Secured Transactions – Winter 2013
Professor: Yael Emerich
Summary: Michael Shortt
This summary is long and detailed. Probably too long and too detailed.
I wish I could make it shorter and more concise, but this has been a busy summer and I didn’t have time.
So, not my best work, but I’m sure you can “perfect” it prior to the exam.
(that was the joke for this summary’s intro)
Note: I added a lot of material to the bankruptcy chapter from my Bankruptcy and Insolvency
law summary. It’s definitely more than you need to know, but the existing materials
didn’t cover a lot of important issues, so I decided over-kill was better than sticking to the coursepack.
Note2: Claire Gowdy has a really good summary for Walsh’s secured transactions. I have
borrowed from it on occasion, and recommend it as an alternative or supplement
to this summary.
Table of Contents
CHAPTER 1: DROIT CIVIL........................................................... 2
Section 1.1: Introduction .................................................................. 2
1.1.1 History..................................................................................... 2
1.1.2 The Patrimony ......................................................................... 2
1.1.3 Seizability of Property............................................................. 3
1.1.4 Execution of Judgments and Distribution Among Creditors ... 5
Section 1.2: Priorities ....................................................................... 7
1.2.1 Types ....................................................................................... 7
1.2.2 Creation ................................................................................... 8
1.2.3 Object and Scope of Security .................................................. 8
1.2.4 Effects of Priority .................................................................... 8
1.2.5 Opposability and Priority ........................................................ 8
1.2.6 Remedies and Execution ......................................................... 9
1.2.7 Extinction ................................................................................ 9
Section 1.3: Hypothecs ................................................................... 10
1.3.1 Juridical Nature ..................................................................... 10
1.3.2 Classification ......................................................................... 11
1.3.3 Creation of Conventional Hypothecs .................................... 11
1.3.4 Object and Scope of Hypothecs ............................................ 13
1.3.5 Effects of Hypothecs ............................................................. 16
1.3.6 Opposability and Priority ...................................................... 17
1.3.7 Hypothecary Remedies ......................................................... 20
1.3.8 Extinction .............................................................................. 23
Section 1.4: Special Types of Hypothecs ....................................... 23
1.4.1 Legal Hypothecs.................................................................... 23
1.4.2 Open Hypothecs .................................................................... 25
1.4.3 Hypothecs Over Claims (Créances) ...................................... 26
CHAPTER 2: OTHER CIVIL LAW SECURITY MECHANISMS........... 27
Section 2.1: Security Trust ............................................................. 27
Section 2.2: Conditional/Installment Sale, Leases ........................ 27
CHAPTER 3: COMMON LAW (PPSA) ....................................... 28
Section 3.1: Introduction ................................................................ 28
3.1.1 History and Purpose of PPSAs .............................................. 28
3.1.2 Definitions............................................................................. 29
3.1.3 PPSAs and the Common Law/Equity.................................... 30
Section 3.2: Scope of PPSAs: What is a Secured Transaction? .. 30
3.2.1 General .................................................................................. 30
3.2.2 Special Cases......................................................................... 31
3.2.3 Deemed Security Interests ..................................................... 34
3.2.4 Excluded Transactions .......................................................... 36
Section 3.3: Creation of Security Interests ................................... 36
3.3.1 Capacity ................................................................................ 37
3.3.2 Attachment ............................................................................ 37
3.3.3 Perfection .............................................................................. 39
Section 3.4: Scope of the Security Interest.................................... 40
3.4.1 General .................................................................................. 40
3.4.2 Proceeds and Tracing ............................................................ 41
3.4.3 Future Property ..................................................................... 45
Section 3.5: Effects of Security Interests ...................................... 46
3.5.1 General .................................................................................. 46
3.5.2 With Respect to Collateral .................................................... 46
3.5.3 Opposability .......................................................................... 47
3.5.4 Priority Conflicts ................................................................... 47
Section 3.6: Recourses and Remedies ........................................... 53
Section 3.7: Extinction of Security Interests ................................. 57
CHAPTER 4: COMMON LAW (OTHER) .................................. 57
Section 4.1: Mortgages ................................................................... 57
4.1.1 Creation................................................................................. 58
4.1.2 Object and Scope of Security ................................................ 59
4.1.3 Effects of Security................................................................. 59
4.1.4 Opposability and Priority ...................................................... 59
4.1.5 Remedies and Execution ....................................................... 59
4.1.6 Extinction .............................................................................. 61
Section 4.2: Pledge .......................................................................... 61
Section 4.3: Liens ............................................................................ 61
4.3.1 Common-law Liens ............................................................... 61
4.3.2 Contractual Liens .................................................................. 62
4.3.3 Statutory Liens ...................................................................... 62
4.3.4 Equitable Liens ..................................................................... 63
Section 4.4: Miscellaneous Common-law Security Interests ....... 63
Section 4.5: Seizure of Property in Common-law Jurisdictions . 64
CHAPTER 5: BANKRUPTCY AND INSOLVENCY ................. 64
Section 5.1: Introduction................................................................ 64
5.1.1 The Bankruptcy and Insolvency Act ...................................... 64
5.1.2 The Companies’ Creditors Arrangement Act ........................ 66
5.1.3 The Winding-up and Restructuring Act................................. 66
5.1.4 The Wage Earner Protection Program Act ........................... 66
5.1.5 Constitutional Issues ............................................................. 66
Section 5.2: Secured Creditors Under the BIA ............................ 68
5.2.1 Definition of Secured Creditor under the BIA ....................... 68
5.2.2 Rights of Secured Creditors in Bankruptcy ........................... 69
Section 5.3: Order of Payment under the BIA ............................. 70
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CHAPTER 1: DROIT CIVIL
Section 1.1: Introduction
Security interests in civilian law are divided between two categories: prior claims (a kind of priority for a personal right) and
hypothecs (an accessory real right that attaches to and follows property).
Simler & Delebecque, Droit civil: Les sûretés et la publicité foncière, 4th ed, 2004: The major purpose of securities is to protect a
creditor against the bankruptcy of the debtor. Hence the maxim “pas de crédit sans sûretés.” Indeed, the word “credit” comes from the
roman “credere” which means “to believe” or “to have confidence in.” In French law, the list of securities seems to be closed,
although security-like advantages can be gained from proprietary-securities or other techniques.
General order of payment in Québec in non-bankruptcy situations
(1) Prior claims in the order they are listed in 2651 (2646, 2657)
(2) Construction hypothecs (2646, 2647, 2726)
(3) Conventional and legal hypothecs other than construction hypothecs (2646, 2647, 2725, 2729, 2730)
(4) Unsecured creditors (2644-2646)
Within classes, the prior creditors (2657) and unsecured creditors (2646) are paid proportionately, as are holders of construction
hypothecs (2952) while for conventional hypothecs and other legal hypothecs each one ranks in order of publication, so there is no
sharing (see 1.3.6(ii) below).
