Commercial Law (Kraag and Hong) - 2013-14 (2)
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Commercial Law – Kraag/Hong – Winter 2014 Table of Contents Definitions ............................................................................................................................................... 5 Introduction ............................................................................................................................................ 5 Canadian PPSA Background .......................................................................................................................... 5 Legislative Objectives .................................................................................................................................... 5 Structural Integration................................................................................................................................ 5 Conceptual Unity ....................................................................................................................................... 5 Comprehensiveness................................................................................................................................... 5 Legal Predictability .................................................................................................................................... 5 Accommodation of Modern Business Financing ....................................................................................... 6 Regulation of Default Rights and Remedies.............................................................................................. 6 John Amour, “The Law and Economics Debate about Secured lending: Lessons for European Lawmaking?” ................................................................................................................................................. 6 Structure of the Ontario PPSA Act ................................................................................................................ 7 Definitions to Know or Not ........................................................................................................................... 7 Personal Property Registry ........................................................................................................................... 8 Classification of Collateral............................................................................................................................. 8 Chapter 2 – The Scope of the Act ...................................................................................................... 9 Introduction .................................................................................................................................................. 9 Statutory Licenses ......................................................................................................................................... 9 Security Interests and Trusts ...................................................................................................................... 10 Trusts....................................................................................................................................................... 10 Deemed Security Interests.......................................................................................................................... 11 Transfers of Accounts & Chattel Paper – Section 2(b) ............................................................................ 11 Leases – Section 2(c) ............................................................................................................................... 12 Consignments .......................................................................................................................................... 12 Exclusions From the Scope of the Act ......................................................................................................... 12 Liens Given by Statute or Rule of Law: Section 4(1)(a) ........................................................................... 12 Insurance: Section 4(1)(c)........................................................................................................................ 12 Interests in Real Property: Section 4(1)(E) .............................................................................................. 14 Deemed Trusts from Income Tax Act ...................................................................................................... 14 Chapter 3 – Validity and Enforceability of the Security Interest ........................................ 18 Introduction ................................................................................................................................................ 18 Validity of the security agreement ............................................................................................................. 18 Section 9 – Freedom of Contract ............................................................................................................. 20 Consumer Security Interests .................................................................................................................... 20 PPSA over other Acts ............................................................................................................................... 20 1 Statute of Frauds Requirements ................................................................................................................. 21 No Securing Unsecured Debt with General Security Agreements ........................................................... 23 Chapter 4 – Attachment..................................................................................................................... 24 Introduction ................................................................................................................................................ 24 Valid Security Agreement ........................................................................................................................... 25 Secured Party Must Give Value .................................................................................................................. 25 Rights in the Collateral ................................................................................................................................ 25 After-Acquired Property .......................................................................................................................... 25 The Floating Charge ................................................................................................................................ 25 Conditional Sales and the Like ................................................................................................................ 31 Debtor Has Sufficient Rights In the Collateral ......................................................................................... 32 Chapter 13 - Enforcement of the Security Interest: Part V of PPSA ................................... 34 Introduction ................................................................................................................................................ 34 Procedural and Substantive Limits on Enforcement Rights ........................................................................ 34 Taking Possession ................................................................................................................................... 35 Acceleration Clauses ............................................................................................................................... 35 Consumer Protection Act ........................................................................................................................ 35 Seizure of Collateral .................................................................................................................................... 35 Section 17 – Custodial Obligations of Secured Party while in possession ............................................... 36 Voluntary Foreclosure................................................................................................................................. 37 Disposal of the Collateral ............................................................................................................................ 38 Deficiency Claims and Guarantor’s Liability................................................................................................ 39 Enforcement of Security Interests by Receivers and Receiver Managers .................................................. 41 Deemed Security Interests.......................................................................................................................... 44 True Leases v Security Leases .................................................................................................................. 44 The Measure of Damages for Breach of a True Lease ................................................................................ 45 Perfection............................................................................................................................................... 46 Perfection by Possession ............................................................................................................................ 47 Continuity of Perfection .............................................................................................................................. 49 Consequences of Non Perfection................................................................................................................ 49 Lien holders ............................................................................................................................................. 49 Trustee in Bankruptcy ............................................................................................................................. 49 Transferee of Collateral .............................................................................................................................. 52 Accounts – s 20(1)(a)(i) ........................................................................................................................... 52 Chattel Paper .......................................................................................................................................... 52 Value ....................................................................................................................................................... 52 Conflicts of Laws .................................................................................................................................. 53 Security Interest in Goods: Initial validity and Perfection – Section 5(1) ................................................... 54 Relocation of Goods – Section 5(2)............................................................................................................. 54 Destination of Goods Rule and Mobile Goods Rule – Section 6 & 7 .......................................................... 55 2 Destination of Goods Rule....................................................................................................................... 55 Mobile Goods Rule .................................................................................................................................. 55 Security Interests In Intangibles, Etc ........................................................................................................... 57 Enforcement ............................................................................................................................................... 57 Registration........................................................................................................................................... 58 Purpose of Registration system .................................................................................................................. 58 Function of Registration.............................................................................................................................. 58 Basic Concepts ............................................................................................................................................ 59 Notice of Registration ............................................................................................................................. 59 Verification Statements and Safeguards ................................................................................................ 59 Debtor Name-Based Registration and Serial Number Registration ........................................................ 59 Errors and Omissions in Registration Data ................................................................................................. 60 Amendments to Registration ...................................................................................................................... 62 Section 30 of OPPSA – Starting Point.......................................................................................................... 66 Section 30.1 Investment Property Priorities ............................................................................................... 66 Justification for the First-In-Time Rule........................................................................................................ 66 Transactional v Notice Filing ....................................................................................................................... 66 The Irrelevance of Knowledge .................................................................................................................... 67 Prior Lender’s Competitive Advantage ....................................................................................................... 69 Security for Future Advances ...................................................................................................................... 70 The Law ................................................................................................................................................... 70 Policy considerations ............................................................................................................................... 71 Priority of Re-perfected Security Interests ................................................................................................. 71 How financing statement can become unperfected ............................................................................... 71 Section 30(6) ........................................................................................................................................... 71 Subordination Agreements ......................................................................................................................... 72 Circular Priorities – Payout Rules ................................................................................................................ 73 Purchase Money Security Interests .............................................................................................. 74 Value given, debtor obtains rights with that value..................................................................................... 75 Inventory PMSI............................................................................................................................................ 76 Cross Over Inventory PMSIs – Previous Collateral covers current debt .................................................. 77 PMSI Priority in Proceeds – Inventory v Receivables Financiers ................................................................ 79 Non Inventory PMSI .................................................................................................................................... 80 Subordination Agreements ......................................................................................................................... 82 Partial Subordination – Circular Priorities ............................................................................................... 83 Fixtures ................................................................................................................................................... 85 Fixtures: s 34 ............................................................................................................................................... 85 Meaning of Fixture .................................................................................................................................. 86 Accessions: s 35........................................................................................................................................... 88 Commingled Goods: s 37 ............................................................................................................................ 89 3 Transferees in Ordinary Course .................................................................................................... 90 Exception: Sale of goods in ordinary course ............................................................................................... 91 Ordinary Course of Business.................................................................................................................... 91 Sale v Agreement to Sell ......................................................................................................................... 93 2006 Amendments – No title needed, goods must be identified ............................................................ 95 Section 27 - Priorities with Repossessed or Returned Goods .................................................................. 95 Transfer of Chattel Paper ........................................................................................................................ 95 Transfer of Instruments and Documents of Title .................................................................................... 96 Proceeds ................................................................................................................................................. 97 Right to Trace in s 25(1) .............................................................................................................................. 97 Perfection of Security Interests in Proceeds: s 25(2), 30 ............................................................................ 98 Tracing......................................................................................................................................................... 99 Tracing into an overdrawn account ........................................................................................................ 99 Tracing into a Mixed Fund ........................................................................................................................ 101 Cannot take proceeds greater than collateral .......................................................................................... 103 Bank Act Security Interest ............................................................................................................ 103 Investment Property ....................................................................................................................... 107 Security Interests ...................................................................................................................................... 107 John Cameron, “Secured Transaction Under Ontario’s Security Transfer Act, 2006” ........................... 107 Attachment ............................................................................................................................................... 109 Direct holding system............................................................................................................................ 109 Indirect Holding System ........................................................................................................................ 109 Perfection .................................................................................................................................................. 109 Direct ..................................................................................................................................................... 110 Indirect .................................................................................................................................................. 110 Key priorities rules ................................................................................................................................. 110 Conflicts of Laws ....................................................................................................................................... 111 Transferees ............................................................................................................................................... 111 4 Definitions Chattel Paper A writing or writings that evidence both a monetary obligation and a security interest in or a lease of specific goods. Purchase-money security interest A type of security agreement which can secure ongoing debt relationships such as an inventory or creditor supplier relationship. It is not used for collateral already issued. Introduction Canadian PPSA Background Ontario PPSA modeled after Article 9 and enacted by legislature in 1967 but a major part of it not enacted until 1976. Afterwards Uniform Personal Property Security Act, 1969 is created and other provinces adopt much of it for their PPSA. Ontario has a new act Ontario Personal Property and Security Act in 1989 based on CBA advisory committee recommendations with exception in regard to leases and their recommended inclusion into the model PPSA. Ontario also has the Security Transfer Act, SO 2006 which has responsibility over purchase and sale of investment property. The OPPSA has related provisions. Legislative Objectives Structural Integration The act prescribes a single system of law relating to security agreements. Common Law still applies in some situation, but the act leaves little scope for the continued recognition of differences between the traditional types of security arrangements such as conditional sales contracts, equitable chattel mortgages, legal chattel mortgages assignment of choses in action and floating charges. Conceptual Unity The act provides a single generic concept as the central feature of all security agreements providing for an interest in property to secure performance of an obligation. In old law, differences in priority and control were determined by the type of security device. Neither form nor locus of title to collateral plays a significant role in the oppsa. If the transaction creates or provides an interest in personal property to secure payment for performance of an obligation, it falls within the scope of the PPSA. Comprehensiveness Not completely self contained, but much better than previous law. Legal Predictability The PPSA provides a mechanism for being able to predict accurately the relative priority position a credit grantor would occupy in the event of default. 5 Accommodation of Modern Business Financing Creditors and debtors have freedom to tailor their agreement to fit particular circumstances. (OPPSa s 9). A security interest can be taking 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 (ss 13, 30(4)) Special priority rules for chattel paper (s 28(3)) Notice filing registration system ( ss 45, 46,18) Regulation of Default Rights and Remedies Prior, rights depended on the type of security granted. Given that all security agreements are designed to accomplish the same end, PPSA prescribes a detailed system of registration of default rights and remedies designed to provide consistency and fairness in the enforcement of security interests (ss 57.166) John Amour, “The Law and Economics Debate about Secured lending: Lessons for European Lawmaking?” (2008), 5 European company and Financial L Rev, Part 2 Security interest understood from a functional perspective conferring upon the lender two sets of rights: 1) priority of payment and 2) control of the collateral o Control State contingent: debtor not in default only control is to prevent the sale of the asset; if in default creditor has positive right to control the liquidation of collateral. o Priority o f payment: entitled to proceeds of sale upon liquidation Early literature puzzle over why debtors grant security o Why bother with offering security If effect of security on debtors aggregate cost of capital is neutral (because security has a cost similar to the increased interest rate) Explanations are 1) Signalling theory, 2) lowering financial agency costs 3) Transfer of wealth from unsecured creditors to the debtor Signalling theory Debtor offers assets to creditor to demonstrate the seriousness of the commitment. Security is a cost and therefore harder for higher risk borrowers. If there is no difference between in costs, from the debtor’s point of view, comparing offering security and higher interest rate, why go to the trouble of offering security? Even the consequences are the same, debtors seize assets if insolvent. In actual fact, Willingness on the debtor’s part to offer security may actually signifies lower quality debtor Lowering Financial Agency Costs 6 o o o Securing collateral prevents financial agency costs, whereby, without the security, the creditor would have no way to prevent excessive risk taking with the assets by managers once the value of the equity is impaired. Managers may take risks with good assets – by selling them – to promote risky behaviour with other assets. Collateral prevent s managers from alienating Security is self-enforcing where loan covenants are not. Transfer of Wealth from Unsecured Creditors to Debtor If creditor does not adjust their rate to reflect loss in ability to seize newly secured asset, then debtor gets an interest rate that she would not have received otherwise, which is effectively a transfer of wealth. Empirical studies show that security tends to be granted by firms which are at relatively greater risk of default. This is consistent with predictions of both reducing agency costs and redistribution of wealth theories(2 &3) Redistributing wealth theory, however, would predict that companies with risk of massive tort claims would offer security more such that creditors have priority over tort claimants. However, looking at tobacco companies that does not seem to be the case, but they are not a good sample as business insurance skews the results. Agency cost view bolstered by the fact that presence of secured corporate loan is correlated with director personal guarentees. Structure of the Ontario PPSA Act Part 1 Part 2 Part 3 Ss 2-8 Ss 9-18 Ss 19-40 Part 4 Part 5 Part 6 Ss 41-57 Ss 58-66 Ss 67-74 Part 7 Ss 75-86 Scope of the act and conflict of laws Creation of the security interest Steps required to make a security interest effective against a third party and with the priority rules among competing security interests or between a security interest and a third party Registration of financing statements “Default rights and remedies” Miscellaneous – judicial supervision of exercise of rights and remedies, compensation for non compliance of statutory requirements Transition from prior registry systems Definitions to Know or Not “attach”: not defined in the act Perfected: not defined Chattel paper: one or more writings that evidence a monetary obligation and security interest in a lease for specific goods. 7 Goods: tangible personal property other than chattel paper, documents of title, instruments, money and investment property, and includes fixtures, growing crops, the unborn young of animals, timber to be cut, and minerals and hydrocarbons to be extracted. Proceeds: identifiable personal property in any form derived directly or indirectly from any dealing with collateral or the proceeds therefrom, and includes: ... Purchase-money security interest: (a) security interest taken in collateral, other than investment property, to secure payment of all or part of its price. (b) 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 the collateral (c) interest in a lessor of goods under a lease for more than one year. Personal Property Registry Required to register security interests as a prerequisite to recognizing priority over competitive claims to the property Efficient but necessarily complex Classification of Collateral Different rules apply to different types of collateral Collateral type is important in: o Conflicts of laws (ss 5(1) and 5(2) o Consumer protection ( ss 12(2)(b), 45(2), 51(5) and 65(1) and 66(2) o Perfection by possession (s 22) o Temporary perfection (s 24) o Special priority rules ( ss 28,33,34 and 35_ o Default rights and remedies (ss 61 and 62(b) Depending on the use being made of them goods collateral can be classified as o Consumer goods, o Inventory o Equipment Second method of classifying collateral: method of attainment o Proceeds (see def) Collateral extends to proceeds 8 Chapter 2 – The Scope of the Act Introduction Section 2 of OPPSA stated the Act applies to “every transaction” that “in substance creates” a security interest in personal property. Ellingsen (Trustee of) v Hallmark Ford Sales Ltd (2000), 190 DLR (4th) 47 (BCCA) There must be a completed sale for there to be a security interest. A security interest is not created if a condition precedent is not satisfied. Purchase of car contingent on financing. Financing did not come through but the buyer had already taken the car. Cannot use security interest to recover. Judge gave some constructive trust argument to give HFS a result that wouldn’t unjustrly enrich other unsecured CR. “In substance covers a wide range of arrangements (even some trusts): conditional sales contracts, leases. It is not the form in which the interest arises, it is the effect that is determinative if the OPPSA applies. Statutory Licenses Saulnier v Royal Bank of Canada [2008] 3 SCR 166 Fisherman signed guarantee on loans which pledged “all ... present and after acquired personal property including ... Intangibles ... and in all proceeds and renewals thereof.” Saulnier went bankrupt, but sale of fishing licence would more than cover outstanding debts Issue: Is a statutory licence, a fishing licence in this case, defined as personal property for the purposes of the OPPSA Cannot rely on fishing regulation definition to see if property under OPPSA Traditional Approach o National Trust Co v Bouckhuyt (1987), 61 OR (2d) 640 Tobacco quota fell within personal property definition in OPPSA Because the regulator had an UNFETTERRED DISCRETION whether to renew or not, the license was not considered property as it was “transitory and ephemeral” o Led to cases decided on how fettered the discretion was of the licensee. o Sugarman (in trust) v Duca Community Credit Union Ltd (1999) 44 OR (3d) 257 (CA) Because nursing homes had a more stable license, in which they could fetter the authority of the regulator and even appeal it, the license was considered intangible personal property for OPPSA Does “not believe that the prospect of renewal, whether or not subject to an “unfettered discretion, is determinative.” Preferred approach is does the license give more than just permission to do that which would otherwise be unlawful, does it imply a proprietary right to the holder? 