has priority over the
purchaser of the electronic chattel paper (SP1), as long as the tangible chattel paper does not indicate that it has
been assigned to an identified assignee other than SP2.
To avoid losing priority, SP1 could have marked the hard copy version with an indication of its interest or required
Debtor to hand over the hard copy versions.
The CCPPSL Report recommends that purchasers of electronic chattel paper should obtain control of the chattel
paper to ensure priority.
I. SECURITY INTERESTS IN CHATTEL PAPER VS SECURITY INTERESTS UNDER CHATTEL PAPER
-
-
-
-
-
Priority disputes may arise involving both the chattel paper itself and the goods to which the chattel paper relates.
In Example 11, Seller sells a guitar to A pursuant to a conditional sale agreement and registers a financing statement
against A, then assigns the chattel paper to SP1 on Day 2, and a second time to SP2 on Day 3 without SP1's consent.
On Day 4, A grants SP3 a security interest in the guitar, and SP3 registers a financing statement. SP1, SP2, and SP3
all claim the guitar. The question is, who wins?
The resolution of this dispute involves a two-tier inquiry:
o As between SP1 and SP2, who has priority with respect to the chattel paper?
o As between the winner of the first dispute and SP3, who has priority with respect to the guitar?
For the first question, OPPSA, s 28(3) may apply depending on the facts. Otherwise, one of the general priority rules
will apply. In either event, whichever of SP1 and SP2 has priority over the chattel paper (Winner) will have first
claim to the benefits of the security interest in the guitar provided by the chattel paper.
For the second question, applying OPPSA, s 21(2), Winner succeeds to Seller's priority position as registered on Day
1. Now, there is a contest between Winner, holding a security interest in the guitar under the chattel paper,
perfected by registration on Day 1, and SP3, holding a security interest granted by A and perfected by registration
on Day 4.
SP1 has priority to the guitar based on OPPSA, s 30(1), rule 1.
V. TRANSFER OF INSTRUMENTS, DOCUMENTS OF TITLE, AND MONEY (SECTIONS 28(4) AND 29)
-
-
-
Section 28(4) of the OPPSA provides priority to a purchaser of collateral that is an instrument or negotiable
document of title over a security interest in the collateral that has been perfected by registration or temporarily
perfected under section 23 or 24.
For section 28(4) to apply, the purchaser must have given value for the interest purchased, purchased the collateral
without knowledge of the security interest, and taken possession of the collateral.
Section 28(4) applies to instruments (e.g. cheques) and negotiable documents of title (e.g. bills of lading) that are
freely transferable in the marketplace.
Section 55 of the BEA provides a similar rule to s 28(4) for negotiable instruments, allowing a person who takes a
negotiable instrument for value in good faith and without notice of any defect in the transferor’s title to get clear
title.
The term "purchaser" in s 28(4) includes sales, security agreements, and taking by negotiation.
In contrast to s 28(3), s 28(4) does not require "new value," and it applies regardless of whether the purchase is in
the ordinary course of the purchaser's business.
Section 29(a) provides that the rights of a holder in due course of a bill, note, or cheque under the BEA are to be
determined without regard to the OPPSA.
80
-
Section 29(b) provides a similar rule to s 29(a) for transferees of money from the debtor.
The OPPSA's approach to disputes involving a security interest in a payment and the recipient of the payment is
patchwork and incomplete.
If the payment takes the form of a cheque or other negotiable instrument, s 28(4) (or s 29(a)) applies;
if the payment is in cash, then the dispute is to be resolved without reference to the OPPSA, while there is no
mention at all in the statute of payments made by electronic funds transfer or other means.
VI. MOTOR VEHICLES (SECTION 28(5))
-
-
-
-
Section III.B.3.d of Chapter 5 requires a financing statement to contain a description of a motor vehicle that is
consumer goods, including its vehicle identification number (VIN). Failure to comply renders registration ineffective
to perfect the security interest. However, if the collateral is a motor vehicle held by the debtor as equipment or
inventory, the secured party is not obligated to include the VIN in the financing statement.
Section 28(5) addresses the concern of not including the VIN in the registration. It provides that a buyer takes a
motor vehicle free from any security interest given by the seller, even though it is perfected by registration, if the
sale is other than in the ordinary course of the seller's business, and the vehicle identification number is not set out
in the designated place on a registered financing statement or financing change statement. However, the buyer
will not be free from security interest if they knew that the sale was a breach of the security agreement.
Section 28(5) applies only where the motor vehicle is equipment and the security interest is given by the seller,
and not in cases where the motor vehicle is consumer goods or inventory. Additionally, it only applies if the sale
is "other than in the seller's ordinary course of business."
o If the sale is in the ordinary course of business and is authorized by the secured party, the buyer takes free
under s 25(1)(a), and if not authorized, s 28(1) may apply.
S 28(5) overlooks the A-B-C-D problem, which is the fact that the security interest may be given by a person other
than the seller. Thus, it only applies where the security interest is given by the seller, making it inconsistent with
the reason for enacting the provision in the first place, which is to encourage the secured party to include the VIN
in its registration to facilitate VIN searches.
VII. TRANSFER OF SECURITIES
John Cameron, “Secured Transactions Under Ontario’s Securities Transfer Act, 2006”
-
-
-
Definition of "Protected Purchaser"
o A protected purchaser is a buyer of a security or an interest in it who meets the following three criteria:
• Provides value
• Has no knowledge of any adverse claim to the security
• Obtains control of the security
o The definition of "purchase" also includes the creation of a security interest
Value
o Value means any consideration sufficient to support a simple contract, including an antecedent debt or
liability
o A binding commitment to extend credit also qualifies as value, even before the commitment is drawn
upon
o Section 1(1) of the STA defines value for the purposes of Articles 8 and 9 as follows:
• In return for a binding commitment to extend credit or for the extension of immediately available
credit
• As security for, or in total or partial satisfaction of, a pre-existing claim
• By accepting delivery under a preexisting contract for purchase
• In return for any consideration sufficient to support a simple contract
Notice of Adverse Claim
o An adverse claim is a claim that a claimant has a property interest in the security, and it is a violation of
the claimant's rights for another person to hold, transfer, or deal with that security
o Awareness that someone other than the debtor may have a property interest in the security is not
sufficient notice of an adverse claim
81
o
-
-
The definition also requires that the secured party know that the creation of the security interest violates
a third party's rights
o Claims that are merely contractual, without involving any property claim based on equity or otherwise,
are excluded
Sections 18 to 22 of the STA contain rules dealing with notice of an adverse claim
Section 18 of the OPPSA provides three tests for a person to have notice of an adverse claim:
o The person has actual knowledge of the adverse claim (Section 18(a))
o The person is aware of facts that indicate there is a significant probability of an adverse claim and
deliberately avoids information (Section 18(b))
o The person has a duty to investigate whether an adverse claim exists (Section 18(c))
The definition of "notice" in Section 3 of the Securities Transfer Act (STA) is not applicable to this context.
A secured party must obtain control of the security to qualify as a protected purchaser (Chapter 4).
To qualify as a protected purchaser, all requirements must be satisfied, including not having notice of an adverse
claim. The rule about willful blindness replaces the requirement of good faith.
Section 70 of the STA provides that a protected purchaser acquires the purchaser's interest in the security free of
any adverse claim.
The "shelter" principle embodied in Section 69 of the STA allows a purchaser to take a security free of adverse
claims if the person transferring the security is a protected purchaser.
Section 30.1 of the PPSA provides priority for a secured party that obtains control of investment property over
another secured party that does not have control.
Section 28.1(2) of the PPSA states that the interest of a protected purchaser takes priority over an earlier security
interest, even if perfected, to the extent provided in the STA.
CHAPTER TEN: PROCEEDS
I. INTRODUCTION
-
The PPSA provides a clear definition of "proceeds" and outlines the secured party's right to claim them, including
in the context of inventory financing.
The need to claim proceeds can arise in various situations, such as when the collateral has been disposed of or
destroyed.
Prior to the OPPSA, the common law and equitable rules regarding the secured party's right to claim proceeds were
complex and uncertain.
Tracing is the process by which a secured party attempts to identify and follow the proceeds of a sale or other
disposition of collateral to ensure that they are subject to the security interest.
II. NATURE AND SOURCE OF THE CLAIM TO PROCEEDS
A. HISTORICAL POSITION
-
Flintoft v Royal Bank of Canada is an important case in clarifying the conceptual significance of the right to trace
to proceeds in OPPSA, s 25. The case involved a bank holding two security interests from its customer: a Bank Act
security in the customer's inventory and a security interest in the customer's accounts (referred to as "book debts").
o The Bank Act security was effective, but the security interest in the accounts was ineffective due to the
bank's failure to complete registration in time.
o At the time of the customer's bankruptcy, there were various uncollected accounts, and the trustee in
bankruptcy argued that the bank had no claim to them.
o The bank claimed that it had a right to the accounts since they arose from the sale of goods covered by its
security, even though the security interest in the accounts was ineffective.
o The Supreme Court of Canada agreed with the bank, stating that if a lender lends for the purpose of
enabling another to acquire and manufacture goods, they would not permit the sale of goods on which
they hold security except on terms that the borrower must bring in the proceeds of the sale of those
goods.
82
-
The principle is that if someone sells another's goods with their consent, it is on terms that the seller brings the
money in place of the goods, and the seller does not sell free of the claim to the proceeds.
B. THE DEFINITION OF PROCEEDS
1. Introduction
-
-
-
OPPSA, Section 25(1) provides the secured party's right to proceeds if collateral gives rise to them.
o The provision extends the security interest to the proceeds unless the secured party expressly or impliedly
authorized dealing with the collateral free of the security interest.
Section 1(1) defines "proceeds" as identifiable or traceable personal property derived directly or indirectly from
any dealing with collateral or the proceeds therefrom.
The definition of proceeds includes:
o payment representing indemnity or compensation for loss of or damage to the collateral or proceeds,
o payment made in total or partial discharge or redemption of an intangible,
o chattel paper,
o an instrument or investment property,
o and rights arising out of, or property collected on, or distributed on account of, collateral that is investment
property.
The provision codifies the principle stated in Flintoft v Royal Bank of Canada, which holds that a lender has a right
to claim the proceeds from the sale of collateral to protect the interest of the secured party.
2. Dealing
-
-
-
-
OPPSA, Section 1(1) defines "proceeds" as property derived directly or indirectly from any dealing with collateral
or the proceeds therefrom.
Typical case of property derived from a dealing of collateral: when the debtor sells or transfers the collateral to a
third party in exchange for payment, and the security interest may or may not continue in the original collateral,
but it extends to the proceeds.
Transfers are not the only kind of dealing.
o E.g., if the collateral is an account and the debtor collects on the account, the collection is a "dealing" with
the account, and the collected funds are proceeds.
Paragraphs (a)-(c) of the definition specify particular cases where property is proceeds even in the absence of a
dealing with the collateral.
o E.g., insurance payouts and payments collected on outstanding accounts or investment property.
Property is not proceeds unless it derives from a dealing with the collateral, subject to the exceptions in paragraphs
(a)-(c) of the definition.
Section 37 of the OPPSA enacts special rules for cases involving manufacture, processing, assembly, and
commingling.
o E.g., if the collateral is raw materials used in the manufacture of an end product, the end product is not
proceeds because manufacture is not a dealing.
3. Directly or indirectly
-
-
Property derived "directly or indirectly" from a dealing with collateral is proceeds.
Example: If a secured party (SP) has a security interest in a debtor's tractor and the debtor sells the tractor to a
buyer and receives payment by cheque, the cheque is personal property derived directly from a dealing in the
tractor (collateral).
When the debtor deposits the cheque, the "account" generated by the deposit is property derived directly from
the cheque and indirectly from the tractor. Later cash withdrawal and the purchase of a painting with the funds
are also proceeds derived indirectly from the original collateral.
83
-
Whether the security interest continues in the painting depends on whether the SP authorized the sale of the
painting. However, under s 25(1)(b) OPPSA, the security interest continues in the painting's sale proceeds
regardless.
4. Identifiable or Traceable
-
-
Personal property must be "identifiable or traceable" to be considered proceeds
“Identifiable” refers to the ability to point to the specific property received by the debtor as a result of the dealing
“Traceable” refers to the situation where the collateral is commingled with other property and its identity is lost
In Transamerica Commercial Finance Corporation, Canada v Royal Bank of Canada, the court clarified the
meaning of "traceable"
o Facts:
• Debtor is car dealer
• RBC has general security interest covering accounts (APAAPP)
• Honda supplies inventory to dealer, dealer agrees to hold money from sale in trust
• Dealer instead pays money from sales into RBC bank account
• Honda serves PMSI notice to RBC, assigns interest to Transamerica
o Issue:
• Transamerica argues super-priority over proceeds under s 34(2)
• RBC argues can't trace PMSI to any specific money; priority to proceeds under s 34(5)
o Decision: Transamerica gets money
• Transamerica has priority under s 34(2), s 34(5) does not apply
• But if s 34(5) did apply, RBC would win. Priority to accounts financers over PMSI financers
• Law of tracing under PPSA more flexible than strict principles of equity
• RBC's SI in accounts refers to accounts receivable, not deposit accounts
In Example 1, the cheque and bank deposit are identifiable personal property
If the collateral is commingled with other funds, the courts have developed rules for tracing SP's claim into the
mixed fund
"Traceable personal property" in the OPPSA definition of "proceeds" means personal property may still be
proceeds if it is traceable according to general law rules relating to tracing
These rules are discussed in Section IV of the OPPSA.
5. Debtor’s Interest in the Proceeds
-
The OPPSA does not require that the debtor must receive the proceeds for them to be considered as such.
However, the SPPSA restricts the definition of proceeds to personal property in which the debtor acquires an
interest.
In Example 2, SP holds a perfected security interest in Debtor's computer, which Debtor sells to Trader, who then
sells it to Buyer for cash and a trade-in printer.
In Ontario, SP can claim the cash and trade-in received by Trader as proceeds, while under the SPPSA, the answer
would be no.
The rationale for the Saskatchewan approach is to prevent the multiplication of proceeds claims and potential
prejudice to third parties who may have no means of discovering SP's security interest.
Problem 10.1
o Day 1. Debtor breeds horses. It borrows money from SP and, to secure the amount owing, enters into a
security agreement with SP charging all present and after-acquired horses. SP perfects its security interest
by a filing under the OPPSA.
o Day 2. Debtor sells a horse to a customer for $50,000 in cash. Debtor puts $10,000 of this into its safe
(there is no other money in the safe) and uses the rest to buy 100 common shares in XYZ Ltd.
o Day 20. XYZ Ltd declares a cash dividend on its common shares paying $1,000 to Debtor, which Debtor
uses to pay for a party for its employees.
o Day 50. XYZ Ltd declares another dividend on the shares held by Debtor, this time an in specie dividend of
five preferred shares.
o Day 75. Debtor defaults on its loan from SP.
84
-
In Problem 10.1, SP can claim the $10,000 in Debtor's safe, the 100 common shares, and the five preferred shares
as proceeds.
The $1,000 dividend is not related to the sale of the horse and cannot be claimed as proceeds.
C. PROCEEDS CLAUSES
-
Section 25(1)(b) of the OPPSA automatically extends the security interest to proceeds.
Express proceeds clauses are still common in security agreements, which are additional protection in case the laws
of another jurisdiction are engaged, and the foreign law does not provide for automatic proceeds claims.
A sample charging clause for a general security agreement in Section 1 of Appendix A includes the term “Collateral,”
which includes “all proceeds of any of the foregoing, wherever located.”
D. IS A FIDUCIARY RELATIONSHIP NEEDED?
-
-
The definition of “proceeds” requires that the personal property be “identifiable or traceable.”
Historically, the right to trace turned on proof of a trust or fiduciary relationship between the parties, and it is still
common in security agreements to add language supporting the presence of such a relationship.
In General Motors Acceptance Corp of Canada Ltd v Bank of Nova Scotia, the Ontario Court of Appeal suggested
that, in the absence of a provision in the security agreement to the effect that the debtor holds any proceeds on
trust for the secured party, the secured party cannot trace.
However, the Saskatchewan Court of Appeal held in the Flexi-coil Ltd v Kindersley District Credit Union Ltd case
that “the secured party’s right to trace proceeds is a statutory right [under the SPPSA] not dependent on finding a
fiduciary relationship between the debtor and the secured party claiming proceeds.”
o This is the better view.
E. CLAIMS TO BOTH ORIGINAL COLLATERAL AND PROCEEDS
-
-
-
-
A security interest in an asset will continue to attach to it upon its disposition, and the security interest also extends
to any proceeds received from the sale of the asset.
o Under OPPSA section 25(1)(a), a security interest continues to attach to an asset even after its disposition,
unless an exception applies.
o Under OPPSA section 25(1)(b), the security interest extends to the proceeds of the asset.