1.1.1 History
The CCBC had several categories of securities, including the nantissement (“contrat réel de garantie par lequel un débiteur, ou un tiers
pour lui, met un bien entre les mains du créancier, pour la sûreté de la dette qu’il contracte”), which was then divided into gage
(nantissement over movable goods) and antichrèse (nantissement over immovables). These securities involved dispossession by the
debtor, so other forms of security interest would soon be demanded by commercial actors, and eventually a law was passed giving
special hypothecation powers to corporation only [216]. A special law gave corporations the power to grant mortgage-like security
over their property. Hypothecs existed in the CCBC, but only for immoveables. This system was very similar to French law [73 for
corresponding CN articles].
The CCBC also had a very long list of privileges (the equivalent to today’s priorities). These privileges were divided between
moveable and immoveable privileges, with about a dozen of each. The list includes most of today’s priorities, plus some drawn from
the federal Bankruptcy and Insolvency Act list of preferred creditors (e.g. funeral expenses) plus some new ones (e.g. medical
expenses, servants’ wages).
During the reform of the CCQ, there were proposals to harmonize Québec’s law with that of the PPSAs by adopting a functionalist
approach to security interests [22-23]. This was rejected for various reasons, such as a desire to preserve the distinctness of the civil
law, but also concerns about the need to clearly identify ownership of collateral subject to proprietary-securities. But while Québec
ultimately adopted a formalist approach, it did impose semi-functionalist measures, such as requiring proprietary-security holders to
publish their claims in the same registries as hypothecs, or submitting their remedies to the hypothecary remedies section of book 6.
The reform of the CCQ also brought about the unity of movable and immoveable securities, something not even the common law
provinces attempted [25].
1.1.2 The Patrimony
Everyone has a patrimony (2, 302 CCQ). The patrimony of the debtor is the “common pledge” of his creditors (2644 CCQ). It
includes current and future property (2645 CCQ). All personal obligations can be executed against the entirety of the debtors
patrimony (2645-2646 CCQ), unless the parties to a given personal obligation contract otherwise (2645 CCQ).
When cash is seized from the debtor, or when assets are seized and sold, the money is distributed among the chirographic creditors in
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proportion to their debts (2646 para 2 CCQ). An unequal distribution is allowed only if there is a “legal cause of preference” (2646
para 2 CCQ). The (only?) legal causes of preference are the priority and the hypothec (2647 CCQ).
Macdonald & Ménard, “Credo, credere, credidi, creditum: Essai de phénomenologie des sûretés réels” 2006 [17]: Judgments
are executed against property, not persons, at least since the abolition of civil imprisonment [321]. Ordinary (chirographic) creditors
benefit from two principles that apply to the patrimony of the debtor: (1) the “assiette universelle” or the idea that all of the patrimony
is available to satisfy creditors’ claims; (2) the equality of all creditors. Secured transactions operate by subverting one of these two
principles. Hypothecs and preference subvert the principle of equality of all creditors, by giving a preference to one creditor over
another with respect to the disposition of certain assets within the patrimony. Proprietary securities (like trusts, conditional sales,
financing leases, title retention, etc) subvert the principle of “l’assiette universelle” by removing property from the debtor’s patrimony,
so that it is unavailable to other creditors. Finally, it is worth noting that Québec has a formalist, rather than a functionalist, approach
to what constitutes a security interest. It rejected the UCC article 9 approach during the reform of the CCQ. That said, Québec does
adopt a quasi-functionalist position when it requires the exercise of rights by propriety security holders to follow Book 6, and when it
imposes publication requirements in accordance with Book 9.
Payette, Les sûretés réelles dans le Code civil du Québec, 3e ed, 2006 [39]: Reviews basics of patrimony.
1.1.3 Seizability of Property
Note that the conditions of 2648 CCQ and 552 CCP are cumulative [42]. Both must be satisfied for the property in question to be
unseizable.
CCQ Provisions [31]
2648 The patrimony of the debtor is immune from seizure to the extent provided for by the CCP. This exemption covers “The
moveable property of the debtor which furnishes his main residence, used by and necessary for the life of the household.” These
moveables may however be seized their vendor if the purchase price remains unpaid.// “Instruments of work needed for the personal
exercise of a professional activity” are also exempt from seizure, except by creditors with hypothecs on them.
2649 Stipulations of unseizability are effective only if made “by an act of gratuitous title” (i.e. given by gift or will), the duration is
temporary, and the stipulation is justified by a serious and legitimate interest. The property “remains liable to seizure to the extent
provided in the Code of Civil Procedure.” The stipulation can be set up against third parties only if published in the appropriate
register. [see also [46]-[47] - Mike]
CCP Provisions [33]
552 When a seizure is executed against a debtor, the debtor may choose the following goods, which are exempted from the execution:
(1) $6000 worth of moveable property that furnishes his principal residence used by and necessary for the life of the
household.
(2) Food, fuel, linens, and clothing necessary for the life of the household.
(3) Instruments of work needed for the personal exercise of professional activity.
The exception in (1) does not apply to unpaid vendors, and the exception in (3) does not apply to hypothecary creditors. Fishermen’s
boats may not be seized or sold between 1 May and 1 November (i.e. not during fishing season). // The seizing officers makes the
determination of the value of property under (1), but this decision can be appealed to a court. // No one may renounce the protection of
this section.
553 The following are exempt from seizure
(1) Religious objects.
(2) Family papers and portraits, medals, etc.
(3) Property stipulated to be unseizable, although a judge can grant permission to seize it anyways to certain creditors.
(4) Family support payments.
(5) Books of account, titles of debt and other papers in the debtor’s possession except those mention in 570 CCP (which
covers bearer bonds, negotiable instruments, cash, and stocks).
(6) Money paid to clerics for performance of their religious duties.
(7) Benefits payable under a supplemental pension plan.
(8) Periodic disability benefits under accident or sickness insurance.
(9) Reimbursement of expenses incurred under a contract of accident or sickness insurance.
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(9.1) Property required to compensate for a handicap (wheelchair, glasses, canes, seeing eye dog, etc).
(10) Repealed.
(11) A certain fraction of your salary:
(a) if you have dependents: (base unseizable part is $180 per week) + ($30 per week for the third and every
subsequent dependant) + (70% of your salary minus the base rate and dependant rates calculated above). So if you
make $1,000/week and have four dependents, it’s 70% of $760 (which is $1,000-240) or $532, resulting in a total
unseizable part of $532+$240=$772).
(b) if you don’t have dependents: (base unseizable part is $120 per week) + (70% of your salary minus the base rate
calculated above). So if you make $1,000/week, it’s 70% of $880 (which is $1,000-120) or $616, resulting in a total
unseizable part of $616+$120=$736).
[You’ll notice the difference between the various calculations is pretty minor, not sure why they went with such a
complex system. In practice, unless you have many dependents, the formula means a little under 30% of your salary
is seizable via garnishment - Mike]
(11.1) 50% of money paid under extra-provincial support order acts.