9 o Fishing license is an interest created by statute that is coupled with a proprietary right to commercial gain. Security Interests and Trusts Trusts Gignac, Sutts v. National Bank of Canada (1987), 5 CBR (4th) 44 (Ont SC) Segal lends Cohen money to invest in the business. Cohen goes bankrupt. Issue: Was the money held in trust to be used for a specific purpose or was it a loan of which Segal stands in priority, behind National Bank “The words and intention of Segal are imperitive.” Court finds a resulting trust in favour of Segal, the money was to be used for a specific purpose, was not, and therefore a resulting trust in favour of Segal is made. “A debt and a trust can co-exist.” If the debtor does not use the money for the explicit purpose set out in the trust, then a resulting trust is created and the money can be demanded under the trust. If the money is employed as per the trust then the money can only be demanded by the creditor as per the terms of the loan agreement Regarding what a trust is: I accept the following statement from Waters (1984) Law of Trust in Canada, 2d. Edition p. 17: A trust can come into existence in one of two ways. It is either clear from a man's words or acts that he intends to settle property by way of a trust, or the law imposes trust machinery in a given situation to ensure that property passes from one party to another. What we are therefore concerned with is discovering the intention of a man, or the circumstances under which the law will deem a trust to arise in order to secure some result the law considers equitable. If we are looking for the intention of a man, we may find that his oral or written words state quite clearly that he is making certain property subject to a trust. ... A trust may be declared either in writing or by word. (See Milroy v. Lord, VII, The Law Times (N.S.) 178 at 11.) Re Skybridge Holidays inc (1999), 173 DLR (4th) 333 (BCCA) Skybridge Holidays filed for bankruptcy while holding monies received from travellers for travel services to be arranged through Skybridge Trustee in bankruptcy looking for direction about the applicability of the BC PPSA to the funds held in trust from traveller’s deposits Does the PPSA apply, to get money back did the travellers have to register their security interest? Issue: whether the interest in the deposited funds of travellers represents a security interest. BC PPSA says a security interest can be a trust. 10 Determines that it is a trust, but the substantive nature of the trust is critical. PPSA says trusts “are security interests if the purpose of the trust is to secure payment or performance of an obligation” In this case the travellers are consumers and are only creditors unintentionally, Skybridge received funds as an agent and not as part of security transaction. Quotes: Graff v Bitz (Trustee of) (1991), 2 PPSAC (2d) (Sask QB) o Relationship was one of principle agent. Agent to purchase car with principles money. Declares bankruptcy before delivery. Resulting trust established, no security interest established. [Security interest would be bad, as failure to perfect would put the car buyer behind other more secured creditors, such as banks] Quotes: Gervais v Yewdale (1993), 6 PPSAC (2d) 62 (BCSC) o The PPSA does not turn collateral into debt and thus create the right to garnishment where no debt existed by agreement or otherwise. o PPSA does not transform Solicitor-client relationship into a debtor-creditor relationship, nor a retainer into a debt. Therefore the retainer cannot be legally garnished. To determine if PPSA applies, you do not apply the words of it to the situation. Instead you look at the purpose of the transactions; the role and relationship of the parties; the practicality and commercial reality; and the intention of the parties with respect to the transactions. Re Hounsome (1991), 4 CBR (3d) 32 (Ont SCJ) - Where the funds are never the property of the assignor, then the trust arrangement does not require a registration of a statement under the PPSA. However, in cases where the receivable or property is that of the assignor at the time of making the assignment, then the assignment must be registered by filing a financing statement under the PPSA. Deemed Security Interests Transfers of Accounts & Chattel Paper – Section 2(b) - Chattel Paper – is a debt instrument that provides a security interest as collateral - OPPSA 2(b) applied to transfer of account or chattel paper even though the transfer may not secure payment or performance - Assignment - Account refers to accounts receivable that have been assigned o Recourse: With recourse: assignee can go back to the assignor if the account does not pay Without recourse: assignee has no recourse o Notice Notification or non notification What if account and assignee have an anti-assignment clause? Section 40(3) says the assignment remains effective but the account can sue for breach of contract. 11 Leases – Section 2(c) - Lease gets reduced interest rate in exchange for lessor getting capital cost deductions - Act applies to a lease of goods under a lease for a term of more than one year even though the lease may not secure payment or performance of an obligation. - Excludes short-term rentals such as the hire of a car for a weekend, UNLESS, as per s 2(a)(ii) the lease also secures payment or performance of an obligation - Long term lease: If Lessor does not perfect, will lose title if leasee sells the chattel. - Short term lease: common law priority rules govern and lessor can get goods back o Nemo dat quod non habet – no one gives what he does not have. Consignments - OPPSA applies to consignments only if it secures payment of performance of an obligation - True consignment is a principle-agent relationship and not subject to the act - If consignee is obligated to pay for the goods and has no right to return, then a security interest is created. Exclusions From the Scope of the Act Liens Given by Statute or Rule of Law: Section 4(1)(a) Commercial Credit Corp Ltd v Harry Shields Ltd (1981), 32 OR 703 (CA) - - Entity defaults, landlord v credit company left to recover what they can Landlord seized goods while credit company tried to exercise its security interest S 4(1)(a) of OPPSA exempts from the application of the act “ a lien given by statute of or rule of law. Landlord has statutory right to sell the seized goods. Section 68 of PPSA has no application - Where there is conflict between a provision of this act and a provision of any general or special act ... the provision of this Act prevails The landlord’s right of distress, once exercised, converts to a lien given by statute or a rule of law to which the OPPSA s 4(1)(a) exception applies. Turn to the statute to determine priorities and s 31(2) of the Commercial Tennancies Act answers the question: a landlord may distrain against (1) a tenants own goods; and (2) goods which are encumbered by a security interest Insurance: Section 4(1)(c) Stelco In (Re) (2005), 253 DLR (4th) 524 (Ont CA) - Two issues - 1) Is assignment of refund of unearned premium (upon cancellation of insurance contract) a security interest? - 2) Does the PPSA apply? 12 - - Facts - CAFO finances insurance premiums for business, purchaser agrees to pay CAFO monthly payments. In this case, the insured, Stelco, went bankrupt, seized to require insurance, and CAFO is trying to recover the premium it financed which has not been earned by the insurance company yet. Analysis - Is the assignment of refund of unearned premiums a security interest? Section 4(1)(c) states the act does not apply to a transfer of an interest or claim in or under any policy of insurance or contract of annuity. The word ‘transfer’ in section 4(1)(c) includes assignment according to Black’s Law Dictionary Yes, the assignment of unearned premiums is a security interest, but section 4(1)(c) exempts the assignee from having to register its security interest under the OPPSA - To determine the law go to the other statute Section 138 of the Insurance Act allows assignees and obligates the insured to make payments of unearned premiums to the assignee upon early cancellation. However, the Insurance Act does not provide for priority over other interests. Companies like CAFO (who sell PICS – Premium Installment Contracts) are still required to ensure that the insured’s policy explicitly names the fancier as the beneficiary of unearned premiums. If the above contract term is in place, then financier gets priority over other creditors or security interests. GE Canada Equipment Financing GP v ING Insurance Company of Canada (2009) 94 OR (3d) 321 (CA) - - - Secured creditor v Insurer’s claim on salvage rights – who has priority? GE leant money to Brampton Leasing to purchase trucks. Brampton rented out to third party who secured insurance from ING Insurance. Trucks were stolen, ING paid Brampton due to Brampton misrepresentation that there were no security interests. Subsequently Brampton goes bankrupt. ING recovers trucks, sells one, and claims absolute ownership due to salvage rights afforded by Statutory 6(7) of the Insurance Act. Issue: Do salvage rights have priority over GE’s pre-existing perfected security interests? ING not required to register with the PPSA but rights of subrogation are no more than preventing over-indemnification of the insured by take the exact rights otherwise enjoyed by the insured. The Insurance Act, does not specify priority of insurers claim of subrogation over secured interests. The insurer’s salvage rights are subject to pre-existing secured interests. GE should have ensured that it was the beneficiary of all insurance proceeds and ING should have checked PPSA registry before paying indemnification to Brampton. 13 - “Section 4(1)(c) does not insulate insurers from the PPSA-protected claims of third party secured creditors” GE wins Interests in Real Property: Section 4(1)(E) Re Urman (1984), 3 DLR (4th) 631 (Ont CA) - - Urman bought and sold mortgages, had a revolving line of credit from CIBC Kreindel lent Urman $65,000 and as collateral Urman assigned him two second mortgages with a clause that provided Kreindel would assign back once $65,000 was paid back. Assignment registered in the land registry office but not under the PPSA Urman defaults and bank goes after mortgages as security for its revolving loan A mortgage created an interest in land and not a security interest as defined by the PPSA, and so the PPSA does not apply to it. The Act does not apply to assignments of mortgages as it is an interest in land and not an intangible. The mortgage assignee is entitled to priority over security interest in the mortgages. Professor Geva writing before the court of appeal: - Registration of a specific assignment in the proper land registry office will put the assignee ahead of a secured party who subsequently registered his PPSA security interest in the land registry office Deemed Trusts from Income Tax Act Cassie populaire Desjardins de l’Est de Drummond v Canada 2009 SCC 29 [Cassie] - - - Issue: - whether the agreements between Cassie and its customer, Camvrac, give rise to a security interest as defined in the Income Tax Act Conclusion: yes, they give rise to a security interest Facts: - Camvrac gets line of credit for $277k upon agreement to deposit $200k at Caisse and is not allowed to withdrawal until line paid off. Camvrac defaults and fails to pay EI and tax remittances which it is holding in trust. Caisse wants to claim the deposit but the government says it has priority over any security interests. Caisse says it does not have a “security interest” but merely a contractual right to set-off or compensation, to try to avoid the security interest priority problem. Analysis: - Income Tax Act definition of security interest is very broad and states: - Security interest means any interest in property that secured payment or performance of an obligation and includes ...[an] encumbrance of any kind ... - Subparagraph 227(4)(1) and section 86(2.1) of the Income Tax Act provides that a deemed trust is created when a company deducts and holds EI premiums or tax remittances. That trust has priority over all security interests 14 - - - Functional approach “So long as the creditor’s interest in the debtor’s property secures payment or performance of an obligation, there is a “security interest” within the meaning of the section.” A set off or compensation agreement ( where the bank can extinguish a debt by taking deposits of client) is a security agreement where the depositor is not permitted to access the deposits until the debt is paid off. - “Even when the remedial mechanism is compensation, so long as an agreement confers on a creditor an interest in property that secures the payment or performance of an obligation through compensation, the agreement will constitute a “security interest” within the meaning of s 224(1)(3).” (para 40) Deschamps worried that Rothstein’s approach would cause negative pledges to become security interests. Rothstein replies: - “I would also agree that a negative pledge “standing alone” does not “prevent the covenanter from giving another effective security interest in the collateral.” Possesory and non-possessory Liens (common law and by statute) in favor of private CR Conflict with other Acts 73. Where there is conflict between a provision of this Act and a provision of the Consumer Protection Act, 2002, the provision of the Consumer Protection Act, 2002 prevails and, where there is conflict between a provision of this Act and a provision of any general or special Act, other than the Consumer Protection Act, 2002, the provision of this Act prevails. Non-application of Act 4. (1) Except as otherwise provided under this Act, this Act does not apply, (a) to a lien given by statute or rule of law, except as provided in subclause 20 (1) (a) (i) or section 31; (b) to a deemed trust arising under any Act, except as provided in subsection 30 (7); Unperfected security interests 20. (1) Except as provided in subsection (3), until perfected, a security interest, (a) in collateral is subordinate to the interest of, (i) a person who … has a lien given under any other Act or by a rule of law or who has a priority under any other Act, or Deemed trusts 30(7) A security interest in an account or inventory and its proceeds is subordinate to the interest of a person who is the beneficiary of a deemed trust arising under the Employment Standards Act or under the Pension Benefits Act. Liens for materials and services 31. Where a person in the ordinary course of business furnishes materials or services with respect to goods that are subject to a security interest, any lien that the person has in respect of the materials or services 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. 15 General Electric Capital Equipment Inc v Transland Tires Sales & Service Ltd. Facts: - GE had a perfected security interest in trailers sold to debtor Transland performed repair work on trailer and gave up possession – Transland registered under the RSLA but the registration was not properly registered GE’s interest and registration came before the repairs and registration by Transland debtor defaulted and priority dispute between ensues between GE and Transland Transland arguments based on section 10 of the RSLA Analysis: S.10 looks pretty similar to a provision in the PPSA (comes up in the context of maintaining registration). S.10(1) says that when you give up possession you have a priority interest as against anybody after you so long as you register. Interesting that they point to this section because if you think about it then it doesn’t really apply here. Result isn’t as important as what the court goes on to say in demonstrating the interplay between PPSA and RLSA. When you look at S.31 of PPSA then you think that Transland should win. Issue is that the lien that Transland had wasn’t properly affected. Court said that if the PPSA doesn’t apply then it isn’t there to determine the effectiveness of another statute. When you look at S.31 that says that if you perform work or service then you take priority, then that is just there for priority dispute and not to determine if you have valid enforcement. Result is consistent with S.4(1). Act isn’t there to govern the lien. Ruling gives effect to S.73. Court is saying that the lien under RLSA is determined under RLSA and that the PPSA doesn’t override it because there is no conflict. Liens in favour of federal and provincial governments and their agencies Leavere v Port Colborne Facts: Secured party with interest over all chattels in the business and perfected under PPSA. Owner didn’t pay their business taxes. DB then went bankrupt. Municipality stepped in and took possession under statute that governs, the municipal act. Analysis: Municipality has lien by rule of law against a perfected security interest. Lawyer argued that this provision has intent of saying that if you have unperfected interest you are subordinate, BUT if you have perfected interest then you aren’t subordinate. BUT Court didn’t agree with the lawyer’s argument. 16 Go back to S.73 – There is a conflict between the acts. So the PPSA is meant to govern and we give effect to S.21(a) saying that perfected interest takes priority. Court says that if the PPSA doesn’t apply then lawyers argument under S.20.1(a) are irrelevant. If it doesn’t apply you can’t say that based on reverse implication of this rule that you should have a security interest. Because the PPSA didn’t apply to the lien, S.73 (being a part of the PPSA) can’t apply because the PPSA doesn’t apply to these cases. If the PPSA doesn’t apply then how do you determine priority? Court said that you have to look back to common law rules. Common law rules provide for first in interest/first in right. But with any common law rule it is open to government to make rule that over rides common law. Court looked at specific provision in the municipal act that was relied upon. Provision says that municipality can do XYZ. They interpreted this provision that if somebody else has interest in the property then the legislative intent was to give priority to municipality over those other people. This security interest wasn’t a mortgage, but if it was a conditional sale agreement then there may have been a different result (form over substance argument). Daimler v Mega Pets Classic case of judge that decided that legislation is going to far. Judge clearly thought that the CRA is going too far in trying to sweep its super priority over others who may have a security interest. What she ends up doing is unfairly taking a very narrow view of principals that have been part of the PPSA for many years. She goes back to common-law principles and reads sections of the act that ignore the form over substance commercial reality that the PPSA tries to reflect. MP is the DB in this case. Through its owner bought a car with guarantee from father for conditional sale agreement (many things are available with some sort of down-payment system. It is a form of credit. By making installment payments you end up paying more than you would with up front cash. With these payments you would want to take security interest in the asset to back the future payments). MP filed for bankruptcy and it turns out they failed to remit taxes. Dispute between Daimler and the CRA. CRA relied on their interpretation of S.227 (applied definitions of S.224) of the ITA. Those provisions show how the ITA sets out super-priority of deemed trust even as against secured CR. They claimed that even though title remained with the seller, they give up possession and there was effectively a sale, and the DB would have had all the rights needed in the truck but for the security interest maintained by Daimler. Daimler had the opposite argument. They argued that the ITA doesn’t need to be informed by the PPSA, and need to take plain meaning of ITA (sparrow). Argued that the PPSA substance over form doesn’t 17 apply. ITA in definition of security interest lists a whole bunch but fails to mention conditional sales agreement. They had the option to include but didn’t, so means that it wasn’t meant to be included. Then by applying form over substance application, they argued that the truck was never property of Mega Pets that could be subject to that security interest (the truck was always Daimlers). But for that security interest it still would have been Daimlers. BC COA looked to Sask case which held that where you have leases, and conditional sales agreements, the property is not the property of the DB in the ITA. It is a shelter for lessors and sellers in conditional sales agreements. If they wanted leases and conditional sales agreements to be subject to this then they should have said so. Court was applying strict and purposive reading for the sole purpose of getting what they wanted. Crtiicized because it ignores the PPSA. Commercial realities today are known to be security agreements, and ought to know that where the defintion of security agreement reads BLAH BLAH and includes XYZ, then the XYZ is not meant to be exhaustive. A lot of conflicting cases. Chapter 3 – Validity and Enforceability of the Security Interest Introduction Validity of a security agreement depends on the following requirements: 1. There must be a concluded security agreement 2. The agreement must comply with the Statute of Frauds requirements as specified in OPPSSA s 11(2)(a)-(d) a. The debtor has signed a security agreement which contains: i. A description of the collateral sufficient to enable it to be identified ii. A description of collateral that is a security entitlement ... b. Collateral is not a certified security and is in possession of the creditor. c. ... 3. There must be attachment 4. The security interest must be perfected Validity of the security agreement Ellingsen (Trustee of) v Hallmark Ford Sales Ltd (2000), 190 DLR (4th) 47 (BCCA) - 3 ways to approach - No concluded agreement - No concluded security agreement - Concluded agreement and security agreement: PPSA applieds 18 - - - - - - Constructive Trust where possession exists but no concluded agreement. Hallmark Ford Sales agreed to sell truck, contingent on financing, to Ellingsen and let him take the truck with him before financing came through. Financing never came through. Hallmark has not signed the agreement. Three months later Ellingsen declares bankruptcy, Trustee claims it is part of the general estate Motor vehicle purchase agreement subject to credit approval. Trustee argued that Hallmark was a creditor but did not perfect under PPSA. Hallmark said there was not a concluded sale of the truck and the beneficial ownership did not ever pass and that s 67 of the Bankruptcy Act applies: the property of the bankrupt shall not comprise property held by a bankrupt in trust for another. Appeal judge finds that there was no contract of sale as there was no enforceable instrument on which Hallmark could sue Ellingsen for. Hallmark did not sign the agreement, and the contingency of financing fell through. Hallmark occupies a different position from that of the general creditors of the bankrupt estate who did extend credit. The creditors would unfairly enjoy a windfall if the truck formed part of the assets available to them. BIA 67(1)(a): property of the bankrupt shall not be comprised of property held by the bankrupt in trust for another. Was there a security arrangement? - No, there was a constructive trust. - To by pass the constructive trust in the BC PPSA, need a juristic reason. A constructive trust is a juristic reason. - Possibility that a constructive trust or an unjust enrichment could be used to thwart the PPSA - “But I am not concerned with these other trusts [(implied or resulting)] having been persuaded that the appropriate remedy is the constructive trust. I do not know how it could be said that a constructive trust secures a payment or the performance of an obligation; rather its purpose is to prevent an unjust outcome.” Unjust enrichment found if 1. An enrichment 2. A corresponding deprivation; and 3. The absence of a juristic reason for the enrichment Can a constructive trust alter priorities among creditors? - Yes 994814 Ontario Inc v RSL Canada Inc and En-Plas Inc (2006), 20 CBr (5th) 163 (Ont CA) - Contest between En-Plas and 994814 over three pieces of equipment that were located on premises of RSL who was in receivership. 994814 holding a general security agreement (GSA) over all assets of RSL, including afteracquired equipment. Conclusion: Finds in favour of En-Plas’s security interest 19 - - En-Plas sells two three machines, two of which are in dispute. Terms of agreement is that they remain in En-Plas’s deliver machines with certified electrical safety, but the machines had not been certified yet and En-Plas had yet to get them certified. Neither En-Plas nor RSL had considered the machine delivery complete, no invoices exchanged. - Therefore no sale was completed PPSA regime not engaged here, even though En Plas had possession. A court must initially determine if and when an agreement of purchase and sale was reached. A security interest in equipment cannot attach until a transaction occurs which gives the debtor rights in the equipment. Condition precedent that remained unfulfilled. RSL did not aquire an interest in the machines so the agreement did not attach. Section 9 – Freedom of Contract - Related to the RSL/En-Plas case, section 9 provides freedom of contract - “Except as otherwise provided by this act or any other Act, a security agreement is effective according to its terms between the parties to it an against third paries.” - En-Plas and RSL able to set custom terms to determine when the transaction has taken place. Consumer Security Interests - See OPPSA ss 12(2)(b), 14(2), 45(2), 57, 65(1), 66(2) and 73 PPSA over other Acts - Section 68 provides that PPSA prevails over other statutes with the exception of The Consumer Protection Act 356447 British Columbia Ltd v Canadian Imperial Bank of Commerce (1998), 157 DLR (4th) 682 (BCCA) - Respondents lent money to family member and family member’s company that went bankrupt. Contract provided that “all funds derived from Georgian Hospitality Joint Venture” would be provided to the respondents Did the agreement create a security interest in joint venture? Applicable law: - S 50(3) of the BC act provides that if a financing statement is registered and no security agreement exists between the secured party and the debtor, a person in the position of the bank mare request the registration be discharged - For an agreement to provide a security interest, the security interest agreement must be in writing. S 50(3) of BC Act - Section 10 of BC Act states that a security interest is only enforceable against a third party where the collateral is in possession of the secured party, or the debtor has signed a security agreement that contains (i) a description of the collateral by item or kind... 20 - - Section 2(1)(a): the act 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.” - No particular wording is required to create a security interest. Issue: Did the contract give a security interest in a business venture or only a contractual right to retain any funds derived from the venture? - Quotes Gontel v Kocian, Ward and Bank of Nova Scotia [1985] 6 WWR 458 (Man QB) - An acknowledgement of the debt owed to a creditor for a specific truck with the VIN written down provided enough evidence for a security interest. - Words that would be sufficient for an equitable assignment are satisfactory for the purposes of creating a security interest under the PPSA. - If A tells B that he expects that 10K is coming to him by a given day, and agrees out of that to pay B 5000, that is good agreement to constitute a charge upon the fund. Statute of Frauds Requirements Writing requirement s are in OPPSA s 11(2)(a)-(d) Summary: unless the secured party takes possession of the collateral (or, where the collateral is investment property, has control over it), the security agreement must be in writing and signed by the debtor, and it must contain a description of the collateral sufficient to identify it. Except where the collateral is consumer goods, the secured party may register a financing statement before the security agreement is concluded: PPSA s 45(3), Therefore, registration in the database is not enough to guarantee a security interest, there must be a valid agreement according to s 11(s)(a)-(d). MacEwen Agricentre Inc v Beriault et al (2002), 61 OR (3d) 63 (SCJ) - - - MacLennan is a farmer, went bankrupt. MacEwen had security interest on crops but MacLennan owed Beriault money from previous years crop shortage. Breriault purchased soy beans from MacLennan but not the specific crops. Beriault takes delivery of the crops and sets off the debt with the money he would have paid. Beriault says that the agreement between MacEwan and MacLennan no good because Beriault already had an interest in the crops, but MacLennan had not contracted to provide those specific crops. Issues - 1) Was there a valid security agreement between MacEwen and Beriault? - Was the paper work sufficient to satisfy the statutory requirements of the PPSA? - Did MacLennan give away what he did not have as the interest was already contracted to Beriault? 21 - - - - - Ratios & Laws: - The definition of security interest a can include a document evidencing a security interest. That “seems to suggest that any document which corroborates the existence of a security interest, even though it may not contain all the terms of the security agreement, falls within the definition of “security Agreement” - there can be more than on document evidencing a security intertest. Application - Security agreement was primarily oral, but it was also partially written - Paper work for security interest was sparse consisting of location of secured crops with his signature. It was accompanied with a loan application booklet. But was enough to satisfy a security interest when combined with MacLennan’s intention to create a security interest. Issue - Did the security interest attach? Ratio - For a security interest to be enforceable against a third party, it has to have the following qualities: - (a) Signed Security Agreement: at least part of the security agreement must be in writing, the part that is in writing must contain provisions relating to security, and that portion of the document must be signed. - (b) Value be given from creditor to debtor The second requirement for a security interest to attach is that value be given from the creditor to the debtor. - (c)Debtor has rights in collateral That the debtor actually has the interest he is signing away. Analysis - There was a signed security agreement: MacEwan signed the documents corroborating the security attachment and the documents, which were signed, did have the description of the property. - Value was given: MacLennan provided supplies to MacEwan. - Beriault, although he had an interest in soy beans from MacLennan, he did not have an interest in the specific crop of soy beans. Conclusion - The security agreement was good. But there was never attachment because it was only orally and SOF prevents oral K from turning into written K for the purposes of attachment. 22 Atlas Industries v Federal Business Development Bank: SK TN Farm and Truck Equipment Ltd (Debtor) 1983, 3 PPSAC 39 (Sask QB) - - Facts - Manufacturer delivers goods on credit at the same time the bank seizes assets due to debenture default which had securitized interests in all assets. - Subsequently manufacturer delivers an invoice that attempted to establish a security agreement in favour of the manufacturer: - “Title to property described on this invoice retained by vendor until payment in full. Vendor has right of repossession on default. Power to forcibly retake. This is a security agreement.” - Manufacturer now seeks to realize its security interest to recover goods Issue: Do the work orders, when combined with the applicant’s invoices, represent a security agreement? - Law - There must be a signed security agreement by the debtor as per s 10(1)(b) in Sask (s 11(2)(a) OPPSA) - Analysis - The debtor did not sign an agreement for security interest and therefore manufacturer does not have a valid security agreement. No Securing Unsecured Debt with General Security Agreements CPC Networks Corp v Eagle Eye Investments Inc 2011 SKQB 436 - - Facts - SP1 has loan #1 to D with GSA for all prior and future debt, SP2 has loan #2 to D SP1 assigns loan and GSA to SP2 Can GSA cover loan #2 as well as loan #1 CPC Networks owes multiple debts to Eagle Eye. One of the debts was an assigned loan from the BDC which had a general security agreement which provided all debt, prior or future, to the BDC would be covered by security interests. On assignment Eagle Eye tried to have its unsecured debt secured and lumped into the GSA. Also, Eagle Eye wants documentation only available to secured creditors, CPC wants to pay the original secured loan and therefore not be obliged to provide the documentation. Issue: Does the PPSA allow for an unsecured creditor, who has been assigned a secured loan and accompanying GSA, to roll the unsecured debt into the secured umbrella of the GSA? Conclusion: No it would be unfair as it would allow assignees to priority jump their Analysis - Section 9 allows freedom of contract, and therefore the parties did not contract that provision. 