A secured party may claim both the original collateral and its proceeds, subject to certain limitations.
The question arises as to whether the secured party can claim both the original collateral and the proceeds, or if
this would be considered double dipping.
In Example 3, the debtor sells a racehorse to a third party without the secured party's authorization, and the debtor
later defaults on their loan. The secured party discovers the sale and finds the horse with the third party, as well as
$1,000 in the debtor's bank account.
o Applying OPPSA s 25(1)(a), the secured party's security interest in the horse continues because they did
not authorize the sale to the third party, and s 28(1) does not apply since the sale was not in the ordinary
course of the debtor's business.
o Applying s 25(1)(b), the secured party's security interest extends to the bank deposit as proceeds.
However, the non-Ontario PPSAs limit the amount a secured party can claim to the value of the original collateral
at the time of sale, to prevent windfalls.
o In Example 3, this means that the secured party can claim both the horse and the money, but only up to
$2,700 (the value of the horse at the time of sale).
In Bank of Nova Scotia v IPS Invoice Payment System Corporations, it was held that this limitation is implicit in the
OPPSA.
The limitation applies when the secured party enforces their security interest against both the original collateral
and the proceeds.
In Example 4, the debtor sells the horse for $1,000 and pays the amount to the secured party in reduction of their
indebtedness. The secured party learns about the sale and takes steps to enforce their security interest.
85
o
-
If the limitation applies, the secured party could only enforce their security interest in the horse up to an
amount of $1,700 (the difference between the $2,700 value of the horse at the time of sale and the $1,000
sale proceeds paid to the secured party by the debtor).
o However, the limitation only applies if the secured party enforces their security interest against both the
original collateral and the proceeds. In this case, the debtor voluntarily paid the sale proceeds to the
secured party and not in response to any enforcement action, so the secured party can claim the full
$2,700 value of the horse.
The policy concern is to protect the secured party's ability to make informed decisions about the value of their
collateral during the life of the loan, so they can carry out proper risk assessments.
o The limitation only applies if the secured party enforces its security interest against both the original
collateral and its proceeds.
o If a debtor voluntarily pays the sale proceeds to the secured party, the limitation does not apply, and the
secured party may claim the full value of the original collateral.
III. PERFECTION OF A SECURITY INTEREST IN PROCEEDS
-
-
-
Section 25(1)(b) confirms that a secured party's security interest extends to the proceeds, but does not address
perfection.
OPPSA sections 25(2), 25(3), 25(4), and 30(5) address how to maintain perfection of a security interest in proceeds.
Sections 25(2) and 25(3) confirm that if the security interest in the original collateral was perfected by registration
when the proceeds arose, the security interest in the proceeds will be automatically perfected by registration for
as long as the registration remains valid.
Section 30(5) establishes that for the purposes of the priority rules in section 30(1), the secured party's original
registration date also applies to proceeds.
The language in section 25(3) reinforces this point.
Example 5
o SP1 has a security interest in Debtor’s inventory, perfected by registration on June 1.
o Debtor sells furniture to O, a retail customer, and uses the sale proceeds to buy a delivery truck from X.
o SP2 lends Debtor money and takes a security interest in the truck, registering a financing statement on
December 1.
o Debtor defaults.
o SP1’s security interest extends to the truck as proceeds of inventory and is continuously perfected by
virtue of OPPSA sections 25(2) and 25(3).
o SP1’s registration date for the truck is the same as its registration date for the inventory, which is June 1.
o SP2 did not register until December 1, so SP1 has priority.
o Section 25(5) provides a limited concession for third parties who may have trouble discovering a security
interest in proceeds, stating that a person who buys or leases a motor vehicle as consumer goods in good
faith takes it free of any security interest therein that extends to it under section 25(1)(b) even though it
is perfected under section 25(2), unless the secured party has registered a financing change statement
that sets out the vehicle identification number in the designated place.
Example 6
o Secured party (SP) has a security interest in debtor's inventory perfected by registration.
o Debtor sells furniture to a retail customer (O) in the ordinary course of business.
o Debtor uses the sale proceeds to buy a car from X.
o Debtor sells the car to T without SP’s authority. T buys the car for personal use.
o Section 25(5) of OPPSA applies because the car is proceeds of the inventory.
o T bought the car as consumer goods, presumably in good faith.
o SP had not registered a financing change statement that set out the VIN.
o Section 25(5) is a consumer protection measure and applies only where the disputed collateral is a motor
vehicle, and the buyer or lessee is a consumer.
• The provision puts the risk of undiscovered proceeds security interests on SP.
o Section 25(4) applies where the security interest is perfected otherwise than by registration when the
proceeds arise.
o It gives the secured party a ten-day grace period to perfect its security interest in the proceeds.
o The security interest is temporarily perfected as to the proceeds during that time.
86
o
-
The secured party may perfect its security interest in the proceeds by registering a financing statement
that describes the proceeds or by taking possession of the proceeds.
The non-Ontario PPSAs have substantially more detailed requirements for perfection of a security interest in
proceeds.
The SPPSA provides that a security interest in proceeds is a continuously perfected security interest if the interest
in the original collateral is perfected by registration of a financing statement that covers the original collateral.
If these provisions applied in Example 5, SP1 would have a 15-day grace period after Debtor bought the truck to
register a financing statement or a financing change statement to cover the truck.
The more limited Ontario approach can be explained on the basis that the Minister’s Order only requires the
secured party to check off a box in the financing statement identifying the class of collateral.
Ontario government has committed to replacing the “check box” collateral description system with the “same item
or kind” approach that the other provinces use.
IV. TRACING
A. INTRODUCTION
-
Tracing is a proprietary remedy that involves following an item of property as it is transformed into other items of
property or as it passes into other hands.
To establish tracing, there must be a close and substantial connection between the original collateral and the asset
being claimed.
B. TRACING INTO AN OVERDRAWN ACCOUNT
-
-
In Flexi-coil Ltd, SP had a security interest in Debtor’s present and after-acquired inventory. Debtor deposited some
of its retail customers' cheques into its account with the credit union, but the account was overdrawn. The Court
had to decide whether SP’s security interest extended to the deposits as proceeds of the cheques.
The answer depends on the nature of the banker–customer relationship.
When the debtor’s account is overdrawn and they bank the money, the answer of whether the secured party can
trace the proceeds depends on the nature of the banker-customer relationship
• If the customer’s account is in credit, the relationship is debtor-creditor, meaning that the customer is the
creditor and it is the bank that is the debtor
• Each deposit increases the amount of the bank’s debt and each withdrawal reduces it
• A bank account with a credit balance is property belonging to the customer and, in PPSA
terminology, is an “account”
• When a debtor deposits into their account, which is in credit, the deposit is an “account” in PPSA
terms, and the secured party acquires a security interest in it as proceeds
• If the customer’s account is overdrawn, the relationship between the customer and the bank is still debtorcreditor, but now the customer is the debtor and the bank is the creditor
• Each deposit reduces the amount of the customer’s debt and each withdrawal increases it
• An overdrawn bank account is property belonging to the bank, not the customer
• When a customer makes a deposit into an overdrawn account, it reduces their obligation to the
bank, but does not create any property rights in the customer – as such, the secured party would
not acquire a security interest in the proceeds.
C. BACKWARDS TRACING
-
Backwards tracing is the process of tracing the proceeds of an asset that has been sold to determine if a security
interest still exists in those proceeds.
The principle of backwards tracing holds that when money is used to pay a debt, it is traceable into what was
acquired in exchange for the incurring of the debt.
However, backwards tracing is controversial and the case law on point is unsettled.
Backwards tracing refers to tracing the proceeds of an asset into something that was acquired in exchange for
incurring a debt.
87
-
-
-
-
-
In Example 8, SP has a security interest in Debtor's cows. Debtor sells the cows to Buyer without SP's authority,
opens a bank account and deposits the $1,000. Debtor then purchases a speedboat but does not immediately pay
for it. Debtor withdraws the $1,000 and uses it to pay the debt owed to Seller for the speedboat.
Strictly applying tracing law, SP has no claim to the speedboat as there is no close and substantial connection
between the cows and the speedboat.
However, if Debtor had immediately paid Seller for the speedboat with the $1,000 withdrawn from the bank
account, SP would have had a claim to the speedboat as proceeds.
The principle of backwards tracing states that money used to pay a debt is traceable into what was acquired in
exchange for incurring the debt.
The case law on backwards tracing is unsettled and controversial.
Agricultural Credit Corp of Saskatchewan v Pettyjohn 1991 CanLII 7979, 79 DLR (4th) 22 (Sask CA)
• Facts: An account with a BOM was a conduit for a line of credit with cash being withdrawn and repaid
continually. Some of the money repaid came from cattle that ACCS had a PMSI in. ACCS says it can isolate
certain transactions as being related to the sale of the cattle in which they had a PMSI. The Pettyjohns say
that some of the borrowed money was used to buy the later cattle and a smaller portion came from other
unidentified sources. Also, cattle sales began before the cattle purchase and ended after them. Also, the
line of credit always had a negative balance.
• Issue: Do the present cattle holdings of the Pettyjohns constitute proceeds of the 1981 and 1984 cattle?
• Analysis:
• PPSA tracing is based on CL and equity but changed to fit PPSA.
• Under normal tracing, the funds were dissipated so they can’t be traced as the funds were used
to pay the debts of the original wrongdoer and the creditor is a bona fide purchaser for value.
• The Close and Substantial Connection Test: Take a broad approach that notices that the
connection between the new and old chattels are close. The proceeds from the old cattle were
clearly used to buy the new one. The account, here, was just a conduit. Form is not as important
as the function and the nature of the property.
• In this case, where a set of chattels is replaced by another of like function in the affairs of the
debtor, it will be to the court to find that they were a replacement regardless of the formalities,
but the formalities may have some effect on finding it as a replacement.
The Durant case held that backwards tracing may be permissible if the deposit and withdrawal are part of a
coordinated scheme.
• Equitable remedies should depend on the substance of the transaction, not the strict order of events.
In Pettyjohn, the Court established the "functional equivalence" test, which allows for tracing if a set of chattels is
replaced by another of like function in the affairs of the debtor.
• The general law tracing rules elevate form over substance and are inappropriate in the PPSA context.
• The new test extends the equitable concept of tracing in a way that is appropriate for the PPSA context.
• In substance, the series of transactions amounted to a substitution of the new herd for the old one.
• The actual form of the transaction should make no difference to the outcome.
"Functional equivalence" means that items of like function in the affairs of the debtor can be traced back to the
original collateral, regardless of formalities.
• Examples of functionally equivalent assets may include breeding cattle and a dairy herd, or horses and
cattle.
• The Pettyjohn approach favors secured lenders, but it disadvantages unsecured creditors by reducing the
assets available to satisfy their claims.
• It is debatable whether the Court took sufficient account of this consideration.
D. TRACING INTO A MIXED FUND
-
When a debtor mixes funds in a bank account that contains proceeds from a secured party's collateral, the secured
party may be able to trace its entitlement into the mixed fund.
In Agricultural Credit Corp. of Canada v. Pettyjohn, the Saskatchewan Court of Appeal defined tracing as follows:
o Tracing involves following an item of property as it is transformed into other items of property, or as it
passes into other hands, so that the rights of a person in the original collateral may extend to the new
property
88
o
-
-
-
-
-
In establishing that one piece of property may be traced into another, it is necessary to establish a close
and substantial connection between the two pieces of property, so that it is appropriate to allow the
rights in the original property to flow through to the new property
Where proceeds become mixed with other funds in a bank account, the law of tracing has rules to help identify
the portion of the mixed funds to which the secured party is entitled
o The lowest intermediary balance rule applies where the mixed fund is depleted between the date the
sale proceeds are deposited and the date of the dispute – the rule states that “a claimant to a mixed fund
cannot assert a proprietary interest in the fund in excess of the smallest balance in the fund during the
interval between the original contribution and the time when a claim with respect to that contribution is
being made against the fund”
The lowest intermediate balance rule was first stated in James Roscoe (Bolton) Ltd. v. Winder [1915] and it has
become an established part of the law in England and most parts of the Commonwealth
o The case law in Ontario has been mixed in terms of whether the rule should apply in Canada
The following examples illustrate the application of the tracing rule:
Example 9:
o SP has a security interest in Debtor's inventory that is perfected by registration.
o On Date 1, Debtor sells inventory to various customers and receives $1,000 in receipts.
o On Date 2, Debtor deposits the $1,000 in its bank account, which already has $500 of Debtor's own money.
o On Date 4, Debtor becomes bankrupt, and there are no further movements in the account.
o The $1,000 is traceable personal property as defined in the OPPSA, s 1(1) definition of "proceeds," and the
security interest attaches to the bank account to the extent of the secured party's entitlement.
o SP can assert its security interest against Debtor's trustee in bankruptcy and is entitled to receive $1,000
from the account before Debtor's unsecured creditors.
Example 10:
o SP has a security interest in Debtor's inventory that is perfected by registration.
o On Date 1, Debtor sells inventory to various customers and receives $1,000 in receipts.
o On Date 2, Debtor opens a bank account and deposits the $1,000, and then deposits $500 of its own funds
on Date 3.
o On Date 4, Debtor withdraws $300, leaving $1,200 in the account.
o On Date 5, Debtor becomes bankrupt, and there are no further movements in the account.
o The amount of the closing balance that SP can claim as traceable proceeds of its original collateral depends
on how Debtor's Date 4 withdrawal is accounted for.
o If the first in, first out rule (Clayton's Case) applies, the $300 withdrawal is debited against the Date 2
deposit, and SP's claim against the closing balance is limited to $700.
o If the presumption of rightful withdrawal applies, Debtor's Date 4 withdrawal will be debited against its
own $500 in the account, leaving SP's contribution intact.
o Accordingly, SP's security interest will attach to $1,000 of the account's closing balance.
Example 11:
o SP1 has a security interest in Debtor's inventory that is perfected by registration.
o On Date 1, Debtor sells inventory to various customers and receives $1,000 in receipts.
o On Date 2, Debtor opens a bank account and deposits the $1,000, and then makes a second deposit of
$500 representing proceeds of collateral belonging to another secured party (SP2) on Date 3.
o On Date 4, Debtor withdraws $300, leaving $1,200 in the account.
o On Date 5, Debtor becomes bankrupt, and there are no further movements in the account.
o The presumption of rightful withdrawal does not apply in this scenario.
o If Clayton's Case applies, the $300 withdrawal is debited against SP1's money so that SP1 and SP2 share
the $1,200 closing account balance in the proportions 700:500.
o The courts are likely to adopt a pro rata sharing rule in place of the rule in Clayton's Case.
o SP1 and SP2 would share the $1,200 closing balance in proportion to the value of their respective
contributions to the fund, that is, 2:1.
E. SEGREGATED BANK ACCOUNTS AND BLOCKED ACCOUNT AGREEMENTS
-
Segregated Accounts:
o A bank account required by the debtor to use solely for deposits of proceeds of collateral
89
o
-
-
-
-
The lender can enforce against proceeds knowing no other funds have been commingled with its proceeds
in the account
o In some cases, the debtor may receive payments from customers, but must deposit them into the
segregated account within a short time frame
o In other cases, especially if the debtor's financial situation is deteriorating, the lender may require
customers to make payments directly into the segregated account
Blocked Account Agreements:
o A three-party agreement between the debtor, the financier, and the deposit institution
o Limits the deposit institution's set-off rights and gives the financier complete control of the account upon
default or certain other trigger events occurring
o Used to guard against the risk of the deposit institution asserting its set-off rights against the funds in the
segregated deposit account
Lockbox Arrangements:
o Used where payments are regularly made by cheque
o Cheques are delivered directly to a lockbox maintained at the bank solely for this purpose and subject to
a blocked account agreement with the bank
Outright Purchasers of Chattel Paper or Accounts:
o May sometimes allow their sellers to continue to collect the chattel paper or accounts on their behalf
o Will face tracing concerns similar to those faced by a secured lender under a security assignment
o May also require segregated accounts and blocked account agreements
o Typically specify trigger events allowing them to take over the collections or to appoint a third-party
collection agent
Case Study:
o Susan sells jeans and has a merchant agreement in place with Bank to provide her with credit card services
o Susan enters into a factoring agreement with SP, who buys her credit card receivables at a discount on a
daily basis
o SP perfects by registration under the OPPSA against accounts
o Susan sells inventory through credit card sales of $1,500 and sells the related credit card receivables to SP
for $1,250
o Some of the jeans Susan has sold prove to be damaged and are returned, reducing the credit card
receivables from $1,500 to $750, causing SP to be $750 out of pocket
o Susan settles with her jeans manufacturer for $2,000 in damages
o Susan becomes bankrupt with assets including the returned jeans, $1,000 in her bank account, and the
$2,000 payable by the jeans manufacturer
o Both SP and the trustee in bankruptcy claim these assets.