(12) Anything declared unseizable by law.
553.1 Works of art or historical property brought into Québec and intended for public display are immune from seizure if the
government declares them so exempt by order in council. This applies only to works that were not original conceived, produced, or
created in Québec. This exemption from seizure does not apply to debts resulting from the transport, warehousing, or exhibition of the
item in question.
553.2 The immovable of the debtor which serves as the primary residence is exempt from seizure where the amount of the debt is
worth less than $10,000 except where
(1) the claim against the debtor is secured by a prior claim or legal or conventional hypothec on the immoveable, other than a
legal hypothec resulting from a judgment.
(2) the claim is a claim for spousal/child support.
(3) the immoveable is already validly under seizure.
Where the debt results from a judgment, the amount of the debt includes interest, but not costs.
Belleau, Précis de procédure du Québec, 4 ed, 2003 [41]: Covers seizure issue in excruciating detail. Despite the fact that the nonseizure provisions were enacted for humanitarian reasons to protect debtors, they are typically interpreted strictly by the Courts, since
they are exceptions to the general rule of seizeability [41]. The unseizabilities created by 552 CCP are “relative” because the debtor
gets to choose the property at the time of the execution [42].
Note that moveables which “furnish” a residence are in contrast to those that merely ornament it - so the debtor can’t
designate just any moveable as non-seizable under 552(1) CCP [42]. The requirements of 2648 CCQ and 552 CCP must both be met
for a piece of property to be unseizable [42]. As for the “necessary for household life”, this means “les meubles qui constituent les
éléments de bas d’une vie normale” [42], like tables and chairs and a dishwasher, but not a bicycle. Cars aren’t moveables that furnish
a residence, so they can’t be exempt from seizure [43]. Microwaves are also controversial [43]. Entertainment electronics is typically
seizable, but personal computers are not [43].
The exception of 552(3) only applies to the principal occupation of the debtor, so only tools associated with that principal
occupation are exempt [43]. Note that there is not monetary limit to the value of these tools [43]. Corporations do not “personally”
exercise any activity, so they cannot benefit from this exception [44]. The Minister’s Commentary on article 2648 seems to restrict
this exception quite severely, noting that “professional activity” is narrower than the notion of enterprise in 1525 CCQ, and that the
debtor must use the property personally - so equipment belonging to the debtor but used by an assistant or secretary is seizable [44].
Jurisprudence is divided on how to apply this provision [44]. If the debtor operates his business through a corporation of which he is
the sole owner, the corporation’s shares can be seized, even if the corporation owns the tools the debtor needs to use his business [44].
The seizability of cars under this provision generally depends on whether the debtor’s job necessarily involves transport or travel (e.g.
taxis, couriers, etc), although some judges allow anyone who has to drive to work to keep his car [45]. The word “professional” in this
context does not mean “member of a professional order” [45].
Belleau endorses the following test, taken from Re Dionne: (1) The property that was seized, is it an “instrument of work”?
(2) Is it “necessary” [to what? that’s not a question you can ask in the abstract - Mike]; (3) Is it necessary to the personal exercise of
the activity [this one makes (2) redundant! - Mike]; (4) Is the debtor’s activity a professional one?
[In my opinion, Belleau basically does it backwards, in addition to his second question being redundant given the third. The
rational way to approach the question is the following: (1) What is the debtor’s primary professional activity? (2) Is the property an
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“instrument of work” for that activity? (3) Is the property used personally by the debtor in that activity? (4) Is it “necessary” to the
debtor’s exercise of the professional activity? - Mike]
The unseizabilities at 553, 553.1 and 553.2 CCP are called “absolute” because they cannot be seized under any circumstances
[45]. Belleau’s discussion of what is listed in these articles is largely uneventful, although there is a long discussion of stipulations of
unseizability at [46-47].
Common Law
NBPPSA
58(3) Subject to subsection (7), a debtor may claim the following items of collateral to be exempt from seizure by a secured party:
(a) furniture, household furnishings and appliances used by the debtor or a dependent to a realizable value of five thousand
dollars or to any greater amount that may be prescribed;
(b) one motor vehicle having a realizable value of not more than six thousand five hundred dollars at the time the claim for
exemption is made, or not more than any greater amount that may be prescribed, if the motor vehicle is required by the debtor
in the course of or to retain employment or in the course of and necessary to the debtor’s trade, profession or occupation or
for transportation to a place of employment where public transportation facilities are not reasonably available;
(c) medical or health aids necessary to enable the debtor or a dependent to work or to sustain health; and
(d) consumer goods in the possession and use of the debtor or a dependent if, on application, the Court determines that
(i) the loss of the consumer goods would cause serious hardship to the debtor or dependent, or
(ii) the costs of seizing and selling the goods would be disproportionate to the value that would be realized.
58(4) A dependent may claim an item of collateral within paragraph (3)(a), (c) or (d) to be exempt from seizure but a claim may not be
made by both a debtor and a dependent with respect to an item of the same kind.
58(5) If a claim for exemption is made under paragraph (3)(a) or (b) and the realizable value of the collateral for which the claim is
made exceeds the maximum amount of the exemption specified in those paragraphs, the secured party may seize the collateral.
58(6) A secured party who seizes collateral in the circumstances referred to in subsection (5) shall dispose of it in accordance with
section 59 and shall pay to the debtor an amount equivalent to the maximum amount of the exemption, whether or not the proceeds of
the disposition exceed that maximum amount.
58(7) Paragraphs (3)(a) to (c) and subsections (4), (5) and (6) do not apply in relation to goods that are subject to a purchase mo ney
security interest held by the secured party against whom the claim to exemption is made.
1.1.4 Execution of Judgments and Distribution Among Creditors
General CCP Provisions
569
Creditors can seize any moveable property of the debtor, whether that property is in the possession of the debtor, the creditor,
or a third party who consents to the seizure [surely you can force people to turn over property without consent - Mike].
The creditor can also seize money by garnishment.
The creditor can also seize immoveable proper in the possession of the debtor.
Execution of Personal Judgments Against Moveable Property
569 Creditors can seize any moveable property of the debtor, whether that property is in the possession of the debtor, the creditor, or a
third party who consents to the seizure. …
570. Bonds, debentures, promissory notes and other instruments payable to order or to bearer, and currency, may be seized like other
movable property; shares of business corporations are seized in accordance with the provisions of Section III of this chapter.
580 The writ of seizure of movable property in execution orders the competent officer to levy against the movable property of the
debtor the amount of the debt in principal, interest and costs, including those of the execution.
580.1 The writ must also contain, in easily legible type, the text determined by the Minister of Justice.
580.2 The seizing officer must, before making the seizure, read the text provided for in article 580.1 to the debtor if he is present.