23 - - - - - What was contracted was that subsequent loans to the BDC would be secured not the assignee. Section 35(5) extends the priority of a secured creditor to future advances by that creditor. - Not the case here as the original obligation was not from Eagle Eye. Quotes Canamsucco Road House Food Co v Lngas Ltd (1991), 2 PPSAC (2d) 203 (Ont Ct gen Div) - An assignee is entitled to priority against a second secured creditor in respect to the assignor’s original secured loan, but not as to any other indebtness owed by the debtor to the assignee. - It would be inequitable as it would facilitate priority jumping as assignees could roll in unsecured debt ahead of other secured creditors. Quotes Near Horbay Inc v Great West Golf & Industrial Inc, 2000 ABQB 861 (CanLII), 2000 ABQB 861 - Same as Canamsucco Reasons for not allowing it include: - Unfairness to the debtor Nothing in the original GSA to lead them to believe that other unsecured debt would then become secured. IN CPC’s case they were not considering having to provide documentation to Eagle Eye - Destructive to Bankruptcy Law Disrupts pro rata sharing of unsecured creditors - Disruption of PPSA priorities Allows priority jumping. Chapter 4 – Attachment Introduction Attachment marks the point at which the secured party’s security interest materializes. Per s 11(2), requirements for attachment are: a) A valid security agreement which satisfies the statute of frauds (or possession) b) The secured party must give value c) The debtor must have rights in the collateral or the power to transfer rights in the collateral to a secured party.. If all aspects of the attachment are valid except for compliance with the statute of frauds, the security interest is unenforceable against third parties but remains enforceable between the parties themselves. 24 Valid Security Agreement There must be a valid security agreement which satisfies the statute of frauds: 11(2)(a). (See MacEwen above for statute of frauds requirements) Secured Party Must Give Value Value as defined in OPPSA s 1(1) means “any consideration sufficient to support a simple contract. Rights in the Collateral The debtor must have rights in the collateral or at least the power to transfer rights. 994814 Ontario Inc v RSL Canada Inc and En-Plas Inc (2006), 20 CBr (5th) 163 (Ont CA) [RSL Canada] - As per above EnPlas delivered machines but did not give title, did not become part of RSL’s property to which security interests could be granted. After-Acquired Property Section 12 provides that a security interest may cover after-acquired property, subject to exceptions for crops and consumer goods. To do so, the only requirement is a provision in the security agreement specifying that the collateral includes after-acquired property. Example: “debtor’s present and after-acquired factory equipment or accounts receivables. After acquired pledges are not available for consumer goods (12(2)(b) or crops (12(2)(a). The Floating Charge Floating charge used to be used as an equitable charge (or lien) over assets that turnover. So long as the debtor has not defaulted the charge does not crystallize and attach to any specific assets. The security interest would not attach until the charge crystallized putting the creditor at risk of having subsequent charges to the initial loan taking priority over the creditor’s security interest. OPPSA s 11(2) provides that a security interest, including a floating charge, attaches when the requirements of the section are satisfied. OPPSA s 25(1)(b) provides that the security interest extends to the collateral ( money or accounts receivables for inventory) extend to the OPPSa s 25(1)(a) the security interest continues as to the collateral unless the secured party expressly or impliedly authorized the dealing with the collateral free of the security interest. OPPSA s 20(1)(a)(ii), stipulates that an unperfected security interest is subordinate to an execution creditor who has assumed control of the collateral. Access Advertising Management Inc v Servex Computers Inc (1993), 15 or (3d) 635 (Gen Div) 25 - - - - - - Bad law as a floating charge is held to not attach until the creditor intervenes to secure its interest. Issue: - Whether funds collected under a notice of garnishment are subject to the interest of the moving party under a security agreement. Facts: - Everex guaranteed US subsidiary for CIT loan on April 6, 1992 by granting security interest to CIY in all its present and after acquired personal property “together with all account deposits.” - Jan 4 subsidiary goes bankrupt. - Jan 6, CIT sends notice to enforce security agreement as per the Bankruptcy and Insolvency Act. Must wait 10 days under the act. - Jan 12, before 10 days, Access Advertising obtains judgment against Everex and gets a garnishment order for $54k Position of the parties - PWC (the receiver for CIT) claims the $54k is theirs as CIT had perfected a security interest on the monies in the account at the bank which had priority over the notice of garnishment. - Access says that the floating charge of CIT did not crystallize until PWC was appointed receiver on Jan 17 and by that time the money was long gone and out of reach of CIT/PWC Issues - When does a floating charge attach to the collateral? If it is once, the default has occurred and the security interest crystallizes then Access has a better claim. Ratio - A security interest was signed, value was given and Everex had rights in the deposit accounts at the bank. When all those three events occurred the security interest in the collateral is attached. - To acquire priority the floating charge must have become specific. There must have been crystallization: Royal Bank of Canada v Mohawk - A default rendering a security in the form of a floating charge enforceable at the option of the chargee does not of itself cause the charge to crystallize. There must be some intervention by the charge to enforce the security. ... An appointment of a receiver crystallizes a charge. A demand for payment of the money secured does not. - Sending of the notice pursuant to s 244(1) of the BIA was sufficient intervention to crystallize the charge. It was not necessary to enforce the security by appointing a receiver in order to effect crystallization. Conclusion - CIT/PWC the secured interests were adjudged priority but only because the sending of the notice pursuant to s 244(1) of the BIA. The court did not want the opportunity for other non secured interests to take priority if they acted within the 10 day notice period demanded by the Bankruptcy and Insolvency Act. 26 Credit Suisse Canada v Yonge Street Holdings (1996), 28 OR (3d) 670 (Gen Div) - Facts - - - Bank loaned 7 million for construction of property. Loan matured but not paid back. Assignment of rent document - Assigns full benefit and advantage of all existing and future leases. - Mortgagor shall not exercise any of the rights or powers herein conferred upon it until a default shall - Mortgagor, on notice, can require lessee’s to pay rent to them. Euromart, property management, collects rent and pays bills and puts surplus monies in a separate account. Both accounts are held in trust for the owners (Yonge St holdings) Surplus account managed by investment advisor. November 30, loan matures December 1, 1994 bank made written demand for payment. December 8, owners instructed investment advisor to transfer money in the surplus account to the owner’s personal accounts. December 29, bank demands all rents, proceeds and other payments from tenants turned over to the bank. Jan 27, 1995 property goes for sale December surplus money being held pursuant to order. Issue: - Yonge St Holdings says it is theirs as the security interest did not crystallize until end of December. Bank says crystallization has no application under the PPSa and that its security interest, having attached and been perfected is fully enforceable. Bank says that it also gets proceeds of the collateral – ie the surplus account money. - Does the concept of crystallization continue to apply to the PPSA? - Does the bank’s security interest under the assignment extend to the surpluses? Ratio - Section 4(1): the act applies to floating charges. - “The very specific enumeration of floating charges in s 2(a)(i) removes any doubt, by its very language, that floating charges fall squarely within the scope of the legislative reform and are governed by the rules set out in the PPSA” - Parties are free to continue to use the pre PPSA devices, however they do not have the effect of “invoking the traditional law governing such transactions. For example, the use of a floating charge in a security agreement will not have the effect of resurrecting the notion of crystallisation and the peculiar priority rules that governed this device. Instead the priority rules that govern will be those set out in the PPSA.” 27 - - - Attachment Section 11(2): A security interest, including a security interest in the nature of a floating charge, attaches when, 1. The secured party obtains possession of the collateral or the debtor signs a security agreement that contains a description of the collateral sufficient to enable it to be identified, 2. Value is given 3. The debtor has rights in the collateral Unless the parties have agreed to postpone the time for attachment, in which case the security interest attaches at the agreed time. National Bank of Canada v Grinnell Corp of Canada (1993), 5 PPSAC (2d) 266 (ont Div Ct) Definition of proceeds in s 1(1) of the PPSA together with ss 11(2) and 25 of the Act, extended the bank’s security interest to the insurance proceeds of Moore’s inventory. The argument that using a floating charge delayed attachment until crystallization was rejected. Contrary approach used in Access (see above) “I conclude that the concept of crystallization is irrelevant under the PPSA” “The act ... contemplates that for attachment to occur at a time other than on the execution of the security agreement there must be a contrary contained intention in the agreement itself.” Credit Suisse Canada v 1133 Yonge Street Holdings Ltd (1998), 41 OR (3d) 632 (CA). - - - Appeal the judgement from above. “Day J reviewed the law regarding the crystallization question and concluded, correctly that the concept of crystallization is irrelevant under the PPSA regime. “Section 11(2) of the PPSA stipulates that attachment occurs under the Act when the three elements set out in that subsection has been satisfied unless the parties have agreed to postpone the time for attachment.” Section 9(1) of the PPSA - 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. Good example of using own terms to postpone attachment - Here, the parties have agreed by their contract that Holdings “shall be entitled to the rents .. due [under the leases,” until notified to the contrary in writing, and that Credit Suisse “shall not exercise any of the rights or powers ... conferred upon it until a default shall occur.” - “The effect of this is to discharge and release the lender’s security in such proceeds, ir, with respect to that collateral and the proceeds of that collateral” 28 - - “There is nothing which prevents commercial parties from negotiating terms which may, in practical terms, have similar commercial consequences to those encompassed in older forms of security.” The effect of ss 2 and s 11(2) of the OPPSA is to restore the early 19th century concept of a security interest in inventory and accounts receivable as a fixed interest with an implied license to the debtor to continue to carry on business until the debtor defaults. Royal Bank of Canada v Sparrow Electric Corp, [1997] 1 SCR 411 - - - RB made secured loan to Sparrow with a GSA covering all present and after-acquired property. Financial difficulties, RB and sparrow execute standstill agreement allowing Sparrow to continue its business. Sparrow continues, does not pay wages or tax remittances on wages. Bank appoints receiver. Attachment of floating charge? - All SCC judges agreed Security interests created under the AB PPSA created specific security interests and not a floating charge. Issues: - Division over the question of whether the terms of the GSA, authorizing Sparrow to continue to carry on its business, conferred an express or implied licence on Sparrow to use proceeds from the sale of its inventory to meet Sparrow’s operating expenses, including payment of employee wages. - If there was a license, would it allow the crown to have a superior claim on unremitted tax deductions over RB’s security interest? Iacobucci Majority Judgement - License theory holds that a bank’s security interest in a debtor’s inventory, though it be fixed and specific, is subject nevertheless to a licence in the debtor to deal with that inventory in the ordinary course of business and that the claim on the inventory must give way to any debts incurred in the ordinary course of business. - A creditor who has granted a license to sell inventory has thereby consented to the subjection of his security interest to other obligations that may arise in the ordinary course of business. - However, in this case the inventory in question was never actually sold pursuant to the license, rather sold by court order. - There must be evidence of intention to take less than an entire security interest. - Otherwise, a security interest in floating assets disappears only if the debtor actually sells the inventory and applied the proceeds to a debt to a third party. - Statute contemplates defeasance of interest if the debtor actually sells the inventory and applies the proceeds to an obligation to a third party. Significantly, the statute does not contemplate a defeasance on the happening of any other event - Gonthier’s position would allow the last security interests take priority over all earlier ones, because only the last interest would not be subject to some charge arising in the ordinary course of business. 29 - - If the legal rule is not clear, then inventory financiers will have to provide against the risk that their security interest might be defeated by some rival claim. - An unclear priority rule imposes a number of social costs. It means that creditors must plan their affairs against less certain outcomes. Uncertain rules generate more litigation that clear rules. - Must take a narrow interpretation of license theory; require that there be clear evidence of the parties agreeing to allow subsequent security interests to undermine the original interest. Gonthier dissenting judgement ( 3 of 7) - License to sell represents a reduction in the value of the security interest only with respect to performed obligations. - License theory has the virtue of achieving fairness in commercial law. - A contractual provision of this type should not govern if the real arrangement between the parties is such that the debtor has the freedom to use the proceeds of inventory in the ordinary course of business. - License theory must be restricted to cases where the secured party permits the debtor to pay employees either out of its collateral or out of the proceeds of its collateral...The test should be whether the debtor had the freedom to use these funds in the ordinrry course of business as opposed to being under an obligation to remit them to the secured party. - Takes a broad approach to license theory and finds that if the debtor has the license to sell inventory in the ordinary course of business, this implies an agreement to allow subsequent charges and obligations to take priority over the collateral and its proceeds. Jacob S Ziegel and Favidd L Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2d ed - - - The burden is on the party averring it to show that an express or implied licence was given to the debtor to support the third party’s claim in defeasance of the secured party’s interest. In the case of inventory financing agreements, the agreement will commonly authorize the debtor to dispose of the inventory in the ordinary course of business but will require the debtor to hold the proceeds on trust for the secured party. Once enforcement proceedings are initiated … the debtor loses its authority to disburse any proceeds. The unmet claims will thereafter be treated as enjoying no priority oer the secured party’s claim whether or not the claims are supported by non-consensual liens under the fiscal legislation. A 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 prior to default, even if incurred in the ordinary course of business, will rank as unsecured claims …. 30 Conditional Sales and the Like Kinetics Technology International Corp v Fourth National Bank of Tulsa, 705 F2d 396 (CCA 10 1983) - - Alleged conversion against Fourth National. Bank took possession of inventory of OHT which shut its doors and gave the keys to the bank. KTI had its own parts in OHT’s inventory, to which it says it remained title holder, as OHT was using them to build a product for KTI. As well, KTI had made progress payments to OHT. The bank contends KTI’s interest amounted to an unperfected security interest over which the bank’s perfected interest had priority. KTI says that the bank did not have an interest in the KTI parts as OHT did not have any rights in them to give as security interest. Issue: Did the bank have a valid security interest in the KTI’s goods? - Did the security interest attach? Did OHT have sufficient rights in the collateral to grant a security interest. Issue: Did the Bank’s security interest attach to the KTI goods? - In order for the Bank’s security interest to include the KTI goods and be enforceable it must have attached to the goods. A security interest attaches to collateral when (1) the debtor (OHT) has signed a security agreement describing the collateral, (2) value has been given, and (3) the debtor has “rights in the collateral.” - Sub Issue: Did OHT have sufficient rights in collateral to grant a security interest - For a security interest to attach, a debtor must have some degree of control or authority over collateral placed in the debtor’s possession. - Requisite authority exists where a debtor gains possession of collateral pursuant to an agreement endowing him with any interest other than naked possession. (That is pretty broad) - Buyer/Lenders could easily protect themselves by registering their claim on the leant inventory. Policy reasons dictate that we should require buyer/lenders to register their interests to provide notice to inventory lenders. - Therefore there was sufficient rights to grant a security interest and the nemo dat rule does not apply - There was a signed agreement, value was given via the loaned money and the debtor had sufficient rights in the collateral to grant a security interest. Therefore the security interest did attach to the KTI goods and the bank did have a valid security interest. - For policy reasons mentioned above, the buyer/lender should have perfected its interests , did not and therefore its claim does not take priority over the Banks. 31 Debtor Has Sufficient Rights In the Collateral R v Canadian Imperial Bank of Commerce (2000), 51 OR (3d) 257 (CA). - - - Mr Obront selling gemstones at inflated prices, guilt of fraud. Order to forfeit assets to the crown, of which one of those assets was a CIBC bank account. The crown says that s 11 of the PPSA provides that a security interest does not attach if the debtor did not have rights in the collateral and that Obront did not have rights in the collateral because they were obtained by fraud Issue: Did Obrant have rights in the account to satisfy 11(2)? - Fraud makes a contract voidable not void and therefore the interest in Obrant’s funds was voidable but not void ab initio. Hence, Obrant did have sufficient rights to grant the security interest. However the CC s 462.41(3) overrides the PPSA and the court returned the money to the victims of the fraud. i Trade Finance Inc v Bank of Montreal, 2011 SCC 26. - - - Determine which of two creditors is entitled to assets from fraudulently obtained funds. i Trade advanced funds to the fraudster’s corporation and received a tracing order to recover from those other than bona fide purchasers for value without notice. BMO secured a credit card account with a balance of $138,747 with an investment account funded by iTrade moneys. I Trade advanced money to Webworx which advanced money to the owner who purchased securities and pledged the account to BMO to secure the mastercard money owing. BMO did not have any knowledge of any equitable interest of I Trade. I Trade has a constructive trust based on the tracing order. It is not a transaction and therefore the PPSA does not apply to it. Issues: - Does BMO’s claim as a bona fide purchaser of the security interest prevail over I Trade’s equitable claim under its tracing order? - Is BMO a bona fide purchaser for value without notice? Did BMO properly purchase its security interest? 1. Did the security interest attach such that it is enforceable? Did debtor have rights in the collateral sufficient to grant a security interest? Ratio and Analysis - BMO’s interest could only be enforced against third parties if the security interest attached. The three requirements are set out in s 11. - Did the debtor have rights in the collateral sufficient to grant a security interest? - If the debtor did not have rights then nemo data applies and BMO did not acquire a security interest. - Fraud makes an agreement voidable, not void. 32 - - - - What is only voidable and not void cannot be held as invalid until it has been rescinded. It is not enough to avoid the contract, that nothing is done to affirm it, it must be disaffirmed. - Webworx acquired rights from I Trade until it was voided. - Quotes A. Swan, Law of Contracts, p 656: If the contract is held to be voidable only , the risk of loss remains with the initial owner, for the contract with the rogue will not be rescinded in this situation and, as a result, title will have passed through the rogue and any subsequent bona fide purchaser will not be liable in conversion to the initial owner. It is far more preferable that the loss remain with the initial owner, for that person had the better (and far cheaper) opportunity to avoid the risk entirely by requiring cash or some other secure form of payment. - Conclusion Therefore the debtor did have rights as I Trade had not yet voided the contract, giving webworx an interest in the money, which it passed to the owner which it then pledged as security for a MasterCard balance Did BMO properly purchase its security interest? - Given that there was a signed security agreement or that it actually possessed the property, value was given and the debtor has sufficient rights grant the security interest, BMO can be said to have properly purchased the security interest. Is BMO a bona fide purchaser without notice? - Conclusion: It was a purchaser and it did not have notice, so yes it was a bona fide purchaser without notice - Bona fide purchase of a legal interest for value without notice of a pre-existing equitable interest is a defence to allow the defendant to hold its legal proprietary rights unencumbered by the pre-existing equitable proprietary rights. Where the defence operates, the pre-existing equitable proprietary rights are stripped away and lost in the transaction by which the defendant acquires its legal proprietary rights. Does BMO’s equitable defence prevail over I Trade’s equitable claim? - By the definition of the defence above, and given that BMO is a bona fide purchaser without notice, then logically, BMO’s defence prevails over I Trade’s claim. 33 Chapter 13 - Enforcement of the Security Interest: Part V of PPSA Introduction Part V governs four stages in the enforcement regime: 1. The events triggering the debtor’s default (S.1(1)) 2. The secured party’s entitlement to take possession of tangible collateral if not already in its possession; (S.58-62) 3. Retention or disposition of the collateral by the secured party, or its redemption by the debtor. (S.63,65,66) 4. The post-disposition relationship between the parties – ie can the creditor sue for deficiency (S.64) Other relevant areas of law to consider: - - Consumer Protection Legislation - Provincial v Federal (provincial usually being more important) - Seize or sue regulations Receivership Law - Privately appointed receivers v court appointed receivers and duties to the parties Canadian Bankruptcy Law - If bankrupt while trying to enforce the security interest: - Must give 10 days notice as per (BIA s 244(1)) - If debtor makes commercial proposal to creditors under Part 3.1 of BIA, creditor will be stayed and must apply to the court to enforce security. - Same with CCAA (in CCAA, the stay is not automatic, but courts will usually grant it in the initial order) Procedural and Substantive Limits on Enforcement Rights Waldron v Royal Bank (1991) 4 WWR 289 (BCCA) - - - Issue - Facts - Ratio - Was it necessary for the Royal Bank of Canada to give the plaintiffs a reasonable time for payment prior to the enforcement of collateral security given in accordance with s 178(1)(b) of Bank Act to secure payment of a demand loan? RB gave loan to Waldron’s ceramics business. Mrs Waldron gets sick, Waldron advertises ‘Moving Out Sale’. Bank makes demand for the loan and hires bailiffs to take possession. Looks to Linster v Dunlop - Quotes Massey v Sladen (1868) 34 - The debtor must be given “some notice on which he might reasonably expect to be able to act.” Application depends on facts. - A person from whom a seizure is being made under a security instrument is entitled to receive such notice of the proposed seizure is reasonable in the circumstances. - Linster v Dunlop applies to all security interests where a person’s property is being taken away by the security holder subject to contrary legislation. Analysis - Lister principle applicable to Waldron and Bank should have given notice. Taking Possession - Part 5 becomes operative upon default by the debtor as per s 59 - Upon default the secured party may take possession of the collateral as per s 62 - Parties are free to contract what constitutes a default - BIA s 244(1) and 244(2) – enforcing security against all or substantially all of the DB assets requires 10 days. - for equipment can take possession by rendering the equipment unusable without removing the equipment from the debtor’s premises (s. 62(1)(b)) - an account receivable? You just notify the person who is required to pay that the borrow owes you and you have exercised your rights and you direct this person to make payments to you instead Acceleration Clauses - PPSA allows for clauses that provide for on default the entire amount becomes due. - Must conform to section 16 of OPPSA - “only if the secured party in good faith believes and has commercially reasonable grounds to believe that” the prospect of payment or performance is impaired (s 16) Consumer Protection Act - Where a consumer under a future performance agreement has paid two-thirds or more of his or her payment obligation as fixed by the agreement, the supplier cannot retake possession despite agreement otherwise, without a court order from the Superior Court of Justice. Seizure of Collateral - PPSA “unless otherwise agreed” gives the creditor the right to take the collateral by any method permitted by law. R v Doucette (1960), 25 DLR (2d) 380. - Facts - Respondents were duly licensed as bailiffs Repossession of a television despite property owner’s objection to trespass. Bailiff punched property owner to secure property. 35 - - - Ratio - Private Bailiffs are not protected by criminal code provisions penalizing resistance to lawful seizures. - It should be made clear oat the outset that the reception or resumption of possession of goods by the act of the owner through an agent or bailiff acting under his written authority, is not lawful execution of any process against lands or goods, or is not the making of a lawful distress or seizure within the meaning of s 110(c) of the Cr Code which is directed against resistance to or wilful obstruction of any person engaged in the performance of such acts. - Quotes 3 Blackstones Commentaries - The owner of the goods may lawfully claim and retake them wherever he happens to find them, so it be not in a riotous manner, or attended with a breach of the peace. - If therefore he can so contrive it as to gain possession of his property again without force or terror, the law favors and will justify his proceeding. But as the public peace is a superior consideration to any one man’s private property - Quotes Nilan v Mcandless (1912), 8 DLR 169 - “He was not justified, however in taking the law in his own hands when he found that he could not get peaceable possession. His proper course was to obtain possession by legal means.” Analysis - Once it was made clear to them, as indeed it was, that they would not be suffered to remove the television set without resistance, they grossly exceeded and abused their rights when they persisted in carrying out their project of adducting the television receiver using force for the purpose necessary. What constitutes reasonable notice? - depends on the facts and circumstances of the particular case - amount of the loan, risk to the creditor, length of relationship / history of relationship, character and reputation of the debtor, potential ability to raise money in a short period, circumstances surrounding the demand for payment, any other relevant factors including terms of the agreements - factors which lead to minimal notice - dishonesty on the part of the debtor, more time serves no useful purpose, value of security is at risk of depreciating rapidly Section 17 – Custodial Obligations of Secured Party while in possession - A secured party having control of investment property as collateral: - a) may hold as additional security any proceeds received from the collateral - b) must either apply funds received from the collateral to reduce the secured obligation or remit the funds to the debtor - c) may create a security interest in the collateral 36 Voluntary Foreclosure Angelkovski v Trans-Canada Foods Ltd, [1986] 3 WWR 723 (Man QB) - - Issue - Facts - - Whether the creditor, by taking possession of chattels given as security under a chattel mortgage, after default by the debtor, and utilizing the chattels in a certain way, thereby terminated any rights the defendant may have had to an additional claim for deficiency. - Did TCF, by its action, elect to receive the chattels in full satisfaction of the debt owed, and therefore the debtor has no further obligation? Trans Canada food lent Angelkovski money with security for the Red Barn restaurant in Winnipeg. TCF took back the restaurant and then decided to run it. Did TCF, by its action, elect to receive the chattels in full satisfaction of the debt owed, and therefore the debtor has no further obligation? Ratios - Common Law (no PPSA) - “In Ontario the courts have held that if it can be demonstrated a chattel mortgagee has appropriated the pledges to his own use, following default by the mortgagor and a proper seizure, he must then be found to have taken them for the debt.” - Cites: McDonald v Grundy (1904), 8 OLR 113 - If the facts show the defendant [creditor] intended to reopen the restaurant to sell the chattels as part of an ongoing business in order to improve their sale value with the primary purpose of recovering the balance of the debt owing, then I do not think an appropriation of the chattels can be found. On the other hand if it can be concluded the defendant [creditor] reopened the restaurant with the essential purpose of operating it himself, or releasing it, so as to make more money than the amount owing on the debt, with no intention of accounting to the plaintiff and his partner for any surplus, then the court could reasonably conclude the chattels were appropriated in full satisfaction of the debt. - BUT WAIT, MUST LOOK AT Manitoba PPSA PROVISIONS - S 60(2) and (3) (MANITOBA PPSA) A secured party in possession of the collateral may, after default, propose to retain the collateral in satisfaction of the obligation secured, upon giving notification to that effect to the debtor. If the debtor objects within 15 days, the secured party must proceed in such a manner as to protect any realized surplus for the debtor, on the disposition of the collateral. 