CHAPTER ELEVEN - FIXTURES, ACCESSIONS, AND COMMINGLED GOODS
I. INTRODUCTION
-
-
-
Section 34 of OPPSA applies to fixtures, where goods with a security interest become installed on land, or where
a security interest is created in goods that are already fixtures.
o a dispute over the fixture may arise between the secured party with the security interest in the fixture and
a third party holding an interest in the land
Section 35 of OPPSA applies to accessions, where goods with a security interest become installed in other goods
or where a security interest is created in goods already installed in other goods.
o a dispute over the installed goods (or “accession”) may arise between the secured party with the security
interest in the accession and a third party holding an interest in the host goods.
Section 37 of OPPSA applies to commingled goods, where goods are blended together in a manufacturing process,
or where fungible goods from different sources are mixed.
o a priority dispute may arise over the end product (the pancakes) between (1) the holder of a security
interest in the flour and the holder of a security interest in the eggs, (2) the holder of a security interest in
either or both the flour and the eggs and the holder of a security interest in the end product, or (3) the
holder of a security interest in either or both the flour and the eggs and the debtor-manufacturer’s trustee
in bankruptcy.
90
-
Priority disputes may arise between secured parties, third parties with an interest in the host goods or land, and a
debtor-manufacturer's trustee in bankruptcy.
II. FIXTURES
A. THE MEANING OF “FIXTURE”
-
-
OPPSA considers fixtures as goods for the purpose of the Act, and fixtures are included in the definition of "personal
property" but exclude building materials.
Fixtures are treated as personal property to facilitate the application of the statute, and OPPSA Section 34 enacts
priority rules for disputes over fixtures.
The common law meaning of "fixture" applies in OPPSA, and building materials are not defined in the OPPSA.
The defining characteristic of building materials is whether the disputed item has become an integral part of the
construction and cannot be removed from the structure at a cost less than the value of the item.
OPPSA adopts a threefold classification of goods in relation to realty:
o (1) goods not sufficiently attached to qualify as a fixture,
▪ If a case falls within class (1), the holder of the real property interest has no claim to the goods,
and no priority dispute arises.
o (2) goods that satisfy the test of a fixture,
▪ If a case falls within class (2), the holder of the real property interest has a claim, and OPPSA
Section 34 applies to determine the resulting priority dispute.
o (3) and goods that have become an integral part of the structure and are deemed to have lost their
character of goods altogether (building materials).
▪ If a case falls within class (3), the secured party loses its claim to the goods when they become
integrated into the structure.
Cormier v Federal Business Development Bank: The common law meaning of “fixture”
o Dealt with determining whether equipment used in a car repair operation was considered fixtures or
personal property.
o The five rules laid down in Stack v. T. Eaton Co. (1902) were applied to assist in this determination.
o The five rules are:
▪ (1) Articles not otherwise attached to the land than by their own weight are not to be considered
as part of the land, unless the circumstances are such as show that they were intended to be
part of the land;
▪ (2) Articles affixed to the land, even slightly, are to be considered part of the land unless
circumstances are such as to show that they were intended to continue to be chattels;
▪ (3) The circumstances necessary to be shown to alter the prima facie character of the articles are
circumstances which show the degree of annexation and the object of such annexation, which
are patent for all to see;
▪ (4) The intention of the parties affixing the article to the soil is material only so far as it can be
presumed from the degree and object of the annexation; and
▪ (5) Even in the case of tenant's fixtures put in for the purpose of trade, they form part of the
freehold, with the right, however, to the tenant, as between him and his landlord, to bring them
back to the state of chattels again by severing them from the soil, and they pass by a conveyance
of the land as part of it subject to this right of the tenant.
o The court held that the equipment was considered fixtures because they were attached to the property
in various ways, but were not part of the property.
o The distinction in Stack between trade purpose and non-trade purpose fixtures was dismissed, as the term
"fixtures" in the PPSAwas intended to cover all chattels attached to the land by the tenant, whether they
are removable or not.
B. THE OPPSA, SECTION 34 PRIORITY RULES
-
Sections 34(1) and (2) can be broken down into the following priority rules:
91
-
-
-
Rule (1): A security interest in goods that attached before the goods became a fixture has priority as to the fixture
over the claim of any person who has an interest in the real property, subject to the limited exceptions in Rules (3)
and (4) below.
o Section 34(1)(a) OPPSA
o if a security interest is taken in goods before they become attached to the real property (i.e. a fixture),
then the secured party has priority over any claim by a person with an interest in the real property (e.g. a
landlord or real estate mortgagee)
o The provision refers to a "person who has an interest in the real property" which includes a landlord and
a real estate mortgagee.
o The rationale for giving the secured party priority over a landlord is to prevent the landlord from obtaining
an unpaid-for improvement to the property.
o The provision applies even if the secured party has not perfected their security interest, as long as it has
attached.
o The provision applies even if the disputed item was not on the premises at the time of the mortgagee's
transaction with the debtor.
o Example: Jane lends money to Jack to buy an expensive chandelier to put in his house, and Jack uses the
chandelier as collateral for the loan. If Jack defaults on the loan, Jane has priority over Jack's landlord's
claim to the chandelier
Rule (2): A security interest in goods that attached after the goods became a fixture does not have priority over
any person who has a registered interest in the real property at the time the security interest in the goods attached
and who has not consented in writing to the security interest or disclaimed an interest in the fixture.
o Section 34(1)(b)
o Rule (2) states that a security interest in goods that were already a fixture before the security interest
attached does not have priority over any person who has a registered interest in the real property, unless
that person has consented in writing to the security interest or disclaimed an interest in the fixture.
o The provision gives priority to the real property interest holder in cases where the debtor is a tenant who
gives the secured party a security interest in an item that is already a fixture, or where the debtor
mortgages the real property and the disputed item is already a fixture.
o The rationale for giving the real property interest holder priority is to give effect to the parties' reasonable
expectations.
o The provision also applies if the real property interest holder consented to the security interest or
disclaimed an interest in the fixture.
o Example: Sarah owns a property and rents it out to Tom. Tom puts a new washing machine in the property,
and then he borrows money from Mary and uses the washing machine as collateral for the loan. Later,
Sarah sells the property to Lisa. If Lisa did not consent to Mary's security interest in the washing machine,
then Lisa has priority over Mary's claim to the washing machine.
Rule (3): A security interest in goods that attached before the goods became a fixture is subordinate to the interest
of a subsequent purchaser for value of an interest in the real property if the subsequent purchase is made without
knowledge of the security interest and before notice of it is registered in accordance with s 54.
o Section 34(1)(a) read in conjunction with Section 34(2)(a)
o The rule protects a subsequent purchaser of the real property.
o It applies when the security interest attaches to the collateral, the collateral becomes affixed to the real
property, and a purchaser acquires an interest in the real property.
o The security interest is subordinate to the purchaser's interest if the purchase was made without
knowledge of the security interest.
o The secured party can prevent this outcome by registering a notice of the security interest in the land
registry office.
o "Knowledge" is defined as actual knowledge or willful blindness.
o If someone buys a piece of property without knowing that there is a security interest (i.e. a loan or other
claim) on any fixtures that are already there, then the security interest is lower in priority than the new
owner's claim on the property.
o The security interest has to have attached to the fixtures before they became part of the property.
o To avoid losing priority, the secured party can register a notice of their interest in the land registry office.
92
o
-
-
-
-
The new owner must truly not know about the security interest for this rule to apply. If they intentionally
ignore information that they should know about, then they will be considered to have "willful blindness"
and won't be protected.
o Example: Emily buys a property from David. After the purchase, Emily finds out that there was a security
interest taken in some of the fixtures by a creditor of David. If Emily bought the property without
knowledge of the security interest, and if the creditor did not register the notice of the security interest in
the land registry office, then Emily has priority over the creditor's claim to the fixtures.
Rule (4): A security interest in goods that attached before the goods became a fixture is subordinate to the interest
of a prior encumbrance of record on the real property to the extent that the creditor makes subsequent advances
if the subsequent advance is made or contracted for without knowledge of the security interest and before notice
of it is registered in accordance with s 54.
o Rule (4) is derived from sections 34(1)(a) and 34(2)(b)
o Protects a mortgagee of real property who makes subsequent advances.
o It applies when the mortgage takes effect, the security interest attaches to the collateral, the collateral
becomes affixed to the real property, and the mortgagee makes a further advance.
o The mortgagee has priority for the further advance if it made or contracted for the subsequent advance
without knowledge of the security interest and before the secured party has registered a notice under s
54.9.
o The rule depends on the mortgagee not knowing of the security interest at the time it makes the further
advance.
o Knowledge is not a factor in determining a secured party's priority for either the initial or future advances
under s 30(1) and (5).
o However, in the real estate context, the courts have consistently held that advances made by a real estate
mortgagee under a contractual obligation are not entitled to priority after the mortgagee receives actual
notice of an intervening security interest or encumbrance.
o The knowledge limitation in Rule (4) is consistent with this case law.
o Example: Tom borrows money from Bank A to buy a property, and Bank A takes a mortgage on the
property. Later, Tom borrows more money from Bank B and uses some of the fixtures as collateral for the
loan. If Bank B made the subsequent advance without knowledge of Bank A's security interest and before
Bank A registered the notice of their security interest in the land registry office, then Bank B has priority
over Bank A's claim to the fixtures to the extent of the subsequent advance.
Rule (5): A security interest in goods that attached after the goods became a fixture has priority over the claim of
any person who subsequently acquired an interest in the real property except a purchaser for value without
knowledge of the security interest who transacts before notice of the security interest is registered in accordance
with s 54.
o Rule (5) comes from s 34(1)(b) and s 34(2)(a) and protects subsequent purchasers of real property. It
applies when a security interest attaches after the goods have become a fixture but before the purchaser
acquires its interest in the real property.
o Rule (3) and Rule (5) are the same except for the timing of when the security interest attaches.
Rule (6): A security interest in goods that attached after the goods became a fixture is subordinate to a creditor
with a prior encumbrance of record on the real property to the extent that the creditor makes subsequent advances
if the subsequent advance is made or contracted for without knowledge of the security interest and before notice
of it is registered in accordance with s 54.
o Rule (6) comes from s 34(1)(b) and s 34(2)(b) and protects mortgagees of real property who make further
advances. It applies when a security interest attaches after the goods have become a fixture but before
the mortgagee's further advance.
In Cormier v Federal Business Development Bank, the court considered the priority of competing security interests
in five pieces of equipment. The court found that two of the items had become fixtures prior to the chattel
mortgage and two had become fixtures after the chattel mortgage. The fifth item had become a fixture prior to the
conditional sales agreement.
o Under section 11(2) of the Ontario PPSA, attachment occurs when the parties intend it to attach, value is
given, and the debtor has rights in the collateral.
o For the first two items that became fixtures before the chattel mortgage, the court found that the Federal
Business Development Bank had priority as the chattel mortgage was executed prior to the attachment of
93
o
o
the applicants' interests. The applicants were not a subsequent purchaser for value without notice, and
therefore, they could not claim priority under section 34(1)(a).
For the third and fourth items that became fixtures after the chattel mortgage, the applicants had priority
under section 34(1)(b) because they were the registered owners of the property when these items became
fixtures and did not consent to the security interest or disclaim an interest in the goods as fixtures.
For the fifth item, the court found that the security interest attached when the conditional sales
agreement was signed on July 2, 1980, as there was no evidence that the parties intended attachment
before that date, and no evidence that value was given before installation. As the Black Hawk Power-Cage
had become a fixture prior to the conditional sales agreement, the applicants had priority under section
34(1)(b)
C. FIXTURES AND THE LANDLORD’S RIGHT OF DISTRESS
-
859587 Ontario Ltd v Starmark Property Management Ltd 1998 CanLII 7138, 40 OR (3d) 481 (CA)
o Issue: Can a landlord distrain against a tenant’s trade fixture, and does the landlord have the right to sell
such fixtures to pay rent arrears?
o Rule: According to the terms of the lease, all improvements except trade fixtures became the property of
the landlord when the lease expired, and the tenant was required to remove trade fixtures at its own
expense at the lease's expiration. The tenant had limited rights to remove and replace trade fixtures during
the lease term. The property security regime is governed by the PPSA which grants priority to a lien over
a security interest if it is created before the security interest.
o Analysis: The court found that the spray booth was a tenant’s trade fixture, attached to the leased
premises to improve the functioning of the machinery, and not to improve the property. The court applied
the long-established legal principles to the largely uncontested facts and determined that the spray booth
was a trade fixture. Therefore, the landlord did not have the right to sell the fixture to pay rent arrears as
the trade fixture was not the landlord’s property. However, the court stated that a landlord has the right
to distrain against trade fixtures if the lease permits it. The landlord could have acquired a lien over the
trade fixture when it levied the distraint, but this would be subject to Atlantic’s security interest as it was
perfected before the distraint.
o Conclusion: The court found that the spray booth was a tenant’s trade fixture and not the landlord’s
property. Therefore, the landlord did not have the right to sell the fixture to pay rent arrears. The landlord
has the right to distrain against trade fixtures if the lease permits it. If a lien was acquired by the landlord
over the trade fixture when it levied the distraint, it would be subject to Atlantic’s security interest as it
was perfected before the distraint.
III. ACCESSIONS
A. INTRODUCTION
-
-
Accessions are components that become attached to host goods, and if multiple parties claim ownership of the
component, the accessions doctrine applies.
The doctrine of accessions is similar to the law governing fixtures, where parties dispute over A's goods attached
to B's land.
The PPSA has enacted priority rules for accessions in Section 35, similar to the rules for fixtures in Section 34.
The priority rules under Section 35 vary depending on whether the accession was added before or after the security
interest attached to the host goods, and whether the competing claimant acquired their interest before or after
the accession was added.
The secured party with priority under Section 35 has the right to remove the accession from the host goods.
B. THE MEANING OF ACCESSIONS
-
OPPSA defines "accessions" as goods that are installed in or affixed to other goods.
Sections 35(4)-(7) deal with the accession secured party's right to remove the accession from the host goods.
94
-
-
To qualify as an accession, the disputed item must be removable without excessively damaging either the item or
the host goods, and there may be some labor involved in removing the item.
o Paint applied to a car is not an accession because it is effectively unremovable, while a set of tools stored
loose in the trunk of a vehicle is not an accession because it is not "affixed to or installed in" the host
goods.
o Section 35 does not apply in cases like these, but the commingled goods provision in s 37 may apply to
determine priorities in disputes between secured parties.
Priority disputes are foreclosed for items like tools stored in a vehicle's trunk because they have insufficient physical
connection to the host goods, and a party with an interest in the vehicle has no claim to the tools simply by virtue
of its interest in the vehicle.
C. THE OPPSA, SECTION 35 PRIORITY RULES
-
-
The priority rules in s 35 of the PPSA require registration of the accession security interest in the PPS register.
An accession security interest is subordinate to an execution creditor of the debtor who assumes control of the
host goods before the accession security interest is perfected, except where the accession security interest is a
PMSI.
S 35(2) protects a “subsequent buyer of an interest in the whole” (the host goods).
A drafting error resulted in s 35(2) applying only to “buyers” and “sales” and excluding a secured party who
subsequently takes a security interest in the whole.
D. REPAIRS
-
-
The case of GMAC Leaseco Ltd v Tomax Credit Corp deals with the relationship between OPPSA section 35 and the
Repair and Storage Liens Act (RSLA).
The RSLA gives a person who repairs goods a possessory and non-possessory lien over the goods to secure payment
of the repair bill.
The RSLA lien has priority over all other interests in the goods.
The question arises whether the fitting of a car radio is a "repair" within the meaning of the RSLA. If so, the fitter
can claim an RSLA lien in the car with priority over a perfected PPSA security interest. If not, the fitter can protect
itself by taking a PPSA security interest in the radio.
OPPSA section 35 will apply to determine priority between the fitter’s security interest in the radio and a competing
security interest in the car itself.
GMAC Leaseco Ltd v Tomax Credit Corp [2001] OJ No 2927 (QL), 3 PPSAC (3d) 15 (Sup Ct J)
o GMAC Leasco Ltd v. Tomax Credit Corp, 2001, Ont SC
o (a repair lien under the RLSA will have priority over an accession under the PPSA)
o Plaintiff sold a car under a conditional sales contract. The defendant later installed stereo and security
system in the car and acquired a lien under the Repair and Storage Lien Act. The plaintiff claimed priority
over the car and the stereo and security system as an accession.
o Held: The work done on the car must be categorized as an accession or a repair. If it is a repair, it will
benefit from the priority of the lien under the RLSA. If it is an accession, it will need to be perfected as per
the PPSA. The stereo is not an improvement, alteration or restoration to the car. It is separable from the
vehicle and therefore not a repair. The security system is integral to vehicle and it is a repair. The
defendant’s lien has priority over the plaintiffs for the security system only.