Execution of Personal Judgments Against Immoveable Property
569 … The creditor can also seize immoveable proper in the possession of the debtor
660 The writ of seizure of immovables orders the sheriff of the district in which the immovables of the debtor are situated to seize
those indicated to him by the seizing creditor and to sell them in satisfaction of the condemnation in principal, interest and costs. It is
executed by the sheriff himself or by one of his officers.// [rules for seizing immoveables present in two districts]
666 The sheriff who has seized an immovable is required to note, upon the first writ, all subsequent writs of execution; in such case
the first seizure cannot be discontinued or suspended, except in consequence of an opposition, or with the consent of the seizing
creditor and of the subsequent creditors whose seizures have been noted, or by an order of a judge.
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If the first seizing creditor releases the seizure or receives payment of his claim, the execution is nonetheless continued in his
name, in order to satisfy the writs noted, but at the cost of the creditors who obtained them.
667 The immovables seized remain in the possession of the debtor, but the seizing creditor may if necessary obtain from a judge the
appointment of a sequestrator.
The fruits and revenues collected by the sequestrator, after deducting expenses, are immobilized and distributed in the same
manner as the sale price.
553.2 The immovable of the debtor which serves as the primary residence is exempt from seizure where the amount of the debt is
worth less than $10,000 except where
(1) the claim against the debtor is secured by a prior claim or legal or conventional hypothec on the immoveable, other than a
legal hypothec resulting from a judgment.
(2) the claim is a claim for spousal/child support.
(3) the immoveable is already validly under seizure.
Where the debt results from a judgment, the amount of the debt includes interest, but not costs
Distribution of Funds from Seizure
615 The distribution of the proceeds of the sale is made in the following order:
(1) Legal costs;
(2) The claims of the prior or hypothecary creditors, if they have filed a statement of their claim supported by an affidavit and
the necessary vouchers;
(3) The claim of the seizing creditor, if unsecured.
In the case of insolvency of the debtor, the distribution among unsecured creditors is made in accordance with article 578.
640. If there are several seizures by different unsecured creditors in the hands of the same garnishee, each seizing creditor has a
preference over later seizing creditors according to the date of service of the writ of seizure by garnishment, unless the insolvency of
the common debtor has been alleged; in the latter case the creditors are called in upon the first seizure in the manner provided in
article 578.
578 When the insolvency of the debtor is alleged, the distribution of the moneys levied cannot take place until his creditors generally
have been called in by public notice given in accordance with article 139.
The distribution is made pro rata between the ordinary creditors who have filed their claims, which must state the name,
occupation and residence of the claimant and the nature and amount of his claim, and be supported by an affidavit that the amount
claimed is due, and by vouchers if any. [For bankruptcies, note that the Bankruptcy Rules will override the provincial procedural rules
to the extent that there is a conflict, but in the absence of a federal rule on a given issue, provincial procedure is used. - Mike]
DC – Caisse populaire Lavaloise c Grigano, 1994 QCCA [53]
Facts: The Caisse obtained a personal hypothecary judgment against Grigano and his company. It then seized some of his moveable
property to pay the judgment debt. Grigano opposes the seizure on the grounds that since the Caisse is a hypothecary creditor, it must
first seize and sell the building, and only if the debt remains unpaid can it seize his moveable property.
Issue: Was the seizure of Grigano’s moveable property valid?
Holding: Yes.
Reasoning: The patrimony is the common pledge of a person’s creditors. The fact that a creditor has a hypothec on a piece of property
does not prevent them from looking to the rest of the debtor’s property if they so choose. Thus, contrary to Grigano’s arguments, a
hypothecary creditor is not forced to execute a seizure against the hypothecated property first seizing the rest of the debtor’s property.
Ratio: Hypothecary recourses are cumulative with personal recourses.
DC – Beaulieu c Tremblay, 1999 QCCA [56]
Facts:
Issue: Can a car be exempted from seizure under 552(1)?
Holding: No.
Reasoning: A car is not a moveable that “furnishes” the residence of the debtor, since grammatically a car does not “furnish” a home.
Furthermore, article 415 CCQ uses the same phrase “moveable property that furnishes the residence” and then continues by listing
cars separately. This shows that that legislature understands cars as falling outside the category of movables that can “furnish” a
residence. Furthermore, it’s not clear that a car is “necessary”, even assuming it could “furnish” the debtor’s residence, since the
debtor can always use public transit or take a taxi [I wonder if modern ride-share sites makes this argument even stronger - Mike].
Ratio: Cars are not covered by 552(1) CCP.
Comment: Presumably mobile homes would be unseizable under 553.2 CCP.
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DC – Re Dionne, 1998 QCCS [58]
Facts: Dionne is an insurance salesperson who is bankrupt. She meets clients at home and is paid on commission. Her creditors wish
to seize and sell her car as part of the bankruptcy process.
Judicial History: The registrar of bankruptcy [a minor court official in the bankruptcy process - Mike] decided that Dionne was an
independent contractor and could not claim her card was unseizable because it was used in the context of an enterprise (1525 CCQ),
rather than professional activity. The registrar relied heavily on the Minister’s Comments in coming to this decision.
Issue: Does Dionne use her car in the context of a professional activity?
Holding: Yes.
Reasoning: The Minister’s Comments are entitled to weight, but are not determinative, and certainly do not have equal weight to the
legislative text itself. Instead, the interpretation given to 552(3) CCP and 2648 CCQ should be anchored in the statute itself. Thus the
following test emerges from the legislative text: (1) The property that was seized, is it an “instrument of work”? (2) Is it “necessary” ;
(3) Is it necessary to the personal exercise of the activity [this one makes (2) redundant! - Mike]; (4) Is the debtor’s activity a
professional one? A positive response to all four question means the property cannot be seized. There was no reason to import the
notion of “enterprise”, especially since it is not mentioned in either article. In any case, the notion of “professional activity” includes
the notion enterprise at 1525 CCQ, but excludes the notion of “commercial activity.” [The “commercial activity” concept under the
CCBC was a strange category that included retailers, but excluded farmers, artisans/skilled trades, and professionals like lawyers and
accountants; I don’t know who else falls within the category of “commerçant” except retailers and restaurenteurs - Mike]
Ratio: (1) Four step test for applying 552(3) CCP; (2) “Necessary” in this context means “ce dont l’absence empêche pratiquement
tout l’exercise de l’activité professionnelle de son possesseur” [64]; (3) “Professional activity” means all non-commercial activity,
with “commercial activity” being understood in the CCBC sense.
Comment: See above for my criticism of this test, and my proposal for a better, more logical one.
DC – Banque de Montréal c Dufour, QCCA [114]
Facts: BMO is trying to seize Dufour’s home in order to sell it, even though the size of their claim is only $6,737.76 and thus below
the $10,000 threshold of 553.2. They claim that because their personal judgment against Dufour resulted in a legal hypothec, they
have permission to seize the house.
Issue: Are holders of legal hypothecs resulting from judgments able to seize homes under 553.2(1)
Holding: No.