37 - - - If there is no objection within the 15 days, the collateral is no longer subject to any claim of the debtor. The statute makes it impossible for the secured party to appropriate the collateral for his own use, free and clear, unless s 60(2) and (3) has been complied with. Analysis - Despite common law rules, the PPSA makes it a requirement to provide notice to the debtor that the collateral is being taken for full satisfaction of the debt, and, therefore, the debt is not yet fully satisfied. Notes - Ontario - IN ONTARIO, a secured party can “propose to retain the collateral in satisfaction of the obligation secured.” OPPSA s 65(2) - Right to keep collateral in return for cancellation of the debt arises by default if the persons who are entitled to object fail to do so within the prescribed time. ( OPPSA s 65(2) and (6) ) - Subordinate security interests are extinguished along with the debtors when the debtor’s rights in the collateral are extinguished. Disposal of the Collateral Copp v Medi-Dent Services Ltd (1991), 2 PPSAC (2d) 114 (Ont Gen Div) - - - Facts Issue Ratio - - Two doctors partner up but then become acrimonious One doc stops paying the lease, other doc stops too, they default Medi-Dent served notice of its intent to sell pursuant to s 63(4) and (5) of PPSA Doc 1 enters agreement to purchase from Medi-Dent Doc 2 makes last minute try to purchase but fails. In disposing of the collateral, did Medi-Dent breach any duties or responsibilities owed to the two doctors Disposals have to be “commercially reasonable” as per section 63(2) - “Fundamental to a resolution of the issues raised, in my view, is a determination as to whether or not the sale consummated between Dr Piccininni and MedDent was a “commercially reasonable transaction”” Citing National Bank of Canada v Marguis Furs Ltd 1. The creditor must “act a role somewhat akin to that of an agent or fiduciary for the purpose of a sale.” Commercial reasonableness requires the creditor to obtain a fair market value for the equipment. 38 - - In the instant application I have no difficulty in concluding that not even the most generous test of reasonableness could be met. There ws no attempt at advertisements or publicity. What we had was a private sale to a party clearly adverse in interest to the joint debtor. Those circumstances are aggravated by the fact that there was no attempt at obtaining any opinion of the value of the security, let alone an independent appraisal. The only measure of the sale price was the amount of the debt outstanding to the lessor and when one considers that the only independent evaluation places a value on the security more than twice the amount of the sale price, the conclusion is inescapable, in all the circumstances, that the impugned transaction was not a commercially reasonable one. Notes - Under OPPSA s 63(3), the secured creditor may delay disposition for such period of time as is commercially reasonable. Failure of the secured party to proceed expeditiously or properly is remediable by court order. (see OPPSA s 67) - OPPSA s 63(7) excuses notice where the collateral can be sold on a “recognized market”, meaning a liquid market where the price is readily determinable. Also gives other exceptions such as for perishables. - 63(2) every aspect of the disposition must be “commercially reasonable.” - S 67(1)(f) – court can require a secured party to make good any default in connection with the secured party’s custody, management or disposition of the collateral of the debtor. - Other parties (required by notice under S.63(4) can redeem their collateral (S.66.1) Deficiency Claims and Guarantor’s Liability Introduction PPSA provides a statutory right to deficiency (OPPSA s 64(3). What about where there has been creditor non-compliance with the PPSA? Bank of Montreal v Featherstone (1989), 9 PPSAC 139 - Failure of the respondent to give the s 59(5) notice to the appellants does not result in its being deprived of the right to claim the deficiency owing. But must have contractual language giving right to deficiency. [this is odd because of s 59 – which stated that the agreement must conform to Part V of the contract] Facts - Creditor had contracted for a right to sue the principal debtor for any deficiency and that the terms of the guarantee covered whatever debts and liability were still owing by the latter to the former when it claimed against the guarantor 39 Consumer Goods - Section 67(2) – a consumer debtor need not prove actual damages to recover $500 Bank of Montreal v Charest (2001), 52 OR (3d) 497 SCJ. - - - - - - Facts - Charest gave personal guarantee and his wife; gave an agreement to later guarantee. BMO issued a notice pursuant to s 63(4) notifying the persons designated in a schedule that it intended to dispose unless security was redeemed. - Notice not served on the Charest in their capacity as obligors but by virtue of 69(a) a reasonable person would have taken notice. S 67(2) which confers a right to compensation for any reasonably foreseeable loss or damage caused by a breach of the obligations imposed by Part V. Nothing in the legislation that would suggest that it was intended that a failure to give notice will, ipso facto, discharge a guarantor from liability. A guarantor is an “obligor who may owe payment or performance of the obligation secured within the meaning of 63(4)(b) which specifies debtors, obligors , etc should get 15 days notice of disposal. In view of s 59(5) that provides that the rights of a debtor and the duties of a secured creditor under ss 63-66 shall not be waived or varied, this is, perhaps, a surprising result – at least where, as in Segreto and Cassidy, the correlative rights and duties of the debtor and creditor are in question. In Featherstone and Moshi that failure by a creditor to give statutory notice of an intended realization of a security will not prevent the creditor from enforcing the guarantee if - A) the creditor has a contractual right to sue the principal debtor for the deficiency - B) the terms of the guarantee purport to make the guarantor liable for the balance of any liabilities owed by the debtor to the creditor at the time the creditor seeks to enforce the guarantee; and - C) The relevant documentation between the parties does not give the guarantor a contractual right to receive notice. [ The last point is mystifying to me give s 59(5) – which says you can’t modify] - Despite subsection (1), the provisions of sections 17, 17.1 and 63 to 66, to the extent that they give rights to the debtor and impose duties upon the secured party, shall not be waived or varied except as provided by this Act. Contracts do not need a deficiency clause, they are implied. - JS Ziegel comment on Segreto - Debentures and other secured loan agreements often do not contain a deficiency clause, and for good reason. It is fundamental to the concept of a secured loan that the security is only collateral to the debt and that th primary obligation remains intact until the debt has been fully discharged. - Speacking to Ziegel’s comment of Segreto 40 - - Such rights must, I believe, be regarded as implied contractual terms in a sufficient sence. - The right to sue for deficiency is, in my opinion, prima facie implied in the security agreements and, as I have indicated, there is nothing in their provisions to displace this prima facie presumption. - Judge is saying that if you look at the legislation and PPSA, he doesn’t think that there is anything to suggest that if you fail to give notice that your claim to deficiencies should be dismissed. If a secured creditor fails to comply then the remedy of the person suffering harm is under S.67(2). The act says that you have a claim for damages. If BMO didn’t send notice then it doesn’t remove the claim for the deficiencies but it would give C a claim for damages (if those damages are worth more than the deficiency then they would be able to not pay). When you look at the act, this seems to be the right result. [ Ruling allows thwarting of s 59(5)! Basically finds contractual terms can waive responsibilities of notice, and then says that those terms are implied in every deal! ] Enforcement of Security Interests by Receivers and Receiver Managers Standard Trust Co v Turner Crossing Inc (1993) 4 PPSAC (2d) 238 (Sask QB). - - Facts - Debtor/Turner applying for order setting aside the appointment of a receiver and manager of the business. - Turner acquired property in Regina for shopping mall complex, financed by Std Trust. - Turner in default of the mortgage, Std Trust appointed a “Receiver Manager of the business of Turner” - Std Trust says they were authorized to do so by a purchase money security agreement Ratios & Law - No statutory right to appoint a receiver. It must be specified in the agreement or appointed by the court. - S 56 states that “a security agreement may provide for the appointment of a receiver or a receiver manager and, except as provided in this Act, prescribe his rights and duties.” - Subsection (2)(a) of s 56 states that a court may appoint a receiver or a receivermanager. No right is given to a creditor, by that statute, to appoint a receiver or receiver-manager. - Directors have no powers under receivership S 91 of the Business Corporation Act states: if a receiver manager is appointed by a court under an instrument, the powers of the directors of the corporation that the receiver-manager is authorized to exercise may not be exercised by the directors until the receiver-manager is discharged. - Analysis 41 - - - Purchase money agreement did not contain any provision whereby Turner agreed, upon default, that the plaintiff would be entitled to appoint a receiver, or a receiver and manager. The agreement only specified rights to the assets. Ratios - Cites Frank Bennett, Receiverships (1985) If the security instrument does not charge the debtor’s goodwill, only a receiver can be appointed. However, if the security instrument covers all the debtor’s property and effects whatsoever, the court will infer that the goodwill was included in order to permit the appointment of a receiver and manager. Conclusion - Order to set aside the appointment of the receiver and manager and vacating the notice filed with the Director of Business Corporations.\ Ostrander v Niagara Helicopters Ltd (1974) 40 DLR (3d) 161 (Ont HC) - Facts - - - Ostrander founder and principal shareholder of Niagara. Niagara borrowed money and gave assets as collateral. Default and Creditor appointed Receiver-Manager – not court order. Ostrander says Receiver-Manager has fiduciary duty with respect to Niagara Helicopters and that their conduct amounted to breach of trust Issue - Do receiver-managers have a fiduciary duty to the companies they take over? Conclusion - No. Receiver-managers do not act in a fiduciary capacity. They are agents for the mortgagee. Ratios and Laws - “Of course he owed a duty to account in due course to the mortgagor for any surplus; and in order to be sure there would be a surplus he was duty bound to comply with the full terms of the conditions of sale set out in the debenture, to advertise the property and to take reasonable steps to obtain the best offer possible.” - A very clear distinction must be drawn between the duties and obligations of a receiver manager... appointed by virtue of the contractual clauses of a mortgage deed and the duties and obligations of a receiver-manager who is appointed by the Court and whose sole authority is derived from that Court appointment and from the directions given him by the Court. - As long as the [out of court] receiver-manager acts reasonably in the conduct of the business and of course without any ulterior interest, and as long as he ensures that a fair sale is conducted and that he ultimately makes a proper accounting to the mortgagor, he has fulfilled his role which is chiefly of course to protect the security for the benefit of the bond holder. 42 - - - Re Newdigate Colliery, Ltd [1912] 1 Ch 468. - Authority for the proposition that it is the duty of the receiver and manager of the property and undertaking of a company to preserve the goodwill as well as the assets of the business, and it would be inconsistent with that duty for him to disregard contracts entered into by the company before his appointment. Re B Johnson & Co (Builders) Ltd, [1955] 1 Ch 634 - Out of court receiver-manager are agents of the company, in order that they may be able to deal effectively with third parties. But the appointment is not for the benefit of the company but for the benefit of the [creditor] to realize teh security; that is the whole purpose of his appointment. - In word, in the absence of fraud or mala fides, ... the company cannot complain of any act or omission of the receiver and manager, provided that he does nothing that he is not empowered to do, and omits nothing that he is enjoined to do by the terms of this appointment. Notes - Court Appointed Receiver - Receiver takes possession and control not only for the benefit of the secured party, but for the benefit of other creditors with a claim to the property as well. The receivers authority derives from the court order. - Requires interlocutory application - Private Receiver - A privately-appointed receiver is essentially an agent of the secured party and draws authority to act from the security agreement. - Private is faster, more efficient - Section 60(2) of PPSA applies “with respect to a receiver or a receiver and manager, however appointed. - In BC s 68 all receivers have to act “in good faith and in a commercially reasonable manner” - Usual security agreements have - Any receiver or receiver-manager appointed hereunder shall be deemed to be the borrower’s agent and the borrower shall be solely responsible for his act, defaults and remuneration. Peat Marwick Ltd v Consumers Gas Co (1978), 83 DLR (3d) 450 (Ont HC) - - Injunction against the defendant utility company require it to supply gas to the business under the receiver-manager’s control. It was argued by the receiver-manager that he as representing the charge holder who had appointed him and not the defendant company. The debenture in such cases, as here, provides expressly that the receiver shall be deemed to be the agent of the company. (so it can contract on its behalf) 43 Sperry Inc v Canadian Imperial Bank of Commerce (1985), 50 OR 267 (CA) - Receiver taking possession could not amount to perfection by possession by the terms of the agreement, the receiver-manager was the agent of the debtor. Additional reason for including in the security agreement that the receiver is an agent of the company (debtor) is to protect the creditor from misconduct or negligence of the receiver. The creditor gets its cake and eats it too. They are working in their interests, but are an agent of the company. Deemed Security Interests OPPSA s 57.1 provides that, except as otherwise provided in Part V, Part V applies to a security interest only if it secures payment or performance of an obligation. Ie Part 5 does not apply to a nonsecurity assignment of accounts or chattel paper or a true lease, even though these transactions are subject to other parts of the statute as per s 2. There must be an actual secured obligation with a security agreement. True Leases v Security Leases OPPSA applies to a lease of goods for a term of more than one year, whether or not it secures payment or performance of an obligation. (Like other provinces) No distinguishing between true leases and security leases. But s 57.1 keeps the issue alive with reference to Part 5 – Default Rights and Remedies - 57.1 Unless otherwise provided in this Part, this Part applies to a security interest only if it secures payment or performance of an obligation If the court determines the lease is in substance a security agreement, the parties rights and obligations will be determined under Part V of the PPSA and by related legislation, such as “seize and sue” in the western provinces. If the court concludes the lease agreement is a true lease, the parties rights and obligations will be determined by common law principles and not Part V. DaimlerChrysler Services Canada Inc v Cameron (2007), 279 DLR (4th) 629 - - Was the trial court correct in characterizing a lease as a security lease concerning a pickup truck, which contained provisions for term, buyback option, residual value, upon default Daimler could take immediate possession of the truck, obtain early termination liability and sue for damages. The fundamental question is whether a lease secures payment or performance of an obligation Citing Child & Gower Piano Co v Gambrel, [1933] 2 WWR 273 (Sask CA) - Security is anything that makes the money more assured in it s payment or more readily recoverable ... The word implies something in addition to the mere obligation of the debtor 44 - - - In my view, it cannot be said that the default provisions in the lease in question create any separate security. They simply represent the calculation of the amounts owing by the lessee upon a breach of agreement. Professor Ziegel has critiqued this decision - Ruling was mistaken because the judge misunderstood the essential feature of a security interest as defined in PPS legislation, and its relationship to a financial lease. If the terms of the lease ensure that, come what may, the lessor will be entitled, or be able, to recover the full price plus the implicit finance charge, it becomes indistinguishable from a purchase money security interest and the lease should be treated as a security lease Supporters of the decision do so n the basis of “close-end” v “open-end” lease. Close-end, the lessor is not responsible for any deficiency on end of the lease. The Measure of Damages for Breach of a True Lease Keneric Tractor Sales Ltd v Langille (1988), 79 NR 241 (SCC) - - - Issue - Whether the method of calculation of damages for breach of a lease of land, should be extended to cover leases of chattels - What are the general rules governing damages for breach of a lease of chattels? - Did the resale by Keneric satisfy its duty to mitigate? Facts - Kenoric leased farm equipment to Langilles. Langilles defaulted. Keneric gave notice and then sold the seized equipment. Keneric now suing for damages as a result of breaching the leases. General Law - Cites Canadian Acceptance Corp Ltd v Regent Park Butcher Shop (1969), 3 DLR (3d) 394 (Man CA) - Lessee failed to make several payments, lessor repossessed and sold a cash registrar. Clause specifying amount for damages. - He can recover damages for any breach up to the date of termination, but not for any breach thereafter, for the simple reason that there are not breaches thereafter. I see no difference in this respect between the letting of a vehicle on hire and the letting of land on a lease. If a lessor, under a proviso for reentry, re-enters on the ground of nonpayment of rent or of disrepair, he gets the arrears of rent up to date of re-entry and damages for want of repair at that date. - Thus, a lessor who terminates a chattel lease by virtue of a provision in the lease allowing him to do so is limited in his remedies to the rent due at the time of the termination plus any proceeds from resale. 45 - - - - - If a landlord re-enters land for nonpayment of rent he may bring an action for arrears for rent on the express or implied covenant to pay rent but he cannot recover rent falling due after the date of re-entry. No authority has been given us to show why the position of a lessor of a chattel should be stronger than that of a lessor of land. Damages flowing from the breach of a chattel lease, like the damages flowing from the breach of a land lease, should be calculated in accordance with general contract principles. Upon repudiation of breach of contract the creditor has three mutually exclusive courses of action - 1) He may do nothing but simply insist on performance of the terms and sue for rent or damages on the footing that the the lease remains in force - 2) He may elect to terminate the lease, retaining the right to sue for rent accrued - 3) He may advise the tenant that he proposes to re-let the property on the tenants account and enter into possession on that basis. IE, get rent accrued, mitigate and then recover for damages. - There is no conceptual difference between a breach of contract that gives the innocent party the right to terminate and the repudiation of a contract so as to justify a different assessment of damages when termination flows from the former than the rather. What was not possible at common law before Highway Properties was for the landlord to terminate the lease, relet the property, and make a claim for damages that included a claim for unpaid future rent less the actual rental value of the unexpired period. As was noted in both Baldock and Regent Park there is no essential difference between a lease of land and a lease of chattels that is material to the ascertainment of damages on breach. They are both contracts. Perfection Perfection relates to the publication of a security interest to give sufficient notice to the debtor and third parties. According to s 19 of the 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. - - Circular logic of defining perfection is because perfection refers to two items: - 1) the procedural steps to give public notice of the security interest - 2) to describe the status of a security interest that has attached There are four types of perfection 1) Perfection by possession; 2) Perfection by registration; 3) Perfection by control 46 4) Temporary perfection Perfection by Possession Re Raymond Darzinskas (1981), 34 OR (2D) 782 (SC) - - - Facts Issue - Security interest pitted against a trustee in bankruptcy Heavy piece of manufacturing equipment. On default, secured creditor sent bailiff to seize the goods. Bailiff executed a lien warrant, but because of size, did not remove. The security interest was not ever registered. Was the security interest perfected by possession, thus making the security interest superior to the claim by the trustee in bankruptcy? Ratio’s and Law - Were the goods seized even though they were not removed from the bankrupt’s premises? - Cites Johnson v Pickering [1907] 2 KB 437, at 443-44 A sheriff may seize goods and chattels without actually laying his hands upon them; it is sufficient if he enters upon land on which the goods and chattels are and announces his present intention of seizing all the goods and chattels upon that land: Gladstone v Padwick (1871), LR 6 Ex 203 - Yes, they were seized. - Was the seizure enough to effect perfection by possession ie did it have actual holding - Section 24 [now 22 and wording changed slightly] Except as provided in section 26, possession of the collateral by the secured party, or on his behalf by a person other than the debtor or the debtor’s agent, perfects a security interest in: 1. Chattel paper 2. Goods 3. Instruments 4. Securities 5. Letters of credit and advices of credit 6. Negotiable documents of title But subject to section 23, only during its actual holding as collateral - I am of the opinion that the intention of the Act is to provide notice to persons dealing with the property or with the owner thereof that the secured party claims an interest in the goods. This can be effected by constructive notice, registration or by actual notice by possession. - The Secured creditor had constructive possession but not actual possession 47 - - Section 24 of the Act 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 wherewith. This possession is required even more where the security interest was not perfected by registration. - Section 58 [now 62] of the PPSA provides for the right to take possession or where there has been perfected registration to render the equipment unusable without removal upon default. Commentary on this case: - Its an old case (80s) - What the advisory committee decided, was that this is an unfair result. If somebody sends in a trustee, receiver, or sheriff to actually take possession and they have done so in a way that doesn't fulfill every element of possession then they should be entitled to something for actually going in to take possession. - Current case law would most likely have allowed for the security interest (We see this in the Sperry Case) Sperry inc v Canadian Imperial Bank of Commerce (1985), 17 DLR (4th) 236 (Ont CA) - - Sperry has a security agreement and so does CIBC with bankrupt company. August 27, 1975 Sperry enters into a dealer security agreement securing inventory. September 9, 1977 bankrupt (prior to) enters into a security agreement with CIBC covering inventory, among other items Debtor goes bankrupt March 14 Bank appoints receiver, in the agreement is “receiver shall be an agent of the debtor” March 25, 1980 Sperry files registration with view to perfect previous agreement “The requirement S 24 requires perfection by possession is “only during its actual holding as collateral” would have to be addressed. However, it need not be in this case, because I think it turns on more basic considerations.” A receiver manager who takes possession, but does so on the authority of a security agreement that provides that the receiver-manager is an agent of the debtor, does not possess the property for the creditor. Hence no perfection by possession can exist. It is not until the receiver general realizes the property for the benefit of the creditor does the creditor possess the property, or its proceeds. - In my view the bank never perfected its security interest in the Sperry supplied inventory. - As the bank has elected to make the receiver the agent of the debtor “it is only “in realizing” that the receiver acts as the creditors agent – to give commercial efficacy to the security agreement, ie so that title may be conferred on the purchaser free of encumbrance. The mere decision to realize falls short. - The agency clause suggesting the receiver is 48 - What if there was no agency clause? Could it qualify as possession for perfection? The statute says “only during its actual holding as collateral.” Is it still holding it has collateral once it has taken possession? The case does not deal with that issue but: - In Re Darzinskas - It is not being held for collateral but for realization. Cannot get perfection by possession. - Alternate view taken ( it is possession for collateral ) in Re Charon (1984), 4 PPSAC 228 (Ont) - Seizure held to perfect the security. - Section 22 now speaks about “possession or repossession” of the collateral as perfecting a security interest. Continuity of Perfection OPPSA Sections - - s 21(1) If a security interest is perfected and then reperfected in the same way, it is deemed to be continuously perfected. S 30(2) a security interest will be held to be continuously perfected by the means by which it was originally perfected ( ie registration, possession, etc) Priority turns on the order of the original events and parties are not prejudiced by changing the method of perfection. S 30(6) where a security interest is unperfected and then reperfected, it is held to be continuously perfected from the beginning date. (unless somebody else perfected in between) Consequences of Non Perfection Section 20(1) provides that failure to perfect results in the security interest becoming subordinate to or ineffective against: 1. other perfected security interests on the same collateral; 2. lien holders or persons having priority under another Act; 3. execution creditors and such like; 4. a trustee in bankruptcy and other creditors representative; and 5. a transferee of the collateral. Lien holders Lien holder means a person holding a non consensual security interest given under a statute or a rule of law. Lien not defined under the statute but presumably means the right to retain or seize all or some of the debtor’s assets and to sell them to satisfy the debtor’s obligation. Trustee in Bankruptcy S 20(1)(b) provides that an unperfected security interest is not effective against a person who represents the creditors of the debtor, including and assignee for the benefit of creditors and a trustee in bankruptcy. 49 S 20(2)(b) provides that the rights of a person under clause (1) (b) in respect of the collateral are to be determined as of the date from which the person’s representative status takes effect. Re Giffen [1998] 1 SCR 91 - - - - - Issue - Whether s 20(b)(i) of the PPSA can render a lessor’s unperfected security interest in personal property ineffective against the rights acquired in the property by the trustee in bankruptcy. Conclusion - I conclude that s 20(b)(i) operates, on the present facts, to defeat the unperfected security interest of the respondent ... in favour of the interest acquired by the...trustee. Facts Lessor leased a 1993 Saturn to BC Telecom who in turned leased it to Giffen - Giffen subsequently went bankrupt, security interest not perfected and trustee bringing motion for an order that it was entitled to the proceeds of sale. Ratio and Law - Section 67 of BIA - The trustee in bankruptcy shall receive only the “property of the bankrupt” thus there was no legitimate basis for granting to a trustee in bankruptcy a greater claim to the property than that which the bankrupt enjoyed. But the PPSA modifies this a bit to allow trustee to gain the unencumbered asset - Public disclosure of the security interest is required to prevent innocent third parties from granting credit to the debtor or otherwise acquiring an interest in the collateral. - Prior to a bankruptcy, unsecured creditors can make claims against the debtor through provincial judgement enforcement measures. Successful claims will rank prior to unperfected security interests pursuant to s 20. Once a bankruptcy occurs, however, all claims are frozen and the unsecured creditors must look to the trustee in bankruptcy to assert their claims. - Trustee , after bankruptcy, acts as the representative of the unsecured creditors of the bankrupt and asserts “the claim of the unsecured creditors to the goods and possessions of the bankrupt pursuant to the priorities established for competing perfected an unperfected security interests. It is simply a contest as between an unsecured creditor and the holder of an unperfected security interest.” - On a plain reading of s 20(b)(i), the lessor’s interest in the car is ineffective against the trustee. Notes - Section 20(2)(b) provides that the rights of a person under s 20(1)(b) in respect of the collateral are to be determined as of the date from which the person’s representative status takes effect. 50 - - 71(1) of BIA states that the beginning of the bankruptcy is deemed to begin at the date of petition and in - Re Hillstead Ltd (1979) Registration of a financing statement after the filing of the petition in bankruptcy but before the receiving order was made was too late to save the security interest from subordination to the trustee in bankruptcy. But 71(1) repealed so there is nothing to stop someone from perfecting between petition and actual appointment of trustee to acquire priority over the trustee. 1231640 Ontario Inc (Re), 2007 ONCA 810 - - Facts - Bank appoints receiver, receiver sells company name which according to s 48(3) requires security interests to reperfect. - Bank does not reperfect on name change and loses perfection. - Later, trustee appointed, trustee wants an order that it has priority over the bank - Bank argues that priority interests are determined as of date of receiver appointment and the “music stops” after that. - Trustee argues that although receiver used to be in s 20(i)(b) it no longer applies. The priority is determined as of the date of the trustee assignment. Ratio and Laws - The bank loses its priority. - The priorities are to be determined as of the time the trustee in bankruptcy is appointed and not when a receiver is appointed. Supporting reasons are ... - It follows from Re Griffen that a receiver is not intended to be included as a “person who represents the creditors of the debtor” for the purpose and therefore within the meaning of ss 20(1)(b) and 20(2)(b) of the PPSA. The reasons for this conclusion are: 1. Unlike in a bankruptcy, a receiver, including a court-appointed interim receiver, does not stand in for unsecured creditors in a priority contest with any other creditor; 2. A receiver is not the ”repository of enforcement rights” of unsecured creditors with any status to “attach the unperfected security interest” ( Re griffen at para 39); and 3. In a receivership, unlike in a bankruptcy, there is no statutory stay causing execution creditors to lose their priority and ability to realize on their debts. - Priorities are determined as per 20(2)(b) once a person is appointed as per s 20(1)(b), but that does not prevent security interests from changing in the future. 