IV. COMMINGLED GOODS
-
OPPSA s 37 governs security interests in commingled or processed goods.
The provision applies where secured party's collateral "subsequently become[s] part of a product or mass [having
been] so manufactured processed, assembled or commingled that [its] identity is lost in the product or mass."
This applies to cases where goods are used in a manufacturing process to form a new end product, and where
goods are mixed with similar goods from another source, losing their identity.
Section 37 applies where one or more of the competing claims is a security interest, and it displaces the common
law rules.
95
-
-
-
-
A security interest in an input continues in the end product or mixture, and a priority rule is enacted for disputes
between the holders of competing input security interests.
Processed and commingled goods are distinguishable from accessions as the accessions provisions apply where the
disputed goods are retrievable, while processed and commingled goods have lost their identity.
Section 37 is particularly relevant in the context of retention of title arrangements or Romalpa agreements.
Common law suggests that the seller's title to inputs is extinguished in the manufacturing process.
An aggregation clause in a retention of title agreement stipulates that ownership of the end product is to vest in
the supplier, which creates a mortgage or charge over the end product that is registrable under the registration of
company charges laws.
To acquire rights in the end product, this could only be done by an express contractual stipulation.
Clough Mill Ltd v Martin suggests that it might be possible to draft an aggregation clause that avoids the outcome
of creating a registrable charge.
Unisource Canada Inc v Hongkong Bank of Canada - OPPSA s 37:
o Reilly J concluded that the paper supplied by Unisource to Johanns became "commingled goods" and "part
of a product" after it was processed into an advertising brochure or pamphlet.
o The identity of the paper was lost after processing, and it was no longer considered as blank paper stock.
o The first part of OPPSA s 37 states that a perfected security interest in commingled goods continues in the
end product or mass.
Example 2:
o If a debtor uses collateral to manufacture an end product or mass, a creditor's perfected security interest
in the collateral continues in the end product or mass under the first part of OPPSA s 37.
o A creditor's security interest in the end product is automatically perfected.
o In Ontario, a creditor can perfect its security interest in the collateral by crossing the inventory box.
Example 3:
o If more than one creditor has a security interest in the end product or mass, they rank equally according
to the ratio that the cost of the goods to which each interest originally attached bears to the cost of the
total product or mass under the second part of OPPSA s 37.
o For example, if SP1 supplied woodchips at a cost of $50 and SP2 supplied resin at a cost of $30, and the
total cost of the chipboard is $100, then the ratio is 1:2.
o If SP1 and SP2 both claim the chipboard, then SP1 would be entitled to $33.33 and SP2 would be entitled
to $66.67.
CHAPTER 12: ENFORCEMENT OF SECURITY INTERESTS
I. INTRODUCTION
-
-
Part V of the OPPSA deals with the secured party's rights and remedies against the debtor when the debtor defaults
under the security agreement.
The Act takes a substance over form approach, which means that the secured party's remedies do not depend on
the form of the security agreement.
Prior to OPPSA, remedies varied depending on form of security agreement:
o Mortgage: right of foreclosure, collateral kept/sold without surplus accounting, debtor's equity of
redemption extinguished, no liability for deficiency
o Charge: no right of foreclosure, only power of sale
o Conditional sale agreement: primary remedy was to terminate contract and recover goods, debtor liable
for arrears of instalments and loss of bargain damages
o Prior to OPPSA, debtor had right to redeem collateral in case of mortgage or charge, but not in case of
conditional sale agreement
Part V of the PPSA provides a common remedies scheme for all security agreements in Ontario, which takes the
pre-PPSA law governing mortgagee's remedies and applies it across the board to all secured transactions.
The sequential steps for a secured party's remedies are spelled out in OPPSA, ss 61-66.
The secured party's remedies include the right to take possession or collect (ss 61 and 62), the right to sell (s 63),
surplus and deficiency (s 64), foreclosure (s 65), and receivership (s 60).
96
o
-
1. Right to Take Possession or Collect (ss 61 and 62): On default, the secured may take possession of the
collateral (s 62) (or, in the case of accounts and documentary intangibles, take steps to collect from the
account debtors [s 61]).
o 2. Right to Sell (s 63). The secured party may realize the collateral by public or private sale, after giving
notice to the debtor, other parties of record, and certain other persons as set out in s 63.
o 3. Surplus and Deficiency (s 64). Any surplus belongs to the debtor (or any other person entitled thereto),
but equally, the debtor remains liable for any deficiency.
o 4. Foreclosure (s 65). Instead of selling the collateral, the secured party may foreclose on the collateral,
retaining it in satisfaction of the debt (subject to the right of the debtor and certain other persons to object
and require a sale of the collateral).
o 5. Receivership (s 60). As an alternative to exercising these remedies itself, the secured party may elect to
appoint a receiver to act on its behalf if there is a receivership provision in the security agreement or,
alternatively, on application to the court.
The debtor has a right to redeem the collateral at any time before it is sold, or the secured party forecloses (s 66).
Part V rights and remedies are cumulative and contractual remedies may not infringe on the debtor's statutory
rights or detract from the secured party's statutory duties.
Secured creditors' claims are stayed in BIA commercial proposal proceedings (BIA, s 69(1)(a)) and typically also in
CCAA proceedings (CCAA, s 11.02, giving the court wide powers to make stay orders).
Recent developments in the common law and amendments to the BIA and CCAA have imposed a duty to act in
good faith on parties to contracts of all kinds, including secured parties.
II. DEEMED SECURITY INTERESTS
A. INTRODUCTION
-
-
Section 57.1 of the Ontario PPSA applies Part V (Rights and Remedies) of the statute only to security interests that
secure payment or performance of an obligation.
Section 2(b) and (c) extend the application of the statute to outright transfers of accounts and chattel paper and
longer-term true lease agreements.
o Despite section 2(b) and (c), the default provisions in Part V do not apply to outright transfers or true
leases due to the lack of obligation secured.
Part V of the PPSA only applies when the debtor is in default under a security agreement, and "default" is defined
as a failure to pay the obligation secured when due.
The distinctions between outright transfers and security transfers, and true leases and security leases remain
relevant to Part V of the PPSA.
B. TRANSFERS OF ACCOUNTS AND CHATTEL PAPER
-
-
-
-
Security and non-security transfers of accounts and chattel paper serve a similar function of raising immediate cash
for the transferor.
In a non-security transfer, the transferee acquires title to the accounts or chattel paper and does not need to repay
the transferor, while in a security transfer, the transferee acquires a security interest, and the payment to the
transferor is a loan.
In a non-security transfer, the transferee has an immediate right to the amounts owing by the account debtors
and to the collection of the payments as they fall due, while in a security transfer, the transferee becomes entitled
to the collections only if the transferor defaults under their obligations to the transferee.
In a security transfer, the transferor generally bears the risk of the account debtor's non-payment, while in an
outright transfer, the allocation of risk depends on the terms of the transfer agreement.
The distinction between security and non-security transfers can be difficult to draw, but factors identified in the BC
Tel case regarding securitization arrangements are equally relevant in the context of the OPPSA.
Relevant sections of the OPPSA: Section 1(1) (definition of "security interest"), Section 2(1) (application of the
OPPSA), Section 9(1) and (2) (creation of security interest), Section 11 (perfection of security interest), Section 18
(rights of transferee), and Section 30(1) (priority of security interest).
Metropolitan Toronto Police Widows & Orphans Fund v Telus Communications
97
o
o
o
o
o
o
o
o
o
o
The leading case relating to the characterization of securitization transactions
Facts: the way the transaction was structured was deemed valid. It was a securitazation in this case.
Securitization: companies that generate a lot of account receivables, like phone companies, sell these
accounts receivables to other companies. Telus has a right to payment, it’s similar to accounts receivable.
This is thus valuable. Telus has a whole bunch of assets and debts. One of them is accounts receivable –
which means a bunch of creditors will go after the assets.
The problem is that all the debts and assets are contaminated. It’s thus hard to understand the risk profile
of a company like Telus. All the assets are commingled. So, the way this is reflected is through higher
interest rates on borrowing costs.
So, Telus sells the accounts receivables in a tax-efficient way. This is thus called a sale or a “true sale” –
this says that the transfer of accounts receivable create a true sale. Telus thus appoints the appropriate
person to get this money.
Issue: Is there an enforcement issue? They don’t need to get their hands on the transaction etc. The
argument that was made is whether or not this is a sale vs a secured transaction. If it was a Secured
transaction, this didn’t respect the PPSA rule.
Ultimately the ONCA recognized that this wasn’t a secured transaction.
Key takeaway: securitazion is a sale rather than a secured transaction.
Rationale: owners don’t need a security interest in the accounts receivable. What thus happens to lease
payments?
C. LEASES
-
-
-
-
-
A TRUE LEASE is a type of bailment where the lessee has possession and use of the goods for a limited time, but
does not acquire any further interest in the goods beyond that time.
A SECURITY LEASE is a disguised purchase agreement where the lessee has possession and use of the goods, but
also has an expectation of ownership or the economic incidents of ownership, and the payments are installments
of the purchase price.
o The key feature that distinguishes a sale from a lease is that, in the case of a sale, the agreement provides
for the passing of property in the goods, whereas in the case of a lease, it does not.
A transaction may be drafted in the form of a lease but still be a sale in legal substance, such as a lease where the
lessee is obligated to purchase the goods at the end of the lease term or where the lessee has no right to return
the goods and must purchase them or renew the lease at the end of the term.
o Such transactions are conditional sale agreements where the lessor's reservation of title in the goods
secures the lessee's payment obligation.
A transaction may be a lease in legal substance but still achieve the same economic results as a sale, such as where
the lessee has an option to purchase the goods at the end of the lease term with financial incentives to exercise
the option, or where the term of the lease coincides with the useful life of the goods.
Part V of the OPPSA applies to a transaction that is in legal or economic substance a sale, even if it is drafted in the
form of a lease.
In cases where the transaction is in legal substance a lease, the task of determining its economic substance can be
more difficult because it turns on multiple and sometimes contradictory indications.
The court must scrutinize the relationship between the lessor and lessee to determine whether the transaction has
the characteristics of a purchase agreement, regardless of its form and the parties' subjective intention when they
entered into it.
Connacher Oil and Gas Limited (Re) 2017 ABQB 769
o I. Introduction: matter of lease characterization. The primary issue before the court was whether the
lease agreement between the parties was a true lease or a financing lease. The court needed to make this
determination to decide whether the lease agreement was subject to the Companies' Creditors
Arrangement Act.
o II. Issue”: The main issue for the court to determine was whether the lease agreement was a true lease or
a financing lease.
o III. Decision: The court held that the lease agreement was a true lease.
o IV. Reasons: The court provided the following reasons for its decision:
98
▪
o
The distinction between a true lease and a financing lease is essential because in a true lease,
the debtor corporation is paying for the use of the lessor's property, whereas, in a financing
lease, the debtor is earning equity in the property with each payment.
▪ The objective of a court's analysis is to determine the parties' intent at the time they entered
into their agreement. In this regard, the court must examine a number of factors, some of which
are contained in the document itself, some of which relate to the manner in which the parties
effected their arrangement, and some of which deal with the nature of the parties themselves.
▪ No one factor is determinative, although some might be more indicative of the nature of the
lease.
▪ The court must interpret an agreement as at the date it was made, as the exercise is intended to
discern the intention of the parties at the time that the contract was formed.
▪ There are certain aspects of the lease that point to a financing arrangement; however, when the
court looked at the transaction as a whole, it found that the lease was a true lease.
▪ The court applied the Smith Brothers Checklist to determine whether the lease was a financing
lease or a true lease. The court considered various factors such as the presence of an option to
purchase for a nominal sum, the existence of a provision in the lease granting the lessee an equity
or property interest in the equipment, the nature of the lessor's business, the payment of sales
tax, and other taxes incident to ownership of the equipment, among others.
▪ The court found that the presence of a requirement for comprehensive insurance on the
equipment, the requirement for the lessee to pay all license fees for the operation of the
equipment and to maintain the equipment at their expense, and the absence of a provision
disclaiming warranties of fitness and/or merchantability on the part of the lessor pointed to a
true lease.
▪ The court dismissed the idea that some Smith Brothers factors were more important than others,
stating that if some were considered paramount, then it would not make sense for the others to
be included in the list.
V. Conclusion: In conclusion, the court held that the lease agreement was a true lease because the
presence of certain factors such as the requirement for comprehensive insurance on the equipment, the
requirement for the lessee to pay all license fees for the operation of the equipment and to maintain the
equipment at their expense, and the absence of a provision disclaiming warranties of fitness and/or
merchantability on the part of the lessor pointed to a true lease.
III. NOTICE BEFORE ENFORCEMENT
-
-
Part V of the OPPSA does not require the secured party to give the debtor notice before enforcing its security
interest.
However, the common law "reasonable notice doctrine" applies, which requires the secured party to give the
debtor a reasonable amount of time to find an alternative source of funds before taking enforcement measures.
The length of notice considered reasonable by the court is typically a few days, but standard practice is to allow for
ten days in the absence of circumstances supporting a longer or shorter notice period.
Relevant factors that the court considers in determining the length of notice include the amount of the loan, risk
to the creditor of losing its security, rapid depreciation in the value of the collateral, the behavior of the debtor
(such as fraud or misrepresentation), and the debtor's chances of being able to raise the money from other sources.
The reasonable notice doctrine applies regardless of what the security agreement says.
Sections 244(1) and (2) of the BIA require a secured creditor who intends to enforce security in all or substantially
all of the inventory, accounts, or other property of an insolvent debtor to give notice of its intention.
o The purpose of these provisions is to give the debtor an opportunity to initiate proposal proceedings under
Part III, Division 1 of the BIA or to seek creditor protection under the CCAA, and to protect the stay by
giving the debtor a reasonable time to file for insolvency protection while still giving effect to secured
creditor remedies if the debtor delays or fails to act.
o A period of at least ten days must elapse between the date the notice is sent and the date of enforcement
of the security interest unless the court approves a shorter period.
o If a secured party sends a s 244 notice and the ten-day period elapses, the secured party is not stayed by
any subsequent BIA proposal the debtor might file (it would still be stayed in CCAA proceedings).
99
IV. REPOSSESSION UPON DEFAULT
A. INTRODUCTION
-
-
Section 62(1)(a) of the OPPSA provides the secured party with the right to take possession of collateral upon
default, unless otherwise agreed.
This right of repossession only applies to goods or tangible personal property, not intangible property.
The debtor is considered "in default" if they fail to pay or perform their obligations as outlined in the security
agreement, or if an event occurs that makes the security enforceable.
The parties can specify what constitutes default in the security agreement, and commonly specified default events
include failure to comply with covenants, breach of representations and warranties, cross defaults to other
indebtedness, and various insolvency-related events.
The right of repossession can be excluded or limited by agreement between the parties, but it cannot be enlarged
beyond what is provided for in the OPPSA.
B. ANY METHOD PERMITTED BY LAW
-
-
-
Under section 62(1)(a), the secured party has the right to take possession of collateral upon default, using any
method permitted by law.
Relevant laws in this context are those related to breach of peace and trespass.
The secured party or its agents cannot use unlawful force to repossess collateral and must avoid violence if the
debtor is present and resists repossession.
o If the debtor resists repossession, the secured party should apply for a court order requiring the debtor to
comply.
Repossessing the collateral without the owner's consent may constitute trespass, but a licence to enter onto the
property may allow for seizure of collateral from an open space.
o However, a licence may not authorize breaking into a building, and if the debtor objects to the
repossession, the licence will not protect the secured party if there is a breach of the peace.
In R v Doucette, the court found that the use of force during repossession constituted a breach of the peace.
o The accused is a bailiff. Along with two other bailiffs, he goes the house of the debtor to take possession
of a TV. They enter the house uninvited despite the protests of the debtor. On the way out assault the
debtor.
o Held: The accused, as agent of the secured party, has the right to possession for the collateral. However,
you cannot do illegal things to get the possession.
o Note: Usually the security agreement will have a provision that grants a licence to enter the debtor’s
premises for the purpose of taking possession of collateral on default.
o Note: In Quebec, taking possession of collateral is not self-help.
C. RENDERING EQUIPMENT UNUSABLE
-
Section 62(2) allows a secured party to render unusable collateral that is too big or heavy to repossess easily,
without removing it from the debtor's premises.
The provisions in sections 62(2) and (3) only apply if the security interest has been perfected by registration and if
the collateral is equipment.
The requirement in section 62(2) is that the secured party must render the equipment unusable, indicating that
posting a sign or indicating intention to take possession is not enough.
It is unclear if section 62(2) applies if the equipment is a fixture (see section 34(4)).
In Bank of Montreal v Gravelle, it was held that instructing the debtor to hand over the keys and removing the
battery of the backhoe is not sufficient to render it unusable under section 62(2).
These steps would also not be sufficient to perfect a security interest by possession.