Reasoning: The intention of the legislature in rewriting this part of the CCP was not to remove the protection for debtors. The use of
“legal hypothec” was a change of language necessitated by the CCQ’s new terminology, and not a fundamental change to 553.2 CCP.
Additionally, to adopt the bank’s interpretation of 553.2 CCP would allow any judgment creditor to obtain a legal hypothec and
thereby circumvent the protection that it is meant to confer on debtors.
Ratio: The “legal hypothec” exception of 553.2(1) does not apply to holders of legal hypothecs resulting from judgments.
Comment: At the time, 5532.(1) did not read “other than a legal hypothec arising out a judgment” - so the decision has been entirely
overtaken by statute.
Section 1.2: Priorities
A prior claim is a kind of “modality” of a claim/créance, in the same way that there are modalities of property. It is a way of being a
claim, just like co-ownership is a way of being a co-owner.
Depage, Traité élémentaire de droit belge : “Le priorité est un aspect particulier de certain droits personnels, une manière d’être de
certains créances”
2650 A claim to which the law attaches the right of the creditor to be preferred over the other creditors, even the hypothecary
creditors, is a prior claim. // The priority of a claim is indivisible.
Note that the state may also publish its fiscal claims as legal hypothecs 2725.
1.2.1 Types
There are currently five recognized prior claims. This is down from 19 (10 moveable, 9 immoveable) under the CCBC [272-273]. The
Minister’s Commentary indicate that the reduction was an attempt to simplify this area of law [274]. The remaining priorities were
kept because they protected claims created by creditors acting in the common interest (#1), or the interest of society in general (#4-5)
or because they protected a particular interest (#2-3) [275]. The particular interests in question deserved protection because “il s’agit
de situations qui ne se pretent pas à la stipulation d’une garantie hypothécaire” [275]. That last one is meaningless… plenty of
situations don’t lend themselves to hypothecs and they don’t receive a prior claim!
7
Boudreault, Les sûretés 1997 [276]: Note that 2651(2) does not apply to commercial sales, only to consumer sales [277]. Most
commentators believe that the Federal Government does not benefit from 2651(4), typically arguing that the provinces cannot bind the
federal Crown [278] [that’s a bad argument, since this isn’t “binding” the federal government… it’s conferring a benefit! - Mike].
2651(5)’s reference to “specially provided for by laws applicable to them” means taxing powers granted by City Charter to certain
municipalities [279]. Transitory law of priorities is discussed [280-282, especially fn 75]
2651 The following are the prior claims and, notwithstanding any agreement to the contrary, they are in all cases collocated in the
order here set out:
(1) legal costs and all expenses incurred in the common interest;
(2) the claim of a vendor who has not been paid the price of a movable sold to a natural person who does not operate an
enterprise;
(3) the claims of persons having the right to retain movable property, provided that the right subsists;
(4) claims of the State for amounts due under fiscal laws;
(5) claims of municipalities and school boards for property taxes on taxable immovables as well as claims of municipalities,
specially provided for by laws applicable to them, for taxes other than property taxes on immovables and movables in respect
of which the taxes are due.
CCQ Provisions Giving a Right of Retention
Major: 1592 A party who, with the consent of the other party, has detention of property belonging to the latter has a right to retain it
pending full payment of his claim against him, if the claim is exigible and is directly related to the property of which he has detention.
1593 The right of retention may be set up against anyone.// Involuntary dispossession does not extinguish a right of retention;
the party exercising the right may revendicate the property, subject to the rules on prescription.
Minor: 875 (heirs); 963 (possessors in good faith for reimbursement of improvement/maintenance costs); 946 (holder of lost or stolen
thing); 974 (accession); 1369 (administrator of property of another); 1250 (person obligated to deliver property under gift or will);
2003 (shipowner over cargo for cost of carriage); 2058 (transporter, similar to shipping); 2185 (mandataries); 2293 (depositories,
seems to overlap with 1592); 2302 (innkeepers).
1.2.2 Creation
All priorities arise automatically by operation of law.
1.2.3 Object and Scope of Security
The state’s claims under 2651(4) and 2653 are general securities over the entire moveable property of the debtor [105]. Because there
is no publication requirement, priorities are said to have “un caractère occulte” for other creditors [285].
CCQ Provisions
2652 Prior claims covering legal costs and expenses incurred in the common interest may be executed on movable or immovable
property.
2654.1 Prior claims of municipalities and school boards for property taxes constitute a real right. //They confer on the holder of the
claims the right to follow the taxable property into whosever hands it may be.
2653 Prior claims of the State for sums due under fiscal laws may be executed on movable property.
2650 … The priority of a claim is indivisible.
1051 Notwithstanding articles 2650 and 2662, a hypothec, any additional security accessory thereto or any preferences existing at the
time of registration of the declaration of co-ownership on the whole of an immovable held in co-ownership are divided among the
fractions according to the relative value of each or according to any other established proportion.
1.2.4 Effects of Priority
None really, since they’re not real rights for the most part, and thus can’t really affect any collateral. Nor do they have an impact on
the debtor’s actions. They just give you a right to be paid first whenever the debtor’s property is being judicially sold.
1.2.5 Opposability and Priority
There is no need to publish priorities for them to be opposable (2655), but they do not have a droit de suite except for
municipal/schoolboard tax claims (2654.1). So most priorities are opposable only to the debtor and other creditors.
The order of payment for a prior claim is in the order they are listed in 2651 (2657 para 1). Claims of the same rank are paid
proportionately (2657 para 2)
CCQ Provisions
8
2655 Prior claims may be set up against other creditors, or against all third persons if they constitute a real right, without being
published.
2657 Prior claims rank, according to their order among themselves, and without regard to their date, before movable or immovable
hypothecs.//Prior claims of the same rank come in proportion to the amount of each claim.
2658 In a case of distribution or collocation among several prior creditors, the creditor of an indeterminate, unliquidated or conditional
claim is collocated according to his rank, but subject to the conditions prescribed in the Code of Civil Procedure (chapter C-25).
2770 Where a hypothecary creditor seizes a moveable over which the holder has a right of retention, the hypothecary creditor must
provide the moveable to the seizing creditor, but the seizure preserves his priority in spite of dispossession, so if the moveable is sold
the proceeds go back to the priority holder.
DC – Québec (Sous-ministre du Revenu) c Banque nationale du Canada, 1999 QCCA [290]
Facts: National Bank exercised a taking in payment remedy against a bankrupt company that also owed large tax debts to the
government. National Bank then sold the property it took in payment. The State claims that it is owed this money due to its priority.
National Bank argues that once it took the property in payment, the property left the patrimony of the debtor, and so the priority
cannot be opposed to it.
Issue: If a hypothecary creditor exercises the right of taking in payment and later sells the property, can the state still exercise a
priority against the proceeds of the sale?
Holding: No.