51 - - The effect of ss 20(1)(b) and 20(2)(b) is to determine the priority rights of creditors at a particular time, but not to freeze priorities for all time, or in the words of appellant’s counsel, to “stop the music.” Applellant’s security interest became unperfected as a result of the operation of s 48(3) and because it did not re-perfect its security interest before the assignment of the debtor into bankruptcy, it was unperfected on the date of the appointment of the trustee and its ssecurity interest is therefore ineffective against the trustee. Notes - Both parties appear to have overlooked OPPSA s 30(1), rule 4 – - Where priority is to be determined between unperfected security interest, priority shall be determined by the order of attachment.” Transferee of Collateral Section 20(1)(c) and (d) provide that transferees of tangibles (c) and intangibles (d) are not obliged to the secured party and the security interest is not effective against them. 20(1)(d) does not apply to accounts but all other intangibles. Accounts – s 20(1)(a)(i) S 20(1)(d) excludes Accounts. Use 20(1)(a)(i) - If you have an unperfected security interest in an account and it gets assigned, first to register will have priority. So unlike in 20(1)(d), you still retain your interest after the fact, and have priority if you are the first to belatedly perfect your interest by registration. Chattel Paper - Chattel paper is a mortgage and security interest on movable property. Not real estate. - Page 201 of text - Competition of provisions not resolved in the statute - S 20(1)(a) - The perfected interest will prevail and be superior to an interest that, although occurred prior to the perfected interest, did not register a financing statement. - S 20(1)(c) - Until perfected, security interest in chattel paper, documents of title, instruments or goods is not effective against a transferee thereof where the transferee gives Value and the transaction does not secure payment. The transferee however, had to be unaware of the security interest. Ie sale of a loan of goods or non real property, or sale of goods which has a security interest on it. - Perhaps if the transferee was aware, could still rely on s 20(1)(a) Value - Definition of value in statute: any consideration sufficient to support a simple contract. - Promise to pay is sufficient value for s 20(1)(c) 52 - But case law held otherwise: - Royal Bank of Canada v Dawson Motors (Guelph) Ltd (1981) - Value held to mean executed consideration - And so value not given until payment made - Requires buyer to search the registry twice, once at contract and another before payment. - But the act has changed and it seems to now apply only to matters where the buyer would acquire actual knowledge of the interest. S 46(5) now provides that registration does not constitute constructive notice. S 69 defines knowledge in a way that seems to preclude constructive notice. Conflicts of Laws Necessary to determine whose law governs: 1. 2. 3. 4. 5. validity of security agreement when a security interest has attached to the collateral priority among competing security interests and the effect of an unperfected security interest the effect of tangible collateral being moved after the security agreement is made. Enforcement of secured party rights upon default Procedural v Substantive Law Jurisdictions are required to follow their own procedural law but can follow other jurisdiction’s substantive law. Choice of law provisions are usually deemed procedural, so wherever the action is brought, that jurisdiction will determine which law applies based on its own statutes. Fortunately the PPSA’s are similar enough that the courts should arrive at similar conclusions as to jurisdiction no matter where the action is brought. Relevant Sections in the OPPA - Section 5 - (1) - - Subject to this section law that governs is the lexus situs of goods when they attached. Section 5 - (2)- Good brought into Ontario 60 days to register in Ontario; 15 days within having received notice; or Before expires in the other jurisdiction - (3) 53 - - - - (4) - If attached elsewhere, can be perfected here. (5) - If goods are subject to revendication in other jurisdiction, 20 days to register goods in Ontario if registered somewhere else and brought into Ontario. Section 6 - Exception to the lex situs rule where parties understand at the time the security interest attaches that the goods will be kept in another jurisdiction and the goods are indeed moved within 30 days. Section 7 – Moving goods, intangibles - (1) - If goods are type that moves jurisdictions, intangible, or security interest - Perfection, attachment and priority is governed by location of debtor - (2) - If debtor moves perfection continues until the earliest of 60 days passed and not registered in Ontario; 15 days from notice ; or Perfection expires in the other jurisdiction Section 8 - Determines enforcement of the security interest. Security Interest in Goods: Initial validity and Perfection – Section 5(1) Section 5 provides the validity, perfection and effect of perfection or non-perfection of security interests in goods or possessory security interests in and instrument, negotiable document of title, money and chattel paper, shall be governed by the law of the jurisdiction where the collateral is situated at the time the security interest attaches. (Lex Situs) Relocation of Goods – Section 5(2) OPPSA s 5(1) provides that perfection issues are governed by the law of the jurisdiction where the goods are situated when SP’s security interest attached. However, this is subject to s 5(2) which states that the goods have to be re-perfected if brought into Ontario. There is a grace period where the goods will be considered to be validly perfected as long as the secured party takes action and perfects within the grace period. (Re Adair; Re general Motors Acceptance Corporation (1985), 4 PPSAC 262 (Ont CA)) The grace period is the shorter of 60 days after the goods are brought in; fifteen days within having been given notice the goods were brought in; or before the expiry of the perfection in the originating jurisdiction. (section 5(2)(a)-(c) Policy: - Middle course, distributes risk on the secured party and the potential buyer/searcher of the goods Searcher at risk as there is a time period where they may search Ontario but it may show up, will have to weigh the risk against the cost of searching in other provinces. Secured party at risk of losing interest if it misses grace period, weigh that against registering in all provinces up front. 54 Re Adair; Re general Motors Acceptance Corporation (1985), 4 PPSAC 262 (Ont CA) - to hold that the 60-day perfection is absolute without need for any subsequent action by the security holder could lead to obvious injustice to innocent parties. They would never be secure. In my view the principle enunciated in the Trans Canada Case is that a security interest in collateral perfected under the law of jurisdiction in which the collateral was when the security interest attached and before being brought into Ontario becomes an unperfected security interest as of the date upon which the collateral is brought into Ontario if the person who owns such security interest fails to perfect it in Ontario within the times limited by s 7(1) and (2) , which ever is applicable, and it remains an unperfected security interest unless and until it is perfected as provided by s 7(3) Re Claude A Bedard (1983), 46 CBR (NS) 172 (Ont SC) - Trustee seeking order that security interest claimed by Nation Bank in a Buick is subordinate to the trustee. Attached in Quebec on purchase, brought into Ontario on 17th May 1982, financing statement registered 20th July, 65 days later. SP knew the debtor was going to take it to Ontario and therefore only had 15 days. Notes - Section 8 - Security interest is perfected if it complied with the laws of the jurisdiction with respect to the jurisdiction it came from, such that it is enforceable against the debtor and third parties. - Re TCT Logistics Inc (2004), 70 OR (3d) 321 (CA) - References to “security interest” in the PPSA conflicts provisions are not limited to the definition of security interest as defined in the Act. Destination of Goods Rule and Mobile Goods Rule – Section 6 & 7 Destination of Goods Rule Subject to section 7, if the parties understand at the time the security interest attaches that the goods will be kept in another jurisdiction, and the goods are indeed moved to another jurisdiction within 30 days, the validity, perfection and effect of perfection or non-perfection of the security interest shall be governed by the law of the other jurisdiction. Is an exception to 5(1) where there is an understanding of relocation. Mobile Goods Rule The mobile goods rule is based on lex domicilii. The validity, perfection, the effect of perfection or nonperfection and the priority of a security interest in 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 the debtor to others ... shall be governed by the law of the jurisdiction where the debtor is located at the time the security interest attaches. (Section 7(1)) 55 7(4) provides that the debtor is deemed to be located at its place of business, if there is one, at the debtor’s chief executive office if there is more than once place of business, and otherwise at the debtor’s principal place of residence. If the debtor is an individual, she is located at her principal place of residence, regardless of where she carries on business, and if the debtor is a corporation incorporated under provincial law, it is located in its province of incorporation. The mobile goods rule avoids the need for the secured party to register in every province if the collateral is mobile. Where the rule applies, the secured party only has to register in the debtor’s home province. Gimili Auto Ltd v BDO Dunwoody (1998), 160 DLR (4th) 373 - - - - - - Head office in Alberta Equipment under dispute - 3 Camper trucks (mobile goods) - Taken out in Manitoba, registered in Manitoba, despite head office in AB - Passenger car (mobile - Registered in BC, despite head office in AB Priority dispute over motor vehicles between two lessors and the trustee in bankruptcy. Bankrupt lent out trucks with campers to tourists. Gimli carried on business in Manitoba and lease taken out there. The three trucks were not registered anywhere. Debtor took the trucks to Alberta, where its head office and chief place of business was. Branch in Surrey BC, long term lease of passenger vehicle with other lessors, Eagle. Car lease registered in BC but not anywhere else. Re Passenger Car - If AB law applies, there was no registration and therefore subordinate to trustee - If BC law applies, there was registration, lessor gets priority. Re trucks - If Manitoba law applies than lessor Gimli will prevail because Manitoba did not require registration (now changed) - If not, then it is subordinate as it did not register anywhere. Choice of law clause does not apply as the statute overrides Three Gimli Trucks - Issue is how in general the trucks are normally used. If they are the type of goods to be used in more than one jurisdiction. Which would make them mobile goods. - Section 7 applies to the three pickup trucks, and AB law governs. The Debtor had its chief executive office in AB, and so s 7 deemed the debtor to be in AB. There was no registration so Gimli security’s interest is subordinate. - Motor vehicles are mobile goods as per section 7 - I conclude that all motor vehicles are goods of a type used in more than one jurisdiction Eagle Passanger Car 56 - “I conclude that all passenger motor vehicles are “of a kind that are normally used in more than one jurisdiction.” Leased or held for lease to others refers only to sub leases. To qualify as mobile goods must be equipment, or inventory must be subleased inventory or equipment. Passenger car is equipment, does not have to be for release and therefore qualifies for 7(2) Lex domicilii applies Therefore governing law is AB according to s 7(4) – chief place of business – and not registered and therefore subordinate. Security Interests In Intangibles, Etc Intangibles are subject to lex domicilii. Section 7(1) provides in part that the validity, perfection, effect of perfection or non-perfection and the priority of a security interest in non-possessory security interest in an instrument, a negotiable document of title, money and chattel paper shall be governed by the law of the jurisdiction where the debtor is located at the time the security interest attaches. Enforcement Cardel Leasing Ltd v Maxmenko (1991), 2 PPSAC (2d) 302 (Ont Gen Div) - - Whether a vehicle leasing company with its head office in Ontario can enforce in Ontario an agreement with a resident of BC and essentially perform in that province where BC law would preclude such enforcement. However there is a choice of law clause choosing Ontario’s law and courts. Auto repossessed in BC and sold there. BC has seize or sue laws, have to choose. Ontario does not you can seize and sue. SP trying to sue debtor for the rest of money owing. Judgement: Action is dimissed Laws - Where the parties to a contract expressly stipulate that an agreement shall be governed by a particular law, that law will generally be the proper law of the contract - 1. But where a law is expressly chosen to evade the provisions of the system of law with which the transaction, objectively, is most closely connected, that choice will be disregarded. - A contract illegal by the law of the country where it is to be performed will not be enforced notwithstanding the explicit choice of law of the contracting parties. - 2. The provision the lessor is trying to avoid extinguishes their rights and therefore is substantive, not simply procedural. 57 - 3. Choice of law had law applies where the agreement is performed which is ambiguous and therefore any ambiguity should be ruled in favour of the lessor who did not have the opportunity to draft – contra proferentem rule of construction. Registration Ontario system entirely electronic Purpose of Registration system - Citing: Secured Transactions in Personal Property in Canada, 2d. Ed., looseleaf (Scarborough: Carswell, 1989), Professor McLaren - The purpose of the registration system is to provide enough information to enable a person searching the system to know how to contact to obtain information regarding a secured transaction. Function of Registration Douglass G Baird, “Notice, Filing and the Problem of Ostensible Ownership” (1983), 12 Journal of Legal Studies 53 - - - - Under a notice filing system, general creditors can learn only that the debtor might have conveyed some ownership rights to a secured party. For everything else they must rely on the debtor and they must expose themselves to the risk that the debtor will misinform them. Needs of general creditors are not addressed by the system The information that the code provides secured creditors in its filing system is exactly tailored to their need to know whether any claim they make to a particular asset will have priority over any other. The filing system is, in effect a place where secured creditors stake claims to the debtor’s property. Little information is included in the filing system so that other creditors do not take advantage of the credit prospect that the first creditor has discovered. First to file rule. A security interest comes into being (or attaches) only after the parties have agreed to make a security interest and 1) the creditor has given value; 2) the debtor has acquired rights in the collateral; and 3) the debtor has signed a written security agreement or the creditor has taken possession of the collateral. But we use registration date over attachment date because it is more certain. The codes notice filing system addresses principally only one kind of ostensible ownership problem – the one arising from competition between secured creditors The present filing system serves the useful function of sorting out and protecting the interests of competing property claimants. The registration is not designed for the benefit of general creditors. 58 Basic Concepts Notice of Registration Section 45 - The PPSA’s require notice of registration containing skeletal information about an existing or potential legal relationship omitting the vast majority of details. OPPSA allows the secured party to nominate its own registration period in the financing statement, except where the collateral is consumer goods, in which case there is a maximum registration period of five years: s 51 Bank of Nova Scotia v Clinton’s Flowers & Gifts Ltd (1994), 108 DLR (4th) 448 (Ont CA) - Transcription error In Ontario prior to 2006, the courts took the view that since SP1’s registration was complete upon lodgement, the error did not affect the validity of SP1’s registration. Thus, SP2 bears the risk of transcription errors Verification Statements and Safeguards - Print out of verification statement is immediately sent to the registering party to determine accuracy - The secured party is required to deliver a copy of a financing statement or verification statement to the person named as debtor in a registration: s 43(12) - Secured party required to register Financing Statement Change (FSC) to discharge the registration - Debtor can demand discharge subject to s 50(3) and failure to comply makes SP liable to debtor according to s 65(4) - Not in statute in Ontario, but in Sask, determination of whether goods are consumer goods, inventory or equipment is done at the time when the security interest in the goods attaches. - See: Royal Bank v Wheaton Pontiak Buick Cadillac gMC (1990), 88 Sask R 151 (QB) Debtor Name-Based Registration and Serial Number Registration - Functions of the two systems - Register against debtor’s name or by serial number - Ontario, serial number index is limited to motor vehicles - ABCD problem with name only search - A registers secured interest on car sold to B - B sells to C - D cannot see the A’s interest if searching C - Solution - VIN/Serial number search on specific asset - Name of the Debtor - Use birth certificate name ( Re Haasen (1992) ) - Ok to use name on Canadian citizenship certificate for foreign born persons. (CIBC v Melnitzer) 59 Errors and Omissions in Registration Data Re Lambert (1994), 20 OR (3d) 108 (CA) - - - Facts - Did not have first name or middle initial correct. Did have valid VIN number. Issues: - When will an error in the contents of a financing statement render the statement invalid and the security interest it represents unperfected as against third parties. Laws - 46(4) - A financing statement or financing change statement is not invalidated nor is its effect impaired by reason only of an error or omission therein or in its execution or registration unless a reasonable person is likely to be misled materially by the error or omission. Ratios - 46(4) is applicable to any error in a financing statement and states that an error does not per se invalidate that statement unless a reasonable person is likely to be misled materially by the error. - The effect of error is not determinative of section 46(4). - By using the reasonable person standard, the legislature intended that the test provided in s 46(4) should be an objective one. To limit the inquiry to the effect of the error on the party challenging the security is to impose a personal or subjective test peculiar to that party. - Juxtapose with s 9(2) - A security agreement is not unenforceable against a third party by reason only of a defect, irregularity, omission or error therein or in the execution thereof unless the third party is actually misled by the defect, irregularity, omission or error. (REPEALED in 2006) - S 46(4) is an objective test. - The reasonable person in s 46(4) is a potential purchaser or lender seeking to locate prior encumbrances on the targeted property, and as a reasonably competent user of the search function of the registration system. - RP in s 46(4) has the following attributes - Reasonably prudent purchaser or lender who looks to the registration system of the PPSA to provide notice of any prior registered claims against the property he or she is proposing to buy or take as collateral for a loan. - Conversant with the search facilities - RP will obtain and search on party’s name and on the vin number for motor vehicles 60 - - If the motor vehicle is consumer goods, correct disclosure of the debtor’s name in the financing statement will not prevent a VIN error or omission from being a materially misleading one as VIN error is still potentially misleading in a abcd scenario Analysis - A RP would have done a search on the VIN as well and therefore would have found the pre-existing security interest. Re Lambert criticized in Gold Key Pontiac Buick (1984) Ltd v 46750 BC Ltd, (2001) 35 CBJL 146 - Serial number searching was intended to be a supplementary mode of searching not an alternative to debtor-name searching. The ability of a third party to place full confidence in whether a debtor name or a serial number search is essential to the integrity of the registry system. Coates v General Motors Acceptance corp (1999), 10 CBr (4th) 116 (BCSC) - - Financing statement filed with an incorrect vin. But search program would have revealed it in similar numbers. Ratio - The following principles apply in respect of registration of serial numbered goods 1. Test if registration is misleading is an objective one; independent of if anyone was actually misled by the search 2. Total accuracy is not necessary 3. A seriously misleading description of either the name or the serial number in the registration will defeat the registration 4. A seriously misleading registration is one that A) would prevent a reasonable search from finding the registration; or B) would cause a RP to conclude that the search was not revealing the same chattel or the same debtor. 5. Focus is on would the system reveal the incorrect registration as in this case. Conclusion - Further investigation of the search result would have revealed that the two debtors listed on the GMAC financing statement were the same as listed on the filing in respect of the petitioner’s promissory note. Adelaide Capital Corp v Integrated transportation finance Inc (1994) Ont Gen Div - Facts - Agreement was to cover all assets but financing statement only specified 50 trucks/ Ratios 61 - - The register has an obligation to provide a sufficient indication of the collateral in which it is claiming a security interest to alert a subsequent searcher that the collateral of interest may be subject to a prior claim. Specification on the Financing Statement restricts the scope of the security interest. Amendments to Registration Heidelberg Canada Graphic Equipment Ltd v Arthur Anderson Inc (1992), 4 PpSAC (2d) 116 (Ont Gen Div) - - Heidelberg sold equipment to Kennedy, held SI in inventory, equipment, accounts and other. Assigned to bank, bank mistakenly filed a change statement to remove some equipment. At the time there was a subordinate SI registered. 2 days later refilled a new Financing Change Statement to include the equipment again. Issues - Can a new Financing change statement perfect equipment that was not covered by the original financing statement? - Do subordinate interests gain priority if a FCS removes an item and then puts it back on later on. - What happens to the security interest on amalgamation? Can a new Financing change statement re-perfect equipment that was covered before in the original financing statement? - Yes, as long as one of the conditions in s 49(a) or (b) exist a FCS can be used to reperfect. - It follows the form of the registration scheme that where the financing statement remains alive, any changes or amendments are to be done by way of a financing change statement. It is only when the financing statement either does not yet exist or no longer exists, that a new financing statement is required. - I can see no impediment in the Act to using a financing change statement under s 49 to re-perfect a security interest if the circumstances of a subsections (a) or (b) exist. - S 49: A financing change statement may be registered at any time during the registration period of a financing statement, (a) to correct an error or omission in the registered financing statement or any financing change statement related thereto; or (b) to amend the registered financing statement or any financing change statement related thereto where the amendment is not otherwise provided for in this Part. R.S.O. 1990, c. P.10, s. 49. - S 56(1)(b) contemplates either payment or performance of certain of the obligations under the security agreement before a financing change statement evidence a partial discharge may be demanded. 62 - - Do subordinate interests gain priority if a FCS removes an item and then puts it back on later on. - No. S 30(6) applies to deem the accounts to be continuously perfected from the time it was first perfected by the financing statement. - To gain rights during the interim period, you would have to do some action to get them. IE file a financing statement. - 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 except that if a person acquired rights in all or part of the collateral during the period when the security interest was unperfected, the registration shall not be effective as against the person who acquired the rights during such period. What happens to the security interest on amalgamation? - Section 179(b) of the OBCA deals with the status of existing contracts of amalgamating companies: The amalgamated company is subject to the contracts, liabilities and obligations of each of the amalgamating companies. - Subject to means not just bound by the contract and its terms but the amalgamating company stands in the shoes of the original debtor. - If name change must comply with s 48 and issue financing change statement. Fairbanx Corp v Royal Bank of Canada, 2010 ONCA 385 - - Fairbanx Factoring accounts for bankrupt, registered but spelt debtor’s name wrong: Actual name is “Friction Tecnology Consultants Inc” but registered “Technology” Friction operated with incorrect spelling Royal Bank did a search with incorrect spelling, found Fairbanx, later did proper search and later registered under proper spelling Debtor goes bankrupt, is Fairbanx properly registered? 2 Issues: - Issue 1: Is the factoring agreement an absolute assignment of accounts that is not subject to the PPSA? - Issue 2: Is Fairbanx’s registration under the incorrectly spelled name of the debtor, nevertheless valid under s 46(4) of the PpSA, thereby standing in priority to the bank’s security Issue 1: Is the factoring agreement an absolute assignment of accounts that is not subject to the PPSA? - Argues that - s 53(1) of the Conveyancing and Law of Property Act stands for the proposition that an absolute assignment is subject only to equitable rights. - But PPSA is such that anyone who intends to lend money and take security on the assets of a debtor, including its accounts receivable, will be able to ascertain, by searching 63 - - under the PPSA whether and to what extent those assets have already been encumbered in any way. - The PPSA prevails over the Conveyancing and Law of Property Act - Conflict is resolved by s 73 of the PPSa, which provides that in the case of any conflict between the PPSA and any other Act except the Consumer Protection Act, 2002, the applicable provision of the PPSA prevails. - Still have to register under the PPSA despite the account receivable being an absolute assignment Issue 2: Is Fairbanx’s registration under the incorrectly spelled name of the debtor, nevertheless valid under s 46(4) of the PpSA, thereby standing in priority to the bank’s security - Argues that s 46(4) saves its registration because a reasonable person would search under the wrong name since that is how the debtor represented itself on letterhead, business cards, etc. - S 46(4) - A financing statement or financing change statement is not invalidated nor is its effect impaired by reason only of an error or omission threein or in its execution or registration unless a reasonable person is likely to be misled materially by the error or omission. - As per Re Lambert, supra. - Creditor’s subjective knowledge of the existence of a financing statement or its registration is irrelevant. The test is an objective one – whether the reasonable person would be materially misled by the error. - Citing: Secured Transactions in Personal Property in Canada, 2d. Ed., looseleaf (Scarborough: Carswell, 1989), Professor McLaren - The purpose of the registration system is to provide enough information to enable a person searching the system to know ho to contact to obtain information regarding a secured transaction. - Ratios - If the name of the debtor is incorrect on the registered financing statement, then the registration will not perfect the creditor’s security interest in the assets of the correctly named debtor. Where the error in the registered financing statement is in the debtor’s name, no registration will be disclosed by a search of the correct name. Therefore, the error in the debtor’s name will not come to the attention of the person searching. In those circumstances, s 46(4) cannot properly apply because the issue of whether the error would materially mislead a reasonable person never arises where the person searching does not find the registration. My thoughts - What about Section 9(2)? Oh it was repealed in 2006, nevermind 64 Lisec America, Inc v Barber Suffolk Ltd, 2012 ONCA 37 - - Issue Facts - - - - Whether Lisec or Roynat Capital holds a prior perfected and first ranking security interest in a waterjet machine. Lisec sold to Barber Suffolk who then, unknowingly to Lisec transferred it to Barber Glass Lisec had another SI registered with Barber Glass for other equipment Roynat had Lisec remove interest in Barber Glass, Roynat lent money to BG, roynat now has first priority on BG. Lisec SI was very broad and would have included property such as the waterjet machine which it did not know was there. (note it did not attach so forget this stupid argument) Roynat says that when Lisec removed BG SI, because it was broad, it also removed the waterjet interest Once Lisec found out about the transfer of the waterjet machine from BS to BG it registered a Financing Change Statement within 30 days of having found out about it according to s 48. Issues - 1) Did the Unknown transfer affect Lisec’s Registration Against Barber Suffolk? - 2) Did Lisec’s Discharge on its SI in BG affect its SI in the waterjet? 