Adding the secured party's name to the collateral would not change the answers to (1) and (2).
If the secured party's registration has lapsed, they may still rely on section 62(2) as perfection is not required for
enforcement against the debtor.
100
D. DISPOSAL OF COLLATERAL
-
-
-
Section 63 deals with the secured party's right to dispose of collateral on the debtor's default.
Repossession is not a requirement for the application of Section 63, unlike Section 62.
Section 63 applies to both tangible personal property and intangibles such as uncertificated securities, security
entitlements, intellectual property, and accounts.
However, if the collateral is accounts, chattel paper, or instruments, it will typically be simpler and cheaper to
proceed under Section 61 (which gives the secured party collection rights) rather than to dispose of the collateral
under Section 63.
The disposal of collateral under Section 63 requires the secured party to provide notice to the debtor and other
interested parties, including any other secured parties with a registered security interest in the same collateral.
o The notice must include certain information, such as a description of the collateral, the method of disposal,
and the time and place of the intended disposition.
o The notice must be reasonable and allow interested parties an opportunity to participate in the disposition
process.
The secured party must obtain the best price reasonably obtainable in the circumstances, and if the collateral is of
a type commonly sold in a recognized market, the price obtained must be at or above the current market price.
The secured party may buy the collateral at the sale but must account to the debtor for any surplus and is liable for
any deficiency.
After the sale, the secured party must provide a report to the debtor and other interested parties, detailing the
disposition and the proceeds of the sale.
Jacob S Ziegel, David L Denomme & Anthony Duggan, Ontario Personal Property Security Act: Commentary and
Analysis, 3rd ed
o Section 63 of the OPPSA governs all aspects of the disposal process. A secured party who fails to dispose
of the collateral in a commercially reasonable manner will be liable in damages. If the secured party fails
to meet the notice requirements or if the notice does not meet the contents requirements, then s. 67(2)
comes into play and, once again, the aggrieved party’s remedy will be a claim in damages. If it is not too
late, an aggrieved person can seek an order of compliance under s. 67(1).
o Section 63(1) of the OPPSA allows the secured party to dispose of the collateral in its condition before or
after any commercially reasonable repair, processing, or preparation for disposition. However, sub-s. (2)
of s. 63 requires that every aspect of the disposition must be "commercially reasonable." Therefore, the
secured party may have to take steps to put the collateral in a saleable condition if this is what commercial
reasonableness requires.
o The "commercially reasonable" test is an objective standard and requires that the secured party display
the prudence and intelligence of a competent financer. The controversy around the standard has a long
history. The reasonable care test replaces the assumption that the secured party's only obligation was not
to behave recklessly or fraudulently. When applying the standard, there are litigated questions such as
the appropriateness of a public or private sale, how long a secured party can wait before disposing of the
collateral, and when a lender should use a professional appraiser to determine the value of a vehicle.
Ultimately, these and other issues are questions of fact, and earlier cases can only supply hints as to how
they are likely to be decided in the future.
o Two questions are of recurring importance: First, must the secured party prove that it acted reasonably if
the price it obtained is being challenged? There appears to be no definitive Canadian case law on point,
but in accordance with general rules of evidence, the burden should rest with the party alleging breach of
the statutory standard. The second question is whether a low resale price is prima facie evidence that the
disposition was not commercially reasonable.
E. DISPOSITION OF SALE PROCEEDS
-
Sections 63(1) and 64 govern the distribution of sale proceeds from secured personal property.
Sale proceeds are distributed in the following order:
o (1) the secured party's reasonable enforcement expenses,
o (2) satisfaction of the secured obligation,
o (3) payment to the holder of any subordinate security interest that is perfected by possession or
registration,
101
o
-
(4) payment to the holder of any other interest who has notified the enforcing secured party in writing of
its interest, and
o (5) the debtor.
If there is any surplus remaining after the distribution process, it is payable to the debtor.
Section 64(3) provides that the debtor is liable for any deficiency in the sale proceeds. The secured party may bring
a deficiency action unless expressly excluded by the security agreement.
V. FORECLOSURE
-
-
-
Foreclosure is an alternative to the rights of repossession and sale, provided by Section 65 of the OPPSA, which
allows a secured party to accept the collateral in satisfaction of the obligation secured.
This gives the secured party title to the collateral free of competing claims, but they give up their right to sue the
debtor for any deficiency.
Foreclosure is different from general law foreclosure in two main ways. First, foreclosure is available regardless of
what form the security agreement takes. Second, foreclosure is an extra-judicial remedy, involving litigation only if
the debtor or other interested party objects to the foreclosure.
The mechanics of the scheme require the secured party to give written notice of its plan to foreclose to the debtor
and other interested parties.
o If the secured party receives an objection within 15 days, it can either challenge the objection or give up
on the foreclosure and revert to its Section 63 remedy.
o If the secured party challenges the objection, the court may declare the objection ineffective.
o If there is no effective objection, the foreclosure takes effect at the end of the 15-day objection period or
earlier with the written consent of the parties entitled to notice.
o After foreclosure, the secured party is entitled to the collateral free from the competing claims specified
in Section 65(6.1).
o If the secured party disposes of the collateral post-foreclosure, the buyer acquires clear title subject to the
limitations specified in Section 65(7).
Foreclosure might be an attractive option for the secured party if the value of the collateral is less than the total
amount owing plus enforcement expenses.
Foreclosure may also be a viable remedy where the secured party knows that there will be a deficiency if it sells
the collateral and that its chances of recovering the deficiency are low.
Additionally, foreclosure may be an option where the collateral comprises intellectual property, such as a patent
or trademark.
Section 65 does not specify the form or contents of a proposed foreclosure notice. Still, creditors should give
adequate notice to the debtor and other interested parties, citing the PPSA, the amount of the secured obligation,
a description of the collateral, an expression of the clear intention to retain the collateral in satisfaction of the debt
(and not as continuing security), and an indication that the parties receiving notice have 15 days to object.
VI. REDEMPTION AND REINSTATEMENT
-
-
-
Section 66(1) of the OPPSA governs the debtor's right of redemption.
Section 66(1) : REDEMPTION: gives the borrower the right to "redeem" the property by paying off the outstanding
loan amount plus any expenses related to collecting the loan, before the lender sells or takes possession of the
property. This right applies to all borrowers who are entitled to receive notice under section 63(4).
o If the borrower has agreed in writing to waive their right to redemption, they cannot use it to get their
property back.
Section 66(2) REINSTATEMENT: applies to loans for consumer goods, like appliances or furniture. In this case, the
borrower has a limited right to "reinstate" the loan by catching up on any missed payments and fixing any other
issues with the loan agreement before the lender sells or takes possession of the property.
o The borrower can only use this right once during the life of the loan agreement, unless a court orders
otherwise.
The main difference between redemption and reinstatement:
o redemption requires the borrower to pay off the entire loan, including any additional fees or charges,
o while reinstatement allows the borrower to catch up on missed payments and continue with the loan
agreement as if they had never missed a payment.
102
-
-
The right of redemption under section 66(1) is based on older mortgage laws, while the right of reinstatement
under section 66(2) is a newer law that applies specifically to loans for consumer goods.
The debtor or any other party entitled to receive notice under section 63(4) may redeem the collateral by paying
the outstanding amount of the secured obligation plus reasonable enforcement expenses before the secured party
disposes of the collateral under section 63 or forecloses under section 65.
The right of redemption may be waived by agreement in writing after default.
Section 66(2) of the OPPSA applies to consumer goods and gives the debtor a limited right to reinstate the security
agreement.
VII. COLLECTION RIGHTS
Collection
-
-
The lender may directly collect payments from parties owing amounts to the borrower or under third-party
contracts relating to the collateral. It may do so in a number of ways, including by notifying the account debtor, or
the person obligated on the instrument, to make payment or render performance to or for the benefit of the lender
(section 61(1)(a), PPSA) by enforcing the borrower's rights with respect of the account debtor's obligations. The
lender can also instruct a bank holding a deposit account in which the lender has a perfected security interest to
pay the balance to or for the benefit of the lender (section 61(1)(b), PPSA).
Section 61(1) of the PPSA provides that the lender has these remedies if the parties agree (in the security
agreement) and, in any event, after an event of default. To exercise these remedies, the lender may need access
to certain information that the borrower may be unwilling to provide. The lender must exercise these remedies in
a commercially reasonable manner (section 61(2), PPSA) and this requirement cannot be waived by the borrower.
A. NOTIFICATION
-
-
-
-
Section 61 PPSA gives a secured party an alternative remedy to enforce its security interest if the collateral is an
account, chattel paper, or an instrument.
Under section 61(1)(a), if there is a notification arrangement, the secured party has the right to notify the account
debtor or obligor on an instrument to make payment to the secured party upon default by the debtor.
o Under section 61(1)(a), if the secured party has an agreement with the debtor that they can contact the
people who owe the debtor money (called the "account debtor") if the debtor doesn't pay, then the
secured party can tell the account debtor to pay them instead of the debtor if the debtor doesn't pay their
debt.
Under section 61(1)(b), if there is a notification arrangement and the debtor has already collected on some or all
of the accounts at the time of default, the secured party has the right to take control of the collection proceeds.
o Under section 61(1)(b), if the secured party has an agreement with the debtor and the debtor has already
collected some or all of the money owed to them by the account debtor, then the secured party can take
control of that money if the debtor doesn't pay their debt.
Section 64 of the OPPSA applies to determine how the secured party is to apply the funds it receives from the
account debtor or obligor on an instrument and the debtor.
If there is an outright assignment transacted on a notification basis, the debtor or secured party notifies the
account debtor or obligor on an instrument at the outset, and the expectation is that the account debtor or obligor
will pay the secured party when the account falls due.
o If the secured party and the debtor agreed from the beginning that the debtor's right to the account, paper
or instrument would be given to the secured party (called an "outright assignment" done on a "notification
basis"), then the secured party will let the account debtor or obligor know that they should pay the secured
party when the account is due.
If there is an outright assignment transacted on a non-notification basis, the account debtor or obligor is not
notified, and the debtor pays the collection proceeds to the secured party.
Section 57.1 provides that the Ontario PPSA applies only to a security interest that secures payment or performance
of an obligation.
The words "where so agreed" in section 61(1) indicate that the provision applies to outright assignments, giving
the secured party under an outright assignment more or less the same collection rights as the secured party under
103
a security assignment, except that the secured party under an outright assignment is not bound by the distribution
rules in section 64 and may keep the payments for itself.
B. SET-OFF
-
-
-
Section 40 of the OPPSA provides protection for account debtor (O) in cases where section 61(1) applies.
Section 40(1.1) allows O to assert any defense or right of set-off they had against Debtor against SP.
Section 40(2) protects O from paying the wrong party when they receive a section 61(1) notice, allowing O to
continue paying Debtor until notified of the assignment and SP's rights, and requiring SP to provide proof of the
assignment upon request.
An assignment of accounts or chattel paper may be transacted on a recourse, non-recourse, or partial recourse
basis.
Section 61(2) requires SP to act in a commercially reasonable manner in its collection efforts and allows Debtor to
sue for damages if SP breaches this duty.
o Section 61(2) applies to both security assignments and true assignments, and both section 61(1) and (2)
are exceptions to section 57.1.
Commercial Factors of Seattle LP v Canadian Imperial Bank of Commerce 2010 ONSC 3516
o Facts:
▪ CIBC hired IT Group Inc. to provide technology services, and IT hired consultants to provide the
services.
▪ IT sold the accounts receivable to Commercial Factors of Seattle LP, which registered the
assignment of receivables pursuant to the OPPSA.
▪ CIBC discovered that IT had failed to pay certain consultants, paid the consultants itself, and then
deducted those amounts from the invoices issued to them by IT.
▪ CIBC then took an assignment from the consultants of the amount IT owed them, meaning
Commercial Factors was not paid the full invoice amount it had purchased.
▪ Commercial Factors brought an action against CIBC for this amount.
o Issues:
▪ Was CIBC relieved of its obligation to make payments under the Agreement due to IT’s failure to
pay the consultants?
▪ If not, was CIBC entitled to rely on the remedy of equitable set-off to set off the amounts owing
by IT to the consultants and assigned to CIBC against amounts owing by CIBC to IT under the
agreement?
o Decision:
▪ CIBC was not relieved of its obligation to pay under the agreement due to IT’s failure to pay the
consultants.
▪ CIBC was entitled to rely on the remedy of equitable set-off.
o Reasoning:
▪ CIBC continued to accept the benefit of the services of the consultants under the agreement and
did not terminate the agreement until after the date of the invoices in question.
▪ Equitable set-offs may be in an unliquidated amount, but the defense must be based on the same
contract as that sued upon by the plaintiff or must be closely connected with it.
▪ CIBC could not assert legal set-off because it had received notice of the assignment, but it argued
that it could still assert equitable set-off even after having received notice of the assignment.
▪ The court held that the right of set-off referred to in Section 40(1.1)(b) of the PPSA refers to the
right of legal set-off and so does not limit CIBC’s right to assert equitable set-off to the time
before CIBC received notice of the assignment of the accounts receivable.
▪ CIBC’s cross-claim was sufficiently connected for equitable set-off to apply as the agreement
required IT to pay the consultants, and when IT did not pay, CIBC paid the amount that IT was
contracted to pay to avoid the risk that the consultants would not complete the project.
o Ratio: Section 40(1)(a) of the PPSA permits the account debtor to raise any defense or claim with the
assignee that it could have served against the assignor with regard to the sales contract, while section
40(1)(b) allows the account debtor to set off against the assignee any other defense or claim that the
account debtor has against the assignor, including a defense or claim arising from an unconnected
transaction, that existed before the account debtor received notice of the assignment.
104
C. ANTI-ASSIGNMENT CLAUSES
-
-
-
-
An anti-assignment clause is a provision in a contract between an account debtor (the person who owes payment
on an account) and an assignor (the person who transfers their rights to payment on the account to an assignee)
that prohibits or limits the ability of the assignor to assign their rights to payment to a third party, such as an
assignee.
When an assignment is made in contravention of an anti-assignment clause, An account debtor may claim that an
assignment breaches an anti-assignment clause in its agreement with the assignor.
Section 40(4) of the OPPSA partially invalidates anti-assignment clauses.
Section 40(4)(a) provides that an anti-assignment clause is binding on the assignor only to the extent of making the
assignor liable to the account debtor for breach of their contract.
o This means that the assignor may be liable to the account debtor for any damages that result from the
breach of the anti-assignment clause
Section 40(4)(b) makes anti-assignment clauses unenforceable against third parties, including the assignee.
o This means that the account debtor cannot rely on an anti-assignment clause to avoid their obligation to
make payment to the assignee.
The corresponding provision in other PPSAs limits the assignor's liability to damages for the breach, but it is unclear
if this means that the account debtor may have other remedies in Ontario.
It is unlikely that an account debtor would be entitled to terminate its contract with the assignor, as this would
impair the assignee's rights by effectively negating the assignment.
The account debtor would presumably not be entitled to injunctive or declaratory relief because that would
prohibit the assignment.
It is common to examine the underlying contracts for anti-assignment clauses when taking an assignment of an
account or chattel paper, and analyze the risk of proceeding in the face of them.
D. CUT-OFF CLAUSES
-
-
-
A cut-off clause is an agreement between the account debtor (the person who owes money on an account or
chattel paper) and the assignor (the person who is assigning or transferring the account or chattel paper) not to
use any defenses that may arise from their contract against the assignee (the person receiving the assignment).
OPPSA section 40(1.1) only applies if there is no enforceable cut-off clause. This means that if there is a cut-off
clause, section 40(1.1) does not apply.
Prospective assignees (people who plan to buy accounts or chattel paper) often want a cut-off clause included in
the contract between the assignor and the account debtor to protect themselves against section 40(1.1).
OPPSA section 14(1) addresses the enforceability of cut-off clauses, but it only applies to chattel paper and not
accounts.
The enforceability of a cut-off clause for an account is determined by general principles of contract. This means
that whether a cut-off clause is enforceable for an account will depend on the specific terms of the contract and
the principles of contract law.
OPPSA section 14(1) does not apply to the assignment of a consumer contract, and it is subject to defenses available
against a holder in due course under the Bills of Exchange Act. This means that there are limitations to the
enforceability of cut-off clauses, and certain defenses may still be available against an assignee who takes the
assignment for value, in good faith, and without notice.
VIII. RECEIVERS
-
Receivership involves appointing someone to take control of property for the benefit of a third person.
Receiverships can be used to enforce a judgment, protect property from destruction or dissipation, or enforce
security interests.
The appointment of receivers originated as a remedy of the Courts of Chancery to preserve property pending
judicial determination of conflicting claims.
Originally, court-appointed receivers only had authority to receive or take possession of property, but the practice
of appointing a receiver-manager developed to allow for the management of a debtor's business.
The extrajudicial appointment of a receiver became common in the 19th century and was later expanded to include
receiver-managers.