Reasoning: Priorities do not have a droit de suite, and are personal recourses exercised against a debtor, not against a piece of
property. The remedy of taking in payment transfers property from the patrimony of the debtor to the patrimony of the creditor. Once
that property is in the hands of the creditor, it can be sold by the creditor without any restriction, since the prior claim is against the
debtor, not the creditor and not the property involved. Although some authors believe that 2782 CCQ forces the hypothecary creditor
to pay for the prior claim, it is at best ambiguous, and the legislative history shows that the legislator withdrew a proposal to explicitly
give prior claimants priority over money from property sold after taking in payment. Various policy reasons support this position as
well [296-297].
Ratio: Taking in payment allows the hypothecary creditor to avoid preferred creditors, with the exception of those whose claims are
real rights.
1.2.6 Remedies and Execution
Article 2656 appears to give new remedies to creditors with prior claims. This is in fact an error. At one point there was a plan to
create special remedies for holders of prior claims, but that project was abandoned. Despite the change in legislative plans, the text of
2656 was never revised. The reference to “mesures provisionnelles” refers to seizure before judgment, conservatory orders, sequesters,
etc.
Property that can be seized by Prior Creditor
Immovable property: legal expenses in the common interest (2652); unpaid municipal claims that are real rights (2654.1)
Moveable property: legal expenses in the common interest (2652); claims of the state for unpaid taxes (2653); retention rights of
moveable property 2651(3); unpaid vendor’s claims 2651(2)
CCQ Provisions
2653 Prior claims of the State for sums due under fiscal laws may be executed on movable property.
2656 In addition to their personal or, as the case may be, real right of action and the provisional measures provided in the Code of
Civil Procedure (chapter C-25), prior creditors may exercise their remedies under the law for the enforcement and realization of their
prior claim.
2654 A creditor who takes procedures in execution or who, as holder of a movable hypothec, has registered a prior notice of his
intention to exercise his hypothecary rights, may apply to the State to declare the amount of its prior claim. The application shall be
registered and proof of notification shall be filed in the registry office. // Within 30 days following the notification, the State shall
declare the amount of its claim and enter it in the register of personal and movable real rights; such a declaration does not have the
effect of limiting the priority of the State's claim to the amount entered.
2652 Prior claims covering legal costs and expenses incurred in the common interest may be executed on movable or immovable
property.
2654.1 Prior claims of municipalities and school boards for property taxes constitute a real right. //They confer on the holder of the
claims the right to follow the taxable property into whosever hands it may be.
2653 Prior claims of the State for sums due under fiscal laws may be executed on movable property.
1.2.7 Extinction
2659 The priority granted by law to certain claims ceases by operation of law when the obligation which is its cause is extinguished.
9
DC – Caisse Populaire Les Méchins c 9035-0489 Canada Inc, 1999 QCCS [284]
Facts: The numbered company is bankrupt and owes a large tax debt to the state. The state was put on notice to publish the size of its
claim under 2654, but never did so.
Issue: What is the effect of failure to publish the amount of the prior claim?
Holding: Loss of the claim’s status as a prior claim.
Reasoning: It is clear from the use of the word “doit” in 2654 that the State has an obligation to state the amount of its claim. The only
issue is the sanction for the non-observance of this requirement. The government argues that if 2654 were intended to extinguish the
prior status of the claim, it would say this explicitly. Doctrinal authors seem to believe that failure to publish the amount of the claim
results in loss of priority status, and there are no decisions on this point. “Le tribunal endosse sans rgserve cette position unanime des
auteurs, principalement au motif que dans notre droit des sûretés, la sanction normale et usuelle du défaut d’inscrire un droit soumis à
cette formalité réside dans l’inopposabilité de ce droit.” [287].
Ratio: Failure to publish the state’s claim under 2654 results in the loss of the claim.
Comment: The claim about GST not being protected under 2651(4) since it’s owed to the state was abandoned.
Section 1.3: Hypothecs
These are the major security interest of the civil law. They represent the addition of a “droit réel accessoire” that is added onto the
property right of the debtor. Because the hypothec is a real right, it will follow the principal property right to which it is attached. This
makes it opposable to third parties. This also sets the hypothec apart from the mortgage, since there is no change of ownership or
dispossession when using a hypothec.
The major division of hypothecs is between legal hypothecs (created by operation of law, and generally without the consent of the
debtor) and contractual hypothecs (which as their name indicates, must be created with the debtor’s consent. Hypothecs are either
moveable or immoveable, which means that the same hypothec cannot cover both moveable and immoveable property.
1.3.1 Juridical Nature
CCBC: 2016 “L’hypotheque est un droit réel sur les immeubles affectés à l’acquittement d’une obligation en vertu duquel le créancier
peut les faire vendre en quelque mains qu’ils soient, et être préféré sur la produit de la vente suivant l’ordre du temps , tel que fixé
dans ce code”
- This definition confirms that the hypothec is a real right, accessory to another obligation, that it has a droit de suite, and that
it confers a power to sell. It also sets out a basic priority scheme (first in time). Note that under the CCBC, hypothecs were available
only on immoveables.
CCQ Provisions
2260 A hypothec is a real right on a movable or immovable property made liable for the performance of an obligation. It confers on
the creditor the right to follow the property into whosever hands it may be, to take possession of it or to take it in payment, or to
sell it or cause it to be sold and, in that case, to have a preference upon the proceeds of the sale ranking as determined in this Code.
- Very similar to the CCBC, except the remedies listed are different, it can apply to moveable or immoveable property, and
the priority ranking refers you to elsewhere in the code. [Pratte, 74]
- Gives a droit de suite and a droit de préférece quite explicitly.
- Minister’s Commentary [67]: “Cet article reprend substantiellement la définition que donnait l’hypothèque à l’article 2016
CCBC, mais il ajoute à l’hypothèque du droit antérieure la possibilité qu’elle puisse désormais grever des meubles, ce que ne
permettait pas l’article 2022 CCBC. L’article expose les diffrents droits que confère l’hypothèque : [lists them]. Le droit de suite,
implicite antérieurement, eest énoncé exoressément de mêe que sont énoncés les droits de prendre en possession, de prendre en
paiement ou de vendre.”
2661 A hypothec is merely an accessory right, and subsists only as long as the obligation whose performance it secures continues to
exist. [see citations at 78]
2662 A hypothec is indivisible and subsists in its entirety over all the charged properties, over each of them and over every part of
them, even where the property or obligation is divisible. (only exception is for condos 1051 CCQ)
2663 The hypothecary rights conferred by a hypothec may be set up against third persons only when the hypothec is published in
accordance with this Book or the Book on Publication of Rights.
Other Definitions [69]: Droit réel; droit personnel; droit réel principal; droit réel accessoire; droit de suite. droit de préférence.
10
DC – Banque laurentienne du Canada c Bélanger,1999 QCCQ [76]
Facts: Bélanger is owed $17,000 by the Bank for work he performed on an immoveable. This work qualifies for a legal hypothec for
the construction industry, and Bélanger followed all the procedural steps required. Bélanger’s personal action against the bank is
extinct via prescription.