1) Did the Unknown transfer affect Lisec’s Registration Against Barber Suffolk? - Lisec properly registered the financing statement change as per s 48(2)(b) and therefore its security interest remains valid - S 48(2) - Where a security interest is perfected by registration and the debtor, without the prior consent of the secured party, transfers the debtor’s interest in all or part of the collateral, the security interest in the collateral transferred becomes unperfected thirty days after the later of (a) the transfer, if the SP had prior knowledge of the transfer (b) the day the secured party learns the information required to register a financing change statement - Unless the secured party registers a financing change statement or takes possession of the collateral within such thirty days. 2) Did Lisec’s Discharge on its SI in BG affect its SI in the waterjet? - No for two reasons, each sufficient on their own. - 1) There could not be perfection without attachment and despite what a financing statement might say, if there is no signed agreement or value given for the item to be secured then there is no perfection. And so a FCS could not operate to change a SI that did not exist. - “Registrations under the PPSA do not operate in the air. They operate to protect a security interest in collateral that has “attached.” Section 11 of the PPSA 65 - provides that a security interest is not enforceable against a third party unless it has attached. Section 19 required that, to be perfected, a security interest must (a) have attached, and (b) been perfected in accordance with the Act. 2) there is nothing in the PPSA that precludes a secured creditor from having a perfected security interest in collateral in more than one way or through registration against more than one entity. - In short even if the Barber Glass registration did encompass Lisec’s security interest in the Waterjet, the discharge of the Barber Glass registration did no take with it the discharge of the Barber Suffolk registration Basic Priority Rules Section 30 of OPPSA – Starting Point Rule of first to register: order of the registration determines the order of priority. Time of attachment not relevant (s 30(1) Rule of first to register or perfect by other means: Earliest perfect wins: s 30(1), para 2(i). Applies to competitions between one registering and one possession. Rule of first to perfect: First perfected takes priority. Applies to situations where there is perfection by means other than registration. (ex possession): s 30(1), para 2(ii). Rule of first to attach: First to attach where none of the security interests have been perfected: s 30(1), para 4. Section 30.1 Investment Property Priorities 1. Control trumps non control. 2. Two security interests perfected by control compete based on time of control obtained. 3. Notwithstanding the above two rules, intermediaries have priority if they have a security interest unless they have otherwise agreed. Justification for the First-In-Time Rule Transactional v Notice Filing Thomas H Jackson and Anthony T Kronman, “Secured Financing and Priorities Among Creditors” (1979), 88 Yale LJ 1143. - Advocates for a transactional rule to apply to some types of secured credit to make it less costly to borrow from junior creditors. The justification for the rule, then is that it does what the parties would do for themselves in its absence, and thereby achieves a savings in transaction costs. - Debtors and creditors would negotiate amongst each other to accomplish the same priority rights that are determined with a first-in-time registration system. 66 - - - - Under a notice filing system, unless a junior creditor obtains a subordination agreement, he runs the risk that the claims of senior lenders will be increased, without losing their seniority. A notice filing system gives senior lenders a competitive advantage in bidding on subsequent loans whenever the collateral in question already belongs to the debtor’s estate and so cannot be used to give the junior creditor an overriding purchase money security interest. A notice-filing system has benefits as well as costs: although it increases the costs of subsequent borrowing from junior creditors, it also reduces the expense of transactions involving the repeated extension of credit from a single senior lender. A transactional filing system requires each individual credit transaction with the debtor to be separately perfected by filing, and so does not permit filing before credit has actually been extended. - Under this system, a junior creditor can determine, merely by inspecting the files, the maximum extent to which his interest can be subordinated to the claims of senior creditors. - As a result it is easier and less costly or a debtor to borrow from junior creditors under a transactional system than under a notice filing system like that employed by Article 9. Nothing in the code itself to preclude a debtor from contracting into a transactional priority rule if he wishes. (“This filing not to exceed $100,000”) For secured transactions involving large, stable assets, a presumption that the parties intend a transactional rule to apply rather than the notice filing rule presently imposed by the code would probably be more efficient. The Irrelevance of Knowledge The Robert Simpson Company Ltd v Shadlock and Duggan (1981), 31 OR (2d) 612 - - - Issue - Facts - Whether priority as between competing security interests in the same collateral security is determined under the PPSA by whoever perfects or registers first OR whether actual notice may defeat a claim to priority based on prior registration or prior perfection? Plaintiff sold to the debtor chattels for installation on a motel property. Defendants given notice about the security interest, but plaintiff did not register. Defendants later mortgaged the debtor’s property, including the Plaintiff’s chattels. Ratios - Actual notice is irrelevant in determining priority (note knowledge and notice are different) - If creditor 1 has actual notice of a security interest of creditor 2 but it is not registered on the filing system, it does not prejudice creditor 1’s priority if creditor 1 registers on the financing system, ahead of creditor 2. 67 Douglass G Baird and Thomas H Jackson, “Information Uncertainty and the Transfer of Property”, (1984), 13 Journal of Legal Studies 299, at 312-16. - - - - - - Issue - Whether the legal system should treat knowledge as equivalent, for purposes of ordering claims of interests in an asset,, to the constructive notice that comes from an interest properly noted in the files. Three types of systems: notice statute, race-notice statute and a race statute Notice statute - Subsequent purchasers without knowledge or notice of an earlier security interest will have priority. - Purchasers with knowledge or notice of an earlier security interest will not have priority over the existing security interest. - Filing is irrelevant in determining priority between the two priorities after the transactions are completed. Race-notice statute - A purchaser will prevail in priority if he had no notice or knowledge of an existing security interest but still must be first to register. - If has notice, cannot gain priority. Race Statute - Knowledge gained outside the filing system is irrelevant. The first party to file wins. Race statute is preferred - Knowledge constraint imposes costs - Inquiries into knowledge will be expensive - Punishing those with knowledge. We want to encourage people to gather information. Relevant focus should not be on the relative rights of the prior and subsequent purchasers, but rather on the relative rights of the prior and subsequent purchasers – those with knowledge and those without it. Implementing a notice recording system, at best, penalizes only a party who actually makes a loan or other purchase. At the margin, such a rule may discourage people from gathering information about property in the first instance. People with knowledge will be discouraged to participate. Notice systems can create circular priorities - Assume filing occurred in this order B, C, A but A had attached first. - Assume B had knowledge of A’s interest but C did not. - A over B as B had knowledge - B over C because it was the first to file. - C over A because it filed before A and had no knowledge. - A -> B -> C -> A 68 Prior Lender’s Competitive Advantage James Talcott, Inc v Franklin National Bank of Minneapolis, 194 NW 2d 775 (S Ct Minn 1972) - Facts - - - Creditor 1 had registered very broad financing statement: “Construction Equipment, Motor vehicles” Creditor 2 makes lease for dump trucks Creditor 1 gives additional money, does not register new financing statement despite revised security agreement giving interest in all property. Debtor goes bankrupt Creditor 2 repossess the dump trucks Creditor 1 wants the dump trucks. Issues - 4) whether the financing statement filed in favour of creditor 1 was sufficient to protect a security interest in the property covered by the extension agreement; - 5) which security interest was entitled to priority Ratios - The original financing statement can be used for subsequent security agreements, future advances, and/or after acquired property. - “A financing statement may be filed before a security agreement is made or a security interest otherwise attaches.” - The code does not require a reference in the financing statement to afteracquired property. - Once a financing statement is on file describing property by type, the entire world is warned, not only that the secured party may already have a security interest in the property of that type, but that it may later acquire a perfected security interest in property of the same type acquired by the debtor in the future. - Even where the parties originally contemplate a single debt, secured by a single item of property or a single group of items, the secured party and debtor may enter into further transaction whereby the debtor obtains additional credit and the secured party is granted more security. - Parties may use future-advance and after acquired clauses, and they are a great convenience. But if they are not used, there is nothing in the code which prevent the parties from accomplishing the same result by entering into one or more additional security agreements. - Where originally a security agreement is executed, an indebtedness created, and a financing statement describing the collateral filed, followed at a later date by another advance made pursuant to a subsequent security agreement covering the same collateral, the lender has a perfected security interest in the collateral not only for the original debt but also for the later advance. 69 - - Priority - If a dispute arises over priority of perfected security interests (both having been perfected by filing before the dispute arose), then the order of filing of the financing statement governs. - All that is required is a minimal description, and it may be by type or kind. The statement need not necessarily contain detail as to collateral, nor any statement of quantity, size, description or specifications, or serial numbers - No preciseness is required with respect to whether the collateral exists at the time of filing or is to be acquired thereafter, and no statement of charges, payment schedule, or maturity date need be included in the statement. The first to file shall prevail. Notes - Section 18 of OPPSA allows potential creditors to ask existing secured creditor for details. - Outcome under the Canadian PPSA is the same. - OPPSA s 45(4) provides that one financing statement may perfect one or more security interests created or provided fo by one or more security agreements. - Creditor 2 had a Purchase Money Security Interests. This means it would have had priority over Creditor 1had it registered within 10 days: OPPSA s 33(2) Security for Future Advances The Law Prior to PPSA as per Hopkinson v Rolt (1861) the tacking doctrine applied: - SP2 could not have priority over SP1 if it had notice of a security interest. The PPSAs replace the tacking doctrine with statutory rules. In Ontario, section 13 read in conjunction with s 30(3): Section 13 – a security agreement may secure future advances Section 30(3) – where future advances are made while a security interest is perfected, the security interest has the same priority with respect to each future advance as it has with respect to the first advance. Section 1(1) definition of “future advance”: advance of money, credit or other value secured by a security agreement whether or not such advance is given pursuant to commitment” Section 45(4): One financing statement can secure multiple transactions and multiple security agreements provided the goods are not consumer goods. 70 Policy considerations Force SP2 to negotiate a subordination agreement with SP1 to be sure of priority As Jackson and Kronman suggest, the policy justification for giving SP1 priority over SP2 for its future advances is that is saves transactions costs without having to file each time. [ there are also heuristic biases that make that make race statutes more attractive. No need to calculate the incremental amount of risk to find the appropriate interest rate ] Coin-O-Matic Service Co v Rhode Island Hospital Trust Co 3 UCC Rep Ser 1112 (RI Superior Ct 1966) - - - - Criticised judgement does not reflect law Facts - SP1 security agreement and registers financing statement - Subsequently SP2 security agreement and registers statement - Then, SP1 makes new loan that cancels the first, new financing statement filed Issue: who gets priority when the first secured creditor subsumes a loan under a new aagreement and registers a new financing statement which is third in priority to another creditor’s and its own first statement. Ratio - If SP1 gets priority it places an unusually strong position vis a vis the debtor and any subsequent lenders. In fact, it gives the lender a throttle hold on the debtor - Says OPPSa s 18 pointless if SP1 gets priority - Information secured by the debtor and given to a subsequent lender is of little value because the second creditor surely could not rely upon the information. ... there seems to be hardly any substantive reason why the original lender should be bound to comply with the borrower’s request for information concerning a ccorrect statement of the outstanding balance and the collateral covered under the security agreement. Analysis - Finds in favour of SP2 which is more like a transactional system. Priority of Re-perfected Security Interests How financing statement can become unperfected 1. If debtor changes name: s 48(3) 2. If debtor transfers interest in the collateral: s 48(2) 3. If the financing statement expires: s 51(2) Section 30(6) - Where a security interest is perfected by registration becomes unperfected and is reperfected, it shall be construed as continuously perfected against all creditors with exception of parties who obtain a security interest in the expired period. - Purpose: 71 - - Prevent a later secured party from gaining a windfall because an earlier secured party has failed to re-perfect. No limit on the period of time between discharge or lapse and re-perfection. Differences between Sask and Ontario - Sask s 35(7) - A secured party must register the security interest not later than 30 days after the lapse or discaharge. Heidelberg Canada Graphic Equipment Ltd v Arthur Anderson Inc (1992), 4 PPSAC (2d) 116 (Ont Gen Div) - - Section 30(6) portion only, see above for full notes. Heidelberg sold equipment to Kennedy, held SI in inventory, equipment, accounts and other. Assigned to bank, bank mistakenly filed a change statement to remove some equipment. At the time there was a subordinate SI registered. 2 days later refilled a new Financing Change Statement to include the equipment again. Issues - Do subordinate interests gain priority if a FCS removes an item and then puts it back on later on. Do subordinate interests gain priority if a FCS removes an item and then puts it back on later on. - No. S 30(6) applies to deem the accounts to be continuously perfected from the time it was first perfected by the financing statement. - To gain rights during the interim period, you would have to do some action to get them. IE file a financing statement. - “Only protects a creditor who acquires some new rights in the collateral during the unperfected period” - 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 except that if a person acquired rights in all or part of the collateral during the period when the security interest was unperfected, the registration shall not be effective as against the person who acquired the rights during such period. Subordination Agreements A subordination agreement occurs when a senior secured party agrees to subordinate its security interest to the security interest of a junior secured party. It does so if it is in its interest not to foreclose the debtor’s access to other sources of credit. A subordination clause differs from a subordination agreement in that it appears in the security agreement between the secured party and the debtor; other secured parties are not privy to it although they are expected to benefit from it. 72 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. PPSA s38 enforces the terms despite no privity. Euroclean Canada Inc v Forest Glade Investments Ltd (1985), 16 DLR (4th) 289 - ONCA held that OPPSA s 38 creates an exception to the privity doctrine. The beneficiary of a subordination clause is not required to perfect its security interest before it can invoke the clause. Turnover Agreement - SP1 promises that if it enforces its security interest, it will pay the proceeds to SP2 up to the value of the collateral. Section 50 makes registering a financing statement declaring a subordination agreement permissible. That will inform searchers to direct s 18 inquiries to SP2. Circular Priorities – Payout Rules Royal Bank of Canada v General Motors Acceptance Corporation of Canada Ltd (2006), 274 DLR (4th) 372 (NLCA) (see payout rules on next page) - Issue - - - Ratio - - Whether by virtue of that subordination: (a) RBC moves up to stand in the place of CIBC and thereby gains priority over GMAC; or (b) while CIBC ranks in priority behind RBC, nonetheless GMAC retains its priority over RBC. The issue thus crystallizes into whether or not the CIBC-RBC subordination agreements have the effect of advancing RBC’s priority to the rank of CIBC’s thus gaining priority over GMAC’s. If they have this effect, RBC ranks ahead of GMAC; if not, GMAC ranks ahead of RBC. Section 41 of NL PPSA - A secured party may subordinate, in a security agreement or otherwise, the secured party’s 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. The solution is to pay C first without prejudicing B, as if there had not been a subordination clause. Payout in a circular subordination goes like this - Assume A,B,C have interests in that order but A subordinates to C 73 - Set aside from the funds the amount of A’s claim. From that amount, pay C’s claim Any remaining from that amount, pay A - Pay to B the amount of the fund remaining after A’s claim has been set aside. - If any balance remains after B has been satisfied distribute the balance to C and then A. See partial subordination rule on page 82 in CIF Furniture – same rule! Purchase Money Security Interests - - PMSI are an exception to the priority rules in s 30. It allows a creditor to rank higher in priority to other existing security interests where the lender satisfies the definitional requirements as well as the requirements in ss 33(1) and (2). Requirements to achieve PMSI Status - Definitional (a) if a seller sells on credit they can retain a PMSI to secure payment; - (b) a lender can claim PMSI status provided it can show that value was given for the purpose of enabling the debtor to acquire rights in, or to, the collateral and that the value was in so fact applied; and - (c) PMSI status is afforded to a lease of goods for a period greater than one year. - A PMSI does not apply to sales to the creditor with a leaseback. - For PMSI interests in inventory the PMSI must be perfected - For a PMSI to have super priority look to s 33 - S 33(2) – Non Inventory Collateral Must be perfected before or within 15 days after the debtor obtained possession of the collateral as a debtor. - S 33(1) – Inventory Collateral Perfected at the time the debtor receives the inventory; Notice is given to every other security interest holder before possession of the inventory describing the inventory by item or by type. Thomas H Jackson and Anthony Kronman, “Secured Financing and Priorities Among Creditors” (1979), 88 Yale LJ 11 43 - PMSI status is granted to stop first to register with an after-acquired clause from having a situational monopoly. 74 Value given, debtor obtains rights with that value Agriculture Credit Corp of Saskatchewan v Pettyjohn [1991] 3 WWR 689 (Sask CA) - - - - Facts Issues - Ratio - Pettyjohns take loan from ACCS to buy cattle which serve as security for the loan. Cannot sell cattle w/o written consent ACCS made loan money available after Pettyjohn’s purchased the cattle. BMO made a bridge loan, to facilitate Pettyjohn’s sell cattle to buy other cattle Went broke, ACCS wants to seize but other Sask law prevents seizing unless PMSI Did ACCS have Purchase Money Security Interest in the original cattle despite only paying out the loan after the cattle had been bought? - Did the loan qualify as value given to the debtor and did the debtor use the value to acquire the collateral? Are the new cattle the proceeds of the original and therefore if they do have a PMSI? Requirements to be a PMSI - 1) lender has taken a security interest in the property - 2) lender has given value for the purpose of enabling the debtor to acquire rights in the property. - 3) the value has in fact been used to acquire those rights. - Value is given where a lender makes a binding commitment to extend credit, notwithstanding. - Use of value after the acquisition of rights does not preclude the conclusion that the value was used to acquire those rights. - “The fact that the use of the value given was, due to the nature of the transaction, after the acquisition of rights does not alter the conclusion that the value given was used to acquire those rights.” Analysis - Pettyjohn’s used the commitment from ACCS as the ultimate value for the transaction. - There fore loan is a PMSI Battlefords Credit Union Ltd v Ilnicki (1991), 82 DLR (4th) 69 - - Ratio - The consolidation loan was a purchase money loan since it enabled the debtor to pay off prior security interests and to increase his own bundle of rights in the collateral. Sask case is inconsistent with s 33(1) and (2) which requires debtor obtain the collateral 75 Unisource Canada Inc v Laurentian Bank of Canada (2000), 47 OR (3d) 616 (CA) - Issue - - - - - Facts Ratio - Whether the motions judge erred in holding that the general security agreement held by Unisource had priority. Did the refinancing and new security interest enable the debtor to acquire rights in or to the collateral? Printers group acquired printing press, sold it to Royal and then did a lease back. Laurentian subsequently refinanced the press, did not take an assignment of RB’s interest but registered a new agreement. Legal title passes to Printer’s Group. PMSI a security interest taken by a person who gives value for the purpose of enabling the debtor to acquire rights in the or to collateral to the extent that the value is applied to acquire the rights - Has priority provided 33(2) conditions are met. - If the security interest allows the debtor to acquire further rights, such as legal title, that qualifies as gaining rights in the collateral. Analysis - Enabled PG to acquire further rights in the press that it previously did not have, therefore it was a PMSI - Lease to title is more than a distinction with a difference as the lease is a contingent ownership where title is ownership once paid for. Cites Greywest Leasing Inc v Canadian Imperial Bank of Commerce (1991), 1 PPSAC (2d) 264 - If a creditor could obtain PMSI merely by helping a debtor to pay for something of which the debtor had already taken possession then all lenders to debtors could jump the priority queue by making their loan on a specific piece of collateral. - But that case was not about obtaining further rights. Inventory PMSI Clark Equipment of Canada Ltd v Bank of Montreal (1984), 4 PPSAC 38 (Man CA) - - Facts Ratio BMO made loan to Maneco, floating charge and after acquired clause Clarke and Credit (financing arm of Clarke) sent notice to BMO about intention to acquire security interest in then owned inventory. Registered financing statement. Year later Maneco acquired three pieces of new equipment from Clark. BMO registered first, so if not PMSI, then BMO has priority 76 - - In order to qualify for special priority granted by s 34(2), [33 in Ontario] the creditor must establish first of all that it has a purchase money security interest in inventory. - A PMSI will be entitled to special priority if three conditions are met: - 1) Perfection of the purchase-money security interest at the time the debtor received possession of the collateral; - 2) Notification to a prior security interest holder about the purchase –money security interest before the debtor received possession of the collateral; and - 3) The notification must inform the prior holder that the seller (the appellants) had or expected to acquire a purchase-money security interest in inventory describing the inventory by item or type. - Doesn’t matter if the agreement calls the interest a PMSI, must fit within the definitional constraints. It is the “substance of the agreement; not what the parties happened to call it.” - PMSI Priority can be granted to only parts of the agreement. It is severable. Analysis - The proper ground work is laid for a PMSI. - The then owned equipment is not covered, but given a PMSI can be severed from other security, the security interest in the new equipment has PMSI status. Cross Over Inventory PMSIs – Previous Collateral covers current debt Re Chrysler Credit Can Ltd and Royal Bank of Canada (1986), 30 DLR (4th) 616 (Sask CA) - Facts - SP1 is for ALPAP by RBC and was registered first. He has monopoly over those assets until PMSI comes in. PMSI does come in, Chrysler credit. Effectively there were conditional sales financed by Chrysler credit so that every time that this White Plymouth dealership would buy cars at wholesale to sell they would borrow from Chrysler that advanced money with PMSI for those cars. Their agreement was very specific (not that it had to be because priority regime gives priority for collateral financed and proceeds from that collateral). Reason that proceeds are included is because inventory is not an asset for long, it gets bundled and sold. WP ran into difficulty and it owed a lot to RBC and a lot to Chrysler credit. Both of them looked to recover from the assets on the dealer lot. - RBC had general security interest and after-acquired clause. Included inventory and proceeds, including trade-ins. Chrysler Credit (“CC”) inventory PMSI covering proceeds including trade-ins. CC served notice, perfected, PMSI status OK. CC had PMSI which ranks ahead of banks Dealership goes broke, 44 second hand cars in stock - 1) 4 are trade ins on sale of new cars which CC has not been paid on its loans for - 2) 31 are trade-ins for new cars, which CC has been paid for - 3) 9 cannot be linked to the sale of new cars - - Issue 77 - - - Ratio - Who gets what? Which of the three categories did CC PMSI extend to? PMSI gets special priority over any other security interest in the same collateral given by the same debtor, provided PMSI is perfected when the debtor receives possession of the goods, and that notice, as require by the subsection, is served upon others having a registered security interest in that type or kind of collateral. - If the agreement specifies that the whole of the collateral is answerable to the whole of the debt, then the PMSI will apply to inventory items which the loans have been paid for already, where there is an existing loan outstanding. Such a PMSI is called a cross over PMSI. Analysis - Trade-ins constitute proceeds. - CC undoubtedly has priority to 1st category. - CC only has regular security interest in 3rd category as it cannot be said they are proceeds of inventory - So what about the 2nd category, does CC PMSI extend to it even though it has been paid on the loan? - Agreement says To secure the performance and payment of any and all present and future obligations of the Dealer to CC, the Dealer does hearby grant, bargain, sell, mortgage and convey a PMSI to CC in and to the Collateral referred to in paragraph 3 hereof together with all proceeds The security interest in the Collateral is granted to secure the performance and payment of all obligations and indebtedness of the Dealer to CC … of every kind and character, direct or indirect, and whether such indebtedness is from time to time reduced and thereafter increased or entirely extinguished. - Section 9 says “Except as otherwise provided in this or any other Act, a security agreement is effective according to its terms” - CC agreement with the debtor/dealer entitled it to inventory or proceeds which although CC had been paid for, it secured other loans outstanding. - So… they intended to have the whole of the inventory answerable for the whole of the debt, so that as long as any part of the indebtedness remaining owing, the inventory remained liable to satisfy it. - CC gets the cars. 4 categories of assets on the lot: 1)New cars that hadn’t been sold – court said that this was easy decision. Chrysler should get the new cars because of the PMSI. 2)Trade-ins that were traceable to new cars that had just been sold – Court said that this was easy as well. Chrysler would get these as well because the security agreement included proceeds and these trade-ins were clearly proceeds. 3)Junky used cars that were not traceable to the sale of new cars (must have been that they bought the used cars and they were not trade-ins and if they were then there was no record of them being trade-ins) – Court said that it is another easy answer and that they go to RBC under their ALPAP. If it doesn’t trigger the PMSI then it goes to the first registered person, which in this case is RBC. 78 - 4)Trade-ins that were traceable to new cars, BUT the loan for the new cars had been paid (there was a PMSI because CC lent money to WP and then WP sold the car for a trade-in but that trade-in was so bad that it sat for too long that by the time the insolvency happened the actual debt for the new car had been extinguished). – Court found that those cars belonged to Chrysler credit. Court applied what is reffered to as the cross-over clause. If you are an inventory financier, then all the cars you financed secure all of the PMSIs. They look at it as a class of inventory being financed. Rationale for that (which the prof doesn’t think should have been applied) goes back to financing of inventory for hard to distinguish assets. Court allows for crossover in this case because it is too difficult to separate where the money went. Prof disagrees with this because he doesn’t think it fits in the definition of PMSI. There is no loan or obligation anymore so there shouldn’t be a PMSI anymore. The author suggests that they also may agree with this, but some academics say that PPSA is meant as general application so you have to look at it without focusing on the specific asset but rather at general rules. Unisource Canada Inc v Hong Kong Bank of Canada (1998), 43 BLR (2d) 226 (Ont SC) - - - Facts - Wholesale security agreement to create PMSI for Unisource benefit. Printer went bankrupt, had paper supplied by Unisource. However, some had been converted to brochures. Issue - Did Unisource hold a cumulative PMSI in the printed products with respect to all monies owing to it or whether its priority was limited to the paper content in each batch of printed products for which it had not been paid? - Otherwords, could it use debt on some items to apply to collateral of previous paid for items. Conclusion - Judge decided that PMSI only applied to each batch to which it had not been paid. Critics - Professor McLaren has argued that the court should have recognized Unisource’s revolving PMSI in the inventory in JGs hands, even though the composite inventory could not be traced to specific orders. - In the case of smaller items and fungible goods it is often impractical to expect the supplier to keep track of how much has been paid on each delivery. - The criticism is not consistent with Ontario PPSAs, would have to revise definition similar to Article 9 that PMSI applies to other inventory that was subject to PMSI interests but that is now paid for. PMSI Priority in Proceeds – Inventory v Receivables Financiers Massey-Ferguson Industries Ltd v Melfort Credit Union Ltd (1986), 6 PPSAC 120 (Sask QB) - - Applicant inventory financer v respondent receivables financer Law - 34(2) - Credit union says new value was given and that its registration was first in time. Ratio 79 - - An inventory financier with a PMSI claiming accounts as proceeds will defeat an accounts financer with a PMSI unless the rule is modified as it is in Sask and Manitoba. In Sask, the result is that an accounts financer is given priority over an inventory financer claiming accounts as proceeds if as between the two accounts financer has registered first. Notes - In Ontario & Atlantic Provinces - The inventory financer gets priority under the PMSI provision, regardless of order of registration, but subject to giving the accounts financer prior notice. - In US and Sask, Account PMSI gets priority on new value: US Official Comment explains the thinking When inventory is sold, someone else will be financing the resulting receivables (accounts or chattel paper) and the priority for inventory will not run forward to the receivables constituting the proceeds. The cash supplied by the receivables financer will often be used to pay the inventory financer. - Prior to 2006 inventory financer got notice, and no requirement to give notice. [EXAM?? Could be hunting out students using old summaries!] - However most provinces have chosen first to register gets proceeds - Will show up on the register and parties can negotiate to subordinate. Non Inventory PMSI North Platte State Bank v Production Credit Ass’n 200 NW 2d 1 (Neb S Ct 1972)- Issue Facts - - - Issue Ratio - Priority of secured creditors each with a perfected security interest Tucker received loan from PCA for livestock with security interest and after acquired clause for purchased or natural increases or otherwise. Tucker later purchased other cattle, took possession of them for 1.5 months before being billed. Tucker 2 months after possession gets loan to purchase and security agreement. Bank files financing statement few days after executing loan. Does the Bank have a PMSI? If so, did it acquire priority? Title passes to the buyer at the time and place at which the seller completes his performance with reference to the physical delivery of the goods, despite any reservation of a security interest. 