105
-
Before modern legislation (circa 1965), there was a clear distinction between court-appointed receivers and
privately-appointed receivers, but legislative developments have made this distinction less significant.
Ostrander v Niagara Helicopters Ltd 1974 CanLII 467, 1 OR (2d) 281 (H Ct J)
o Key Facts:
▪ Ostrander was the principal shareholder and founder of Niagara Helicopters Ltd., which
borrowed money from Roynat Limited and used its assets as security under a trust deed
arrangement. After defaulting on the loan, Roynat appointed Bawden as the receiver-manager
of the corporation. Bawden then sold most of the assets of the corporation after receiving two
tenders. Ostrander brought an action to regain possession of the corporation and to set aside
the sale of its assets, alleging that Bawden had conducted himself improperly.
o Issue:
▪ Is there a difference between court-appointed and privately-appointed receivers? Do privatelyappointed receivers act in a fiduciary capacity?
o Decision:
▪ The court found that there is a difference between court-appointed and privately-appointed
receivers.
▪ Privately-appointed receivers, such as Bawden, do not act in a fiduciary capacity. Bawden was
an agent for a mortgagee in possession, whose role was to protect the security of the
bondholder. The duty of Bawden was to sell the assets and realize the proceeds for the benefit
of the mortgagee. He was required to comply with the full terms of the conditions of sale set out
in the debenture, advertise the property, and take reasonable steps to obtain the best offer
possible. However, he owed a duty to everybody to act in good faith and without fraud.
o Reasoning:
▪ The court held that there is a clear distinction between the duties and obligations of a privatelyappointed receiver-manager appointed by virtue of a contractual clauses and the duties and
obligations of a court-appointed receiver-manager whose sole authority is derived from the
court appointment and the directions given by the court. A court-appointed receiver-manager is
an officer of the court and is definitely in a fiduciary capacity to all parties involved in the contest.
However, in the case of a privately-appointed receiver-manager, the borrower accepts in
advance the conditions by which the receiver-manager is to go about their duties. In carrying out
those duties, the receiver-manager acts as an agent for the secured party.
▪ The court held that as long as the receiver-manager acts reasonably and without ulterior interest,
they will have fulfilled their role, which is chiefly to protect the security for the benefit of the
secured party. Bawden fulfilled his duties by selling the assets of Niagara Helicopters Ltd. and
realizing the proceeds for the benefit of the mortgagee.
o Ratio:
▪ There is a clear difference between the duties and obligations of a court-appointed receivermanager and those of a privately-appointed receiver-manager. A court-appointed receivermanager is in a fiduciary capacity to all parties involved in the contest. On the other hand, a
privately-appointed receiver-manager acts as an agent for the secured party, and as long as they
act reasonably and without ulterior interest, they will have fulfilled their role, which is chiefly to
protect the security for the benefit of the secured party.
o Note:
▪ The OPPSA defines "secured party" to include a receiver or receiver-manager, providing that the
receiver or receiver-manager has the right to enforce the security interest.
CHAPTER THIRTEEN: CONFLICT OF LAWS
I. INTRODUCTION
-
Conflict of laws determines which law applies in transactions with multiple state contacts.
Example 1: Dispute between SP and Buyer over factory equipment in Manitoba, owned by a corporation
incorporated in Ontario and with locations in Ontario and Manitoba.
The law that applies will determine whether SP’s security interest is effective against Buyer.
Conflict of laws issues can arise within Canada and internationally.
106
-
The potential for conflict of laws issues is greater between Canadian PPSAs and US states that have not adopted
Revised Article 9, and between Canadian PPSA jurisdictions and Quebec due to significant differences in their laws.
Determining Governing Law for Secured Transactions in Ontario
o Pre-PPSA common law rules based on English case law were “scanty and unsatisfactory.”
o Common law rule for transfers of interests in tangible personal property was the law of the jurisdiction in
which the tangible property was located at the relevant time (lex situs).
o The lex situs rule was inadequate for self-propelled property, such as a ship or an aircraft, or for intangible
personal property without physical existence.
o As interprovincial commercial dealings grew, the inadequacy of the lex situs rule became unacceptable for
a modern economy.
o Each PPSA has enacted rules for resolving choice of law issues, including in Ontario in sections 5-8.1 of the
OPPSA.
o Section 5(1) applies to goods (excluding goods under s 6 or s 7(1)) or tangible chattel paper with a
possessory security interest and provides that the governing law is the jurisdiction where the collateral is
situated at the time the security interest attaches (lex situs rule).
o Section 7(1) applies to intangibles, mobile goods that are equipment or inventory leased or held for lease
to others, electronic chattel paper, or tangible chattel paper with a non-possessory security interest and
provides that the governing law is the jurisdiction where the debtor is located at the time the security
interest attaches (debtor location test).
o Section 7.1 applies to investment property and varies depending on the type of collateral.
o There are additional rules in each of ss 5, 6, 7, and 7.1 for cases where the collateral is moved to another
jurisdiction, where there has been a change in the debtor’s location, or where the collateral is investment
property and the applicable connecting factor changes.
o Section 8(1) applies to conflict of laws issues involved in the enforcement of the rights of a secured party
against collateral.
o The conflict of laws provisions in the PPSAs are uniform, except for some significant exceptions discussed
in Section IV.
II. GENERAL CONSIDERATIONS
A. SCOPE OF RULES
-
-
Conflict of laws rules in ss 5-8.1 of the OPPSA deal with choice of law issues in secured transactions in personal
property.
These rules are not a complete code on all conflict of laws rules relating to secured transactions and do not cover
issues such as court jurisdiction, recognition of foreign judgments, or enforcement of foreign law provisions.
Other private international law rules, both statutory and common law, will apply in these cases.
The PPSA contains conflict of law rules, which determine the laws that govern (among other things) the
perfection of security interests in personal property (sections 5 through 8, PPSA). Under these rules, the
jurisdiction whose laws will govern perfection is either:
o The jurisdiction where the collateral is located.
o The jurisdiction where the debtor is located, determined in accordance with section 7(3) of the PPSA.
-
Which test applies depends on the nature of the collateral, as follows:
-
Type of Collateral
Tangible goods that are not mobile goods.
An instrument, negotiable document of title,
money and tangible chattel paper, in each case
perfected by possession.
Intangible property (including accounts).
Mobile goods (goods that are normally used in
more than one jurisdiction), provided the goods
Governing Law
The jurisdiction where the collateral is situated at
the time of attachment (section 5(1), PPSA).
Location of the debtor at the time of attachment
(section 7(1), PPSA).
107
are equipment or inventory leased or held for
lease by the debtor to others.
Electronic chattel paper.
Non-possessory security interests in an
instrument, negotiable document of title, money
and tangible chattel paper.
-
The equivalent legislation in other provinces, states, and jurisdictions has its own respective conflict of law rules,
and these rules are not identical to the rules set out in the PPSA. If the rules in other relevant jurisdictions indicate
a governing law that is different from the PPSA's conflict of law rules, then a prudent lender will perfect its security
interest in all applicable jurisdictions.
B. VALIDITY
-
The OPPSA rules in sections 5(1), 6(1), 7(1), and 7.1 refer to the validity of the security interest, not the security
agreement.
This refers to the substantive requirements for the creation of a security interest as a property right, including
attachment, effectiveness, and enforceability between parties and against third parties.
This does not refer to the validity of the security agreement as a matter of general contract law, which is determined
by the general choice of law rules for contract.
In Example 2, SP1 and SP2 both claim Debtor's equipment in Bolantina after Debtor defaults.
o Under Bolantina law, a security interest is void unless the security agreement is in writing and executed
by both parties before a notary.
o SP1's security interest was not signed by SP1 and was not executed before a notary, while SP2's security
agreement is in compliance with the Bolantina documentation requirements.
o The court will apply Bolantina law to resolve the dispute because the equipment was located in Bolantina
at all relevant times, and SP1's security interest in the Bolantina equipment is void.
o However, there is a conundrum in the application of these rules to cases like Example 2, which can be
resolved by reading the provisions as referring to putative attachment.
o SP1 could have avoided this outcome by ensuring that its security agreement complied with the
requirements of Bolantina law or by entering into a separate security agreement with Debtor covering the
Bolantina equipment and documented in accordance with Bolantina law.
C. PERFECTION AND NON-PERFECTION
-
-
-
The words “perfection and the effect of perfection or non-perfection” in OPPSA, ss 5(1), 6(1), 7(1), and 7.1(2) refer
to the requirements for perfection in s 19, the consequences of failure to perfect set out in s 20, the various
methods of perfection (possession, delivery, registration, control, and temporary perfection), the rules for
obtaining perfection by each of these methods, and the priority status of a perfected security interest relative to
competing unperfected claims.
Sections 7(1) and 7.1 refer to not only validity and perfection, but also to “priority”. Although priority is not
expressly mentioned in s 5(1), it is implied that s 5(1) extends to priority issues.
When there is a dispute between two secured parties (SP1 and SP2) over a piece of equipment located in Ontario,
and the case is litigated in Ontario, s 5(1) of the OPPSA directs the court to apply Ontario law. SP1’s security interest
is valid because they have complied with the attachment requirements in s 11 of the OPPSA.
Ontario law applies to determine priorities between SP1 and SP2. On this basis, SP1 has priority because its security
interest was perfected by registration in Ontario, while SP2 was unperfected in Ontario (see OPPSA, s 20(1)(a)(i)).
D. MEANING OF “SECURITY INTEREST”
-
Example 3: Debtor owns a jewellery store in Toronto. SP is a jewellery manufacturer based in Nova Scotia. SP
regularly consigns jewellery to Debtor for sale. On Date 1, SP consigns several valuable rings to Debtor. SP does not
register in either Nova Scotia or Ontario. On Date 2, while the rings are still in Debtor’s possession, Debtor goes
into bankruptcy, and the trustee claims them. SP brings proceedings in Ontario challenging the trustee’s claim.
108
-
-
The transaction between SP and Debtor is a true consignment that is a commercial consignment under the NSPPSA,
and the effect of NSPPSA, s 4(2) is that SP is deemed to hold a security interest in the rings.
OPPSA does not apply to true consignments.
Section 5(1) of the OPPSA points to the application of Ontario law because the rings were delivered to Debtor in
Ontario, and Debtor acquired rights in them at that point.
The interest of a consignor under a true consignment is not a security interest as defined in the OPPSA.
The references to “security interest” in s 7(1) of the OPPSA are not limited to security interests as defined in the
OPPSA itself but should be expanded to include a security interest as defined in the other PPSAs.
SP does hold a security interest in the rings for the purposes of s 5(1) of the OPPSA because, in the other provinces
(including Nova Scotia), the PPSAs apply to a true consignment if it is a commercial consignment.
The case of Receivership of TCT Logistics Inc, Re has been criticized by Professor Ziegel who argues that the decision
involves reading the OPPSA conflict of laws provisions independently of s 2 and that, as a matter of history, policy,
and statutory interpretation, there is no warrant for this approach.
In the absence of a statutory rule, the court must revert to the common law choice of law rules.
There was traditionally no mobile goods rule at common law, and the lex situs rule applied.
The law of the debtor’s (lessee’s) location, namely Alberta, would have applied regardless of where the trailers
were located, and the result would have been the same as if s 7(1) of the OPPSA was applied if the court had
developed a common law version of the mobile goods rule, tracking the statutory version.
II. SECURITY INTERESTS GOVERNED BY SECTIONS 5 AND 6
A. THE MAIN RULE
-
-
Section 5(1) of the OPPSA governs the validity, perfection, and effect of perfection or non-perfection of security
interests in goods and possessory security interests in certain types of intangible property.
This section applies to tangible personal property that can be physically located, such as goods (other than those
covered by Section 6 or mobile goods covered by Section 7) and certain types of intangible property subject to a
possessory security interest.
The law of the jurisdiction where the collateral is situated at the time the security interest attaches governs the
validity, perfection, and effect of perfection or non-perfection of the security interest.
If the collateral is located in more than one jurisdiction, the secured party may need to register or perfect their
security interest in each jurisdiction where the debtor carries on business.
B. RELOCATION OF GOODS
-
-
-
OPPSA Section 5(1) provides that perfection issues are governed by the law of the jurisdiction where the goods are
situated when the security interest attaches.
S 5(2) deals with the perfection of a security interest in goods that were located outside Ontario at the time the
security interest attached.
OPPSA Section 5(2) states that a security interest in goods perfected under the law of the jurisdiction where the
goods are situated at the time the security interest attaches, but before the goods are brought into Ontario,
continues to be perfected in Ontario if a financing statement is registered in Ontario before the goods are brought
in, or if it is perfected in Ontario within 60 days after the goods are brought in, within 15 days after the secured
party receives notice that the goods have been brought in, or before the date that perfection ceases under the law
of the jurisdiction where the goods were situated at the time the security interest attached, whichever is earliest.
This provision essentially allows a secured party who has already perfected their security interest in goods in
another jurisdiction to maintain that perfected interest when the goods are brought into Ontario. However, the
secured party must comply with certain conditions to ensure that the security interest is properly perfected under
Ontario law. The secured party must either register a financing statement in Ontario before the goods are brought
into the province, or perfect the security interest in Ontario within the specified time limits.
Section 5(2) implies that Ontario law governs the dispute between the secured party and a buyer, and provides for
the perfection of the security interest in Ontario.
The grace period is the shortest of the three periods listed in Section 5(2)(a), (b), and (c).
109
-
If a secured party does not register in Ontario within the Section 5(2) grace period, the security interest is
unperfected in Ontario from the date the collateral was brought into Ontario until the registration date. A buyer
who acquires the goods as consumer goods in good faith and without knowledge of the security interest and before
the security interest is perfected in Ontario takes the goods free of the security interest.
C. THE DESTINATION OF GOODS RULE
-
-
-
-
-
-
Example 8: A newspaper business owner in Ontario buys a printing press from a seller in Saskatchewan and borrows
money from SP1 to pay for it. SP1 takes a security interest in the press, and the press is delivered to Ontario on
March 15th. On April 1, Debtor gives SP2 a security interest in all present and after-acquired personal property and
registers a financing statement in Ontario. On April 15, SP1 registers a financing statement in Ontario. When Debtor
defaults, both SP1 and SP2 claim the press. Since the press was situated in Ontario when SP2's security interest
attached, Ontario law governs the dispute between SP1 and SP2. For the purposes of priority rules, SP1 has priority
since its priority time is March 1, while SP2's priority time is April 15 (OPPSA, s 30(1), rule 2, s 30(2)).
Section 5(2) may apply, which means SP1's security interest is continuously perfected in Ontario from March 17th
onwards, temporarily perfected from March 1st to April 15th, and perfected by its OPPSA registration thereafter.
However, for s 5(2) to apply, SP1 must register twice: first, in Saskatchewan before the press is moved, and
secondly, in Ontario, within the s 5(2) grace period. Alternatively, s 6(1) may apply in fact situations like Example 8,
which is an exception to the lex situs rule in s 5(1). If s 6(1) applies, Ontario law governs from the outset even while
the goods are still located in the other province, provided that the parties understand that the goods will be kept
in the other jurisdiction and the move takes place within 30 days after the security interest attaches. In Example 8,
SP1 could have taken advantage of s 6(1) by registering in Ontario on March 1st.
This example describes a situation where two creditors, SP1 and SP2, both have a security interest in a printing
press owned by a newspaper business in Ontario. SP1 had a security interest in the printing press before SP2, so
according to the law, SP1 has priority in claiming the press. However, there are some rules that need to be
considered to determine the priority of the creditors.
One of the rules is called "lex situs," which means that the law of the place where the property is located applies
to determine the priority of creditors. In this case, since the press is in Ontario, the law of Ontario applies.
There are also two other rules, section 5(2) and section 6(1), that may apply in this case. Section 5(2) states that if
the creditor registers their security interest twice, once in the place where the property is located and once in the
place where the debtor is located, they will have priority over other creditors. However, this only applies if the
creditor registers within a certain period of time.
Section 6(1) is an exception to the lex situs rule, which means that even if the property is located in a different
province, the law of the debtor's province will apply if the parties agreed to keep the property there and the move
happened within 30 days of the security interest attaching.
In this example, SP1 could have taken advantage of section 6(1) by registering their security interest in Ontario on
March 1st when they first acquired the security interest. However, since they did not do so, the lex situs rule applies,
and SP1 has priority over SP2 because their security interest attached before SP2's did.
III. SECURITY INTERESTS GOVERNED BY SECTION 7
A. INTRODUCTION
-
OPPSA, s 7(1) governs the validity, perfection, effect, non-perfection, and priority of security interests in:
o intangibles;
o goods that are of a type used in more than one jurisdiction, if the goods are leased or held for lease by a
debtor to others;
o electronic chattel paper;
o non-possessory security interests in an instrument, negotiable document of title, money, or tangible
chattel paper.