Issue: When the debt is extinguished by prescription, is the legal hypothec extinguished as well?
Holding: Yes.
Reasoning: Article 3063 allows the expungement of hypothecs where “le droit inscrit est annulé, résolu, résilié, ou éteint par
prescription.” As an accessory right, the hypothec cannot exist when the obligation to which it was an accessory is extinguished.
Additionally, given that the obligation was a personal debt, the 3 year limit for personal actions is the applicable prescription period,
not the ten year limit for actions based on real rights. The hypothec, being accessory, cannot give the primary obligation an
immoveable character. The debt is prescribed, so the hypothec should be expunged.
Ratio: If the obligation secured by the hypothec is prescribed or ceases to exist for any reason, the hypothec may be expunged.
1.3.2 Classification
Article 2665 implies that you can’t have a hypothec that covers a mix of both moveable and immoveable property. You’d need two
separate hypothecs.
CCQ Provisions
2664 … A hypothec may be conventional or legal.
2665 A hypothec is movable or immovable depending on whether the object charged is movable or immovable property or a
universality of movable or immovable property. // A movable hypothec may be created with or without delivery of the movable
hypothecated. Where it is created with delivery, it may also be called a pledge.
2695 Hypothecs on present and future rents are considered immoveable hypothecs and must be registered as such.
2672 Movables charged with a hypothec which are permanently physically attached or joined to an immovable without losing
their individuality and without being incorporated with the immovable are deemed, for the enforcement of the hypothec, to retain their
movable character for as long as the hypothec subsists.
2698 A movable hypothec charging the fruits and products of the soil, and the materials and other things forming an integral part
of an immovable, takes effect when they become movables with a separate existence …
2796 Where a movable property is incorporated in an immovable, the movable hypothec may subsist as an immovable hypothec,
notwithstanding the change of nature of the property, provided it is registered in the land register; it is ranked according to the rules set
out in the Book on Publication of Rights [see 2951 for the priority rules - Mike].
1.3.3 Creation of Conventional Hypothecs
Note: the “clause de datation en paiement”, a clause which allowed the creditor to become owner of the property if there was a default,
is invalid under the CCQ (1801; Marcos v Freedman, 2000 QCCS). You have to create a hypothec and abide by the rules of
hypothecary recourses.
General
2664 Hypothecation may take place only on the conditions and according to the formalities authorized by law. …
1525 … The carrying on by one or more persons of an organized economic activity, whether or not it is commercial in nature,
consisting of producing, administering or alienating property, or providing a service, constitutes the carrying on of an enterprise.
Capacity
The general rule is that anyone can create a hypothec over anything, as part of the principle that everyone has free exercise of civil
rights (1, 302 CCQ). The basic requirement is that the grantor must have the capacity to alienate property (2681 CCQ). This can be the
debtor or a third party/guarantor (2681 CCQ). However, there are some important exceptions:
- Hypothecs over movable property without dispossession can be granted only by a person or a trust that operates an
enterprise, and the open hypothec can only to the property used for the purposes of that enterprise (2683 CCQ), or over
automobiles, regardless of whether they are used for an enterprise (2683 CCQ). Regulations create a few other circumstances
in which individuals are allowed to create hypothecs without dispossession (see below).
- A hypothec on a universality of property can be granted only by a person or a trust that operates an enterprise, and the
open hypothec can only to the property used for the purposes of that enterprise (2684 CCQ). There is an exception to this rule
for securities (stock in companies), which may be hypothecated as part of universality (2684.1 CCQ).
11
- An open hypothec can only be created by a person or a trust that operates an enterprise, and the open hypothec can only to
the property used for the purposes of that enterprise (2686 CCQ). An open hypothec must be stated explicitly to be “open”,
otherwise it will be considered ordinary (2715 CCQ).
- Despite the use of the word “person” in 2681, the general opinion is that partnerships can grant conventional hypothecs
[188]. Hypothecs should be granted by the partnership itself, not by the partners acting as a group [187].
- Limited partnerships can be tricky, but the general consensus is that the operating partner can grant the hypothec on
behalf of the partnership as whole, while the limited partners do not have the power to grant hypothecs [187-188].
By regulation 15.02 of the Regulation Respecting the register of moveable and personal rights, a physical person not operating an
enterprise can give moveable hypothecs without dispossession of the following goods:
(a) any car/boat/motorcycle/snowmobile or aicraft mentioned in regulation 15.01 (see section 2.2 below).
(b) “precious property” any print, etching, drawing, painting, sculpture or other similar work of art, jewellery, rare folio, rare
manuscript or rare book, stamp, or coin.
(c) incorporeal personal property, including stocks and derivatives.
Formalities
- Hypothecs on immoveables must be created by notarial act en minute (2693).
- Hypothecs which secure the payment of bonds must be created by notarial act en minute (2692).
- Moveable hypothecs without dispossession must be created by a written document of some kind (2696).
- Moveable hypothecs with dispossession do not require a writing of any kind, and are granted by transfer of possession (2702).
- Open hypothecs without dispossession must be in writing (2696). Open hypothecs over immoveables must be created by notarial act
en minute (2693). Open hypothecs that are granted by a corporation, limited partnership, or trust and which guarantee the performance
of bonds or other “titles of indebtendness” must also be created by notarial act en minute, regardless of whether they affect movaeable
or immoveable property, and the notarial act must be in favour of the person holding power of attorney for the creditors (“en faveur du
fondé de pouvoir des créanciers”) (2692).
- Hypothecs on universalities of claims must be signified to the debtor of the claim using the provisions for notifying debtors of
assignments (CCQ 2710).
- For bills of lading see 2041, 2685.
Future Property and Property Belonging to Other People
2670 A hypothec on the property of another or on future property begins to affect it only when the grantor acquires title to the
hypothecated right.
Dispossession
The CCQ uses the CCBC term “gage” or “pledge” to mean moveable hypothec with dispossession, but did not take up the CCBC term
of “nantissement” for immoveable securities with dispossession. Thus under the CCQ, only moveable hypothecs, and not immoveable
ones, may be formed by dispossession [107]. Immoveable hypothecs can only be formed by following the various registration and
formality requirements.
2702 A movable hypothec with delivery is granted by physical delivery of the property or title to the creditor or, if the property is
already in his hands, by his continuing to physically hold it, with the grantor's consent, to secure his claim.
2710 A movable hypothec on a claim held by the grantor against a third person or on a universality of claims may be granted with or
without delivery. // However, in either case the creditor may not set up his hypothec against the debtors of hypothecated claims as long
as it may not be set up against them in the same way as an assignment of claim.
Requirement of Sufficient Description
2694 An immovable hypothec is valid only so far as the constituting act specifically designates the hypothecated property.
2697 A sufficient description of the hypothecated property shall be contained in the act constituting a movable hypothec or, in the
case of a universality of movables, an indication of the nature of that universality.