80 - - - - 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 use the of collateral if such value is in fact so used. - The time at which the debtor receives possession starts the running of the ten-day grace period for perfection. Analysis - Title passed and it was an unsecured credit transaction between tucker and the seller. - The money advanced by the Bank enabled Tucker to pay the price but was not used by Tucker to acquire any NEW rights that he did not already have – title and possession. - The filing occurred 2 months after cows had been delivered needed to be within 10 days under US law. Conclusion - Bank failed to comply with requirements. - Did not file a financing statement in time - Therefore first to file wins. PCA wins. Notes - In Ontario there is no notice requirement for non inventory collateral and creditor has 15 days to register [case book says 10 here, but it is wrong] Brodie Hotel Supply v US, 431 F2d 1316 (CCA 9 1970) - Facts - - - Proceeds of restaurant equipment Brodie sold equipment to restaurant which went bankrupt Brodie repossessed but left it in the restaurant Lyon took possession and operating it. 5 months later got a loan from Bank of Alaska, chattel mortgage covering restaurant equipment. Bank assigned mortgage to SBA represented by US. Shortly after Brodie executes chattel mortgage for equipment. Brodie files financning statement. Summary - Debtor has possession for 5 months w/o agreement with SP2. SP1 gets secured interest meanwhile on general loan. SP2 then executes a mortgage after SP1 to give title in the equipment. - Issue – he had it but did he have it as a debtor? Ratio - PMSI prevails over conflicting interest in non-inventory collateral if “the PMSI is perfected at the time the debtor receives possession of the collateral or within 10 days after the debtor receives possession.” - Term debtor means the person who owes payment or other performance of the obligation secured.” Analysis 81 - Lyon was not obligated to pay or other performance and therefore was not a debtor. Brodie’s filing was therefore within the 10 day period of the debtor receiving possession. Notres - OPPSA s 33(2)(a)(i) adopts Brodie’s reasoning by requirement of obtaining possession as a debtor. - Seller PMSI priority over non seller PMSI s 33(3) MacPhee Chevrolet Buick GMC Cadillac Ltd v SWS Fuels Ltd - - - - - Facts Issue - Dixon fuels obtained possession of GMC Truck in 2004 and kept possession since then. First was a lease in 2004 with GMAC but then in November 2007 MacPhee purchased title from GMAC and released it to Dixon Fuels. GMAC had a PPSI but did MacPhee? SWS has regular security interest before MacPhee. Whether MacPhee has super-priority, as holder of a PMSI, over SWS - Did Dixon Fuels “obtain possession of the collateral” on or after November 20, 2007 Ratios - PMSI to include the interest of a lessor of goods under a lease for a term of more than one year. - It is not whether the debtor “had” possession within fifteen days, rather the standard is whether the debtor “obtained” possession within the fifteen days. - The Legislature has not conditioned the PMSI’s super-priority on the date the debtor first possess collateral as a debtor to each new creditor, despite that the debtor earlier had obtained his possession of this collateral as a debtor with another creditor. Other Law - The reason the PPSA applies to leases is that the lessor has allowed the lessee to have the appearance of power to deal with the asset. Conclusion - MacPhee does not have a PMSI as the debtor did not obtain possession within 15 days. - Dismiss the appeal and affirm the ruling that SWS has priority over MAcPheee for the GmC Truck and its proceeds. Subordination Agreements OPPSA s 38 provides that a subrogation agreement or provisions is “effective according to its terms” Euroclean Canada Inc v Forest Glade Investments Ltd (1985), 16 DLR (4th) 289 (Ont CA) - SP1 and D entered in to general security agreement covering all D’s assets - Agreement allowed the D to acquire new property with mortgages which would rank ahead of the SP1’s agreement 82 - - SP2 failed to register a PMSI in time but did register a regular security interest. - The subordination clause gave SP2 priority regardless. Also term: Floating Charge - Houlden HA said the the use of “floating charge” in describing the security interest may implicitly make it subject to subordination: “that is, the consent of the secured party to the debtor to deal with the charged collateral in the ordinary course of his business free of, or subordinate to, the lien represented by that charge.” Chips Inc v Skyview Hotels Ltd (1994), 116 DLR (4th) 385 (Alta CA) - SP1 and D enter into security agreement and agreement says no security interest can rank ahead unless it is a PMSI and the PMSI can only cover the equipment purchased. Kubota Canada Ltd v Case Credit Ltd (2005), 253 DLR (4th) 171 (Alta CA - Ratio: PMSI should not have priority at all unless they comply with section 33. - But may be a wrong decision The problem with this conclusion is that it disregards the statements in s 38 - That a subordination agreement is effective according to its terms. Implication is that if SP1 allows D to create PMSIs, the PMSI should always have priority whether it complies with s 33 or not. - But that undermines notice and timely registration - Courts steer the middle ground on a case by case basis, no certainty Partial Subordination – Circular Priorities CIF Furniture Limited (Re), 2011 ONCA 34 - Facts - - - Priorities dispute between 2 secured creditors of Insolvent Corporation. Kari Holdings (holding company of insolvent corp.) and VenGroth group which financed owner’s shares. Result of credit agreements and inter creditor agreements - VenGrowth -> Kari -> Commercia -> VenGrowth Issue - Whether a theory of complete subordination or a theory of partial subordination should be used to resolve the dispute. - Under the complete subordination theory Kari gets jumped up, under partial VenGrwth succeeds. Partial Subordination wins, finds in favour of vengrowth Complete subordination (which is not chosen) - SP1 gives to SP3 but SP3 not greater than SP2 so new order is SP2, SP3, SP1 Partial Subordination chosen - SP1 gives up to SP3 only the amount of its claim (4.3mm) 83 - - SP2 stays in its same priority and is not prejudiced by the SP3 taking only what SP1 would have been entitled to. - SP3 takes anything left after SP2’s claim is satisfied if not fully satisfied already. - SP1 takes anything left after SP3 is satisfies. Section 38 - “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” - Third parties not privy to the subordination agreement can rely and enforce that subordination. 84 Fixtures Fixtures: s 34 Interest in land existed before the security interest attached Interest in land was subsequent to the security interest attachment. (including a creditor who had a prior encumbrance but made a subsequent advance) Security Interest attached before the goods became a fixture The security interest has priority: s 34(1)(a) Security Interest has priority if the land interest had knowledge or the secured party registered as per s 54 in the land registry. If no knowledge and no registration then the party with the interest in land has priority to the fixture: s 34(2) Security Interest attached after the goods became a fixture The party with the land interest has priority unless they consented to the security interest or disclaimed their interest in the fixture in writing: s 34(1)(b) The security interest has priority if the competing party with the land interest had knowledge of the security interest or the security interest was registered as per s 54. Conversely, the land interest has priority if there was not knowledge and there was not registration as per section 54. The priority of security interests in fixtures turns on a matrix of outcomes depending on (1) whether the security interest attached before or after the goods became a fixture and (2) whether the competing party’s interest in land was subsequent to the security interest attachment – including prior creditors who made subsequent advances, or whether the interest existed before the security interest attached. Where the security interest attached before the goods became a fixture and the competing parties interest in the land existed before the security interest attached: the security interest has priority: s 34(1)(a). Where the security interest attached before the goods became a fixture but the interest in the land was subsequent to attachment or where a prior creditor made an advance subsequent to the attachment, the security interest Security Interest has priority if the land interest had knowledge or the secured party registered as per s 54 in the land registry. Otherwise, if there is no knowledge and there has not been a section 54 registration, then the competing party with the land interest has priority: s 34(2) 85 Where the security interest attached after the goods became a fixture and the interest in the land existed prior to the attachment, the party with the land interest has priority unless they consented to the security interest or disclaimed their interest in the fixture in writing: s 34(1)(b). Where the security interest attached after the goods became a fixture but the interest in the land was subsequent to attachment or where a prior creditor made an advance subsequent to the attachment, the security interest has priority if the competing party with the land interest had knowledge of the security interest or was the security interest was registered as per s 54. Conversely, the land interest has priority if there was not knowledge and there was not registration as per section 54. Meaning of Fixture Cormier v Federal Business Development Bank (1983 ), 3 PPSAC 161 (Ont Co Ct) - - - Issue - Facts - Who is entitled to possession of five items of machinery and equipment which are situated on the premises owned by the applicants and which had been leased to Country Squire Auto Body Limited which went bankrupt? Land owner v security holder in equipment attached to the building (just by a few bolts though) Ratios - What is a fixture - Not defined in the act. - Cites Stack v T Eaton Co (1902), 4 OLR 335 (CA) Five rules were laid down to assist the court in determining what constituted a fixture 1. Not attached to the land other than by gravity are not a fixture unless intended to be. 2. If affixed to the ground, even slightly, it is part of the land, unless it can be shown they were intended to be chattels 3. To alter the prima facie character must consider the degree of annexation and the object of the 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 (objective not subjective) 5. Even in the case of a 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 the 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. 86 - - - Cites Argles v McMath (1894) 26 OR 224 (HC) Distinction between fixtures in the primary sense and were irremovable and fixtures in the secondary sense of the term which were removable. Secondary fixtures included fixtures affixed for purpose of trade or demostive convenience or ornament and the tenant had qualified rights to them. - Fixtures in the act were intended to cover all chattels attached to the land by the tenant whether they are removable or not even if they are subject to the tenants right of severence. Analysis - Rule 2 applies, but so does rule 5. The tenant affixed them for the purpose of trade. - Fixtures 1&2affixed to the property prior to the chattel mortgage, - Fixtures 3&4 affixed to the property subsequent to the chattel mortgage. Notes - Circular priorities problem could arise where SP1 does not file as per s 54 but SP2 does. - SP2 -> LI -> SP1 -> SP2 GMS Securities and Appraisals Limited v Rich-Wood Kitchens Limtied (1995), 21 OR (3d) 761 (CA) 859587 Ontario Ltd. v. Starmark Property Management Ltd. (1997 ), 12 PPSAC (2d) 281 The outcome of this case turns on whether it was a chattel or a fixture. Feb 96, HK auto center rented land from SPM. March 96, Atlantic sold a spray booth to HK as conditional sale. Booth was installed in March. Large booth and weighed 3,500 pounds and was attached in way that could easily be removed. Sept.96 HK owed rent and landlord levied on the property and took possession of the booth. At the time HK had paid 11k but still owed 7k. Atlantic was unperfected at the time that the landlord took possession. Landlord said they should be able to sell the spray booth because it was affixed to land they owned or because it was chattle and they could sell it. Talking about whether the landlord can exercise rights in this way. Lien that landlord had over chattel on property isn’t subject to the PPSA except for s4. and s.20(1). Here the landlord has lien under landlord tenant act and under s.20(1)(a) because Atlantic’s interest was unperfected they therefore had subordinate interest to the landlord (IF IT WAS CHATTEL). S.34 which talks about if it is a fixture, then Atlantic had security interest before it was attached to the property (because it was conditional sale) then under S.34 Atlantic would get the priority. So if fixture then Atlantic wins, and if chattel then landlord wins. Looks back to C v FBDB for the conditions set out. SPM was trying to argue that the spray booth wasn’t really affixed because it was such a miniscule attachment. Court held that the minimal attachment brings it into the realm of a fixture. Legislative 87 intent here is to affix it and override the PPSA. So here Atlantic won. Accessions: s 35 Probable not on exam Accessions: means goods that are installed in or affixed to other goods; the good is known as an ‘accessory’ that is attached to the principle good. It maintains its identity. 35. (1) Subject to subsections (2) and (3) of this section and section 37, a security interest in goods that attached, (a) before the goods became an accession, has priority as to the accession over the claim of any person in respect of the whole; and (b) after the goods became an accession, has priority as to the accession over the claim of any person who subsequently acquired an interest in the whole, but not over the claim of any person who had an interest in the whole at the date the security interest attached to the accession and who has not consented in writing to the security interest in the accession or disclaimed an interest in the accession as part of the whole. Exceptions (2) A security interest referred to in subsection (1), (a) is subordinate to the interest of, (i) a subsequent buyer of an interest in the whole, and (ii) a creditor with a prior perfected security interest in the whole to the extent that the creditor makes subsequent advances, if the subsequent sale or subsequent advance under the prior perfected security interest is made or contracted for before the security interest is perfected; and (b) is subordinate to the interest of a creditor of the debtor who assumes control of the whole through execution, attachment, garnishment, charging order, equitable execution or other legal process, if control is assumed before the security interest is perfected. 2 Stage analysis: 1. Are the goods accessions in the statutory sense? 2. Which of the provisions under Section 35 apply? Industrial Acceptance Corp v Firestone Tire & Rubber (1968), 8 DLR (3d) 770 (Alta AD) - Old common law case, replaced by PPSA 88 - - Does doctrine of accession apply so as to cause the tires to have become part of the truck and thus available as part of the security of the appellant? The right of accession gives the property in the whole to the owner of the principal chattel, which is probably that which is the greater in value, and the degree of annexation sufficient to constitute an accession may be decided in the light of various tests: (1) that of “injurious removal” – can there be a separation of the original chattels without destroying or seriously injuring the whole?; (2) that of “separate existence” – has the incorporated chattel ceased to exist as a separate chattel?; or (3) would the removeal of the incorporated chattel destroy the principal chattel? Notes - PPSA definition of accession is much broader than the common law test: the only question is whether the goods have been installed or affixed to other goods. It makes no difference whether the goods can be removed without damaging the principal goods. GMAC Laseco Ltd v Tomax Credit Corp [2001] OJ No 2927 (SC) - - Radio equipment and security alarm were installed in truck. Repair has a lien on it according to Repair and Storage Lien Act. Laws - Lien in s 3(1) of the RLSA is restricted to the amount agreed to be paid for, or the fair value of the repair. - Accession is defined in s 1(1) of PPSA to mean “goods that are installed in or are affixed to other goods” Analysis - A radio installed in a vehicle is not a repair under the RLSA. It does not alter, improve or restore the properties of the vehicle. It is different from tires, windows, brakes, transmission, exhaust systems. Dented fenders, scraped paint, etc - PPSA applies to the radio. - RLSA applied for the security alarm as it was considered operational part of the truck (shows how hard it can be to distinguish) Commingled Goods: s 37 S 37: A perfected security interest in goods that subsequently become part of a product or mass continues in the product or mass if the goods are so manufactured, processed, assembled or commingled that their identity is lost in the product or mass, and, if more than one security interest attaches to the product or mass, the security interests 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. Order of registration is irrelevant…if they are commingled they rank equally. Hence this is another exception to s.30 89 In the Matter of San Juan Packers Inc, 696 F2d 707 (CCA 9 1983) - Proceeds includes what ever is received when collateral or proceeds is sold, exchange, collected or otherwise disposed of. Banks security interest in the vegetables after their sale to the good processor Where collateral loses its identity by commingling or processing, the security interest continues in the mass or product Unisource Canada Inc v Hongkong Bank of Canada (1998), 43 BLR (2d) 226 - Paper products turned into brochures were “so processed … that their identity was lost in the product.” Gran Gilmore, Security Interest in Personal Property Vol II (Boston: Little, Brown 1965) Borden (UK) Ltd v Scottish Timber Products Ltd [1981] Ch 25 (CA) - Resin manufacturer had clause to say it retained title and so wanted full amount of debt instead of portion of the proceeds. But the court did not allow as they knew it would be used to be mixed into chipboard and would lose its identity Tracing remedy is not available under the rule in Re Hallett’s Estate (1880), 13 Ch D 696, where there is a mixture of heterogeneous goods in a manufacturing process wherein the original goods lose their character and what emerges is a wholly new product.” Transferees in Ordinary Course General rules: OPPSA ss 20(1)(c), 20(1)(d) and 25(1)(a) 20(1)(c): unperfected security interest in chattel paper, documents of title, securities, instruments or goods is not effective against a transferee thereof who takes under a transfer that does not secure payment or performance of an obligation and who gives value and receives delivery without knowledge of the security interest. 20(1)(d): same as above but for accounts 25(1)(a): where collateral gives rise to proceeds, the security interest therein continues as to the collateral, unless the secured party expressly or impliedly authorized the dealing with the collateral free of the security interests. Three rules read together: 1. If the security interest is unperfected, the transferee gets clear title provided the transferee gave value, took delivery, and had no knowledge of the security interest 90 2. If the security interest is perfected and SP expressly or impliedly authorized the transfer, transferee gets clear title. Courts will read in implied authority where collateral is inventory. 3. If the security interest is perfected and there is no implied or express authority to transfer, the transferee takes the items subject to the security interest. BUT WAIT THERE IS MORE Section 28 – Exceptions where T can get clear title despite perfection and no authority to transfer Exception: Sale of goods in ordinary course 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 therein given by the seller even though it is perfected and the buyer knows of it, unless the buyer also knew that the sale constituted a breach of the security agreement. Buyer 28(1) applies to buyers only not purchasers. As per the act a purchaser is more broad and can include secured parties purchasing secured interests, or people who take something by rent, lease,etc. So renters do not count as buyers. Given by seller – ABCD Problem 28(1) only applies if security interest is given by seller which can cause the ABCD problem: A transfers equipment (not inventory) to B with security interest. B needs cash and sells equipment not in the ordinary course of business to C. C sells in ordinary course of business to D. D takes goods subject to A’s security interest because the seller with the security interest did not sell it in the ordinary course of business. D had no reason to suspect or even find out about A as D would search C not B. Ordinary Course of Business Camco Inc v Olson Realty (1979) Ltd (1986), 50 Sask R 161 (CA) - Facts - - Issue - Provision similar to OPPSA s 28 Real estate developer with condo project sells kitchen appliances with units Appliances purchased by developer on conditional sale, Camco did not know they intended to resell the appliances and thought it was to go with the building (equipment) Camco is perfected. Developer goes belly up, Camco wants security interests to pass onto the condo purchasers. Were the sales to the end condo purchasers made in the ordinary course of business? Does it have to be inventory (not equip as per agreement) to be ordinary course? 91 - - - Ratio - S 28 protects such a buyer from a security interest created by his seller even though the security interest is perfected and the buyer knows of its existence, unless the buyer also knows that the sale was in violation of the security agreement. - Section 28 is not limited to inventory only, key question is whether the business is in the business of selling goods of that kind. - In Ontario you look at the general commercial practice rather than the dealer’s particular operating method - In Sask, you consider the business of the particular seller rather than limit the inquiry to the ordinary course of the business in the trade or industry as a whole. - Was the person in the business of selling goods of that kind and whether the transactions took place in the ordinary course of that business? - Give a liberal interpretation to “buyer of goods sold in the ordinary course of business of seller” protect buying public in cases where the secured party furnishes goods which are sold to the public by the debtor in the regular course of the debtor’s business. Conclusion - Condo seller sold the appliances in ordinary course of business, transferees get clear title. Notes - Developer had no authority to sell the appliances (were to be included as fixtures) but unit buyers had no easy way of discovering this. Outward appearances suggest the appliances were inventory and would expect to get clear title. Agriculture Commodity Corp v Schaus Feedlots Inc, [2001] OJ No 2908 (SCJ) - Ontario Seller starting in business so not previous pattern of sales. Frequency and number of sales is nto determinative of ordinary course of business 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?) It is what the reasonable buyer would think. Tanbro Fabrics Corp v Deering Milliken Inc, 39 NY 2d 623 (CA 1976) - Facts - Textile converters take raw textiles and put patterns on them etc Tanbro a textile conversion fabric company buys excess fabrics from other textile conversion company, Mill Fabrics. Those fabrics are in supplier’s warehouse, and supplier keeps it as a possessory security interest until converter needs some of it. Tanbro gets delivery through Mill Fabrics calling supplier to deliver to Tanbro 92 - - - - Issue - Mill Fabrics defaults with supplier, supplier will not deliver to Tanbro the fabrics purchased from Mill Fabrics. Whether Tanbro’s purchase was in the ordinary course of Mill Fabric’s business, and hence free of Supplier’s perfected security interest. Ratio - Buyer in the ordinary course takes goods free of even a known security interest so long as the buyer does not know that the purchase violates the terms of the security agreement. - Buyer in the ordinary course is a person who in good Analysis - Transaction was in the ordinary course, even though Mill’s sale was not its predominate business purpose. - Record shows that converters will sometimes sell excess fabric to each other, although infrequent, it was an ordinary course transaction, even if only incidental to their predominate business purpose. Conclusion - Tanbro gets the fabric over the supplier who was in possession. Notes - Criticism - Exceptions like s 28 was never intended to apply to a case where the secured party retained possession of the goods. Secured party with possession to make it impossible for the debtor to take any advantage of apparent ownership. Possessor expects perfection to be secure but now debtor can sell it regardless if it is in the ordinary course of its business. Sale v Agreement to Sell Royal Bank of Canada v 216200 Alberta Ltd (1987), 51 Sask R 147 (CA) - Issue - - - Facts - Whether a perfected security interest under the PPSA covering present and after acquired inventory of a retail vendor, takes priority over the claims of persons who, in the ordinary course of business, have placed a deposit or made a partial payment on goods in the possession of the vendor or prepaid all or a portion for goods not yet in possession of the vendor. What if buyers pre pay but have not taken delivery? - Where vendor has the equipment? - Where vendor does not yet have the equipment? Sofa company goes out of business. Class of buyers 93 - Ratio - - - 1 - Paid full price, but property not in possession of store 2 - Paid part of price for property in possession of store 3 - Paid part of price for property not in possession 4 - Owed refunds. Must determine if one is a buyer - Before a buyer can take property free of the security interest, he must establish that there has been a sale and that he is a buyer in the ordinary course of business. - Must refer to Sale of Goods Act to determine if there has been a sale. ( Subsequently overruled S 3(4): title has to transfer otherwise only an agreement to sell. Were they trusts which can defeat the security interest? - Liberal application of trusts can create uncertainty in commercial law. - How does one categorize the transaction here? Is it one where the purchases paid a deposit or part-payment of the purchase price, or a transaction where the purchaser paid money to the vendor in trust not to be applied or used until the happening of certain events, or is it an implied or constructive trust because of the unjust enrichment of the vendor? - Constructive has been utilized as a remedy for injured parties when there has been an unjust enrichment. - Not a trust. - Pre paid people are creditors only and subject to PPSA. Notes - Not fair as buyers were involuntary creditors. - S 28(1) presupposes that but for SI buyer would get goods, but what if you cannot identify which goods are for which buyers? Sale of Goods act says buyer gets none as nothing as been appropriated to the buyer in the contract? What if there are more buyers than sofas? - S 28(1) doesn’t do anything for the Buyer, extinguishing SP SI, if the Buyer has not title to a specific item. Spittlehouse v Northshore Marine Inc (Receivor of), [1994] 18 OR (3d) 60 (CA) - - Facts Issue Ratio Plaintiffs entered into contract with Northshore Marine for specific boat. Paid 90% of $550K, not yet delivered Northshore defaults with creditor Who gets the boat 94 - - - I would not follow the Royal Bank case No need to resort to trusts Sale of Goods Act is not relevant or material to resolution of finding out if a sale has occurred. - “Sale of Goods Act may affect the time when property in the goods passes but it cannot change what is clearly a sale in another Act into something it is not.” Analysis - Here there was a sale with a seller and a purchaser who between them agreed that title in the goods would not pass until all purchase money was paid. Note - - Go out of their way to draw distinction with RBC. They point to the case that RBC relied upon, UCC case, and point out that after RBC came out, the UCC case (in the US) got a lot of criticism and when it came back up it was overturned. There is no defintion of buyer/seller in PPSA, and this K was conditional sale agreement. It provides that they withhold legal title until final payment. Conditional sale is really just withholding legal title, but as purchaser/buyer, you have beneficial ownership. COA here siad that SOG act isn’t relavent to defining buyer as under the PPSA. When you look at current PPSA, combined impact of S.28 from 2006 amendments, these are made by people aware of the cases. These provisions confirm Spittlehouse, while also confirming the rules set out in RBC. 2006 Amendments – No title needed, goods must be identified - Section 28(1.1)(c) – subsection (1) applies whether or not title to the goods passes to the buyer - Overruling Royal Bank - 28(1.2) – despite 1.1, the goods still have to be identified - 28(1.3) – goods are identified to the contract when they are either identified and agreed upon by the parties at the time the contract is made or marked or designated to the contract by the seller or by the buyer, with the seller’s consent or authorization. Section 27 - Priorities with Repossessed or Returned Goods - If for example goods defective and returned - 27(1) regulates the rights of the goods between debtor and secured party - 27(3) same with chattel paper or account - 27(5) when transferee of account is demmed to have acquired a perfected security interest in the goods, use s 30 and 33 - 27(6) regulates contest between inventory financer and the transferee of chattel paper Transfer of Chattel Paper - Chattel Paper defined - One or more than one writing that evidence both a monetary obligation and a security interest in or a lease of specific goods. - S 28(3) - Purchaser of chattel paper who takes possession of it in the ordinary course of business and gives new value has priority over any security interest in it, 95 - - (a) that was perfected by registration if the purchaser did not know at the time of taking possession that the chattel paper was subject to a security interest. Applies to discounters SP1 –thing,SI---> D ---thing with a/r---> X, D –A/R chattel paper SP2 SP2 wins unless SP1 marked the chattel paper so SP2 has knowledge? But must be in ordinary course of business, must be a discounter ordinarily Purchase applies where discounter either buys the chattel paper or has it as collateral for a loan. (b) that has attached to proceeds of inventory under section 25, whatever the extent of purchaser’s knowledge SP2 has K of SP1 SI SP1 –thing,SI---> D ---thing, A/R---> X, D –A/R chattel paper SP2 SP2 wins SP2 wins only if dedicated inventory financer, otherwise use (a) Transfer of Instruments and Documents of Title Jacob Ziegel, “Perfection by Registration, Instruments, Securities, Documents of Title, and the Personal Property Security Act 1989” (1989), 15 CBLJ 242, at 246-48 and 250-51 - - - - 28(4) - Purchaser of collateral that is an instrument or negotiable document of title has priority over any security interest therein perfected by registration or temporarily perfected under section 23 or 24 if the purchaser - Gave value for the interest purchased - Purchased the collateral without knowledge that it was subject to a security interest; and - Has taken possession of the collateral Rational - Should not be obliged to search the PPS registry before consummating a transaction because that would defeat the essential qualities of these types of instruments. - [should be able to be used like money, ex cheques] Lender making a secured loan to the debtor can override a prior perfected non-possessory security interest in an instrument or negotiable instrument, provided the lender takes possession of the collateral and satisfies (a),(b),(c) Covers negotiable money obligations, any writing that evidences a right to the payment of money and is of a tye that in the ordinary course of business is transferred by delivery with any necessary endorsement or assignment. A debenture made payable to order or to bearer is a good example. 