110
B. MOBILE GOODS
-
-
-
-
Section 7(1)2 applies where collateral is "goods that are of a type that are normally used in more than one
jurisdiction if the goods are equipment or inventory leased or held for lease by a debtor to others".
The "mobile goods rule" replaces the location of the goods (lex situs) rule with a debtor's location test to avoid
multiple registrations and searches in different jurisdictions.
The mobile goods rule
o applies to equipment and certain types of inventory, but not consumer goods.
o applies to inventory held for lease, not for sale, as inventory held for lease is often mobile.
The debtor's location is determined by s 7(3), which used to deem the debtor to be located at its place of business,
chief executive office, or principal place of residence, but in Ontario, British Columbia, and Saskatchewan, the rules
changed after 2006/2010.
OTHER APPLICATIONS OF SECTION 7
o Section 7 applies to intangibles, electronic chattel paper, and non-possessory security interests in an
instrument, negotiable document of title, money, or tangible chattel paper.
o To perfect a security interest in intangibles, there must be either control by the secured party or a
registration in the appropriate register.
o Electronic chattel paper can be perfected by control or registration.
o Control of an instrument, negotiable document of title, or tangible chattel paper is required to perfect a
security interest.
Gimli Auto v BDO Dunwoody 1998, ABCA
o Facts:
▪ Bankrupt leased three cars from Gimli in Manitoba
▪ Gimli never registered its security interest because Manitoba legislation did not require it
▪ Bankrupt used cars in AB for his business
▪ Bankrupt also had a branch in BC, where he leased a truck from Eagle Ridge, another appellant.
Eagle Ridge registered its interest in BC but not elsewhere
o Decision: AB legislation applies (location of debtor [s 7(2)])
▪ Collateral is of a "type normally used in more than one jurisdiction"
▪ Main office of bankrupt's business is in AB, cars were used primarily in AB
▪ Eagle Ridge didn't perfect pursuant to AB PPSA, so they also lose
C. INTANGIBLES, ETC.
-
Section 7(1) of the PPSA applies to intangibles, electronic chattel paper, and non-possessory security interests in
instruments, negotiable documents of title, money, or tangible chattel paper.
The location of collateral test under s 5(1) of the PPSA does not apply if the collateral is intangible, electronic
chattel paper, or a non-possessory security interest in certain types of collateral.
For these types of collateral, the PPSA uses the debtor location test instead of the location of collateral test.
The debtor location test applies because these types of collateral are highly mobile and determining a physical
location is problematic.
Possessory security interests are subject to the location of collateral test because the secured party's possession
deprives the collateral of its mobility.
D. DETERMINING THE DEBTOR’S LOCATION
-
Under the OPPSA, the location of the debtor is important for determining the applicable law in the case of a dispute.
The location of an individual debtor is their principal residence, while for corporations, the location is the place of
incorporation or organization.
If the corporation is federally incorporated, the location is the registered office or head office of the debtor.
In the old version of the OPPSA, a debtor was deemed to be located at the debtor’s place of business if there is
one, at the debtor’s chief executive office if there is more than one place of business, and otherwise at the debtor’s
principal place of residence. However, the new s 7(3) is considerably more detailed, and now avoids much of the
uncertainty surrounding the old provision.
111
-
-
-
-
Example 9 illustrates how the different approaches to determining debtor location affect the outcome of a dispute.
In this example, a debtor runs a retailing business that is incorporated in Ontario and has its largest retail outlets
in Toronto, Ontario. Its chief executive office is in Winnipeg, Manitoba. The case is litigated in Ontario and SP2 has
priority because its security interest is perfected in Ontario. However, if the case is litigated in Manitoba, SP1 has
priority as its security interest is perfected in Manitoba while SP2’s is not. The outcome of the dispute varies
depending on the choice of forum.
Section 7(1) of the OPPSA points to the application of Manitoba law if the debtor is incorporated in Manitoba.
Manitoba law includes s 7(1) of the MPPSA, which provides that the location of a debtor incorporated in Manitoba
is determined by the location of its chief executive office.
The implications of these different approaches are illustrated by Example 9. The outcome of the dispute varies
depending on the choice of forum. To better protect itself, a creditor should register its security interest in both
the province of incorporation or organization and the location of the chief executive office, and should conduct
PPSA searches against the debtor in those two provinces and any other jurisdictions where the debtor may have
been located previously
Relevant sections of the OPPSA: Section 7(3)(a) and (c)
E. CHANGE IN DEBTOR’S LOCATION
-
-
Section 7(2) of the OPPSA deals with situations where a debtor changes location after a security interest has been
perfected.
If the security interest is already perfected under the law of the original jurisdiction where the debtor was located,
then the interest continues to be perfected for a limited time period.
The security interest will continue to be perfected until the earliest of:
o 60 days after the day the debtor's jurisdiction changes
o 15 days after the secured party learns of the change in jurisdiction
o the day perfection ceases under the previously applicable law.
Section 7(2) is the counterpart of section 5(2) which deals with the relocation of goods.
The grace period provided in section 7(2) is absolute, unlike the conditional grace period provided in section 5(2).
The corresponding provision in other provinces, such as the Alberta Personal Property Security Act (APPSA), applies
to situations where the debtor relocates or transfers an interest in the collateral to a person in another jurisdiction.
Originally, section 7(2) of the OPPSA only applied to situations where the debtor changed location to Ontario, but
it may be read to extend to transfers as well.
John Cameron, “Secured Transactions Under Ontario’s Securities Transfer Act, 2006”
o Section 7.1 of OPPSA deals with validity, perfection, and priority of security interest in investment
property.
o The validity of a security interest in investment property is governed by the law of the jurisdiction where
the certificate is located, issuer's jurisdiction, or securities intermediary's jurisdiction, depending on the
collateral type.
o For perfection and priority, registration of a security interest in investment property is governed by the
debtor's location.
o Perfection and priority of a security interest in a certificated security is governed by the location of the
certificate.
o Perfection and priority of an uncertificated security is governed by the issuer's jurisdiction.
o Perfection and priority of a security entitlement is governed by the securities intermediary's jurisdiction.
o The issuer's jurisdiction is defined in section 44 of STA and is the jurisdiction where the issuer is
incorporated or organized.
o The securities intermediary's jurisdiction is defined in section 45 of STA and depends on the rules specified
in the agreement between the intermediary and entitlement holder.
o Sections 7.1(6) and 7.1(7) of OPPSA contain rules for changing debtor location, issuer's jurisdiction, or
securities intermediary's jurisdiction, requiring steps to be taken to perfect in the new jurisdiction within
specific periods of time.
IV. PROCEEDS
-
The conflict of laws rules that apply to the original collateral also apply to proceeds.
112
-
Example 10:
o Debtor is a retailer incorporated in British Columbia with stores in several provinces, including Ontario.
o SP1 takes a security interest in inventory and registers in Ontario.
o Debtor later grants a security interest in its accounts to SP2, who registers in British Columbia.
o Debtor defaults, and SP1 claims the accounts as proceeds of inventory, while SP2 claims them as original
collateral.
o The accounts are intangibles, and s.7(1) of the OPPSA applies to determine the law governing the dispute.
o Section 7(1) refers to the law of the debtor's location, and since Debtor is incorporated in British Columbia,
British Columbia law applies.
o SP1's Ontario registration is not effective in British Columbia, and SP1's security interest is unperfected as
to the accounts in British Columbia.
o To avoid this outcome, SP1 should have registered in British Columbia as well as in Ontario.
V. ENFORCEMENT
-
-
-
Conflict of laws issues may arise in disputes over the enforcement of a security interest against a debtor in default.
Section 8(1) of the OPPSA deals with disputes of this kind.
Procedural issues involved in the enforcement of the rights of a secured party against collateral are governed by
the law of the jurisdiction in which the enforcement rights are exercised.
Substantive issues involved in the enforcement of the rights of a secured party against collateral are governed by
the proper law of the contract between the secured party and the debtor.
Section 8(1)(a) of the OPPSA states that procedural questions relating to the enforcement of a security interest are
governed by the law of the forum (lex fori).
o This means that if legal proceedings are taken against the party liable on the intangible, the rules of
pleading and evidence in Ontario must be complied with.
o In the case of tangible property, if the law where the property is situated prohibits repossession of the
collateral without a court order or only allows a public official to seize the collateral, these conditions must
be respected even if the proper law of the contract is more permissive.
o The rules of the forum must be examined to see if their purpose is procedural or substantive in character.
If their purpose is distributive, to limit the secured party’s substantive enforcement rights, the rule should
be classified as substantive and governed by the proper law of the security agreement.
Section 8(1)(b) of the OPPSA states that the rights and obligations arising out of the security agreement are
governed by the proper law of the contract.
All the Canadian provinces have statutory restrictions on the secured party’s entitlement to seize and realize the
collateral in the event of default and to sue for any deficiency. The proper law will govern such questions as the
validity of the contract, its interpretation, and the secured party’s enforcement rights and obligations with respect
to the collateral and against the debtor in case of default.
Determining the proper law of the contract is not explicitly stated in the OPPSA. A well-established Anglo-Canadian
rule is that the parties to a contract are free to choose the law governing their agreement. If the parties have not
made an express choice of law, the proper law will be the law with the closest and most real connection to the
contract.
CHAPTER FOURTEEN: BANK ACT SECURITY
I. INTRODUCTION
-
-
I. Introduction
o Provincial laws govern personal property security interests in Ontario.
o Federal laws also contain provisions relating to security interests, including the Bank Act.
II. Overview of Bank Act Security Provisions:
o Section 427 of the Bank Act establishes a special regime for security interests in inventory and other goods
given to banks by retailers, traders, manufacturers, and in farming, fishing, mining, and forestry concerns.
o The Bank Act security provisions are intended to be an alternative to the Personal Property Security Act
(PPSA).
113
o
-
-
-
Bank Act security allows banks to take security interests in personal property without having to comply
with the PPSA's registration requirements.
III. Rules Governing Priorities between Bank Act Security and Competing Claims:
o The Bank Act provides priority for bank security interests in certain situations, such as where a retailer,
trader, or manufacturer defaults on a loan.
o Priority disputes between Bank Act security and other security interests are resolved using the usual rules
of priority under the PPSA.
IV. Interaction between Bank Act Security Provisions and Provincial PPSAs:
o The Bank Act security provisions can be used in conjunction with the PPSA, but the PPSA's requirements
must still be met.
o Where there is a conflict between the Bank Act and the PPSA, the Bank Act prevails.
V. Proposals for Repeal of Bank Act Security Provisions:
o Some have proposed repealing the Bank Act security provisions, arguing that they are redundant and
cause confusion.
o Others argue that the Bank Act provides important protections for banks and should be preserved.
II. THE BANK ACT SECURITY REGIME
A. THE SCOPE OF THE BANK ACT SECURITY
-
-
Bank Act security is created by statute and can only be granted by banks listed in Schedule I or II of the Bank Act
and authorized foreign banks.
Bank Act security can only be given to secure loans or advances made to the borrower itself, not to secure
contingent liabilities.
Eligibility criteria for Bank Act security are set out in section 427(1) of the Bank Act, which provides that a bank may
lend money to business debtors on the security of specified collateral.
The specified collateral for each paragraph is as follows:
o (a) Primary products, goods, wares, and merchandise.
o (b) End products, manufacturing inputs, packing materials.
o (c) Aquacultural stock.
o (d) Crops.
o (e) Aquacultural equipment.
o (f) Agricultural equipment.
o (g) Aquacultural implements.
o (h) Agricultural implements.
o (i) Aquacultural electric systems.
o (j) Farm electric systems.
o (k) Aquatic broodstock or seedstock.
o (l) Seed grain or seed potatoes.
o (m) Aquacultural pesticides and feed.
o (n) Fertilizer, pesticides, feed, and livestock.
o (o) Fishing vessels, fishing equipment, and catch.
o (p) Forestry equipment, forestry implements, products, fertilizer, and pesticides.
The remaining parts of section 427 and section 428 deal with the formal requirements for a Bank Act security
agreement, the juridical nature of the Bank Act security, the attachment of the Bank Act security, the effectiveness
of the Bank Act security against third parties, priorities between the Bank Act security and competing claims, and
enforcement of the Bank Act security.
B. FORMAL REQUIREMENTS
-
In Ontario, for a bank to have a valid security interest in personal property, the debtor must sign a written security
agreement.
114
-
-
-
The security agreement must be in the prescribed form or in a form to the like effect, as set out in the regulations.
The debtor must deliver the security agreement to the bank for it to be valid.
Section 427(1) of the Bank Act sets out the formal requirements for a valid security agreement.
The substantive part of the prescribed form includes a description of the eligible collateral and the location of the
collateral.
Section 427(2) provides that the delivery of a document giving security on property to a bank vests certain rights
and powers in the bank in respect of the property described in the document.
Section 427(1)
o Section 427(1) of the Bank Act states that a security interest in personal property may be given by
signature and delivery to the bank of a document in the prescribed form or in a form to the like effect.
o The form of the document is prescribed by regulation and includes a substantive part that assigns the
property described to the bank as security for payment of the loan or advance.
o The security agreement must be signed by the debtor, in the prescribed form or to like effect, and
delivered to the bank for it to have a valid security interest in the property described in the agreement.
Section 427(2)
o Section 427(2) of the Bank Act provides that delivery of a document giving security on property to a bank
vests in the bank certain rights and powers in respect of the property described in the agreement.
o To have a valid security interest, the debtor must deliver the signed and prescribed security agreement to
the bank, and the bank must comply with the formal requirements of the Act.
The combined effect of ss (1) and (2) is that in order for the bank to have a valid security interest
o (1) there must be a written security agreement signed by the debtor,
o (2) the security agreement must be in the prescribed form or to like effect, and
o (3) the debtor must deliver the security agreement to the bank.
C. THE JURIDICAL NATURE OF THE BANK ACT SECURITY
-
-
Section 427(2)(c) of the Bank Act states that delivery of the security document gives the bank the same rights and
powers as if they had acquired a warehouse receipt or bill of lading in which the property was described.
The acquisition of a warehouse receipt or bill of lading passes title in the underlying goods to the holder of the
document.
Section 435(2)(a) enhances these rights by vesting in the bank, from the date of its acquisition, all the right and title
to the warehouse receipt or bill of lading and to the goods, wares and merchandise covered thereby of the previous
holder or owner thereof.
In substance, the transaction is a mortgage, and until the loans are repaid, the bank is the legal owner of the goods.
The bank's security is a fixed security interest, not a floating one, even in relation to after-acquired property.
Royal Bank of Canada v Sparrow Electric Corp
o
o
o
o
o
o
o
o
o
Summary of Bank Act security (BAS) and the nature of its attributes:
BAS is a type of security that is set up by the Bank Act, enabling manufacturers to obtain large loans
from their bankers to carry out their industrial activities.
BAS is essentially a mortgage transaction and subject to the general law of mortgages except where the
statute has otherwise expressly provided.
The bank acquires ownership in the goods by the statute.
BAS gives the lender legal title in the collateral.
By section 427(2), a bank may take security in property owned by the borrower at the time of the loan
transaction and any property acquired during the pendency of the security agreement.
The rights and powers of the bank with respect to the secured property are the same rights and powers
as if the bank had acquired a warehouse receipt or bill of lading in which such property was described.
The bank's interest attaches to the assigned property when the security is given or the property is
acquired by the borrower and remains attached until released by the bank, despite changes in the
attributes or composition of the assigned property.
The borrower retains an equitable right of redemption, but the bank has legal title to the property in
question
115
-
NOTE:
o
o
o
o
o
Section 427(2)(d) of the Bank Act gives a bank a "first and preferential lien" on aquacultural stock, crops,
or equipment that is or may become a fixture, which aims to prioritize the bank's claim over someone
claiming an interest in the land.
The bank acquires this lien in addition to the rights granted under section 427(2)(c).
Collateral that consists of "agricultural equipment," which is usually affixed to real property, falls within
the scope of section 427(2)(d).
The creation of a "first and preferential lien" does not increase the priority position of a bank over another
secured creditor of personal property because it is contrary to other explicit priority rules in the Bank Act.
Section 427(2)(d) is interpreted as a statement of the nature of the interest acquired, and it addresses
conflicts between a bank and the holder of an underlying interest in real property upon which agricultural
equipment or crops are affixed.
D. ATTACHMENT
-
-
Sections 427(2)(a) and (b) of the Bank Act determine the bank's security interest in personal property.
Sections 427(2)(a) and (b) of the Bank Act refer to the bank's security being in property that the debtor either owns
at the time of delivery of the security document or becomes the owner of at any time before the release of the
security by the bank.
Attachment of a security interest requires the debtor to have rights in the collateral, as stated in section 11(1) of
the OPPSA.
The bank's security interest depends on the debtor being or becoming the owner of the property in question.