96 Perimeter Transportation Ltd, Re, 2010 BCCA 509 - - - Facts Issues Ratio - C leased 3 buses to bus company G lent $4.3mm to C with SI in buses identified by serial number Bus co bankrupt But Bus Co buyer in ordinary course and therefore receives it free of G’s SI Lease ends, buses returned to C, G gets its SI back. Can a lease qualify as a buyer? - Lease is written into BC PPSA 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 therein 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. Proceeds Four stages of enforcement regime: OPPSA s 25 deals with - The nature and source of the secured party’s claim to proceeds What extent the secured party must do to perfect its security interest in the proceeds The extent to which the proceeds can be followed by the secured party. Right to Trace in s 25(1) Flintoff v Royal Bank, [1964] SCR 631 - - Before PPSA but illustrative of s 25 Facts - Bank holding security v trustee in bankruptcy with respect to uncollected debts: who owns them. Debts arose by sale of inventory covered by bank’s security interest - Proceeds covered in the security agreement and rejects a separate requirement to have security in the resulting accounts that are derived from the sale of inventory. Ratio - Bank gets same rights and powers as if it had acquired a warehouse receipt or bill of lading in which the property was described. - The proceeds are subject to the agreement between the bank and the customer. A second assignment between the customer assigned nothing more to the bank than it already had.. The actual assignment of the book debts which was signed does not more 97 - - - than facilitate collection. Any other assignment whether, whether general or specific, of these debts by the customer to a third party would fail unless the third party was an innocent purchaser for value. Cites Re Goodfallow, Traders’ Bank v Goodfallow [(1890), 19 OR 299] - Bank v estate of deceased (D) - D had given warehouse receipt to the bank for wheat. - Some of the wheat converted into flour. - Ratio As long as the product of this wheat can be traced, whether it be in flour or in money, it is recoverable by the bank as against the deceased and his administrator. No agreement in writing, but even in its absence the principle is plainly to be spelled out that if you sell my goods with my consent, it is on same terms that you bring me the money in place of the goods. In bankruptcy, claims of the bankrupt on its customers which are proceeds flow to the secured creditor and the trustee in bankruptcy does not acquire any rights that the customer did not have. NOTES: Inventory financer’s right to the proceeds arises from the nature of the inventory financing even if the agreement itself is silent on the subject. Proposition codified in s 25(1) 25(1)(a) – if sold in the ordinary course of business then SI does not follow the goods 25(1)(b) – SI applies to the proceeds regardless if sold in the ordinary course of business. Therefore, if goods are sold outside ordinary course of business or outside scope of implied consent then SP can go after the goods and the proceeds to recover. Non Ontario statutes limit this by specifying SI is recoverable on debtor only. Perfection of Security Interests in Proceeds: s 25(2), 30 Ss 25(2), 25(3), 30(5): 25(2)-(3): if SP was perfected in the original collateral, it is also perfected as to the proceeds. 30(5) – perfection date in proceeds is the original perfection date in the original collateral. 25(5) – where a motor vehicle is proceeds, a person who buys or leases the vehicle as consumer goods in good faith takes it free of a security interest. - Ex: SP -> D -> O Proceeds to -> D buys Car and sells to T, T has free in clear. 98 Tracing Definition of proceeds per s1 - Identifiable or traceable personal property in any form derived directly or indirectly from any dealing with the collateral. - Requires some connection between collateral and asset SP is claiming. Agriculture Credit Corp of Saskatchewan v Pettyjohn - Tracing involves following an item of property either 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 property may extend to the new property. Tracing into an overdrawn account Extinguishing a debt with proceeds extinguishes the claims of the SP entitled to the proceeds, (Usually) unless a commercial reality is that the proceeds, despite the form of the transactions, were actually used to acquire the goods being claimed (Agriculture Credit Corp of Sask v Pettyjohn) Agriculture Credit Corp of Saskatchewan v Pettyjohn (1991), 79 DLR (4th) 22 (Sask CA) - - - - Court held that new herd of cows was proceeds of old herd despite formal transactions which saw Pettyjohn buy the heard with debt, sell another heard which was secured, and pay off the debt. Tracing - Tracing is following an item of property either as it is transformed into other forms of property or as it passes into other hands, so that the rights of a person in the original property may extend to the new property. 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. Close and Substantial Connection - Court said that in as long as a close and substantial connection established through the substance of a series of transactions through which one set of chattels replaces another of the same kind can be sufficient to found a tracing remedy irrespective of the form in which the transactions. - The appropriate principle of tracing in such a case is that where a set of chattels is replaced by another of like function in the affairs of the debtor, it shall be open to the court to find that the proceeds from the first were used to acquire the second, whatever the formalities of the transactions in question. Allocation of proceeds amongst creditors 99 - - Tracing is concerned with fairness not between debtor and creditor but with fairness amongst creditors. Fairness as between secured and unsecured creditors in the context of a tracing remedy demands that the proportion of the proceeds available to secured and unsecured creditors remain the same as it had been with regard to the original property. If only had SI in 50% of original, can only claim 50% of SI in proceeds. But dissent gets used in following case. Flexi-Coil Ltd v Kindersley District Credit Union Ltd (1993), 107 DLR (4th) 129 (Sask CA) - - - - - - - Priority dispute between a lender and an inventory supplier following the bankruptcy of their mutual customer: a retail equipment supplier (Churchhill) Flexi was Churchill supplier and credit union was banker. Money from sale of inventory put into credit union account which had negative balance. Where knowledge is a factor in determining priority in the PPSA, only actual knowledge is relevant. If money is taken from its beneficial owner without authority he can recover the amount from any person into whose hands it can be traced unless and until it reaces on who receives it in good faith and for value and without notice of the want of authority. OPPSA s 25(1) - Subject to other provisions, where collateral is dealt with or otherwise gives rise to proceeds, the security interest therein (b) extends to the proceeds. Proceeds - Identifiable or traceable personal property in any form derived directly from any dealing with the collateral or proceeds therefrom. Cites Transamerica - Identifiable refers to ability to point to the particular property obtained by the debtor as a result of the dealing with the collateral - Traceable refers to the situation where the collateral is commingled with other property so that its identity is lost. - Cheques were cashed into positive account balance. Creditor defeats banks claim Cites Indian Head Credit Union v Andrew (992), 97 DLR (4th) 462 - Term deposit purchased from proceeds. - Bank knew proceeds was cattle - the credit union was able to trace its security interest to the term deposit and defeat the bank which claimed th term deposit as security Cites Pettyjohn - Developed a fundamental equivalency test based on a close and substantial connection to find the second herd proceeds of the first. Ratio - Funds remain traceable despite mingling funds in an account. - Tracing is a statutory right under the PPSA, no need for fiduciary relationship 100 - - Proceeds - Proceeds must have the following characteristics: (1) must be personal property; (2) must be identifiable or traceable; (3) they must arise from a commercial dealing and can be derived from dealing with the original collateral - When a cheque is deposited with a deposit taking institution when an account is in positive balance is proceeds. - When an account is in overdraft, no property right arises as the customer is the debtor of the deposit taking institution. - Electronic transfers same as cheques. Analysis - Churchill deposited money into a negative balance and therefore Churchill did not have any property to pass to Flexi as proceeds. Bank wins. Tracing into a Mixed Fund Choosing which rule to apply when tracing into a mixed fund will turn on the facts and depends on a whether there is enough money to satisfy the trust and whether, value in the account fell below the amount held in trust at any given time, whether the deposit is in a negative or positive balance fund and whether the challenge is between the defaulting trustee and the beneficiary or solely amongst beneficiaries. Enough Money in the account Account dipped below trust obligation Case 4 Trust did not dip below the trust obligation Case 1, Case 2 Not enough money in the account Case 5 (dipped prior to last transaction), Case 3(dipped at end) Impossible . Case 1: Defaulting Trustee v Beneficiary – Enough money in the account Action Balance $500 in T’s account $500 $1000 deposited from B held in trust $1500 T goes bankrupt $1500 Rule: Beneficiary gets charge over fund to the extent of the beneficiary’s entitlement. Case 2: Defaulting Trustee v Beneficiary – T takes withdrawals Action $500 in T’s account $1000 deposited from B held in trust T withdraws $400 T goes bankrupt Balance $500 $1500 $1100 $1100 101 Rule: According to Re Hallett’s Estate, the court will presume T’s $400 withdrawal to have been made from his own share of mixed fund. B gets full $1000 Case 3:Beneficiary v Beneficiary – T withdraws $, not enough to pay everyone Action Balance $500 deposited from C in trust held by T $500 $1000 deposited from B held in trust $1500 T withdraws $400 $1100 T goes bankrupt $1100 Rule: Pro rata sharing of remaining amount among beneficiaries (Ontario Securities Commission v Greymac Credit Corp (1986), 55 OR (2d) 673.) Case 4:Beneficiary v Defaulting Trustee – Enough money but account dipped below amount to satisfy Action Balance $500 in T’s account $500 $1000 deposited from B held in trust $1500 T withdraws $400 $1100 T withdraws $200 $900 T deposits $800 $1700 T goes bankrupt $1700 Rule: Lowest intermediate balance rule: claimant to a mixed fund cannot assert a proprietary interest in that 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. B gets $900 only. Case 5: Beneficiary v Beneficiary – Not enough money, account activity Action Balance $500 in T’s account $500 $1000 deposited from B held in trust $1500 T withdraws $400 $1100 T withdraws $200 $900 Deposit Trust funds from C of $800 $1700 T goes bankrupt $1700 Rule:Pari passu ex post facto: remaining funds shared in proportion to their contributions without regard to any intervening state of the mixed fund. (Re Graphicshoppe Ltd, [2004] OJ No 5169) Lowest intermediate balance rule does not apply, only appropriate for dispute between beneficiary and defaulting trustee. How it gets applied If a debtor sells collateral and deposits the sale proceeds into its general account, Case 4 applies. 102 If a debtor sells collateral from two separate SPs and deposits the money into a general account, Case 4 may apply. If the account is negative balance, the bank wins. Cannot take proceeds greater than collateral Bank of Nova Scotia v IPS Invoice Payment System Corporations, 2010 ONSC 2101 - - Issue - Facts - - Ratio - Whether a secured party can enforce its security against both the original collateral and the proceeds of that collateral in an amount that exceeds the value of the original collateral. Bank has big loan, partly secured by accounts receivables, inter alia. AR value about ½ of loan. Company factors accounts receivables against agreement, and factor knew of the SI so not purchaser with value without notice. Factor pays money to company which pays debt down to bank. Bank finds out about factoring agreement and appoints receiver. Bank tries to claim full amount of the loan, all on the back of the A/R. Wants proceeds which is the money collected by factors PLUS the money already paid to it via payment from factors to the company. Despite not in the Ontario legislation not saying so, a recovery under s 25 of the PPSA is limited to the value of the collateral on the date of dealing. In this case, the value of the collateral is the face value of the receivable and not the discounted value. - As the bank did not authorize its factoring it should not have to pay the discount. Also no evidence of aging given. Bank Act Security Interest Other summary notes important limitation of Bank Act Security: can only be given on present and future advances – not on past indebtedness retail purchaser (essentially only business loan) farmers, fishers etc - once a claim is made under a document giving security under the bank Act – then after that the bank cannot claim more than what the original security gave ∆ once the bank created a document under the Bank Act it showed an intent to get what was provided under the Bank Act - the rights the bank had spring from the documents registered under the BA 103 Geva – logically this doesn’t make sense – once the document used is the one for the bank act then there is a presumption that arises to limit oneself to the Bank Act Next attempt: banks made transactions with two sets of documents – one for Bank Act and one set for PPSA – this has yet to be tested in court but prevailing view is that it will work. Roderick J Wood, “The Nature and Definition of Federal Security Interests” (2000), 34 CBLJ 65 - - Similar features to PPSA - Notice filing system - Centralized registry system - Fixed security in after-acquired property - Future Advances - Fixture provisions: can remove fixtures, but need notice in land registry office - Commingled Property Rules - Wage-Earner and Agricultureal Product Priority Drawbacks / Divergence from PPSA - Limited scope: only banks and only certain types of debtors - Anti fraud provisions: evolved at a time when chattel mortages were being used for fraud and shady dealings - Obscure language - Document of title fiction: the bank becomes owner of the goods and debtor has a mere right - Lack of complete priority system - Lack of enforcement system. Royal Bank of Canada v Sparrow Electric Corp, [1977] 1 SCR 411 - - Bank Act Security gives to the lender legal title in the collateral. - S 178(2):Bank acquires “same rights and powers as if the bank had acquired a warehouse receipt or bill of lading in which the property was described. - As per s 435: where it is specified any warehouse receipt or bill acquired by a bank as security for the payment of a debt, vests in the bank all the right and title to goods, wares and merchandise covered by the holder or owner thereof. Legal title means fixed charge on after-acquired property, with license to sell inventory Innovation Credit Union v Bank of Montreal, 2009 SKCA 35 - - Facts - Priority dispute between unregistered PPSA interest v subsequent security interest taken and registered under the Bank Act - Bank did not take a PPSA registration, but did search and saw nothing. Conclusion 104 - - Prior PPSA interest defeats the Bank Act security on the basis that the bank acquired its interest subject to the prior PPSA interest regardless of the fact that it was unregistered Ratio - Cites International Harvester (below) - [It seems that if a bank registers both PPSA and Bank Act, it only gets the Bank Act.] Bank could not acquire, by registration under the PPSA, anything more than its security documentation, and the Bank Act, had already given it. The court found that the Bank Act gave to the bank only that which remained after the prior unperfected security interest had been given, or in other words, nemo dat quod non habet. - S 435(2): a bank acquires only the “right and title” of the person from whom the interest is taken, and leaves to the law of the province to determine what that means. - It is clear that the Bank act provides no express priority rule vis a vis prior security interests. - Courts should proceed as if the bank act expects provincial law to determine the consequences of holding a warehouse receipt or bill of lading. - A bank, by virture of the document of title fiction, acquires whatever interest the debtror has in the property at the time the bank acquired its interest. - The relevant question in determining these conflicts is what the debtor owned in this case when the bank acquired its interest under the Bank Act. Analysis - The bank acquired its rights subject to attached security interest of the credit union. Radius Credit Union Limited v Royal Bank of Canada, 2009 SKCA 36, Confirmed: [2010] 3 S.C.R. 38 - - - Simultaneous attachment in after-acquired property. Facts - Priority dispute between collateral that is after-acquired property subject to an unperfected PPSA interests and a subsequent properly registered Bank Act security interest. - SI in after-acquired collateral does not attach until debtor obtains rights in the collateral so Bank Act and unregistered PPSA SI attach simultaneously PPSA - Whomever executed the security agreement first has priority Anlaysis - Credit union had agreement first so it wins - Lack of perfection in PPSA is irrelevant, failure to register does not affect the validity or the enforceability of the interest. “Where valid Bank Act and PPA security interests are asserted in after acquired property, priority is to be determined as of the date of execution of the respective security agreements. This rule applies even if the PPSA interest is unperfected.” 105 Bank of Nova Scotia v International Harvester Credit Corp (1990), 73 DLR (4th) 385 (Ont CA) - - - - - Bank has: Bank Act security and perfected PPSA IHCC has unperfected PPSA interest prior to Bank Contemplates Bank Act security as being registerable under the PPSA? - “I have no doubt that the PPSA can apply to security taken pursuant to s 178 of the Bank Act where the bank elects to utilize the provisions of the Act.” - But doesn’t apply to this case Neither the provisions of the Bank Act which provide for the security nor the provisions of the security document itself five to the bank anything other than the interest which the debtor had in the equipment. I am of the view that the bank’s prior registration under the PPSA does not, on the facts of this case, give it any right in the equipment, or in the proceeds from its sale, other than the rights that its customer might have had. This case was cited in Innovation Credit Union, supra - Bank could not acquire, by registration under the PPSA, anything more than its security documentation, and the Bank Act, had already given it. The court found that the Bank Act gave to the bank only that which remained after the prior unperfected security interest had been given, or in other words, nemo dat quod non habet. So Bank Act registration and PPSA registration on the same agreement makes the PPSA registration not effective? Jacob Ziegel and David Denomme, The Ontario Personal Property Security Act: Commentary and Analysis, 2d ed (Markham, ON: Butterworths, 2000), 52-55 - - Does PPSA apply to s 427 Bank Act interests? 1 agreement concluded between parties for s 427 SI - Bank should not be able to invoke provincial act to take advantage of its provisions - But International Harvester suggests otherwise - Problems: ignores intention of PPSA to apply to Ontario statutes, bank can choose either regime causes uncertainty 2 agreements, one for PPSA and one for s 427 - Does bank get benefits of both? - Does s 427 override PPSA? - Or bank should choose at time of registration Law Commission of Canada, Modernizing Canada’s Secured Transactions Law: The Bank Act Security Provisions (Ottawa: Government of Canada, 2004), at 26-30. - Original justification for the Bank Act security was that it would promote certain identified sectors of the Canadian economy. At one time, banks were not permitted to take provincial or 106 - territorial security interests to secure their loans. Restriction later removed, but the state of the provincial law was, at the time, disordered. (paraphrased) Causes unnecessary confusion Recommendation: Eliminate the Bank Act security regime by repealing sections 427 to 429. Investment Property Security Interests John Cameron, “Secured Transaction Under Ontario’s Security Transfer Act, 2006” (2007) 22 BFLR 309 Securities Transfer Act governs the rights and obligations of issuers, securities intermediaries, investors and secured parties, relating to the transfer of securities. Direct holding system v indirect holding system o Direct applies where the relationship is between the issuer and the investor o STA changes deal with indirect holding Direct o Direct dealings in a “security” o Obligation of an user or a “share participation or other interest” v old definition of “document” o Issuer is any individual, partnership, trust, corporation, government and any other legal or commercial entity o Security definition: Obligation or interest must be “fully transferable” Obligation or interest must be part of a class or series, or must be divisible Functional test which determines if the obligation or interest is dealt in or traded on securities markets or security exchanges; however, issuers can opt in and specify it is an security for the purposes of the STA Indirect Holding System o Securities intermediary (CDS, securities dealer, bank) holds securities and other financial assets in a securities account for a person o Definitions Security intermediary is a person that in the ordinary course of business maintains securities accounts for the benefits of others and is acting in that capacity. Securities account is an account to which a financial asset is or may be credited in accordance with an agreement under which the person maintaining the account undertakes to treat the person for whom the account is maintaines as entitled to ecercise the rights that constitute the financial asset. Financial Asset: any of the follwing Any of type of security 107 o Any share or obligation that “is or is of a type, dealt in or traded on financial market Property held in a securities account that a securities intermediary and the person for whom the account is maintained have agreed is to be treated as a financial asset A credit balance in a securities account unless the securities intermediary and the person for whom the account tis maintained have agreed is not to be treated as a financial asset. Security Entitlements When security intermediary credits a financial asset into a financial account a security entitlement is made. One of the components of the entitlement is a property interest in the underlying security. In personam rights Consist of five core duties of a securities intermediary: o Duty to maintain financial assets o Duty to obtain payments or distributions o Duty to exercise rights as directs o Duty to change security entitlement into another form of holding Property Rights and Cut off rules Security entitlement includes property rights and cut off rules: o Financial assets held by intermediary are held for its customers to the extent necessary for the securities intermediary to satisfy all security entitlements against it tto those financial assets o Rights against unsecured creditors of securities intermediary: “Unsecured creditors of a securities intermediary cannot reach the financial assets held by the intermediary to the extent that the intermediary needs them to satisfy the related security entitlements against it. o Secured creditors of securities intermediary: secured creditors of the intermediary who have a security interest in finacncial assets held by that intermediary cannot reach those financial assets to the extent that the intermediary needs them to satisfy the related security entitlements against it even though section 19.2(2) of the PPSA provides that a security interest in investment property created by a broker or securities intermediary is perfected when it attaches. Even if an intermediary gives financial assets as security, creditors cannot get at financial assets to the 108 extent that they are needed to satisfy security entitlements. Attachment John Cameron, “Secured Transaction Under Ontario’s Security Transfer Act, 2006” (2007) 22 BFLR 309, at 318-20 and 343-33 Direct holding system Criteria for attachment of security interest under direct holding system: 1. Value if given – any consideration sufficient to support a simple contract, including antecedent debt or liability 2. Debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party 3. The debtor a. Must have signed a security agreement containing a description of the collateral sufficient to enable it to be identified; or b. In the case of a certificated security in registered form, the security has been delivered to the secured party in accordance with section 68 of the STA; or c. In the case of investment property, which includes a security, the secured party has obtained “control” under the debtor’s security agreement. Indirect Holding System 1. Value if given – any consideration sufficient to support a simple contract, including antecedent debt or liability 2. Debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party 3. The debtor a. Must have signed a security agreement describing the collateral as a security entitlement or a securities account or describing the underlying financial asset held in the securities account; or b. In the case of investment property (which includes among other things, a security entitlement or a securities account), the secured party has obtained “control” ... under the debtor’s security agreement Attachment of a security interest in a securities account is also attachment of a security interest in the security entitlements carried in the securities account. Perfection John Cameron, “Secured Transaction Under Ontario’s Security Transfer Act, 2006” (2007) 22 BFLR 309, at 310-14 and 344-347 Methods of perfection 109 1. Control: best method for indirect and direct. Means can transfer w/o recourse from debtor 2. Possession: works for direct 3. Registration: direct or indirect Direct Control in direct system - - Certificated securities - Take delivery of the certificate + (endorsement or registrar change name to the secured party) . If only take delivery, that is only possession Uncertified Securities (no certificate) - Registrar change name of security to secured party, - Obtain control agreement from the issuer - Someone else have control for benefit of secured party. Control Agreement - In direct holding system agreement between the issuer, debtor and secured party that the issuer will comply with SP instructions For control, do not need exclusive control. Indirect Control in indirect system - Securities intermediary record SP as the entitlement holder, Obtain control agreement from securities intermediary, or 3rd party has control for benefit of SP Control agreement: intermediary will comply with instructions from SP Key priorities rules 1. Control trumps non control 2. Control v Control: first to obtain control wins 3. Securities Intermediary gets priority when it has security interest. 4. Section 30 of PPSA for all else Kallis v First Capital Management Ltd [2011] AJ No 163 - Perfection of security interest Perfections occurred by delivery as the broker (which was also the creditor, and who went bankrupt, maintained and acknowledged that iti physically held pledged shares on behalf of both applicants. No actual delivery required to perfect. 110 Conflicts of Laws Section 7.1(1) the validity of a security interest in investment property shall be governed by the law, at the time of the security interest attaches, (A) AND (B) are direct while (c) is indirect (a) Of the jurisdiction where the certificate is located if the collateral is a certified security (b) Of the issuer’s jurisdiction if the collateral is an uncertificated security (c) Of the securities intermediary’s jurisdiction if the collateral is a security entitlement or securities account Transferees Direct holding Protected Purchaser in Securities Transfer Act Purchaser of a certificated or uncertificated security, or of an interest in the security who: a) Gives value, (any consideration to support simple contract including past debt or liability) b) Does not have notice of any adverse claim to the security: aware that it violates actual agreement. Cannot be wilfully blind. c) Obtains control of the security Protected purchasers purchase free from any claim Shelter principle: someone with notice of an adverse claim can buy from a protected purchaser and receive free from claim. 28.1 of PPSA not necessary. 28(6): A purchaser of a security, other than a secured party, who, (a) Gives value; (b) Does not know that the transaction constitutes a breach of a security agreement granting a security interest and the secured party does not have control; and (c) Obtains control of the security Acquires the security free from the security interest. 111 28(7) purchaser not required to determine if there is a security interest or a breach of security agreement. 28(6) more lenient requiring no knowledge v STA requiring no notice of adverse claim. Indirect STA s 96: An entitlement holder is protected against any adverse claim to a financial asset if the entitlement holder acquired its security entitlement for value and without notice of the adverse claim. STA s 104(1): Persons who purchase a security but do not become an entitlement holder are protected from adverse claims if acquired interest for value without notice fo the claim and obtains control. Shelter principle as well. 112