If the debtor owns the collateral at the time the Bank Act security document is delivered, the security attaches at
that point (s 427(2)(a)).
If the debtor acquires the collateral later, the security attaches then but not earlier (s 427(2)(b)).
The Bank Act limits the bank's security interest by reference to the debtor's own interest in the collateral.
The bank's security interest is in the debtor's right of possession and no more.
Section 427(2)(b) allows the bank to take security in after-acquired property, but the security does not attach until
the debtor becomes the owner.
o This makes the Bank Act security a fixed security interest, not a floating one, which means that it attaches
to each new item of after-acquired property as and when the debtor becomes the owner of it, as in the
case of security interests under the PPSA.
E. EFFECTIVENESS AGAINST THIRD PARTIES
-
-
-
Section 427(4) of the Bank Act establishes a registration system for Bank Act security, which must be registered in
the appropriate agency not more than three years immediately before the security is given.
If a notice of intention signed by or on behalf of the person giving the security was not registered, the rights and
powers of the bank in respect of property covered by the security are void as against creditors of the person giving
the security and as against subsequent purchasers or mortgagees in good faith of the property covered by the
security.
The “appropriate agency” is defined in s 427(5) to mean the office of the Bank of Canada in the province where the
debtor has its place of business, its principal place of business (if it has more than one place of business), and its
residence (if the debtor has no place of business).
The notice of intention must be in the form prescribed by regulation and must set out the name and address of the
debtor and the name and address of the secured party, and it must be signed by the debtor.
The notice does not contain a description of the collateral; for this and other details of the security agreement, a
searcher must ask the secured party.
The Bank Act security must be registered before the Bank Act security document is signed and delivered by the
debtor, but not more than three years before the security is granted.
The term of the Bank Act registration is a fixed period of five years, which is renewable for one-year periods
thereafter.
Failure to properly register Bank Act security results in the security being “void as against creditors of the person
giving the security and as against subsequent purchasers or mortgagees in good faith [of the collateral].”
116
-
The Bank Act registration system is paper-based, unlike the computerized PPS register.
Similar to the PPSAs, an unperfected security interest under the Bank Act is ineffective against various third parties,
including the holder of a competing perfected security interest and a transferee of the collateral for value.
F. PRIORITIES
-
The main Bank Act priority rules are in s 428(1) and (2). Other relevant provi- sions are ss 427(2)(a) and (b),
427(4)(a), and 435.
G. ENFROCEMENT
-
-
The main enforcement provisions are found in sections 427(3) and 428(7)-(12).
Section 427(3) allows the bank to take possession of the collateral if the debtor defaults, even if the collateral has
become a fixture. The bank also has the right of entry onto the land to remove the collateral.
Section 428(7) permits the bank to sell the collateral in case of non-payment and use the proceeds to pay off the
debt. Any surplus must be returned to the debtor.
Section 428(8) requires that the sale must be conducted by public auction, and the debtor must be given at least
ten days' notice of the sale. The sale must also be publicly advertised in at least two newspapers published in or
near the location of the sale.
Section 428(10) imposes a duty on the bank to act honestly and in good faith when dealing with the property in
connection with the sale, and to handle it in a timely and appropriate manner.
Section 428(11) requires the bank to sell the property as soon as reasonably practical given the nature of the
property.
Section 427(12) applies when the collateral is used in a manufacturing process, giving the bank the same rights with
respect to the end product as it had with the original collateral.
III. PRIORITIES
-
-
-
-
The main Bank Act priority rules for secured transactions in personal property are in ss 428(1) and (2).
Section 428(1) provides that the rights and powers of a bank in respect of property covered by its security have
priority over all rights subsequently acquired in, on or in respect of that property, and also over the claim of any
person who has a security interest in that property that was unperfected at the time the bank acquired its security
in the property.
Section 428(2) states that the priority referred to in subsection (1) does not extend over the claim of any person
who has a security interest in the property that was unperfected at the time the bank acquired its security, if the
bank acquired it with knowledge of that other person’s security interest.
There are two separate priority rules embedded in these provisions: Rule 1 and Rule 2.
o Rule 1 provides that a Bank Act security has priority over any subsequently acquired security interest in
the same collateral.
o Rule 2 provides that a Bank Act security has priority over the claims of a secured party with an existing
security interest in the same property if at the time the bank acquired its Bank Act security the competing
secured party’s security interest was unperfected, and the bank did not know of the competing security
interest.
Example 1 (application of Rule 1): Bank A registers a notice of intention on May 1. Bank B registers a notice of
intention on May 15 and obtains a Bank Act security agreement from Debtor on May 18. On May 21, Bank A obtains
a Bank Act security agreement from Debtor granting security in the same collateral. The collateral is Debtor’s
agricultural equipment, including a tractor that Debtor has owned for some time. Debtor defaults, and Bank A and
Bank B both claim the tractor.
o Example 1 (application of Rule 1): involves a scenario where two banks, Bank A and Bank B, both have a
security interest in the same collateral, which is Debtor's agricultural equipment including a tractor. Bank
A registered their notice of intention on May 1, while Bank B registered their notice on May 15 and
obtained a security agreement from Debtor on May 18. On May 21, Bank A also obtained a security
agreement from Debtor. When Debtor defaults, both banks claim the tractor.
117
o
-
-
Under Rule 1 of the Bank Act, Bank B has priority because they acquired legal title to the tractor on May
18, which is before Bank A acquired legal title on May 21. This is based on the nemo dat principle, which
means that Debtor cannot give legal title to Bank A after already giving legal title to Bank B.
o However, if Bank B had failed to register a notice of intention, then their security interest would be void
against other creditors under section 427(4)(a). In this case, Bank A would have priority, despite registering
their notice of intention later than Bank B.
o This example is about the priority of two banks, Bank A and Bank B, that both have a security interest in
the same collateral, which is the Debtor's agricultural equipment, including a tractor.
o In the first scenario, Bank A registered a notice of intention on May 1, while Bank B registered on May 15
and obtained a Bank Act security agreement from the Debtor on May 18. Bank A obtained a security
agreement from the Debtor on May 21.
o According to Rule 1, Bank B has priority over Bank A because Bank B acquired the rights in the tractor on
May 18, the date of its security agreement. This is because the principle of nemo dat, which means "no
one gives what he does not have," applies. If Bank B already has legal title to the tractor, the Debtor cannot
give legal title to Bank A later. Bank A can only acquire the equity of redemption from the Debtor, which
is the right to redeem the property by paying the outstanding debt.
o In the second scenario, Bank B failed to register a notice of intention, and Bank A registered on May 1.
Since Bank B did not comply with the OPPSA, its security interest is void against other creditors under
section 427(4)(a). Therefore, Bank A has priority over Bank B because Bank A registered first, and Rule 1
is expressly subject to section 427(4)(a).
Example 2 (application of Rule 2): Debtor is a corporation incorporated in Ontario. Debtor runs an agricultural
business on a property in Ontario. Credit Union takes a security interest in Debtor’s tractor on May 18 but does not
register a financing statement under the OPPSA. Bank obtains Bank Act security from Debtor on May 21, having
previously registered a notice of intention. Debtor defaults, and Bank and Credit Union both claim the tractor.
o In Example 2, there are two parties with conflicting claims to a tractor owned by a corporation that runs
an agricultural business in Ontario. The Credit Union takes a security interest in the tractor on May 18 but
fails to register it under the Ontario PPSA. The Bank obtains security from the corporation on May 21 and
registers it under the Bank Act. When the corporation defaults, both the Bank and the Credit Union claim
the tractor.
o The Bank Security Act provides two rules that determine priority in cases like this.
▪ Rule 1 states that a bank's security has priority over any security interest that is subsequently
acquired.
▪ Rule 2 states that a bank's security has priority over any security interest that was unperfected
at the time the bank acquired its security interest.
o In this case, the Credit Union's security interest was unperfected because it failed to register it under the
Ontario PPSA. Therefore, the Bank has priority over the Credit Union's claim to the tractor, according to
Rule 2.
o This case was based on Bank of Montreal v Innovation Credit Union, which did not have an express
priority rule for this situation at the time. The court applied the nemo dat principle in the absence of an
express priority rule. However, the Bank Security Act was amended in 2012 to include Rule 2 to address
concerns about undiscoverable security interests.
o If the Credit Union had perfected its security interest under the OPPSA on May 18, it would have priority
because Rule 1 would not apply, and Rule 2 would not apply because the security interest would not be
unperfected.
o The practical lesson is that non-Bank Act security interests can protect themselves against later competing
Bank Act security interests by registering under the PPSA. Banks should search both the Bank Act register
and the relevant PPSA register before taking Bank Act security.
Example 3: Example 3 involves a situation where a bank has taken a security interest in a debtor's agricultural
equipment, including a tractor, and the seller of the tractor has sold it to the debtor under a conditional sale
agreement. The seller did not register their interest under the PPSA. When the debtor defaults on payments to
both the bank and the seller, the question arises as to who has priority in relation to the tractor.
o Under section 427(2)(a) of the Bank Act, the bank's security interest extends only to property described in
the security agreement of which the debtor "is the owner". In this case, the seller has reserved title in the
tractor, and therefore, the seller is the owner. However, the debtor has a right of possession under the
118
-
-
conditional sale agreement, subject to the bank's security interest. The bank's right to possess the tractor
can be defeated by the seller simply asserting its ownership and reclaiming the tractor.
o Therefore, in Example 3, the seller has priority over the bank, regardless of whether or when the seller
registered their interest under the PPSA. This is in contrast to the PPSA approach, where a purchasemoney security interest (PMSI) in equipment has priority over an earlier competing security interest,
provided the PMSI holder perfects their security interest within 15 days after the debtor obtains
possession of the collateral.
o If the seller's transaction with the debtor precedes the bank's security interest, the seller still has priority
over the bank, even if they did not register their interest under the PPSA. This is because the bank's
security interest extends only to property of which the debtor is the owner, and the debtor has no more
than a right of possession, which is bounded by the seller's right to retake the tractor. Rule 1 and Rule 2
of the Bank Act have no application in this scenario.
o It is important to note that the Bank Act definition of "security interest" does not cover title retention
arrangements, such as conditional sales, security leases, and security consignments. Therefore, even if the
seller failed to register a financing statement or otherwise perfect their "security interest" under the PPSA,
they still have priority over the bank.
Example 3 involves a scenario where a bank has taken security in a debtor's present and future agricultural
equipment and has registered a notice of intention under the Bank Act. Later, the debtor buys a tractor from a
seller under a conditional sale agreement, and the seller does not register under the PPSA. When the debtor
defaults on payments to both the bank and the seller, the question arises as to who has priority in relation to the
tractor.
o According to Section 427(2)(a) of the Bank Act, the bank's security interest extends only to property
described in the security agreement of which the debtor "is the owner." In this case, the seller has reserved
title in the tractor, so the seller, not the debtor, is the owner. However, the debtor has a right of possession
under the terms of the conditional sale agreement, which is subject to the bank's security. The seller can
defeat the bank's possessory entitlement by asserting its ownership and reclaiming the tractor.
o As per the International Harvester case, a conditional purchaser is an "owner" within the meaning of
Section 427(2)(a) and (b) of the Bank Act. However, the bank only gets the right and title to the equipment
that the owner of the equipment had. Therefore, in Example 3, the seller has priority over the bank. It
does not matter that the seller did not register under the PPSA because Rule 2 only applies to cases where
the security interest pre-dates the Bank Act security.
o If the facts of Example 3 were changed, and the seller's transaction with the debtor precedes the bank's
Bank Act security, the analysis remains the same. Applying Section 427(2)(a), the bank's security extends
only to property of which the debtor is "the owner." The debtor has no more than a right of possession,
which is bounded by the seller's right to retake the tractor.
▪ As per Rule 1, the bank's security interest precedes the competing claim.
▪ Rule 2 also has no application because the seller's claim to the tractor is not a "security interest"
for the purposes of the provision. The Bank Act definition of "security interest" does not cover
title retention arrangements. Therefore, in this scenario, the seller has priority over the bank. It
does not matter that the seller failed to register a financing statement or otherwise perfect its
"security interest" under the PPSA, and the bank had no easy way of discovering the seller's
interest in the tractor before acquiring its security.
o The OPPSA comes into play in this scenario because the seller holds a PMSI in equipment. According to
Section 33(2) of the OPPSA, a PMSI in equipment has priority over an earlier competing security interest
provided the PMSI holder perfects its security interest within 15 days after the debtor obtains possession
of the collateral. The Bank Act provisions lead to the same result as the OPPSA, except that the conditional
seller's priority over a Bank Act security is not conditioned on perfection. In a case like Example 3, the
seller has priority regardless of whether or when it registered in the PPS register.
Example 4:
o In this example, a Credit Union has an unperfected security interest in all of the Debtor's present and afteracquired personal property from April 1, while a Bank has a Bank Act security in the Debtor's present and
after-acquired agricultural equipment from August 1. On December 1, the Debtor acquires a new tractor,
and both the Credit Union and Bank claim the tractor after the Debtor defaults.
o Under Rule 1, the Bank Act security has priority over "all rights subsequently acquired in the property."
However, since the parties' interests in the tractor came into existence simultaneously, Rule 1 did not
119
o
o
o
apply. Thus, the Court fell back on common law principles to determine priority based on the dates of
their respective security agreements. Applying this principle, the Credit Union's security agreement predated the Bank's security, and therefore the Credit Union had priority over the Bank.
Royal Bank of Canada v Radius Credit Union Ltd: the Court determined priority based on the dates of the
parties' respective security agreements.
The 2012 amendments to the Bank Act provide Rule 2, which states that the bank's security has priority
over any person who has a security interest in the disputed property that was unperfected "at the time
the bank acquired its interest in the property." However, it is unclear when the bank acquires its interest
in the tractor. One view is that the bank acquires its interest on December 1 when the Debtor becomes
the owner, while another view is that the bank acquires inchoate rights on August 1, the date of the
security agreement. If the bank acquires its interest on August 1, then Credit Union's security interest is
first in time, Rule 2 applies, and because Credit Union failed to perfect its security interest, the bank has
priority.
If Credit Union perfected its security interest on April 1, then neither Rule 1 nor Rule 2 applies, and the
courts will revert to the common law. However, the 2012 amendments fail to address the "dysfunctional
relationship" between the Bank Act and PPSA regimes, and the new priority rule is considered inadequate
and will likely generate more litigation.
IV. RELATIONSHIP BETWEEN THE BANK ACT SECURITY AND THE PPSAS
-
-
-
-
-
-
-
-
In Example 5, the bank took security in the debtor's equipment under the Bank Act but neglected to register a
notice of intention. Later, the debtor granted a security interest in the same equipment to a credit union, which
registered a PPSA financing statement that was invalid. When the debtor defaulted, the bank took possession of
the equipment.
Under section 427(4) of the Bank Act, the bank's security interest is void against the credit union because the bank
failed to register a notice of intention. However, if the OPPSA applies, the bank would have priority over the credit
union because the bank's security interest became perfected when it seized the equipment, while the credit union's
security interest is unperfected (see OPPSA, s 20(1)(a)(i)).
In other provinces, repossession does not perfect a security interest, but the bank would still have priority under
the rule that in a competition between unperfected security interests, priority turns on the order of attachment
(see, for example, SPPSA, s 35(1)).
In all PPSA jurisdictions except Ontario and the Yukon, the Bank Act security is expressly excluded from the PPSA.
However, there is no corresponding provision in the OPPSA or the YPPSA, and the International Harvester case
suggests that the OPPSA applies to Bank Act security and operates concurrently with the Bank Act provisions
In this example, the Bank takes a security interest in the debtor's equipment under the Bank Act, but fails to register
a notice of intention. Later, the debtor gives the Credit Union a security interest in the same equipment, and the
Credit Union registers a PPSA financing statement, but the registration is invalid. The debtor defaults and the Bank
takes possession of the equipment.
Under section 427(4) of the Bank Act, the Bank's security is void as against the Credit Union because the Bank failed
to register a notice of intention. If the OPPSA applies, however, the Bank will have priority because its security
interest became perfected when it seized the equipment, while the Credit Union's security interest is unperfected
(OPPSA, s 20(1)(a)(i)). In other provinces, repossession does not perfect a security interest, but the Bank would still
have priority under the rule that in a competition between unperfected security interests, priority turns on the
order of attachment (SPPSA, s 35(1)).
In all PPSA jurisdictions, except Ontario and the Yukon, the Bank Act security is expressly excluded from the PPSA.
This means that in a case like Example 5, the Bank cannot rely on the PPSA. However, there is no corresponding
provision in the OPPSA or the YPPSA, and the International Harvester case suggests that the OPPSA applies to the
Bank Act security and operates concurrently with the Bank Act provisions.
Bank of Nova Scotia v International Harvester Credit Corp of Canada Ltd 1990 CanLII 6739, 73 DLR (4th) 385 (Ont
CA)
120