2689 An act validly constituting a hypothec indicates the specific sum for which it is granted. // The same rule applies even where
the hypothec is constituted to secure the performance of an obligation of which the value cannot be determined or is uncertain.
Ciotola, “Le Lendemain de la Mise en Vigeur du Nouveau Droit des sûretés” 1997 [135]: Notes that 2689’s requirement about the
specific value of the hypothecary claim is strictly enforced. So a hypothec guaranteeing a future debt of uncertain size is invalid [137].
But hypothecs related to lines of credit may be valid [137; he cites 2797… not clear why this proves his point]. There also seem to be
exceptions to the strict application of the need for a determinate amount of the hypothec, in that interest and costs can be added to the
12
value of the debt a hypothec secures. The other requirements relating to the scope of the property secured by the hypothec have been
treated less strictly.
DC – Caisse populaire de Thetford Mines c Ed-Vic inc, 1996 QCCS [156]
Facts: EV was a struggling business that obtained an increase in its line of credit from the Caisse just prior to bankruptcy. This
increase was guaranteed originally by a CCBC security with a very vague definition of the debts it covered. The CCBC security was
later transformed into a moveable hypothec for $45,000. The increase in the permitted overdraft was to be an extra $30,000 of which
$27,000 was used when EV went bankrupt. The debt is admitted, but EV’s trustee in bankruptcy claims that the $27,000 debt is
unsecured because there was no valid hypothec.
Issue: Was the hypothec valid?
Holding: Yes.
Reasoning: The hypothec here was successor to a general transport of claims under the CCBC. The CCBC security would be invalid
under current law, since a hypothec for “current and future debts” would violate 2689. Here though, the moveable hypothec registered
after the CCQ came into force was for the sum of $45,000. Thus the moveable hypothec satisfies 2689.
Ratio: The requirement for a specific sum under 2689 will be strictly enforced.
DC – Re 3540618 Canada inc, 2000 QCCS [190]
Facts: Before going bankrupt, 3540618 acquired certain goods from Camping Gatineau inc. To guarantee the sale price, Camping
Gatineau received a moveable hypothec over several items of property. Most were specifically described, but one of these items was
“l’inventaire des pièces neuves et usagées”. The trustee in bankruptcy objects to this security, claiming it is too vague to be valid
hypothec. The registrar of bankruptcy also found the clause ambiguous, stating that it wasn’t clear if future inventory was included.
Issue: Does the hypothec provide a sufficient description?
Holding: Yes.
Reasoning: The Minister’s Comments indicate that 2697 was intended to soften the requirement for a precise description of the
hypothecated goods, in order to make challenges to hypothecs on such a technical basis less common. Doctrine confirms this
interpretation. Here there was more than enough information. Finally, the CCQ states that hypothecs on universalities automatically
extend to replacement property. So there was no need to specify that future inventory was included in the hypothec - it would be by
operation of law.
Ratio: The sufficient description requirement of 2697 is simple to fulfill.
1.3.4 Object and Scope of Hypothecs
Accession and real subrogation are defined at [134]. Real subrogation is specifically authorized in several articles of the book on
hypothecs, generally those relating to universalities (2674-2676). Another example is 2497, which gives hypothecary creditors the
right to collect the insurance proceeds arising from the loss/damage of the hyothecated property. It is unclear to what extent real
subrogation can be invoked beyond those parts of the code that explicitly authorize it [134].
Note that there is no general “proceeds” protection in the CCQ as there is under the PPSA. Universalities have a rule that looks like
the PPSA proceeds rule at 2674, but there is no general rule. Additionally, the CCQ only allows you to proceed against one good at a
time - either the original good or the proceeds, while the PPSA allows you to proceed against both.
Because hypothecs are accessory rights, they can’t be put on another accessory right, like a servitude or another hypothec. Although in
theory you could hypothecate the underlying contractual debt which gave rise to the other hypothec, which would allow you to acquire
that other hypothec at the same time you got rights over the contract.
General CCQ Provisions
2666 A hypothec may be made over corporeal or incorporeal property, moveable or immoveable (but not both), and over one, many,
or a universality of property.
2662 A hypothec is indivisible and subsists in its entirety over all the charged properties, over each of them and over every part of
them, even where the property or obligation is divisible.
2668 Property exempt from seizure may not be hypothecated. // The same rule applies to movable property belonging to a debtor
which furnishes his main residence and which is used by and is necessary for the life of the household.
913 Objets hors commerce can’t be hypothecated, because they can’t be alienated. An unalienable property is unseizable too.
2669 A hypothec granted on the bare ownership does not extend to the full ownership upon extinction of the dismemberment of the
right of ownership.
13
2670 A hypothec on the property of another or on future property begins to affect it only when the grantor acquires title to the
hypothecated right.
1212 Stipulations of unalienability are generally invalid in Québec, unless there is a valid reason and they are created by gift or will.
Even then they have to be temporary.
2649 Like 1212, but for stipulations of unseizability. And these ones must be registered to be opposable to third parties.
2678 Where what is owed to the creditor is the object of a tender or deposit in accordance with this Code, the court may, following
an application by the debtor making the tender or deposit, authorize the extension of the hypothec on the property tendered or
deposited, and it may allow the amount initially registered to be reduced. // Once the reduction of the initial amount is entered in the
appropriate register, the debtor is no longer entitled to withdraw his tender or the property deposited.
1051 Notwithstanding articles 2650 and 2662, a hypothec, any additional security accessory thereto or any preferences existing at the
time of registration of the declaration of co-ownership on the whole of an immovable held in co-ownership are divided among the
fractions according to the relative value of each or according to any other established proportion.
Financial Scope of Hypothec
2667 A hypothec secures the capital, the interest accrued thereon and the legitimate costs, other than extra-judicial professional
fees, incurred for their recovery or for conserving the charged property
2762 Basically repeats 2667 in the remedies chapter, underlines that extrajudicial fees (lawyer costs) may never be recovered.
2668 Property exempt from seizure may not be hypothecated. //The
same rule applies to movable property belonging to a
debtor which furnishes his main residence and which is used by and is necessary for the life of the household.
2959-2960 Registration and priority rules for interest.
Undivided Co-ownership
2679 A hypothec on an undivided share of a property subsists if the grantor or his successor preserves rights over some part of the
property by partition or other act declaratory or act of attribution of ownership, subject to the Book on Successions. // If the grantor
does not preserve any rights over the property, the hypothec nevertheless subsists and extends, according to its rank, to the price
of transfer payable to the grantor, to the payment resulting from the exercise of a right of redemption or a first refusal agreement, or
to the balance payable to the grantor.
Substitution of Hypothecated Property
2700 A movable hypothec on property that is not alienated in the ordinary course of business of an enterprise and that is not
registered in a file opened under the description of the property is preserved by filing a notice of preservation of hypothec in
the register of personal and movable real rights.// The notice shall be registered within 15 days after the creditor is informed in
writing of the transfer of the property and the name of the purchaser, or after he consents in writing to the transfer. The creditor
transmits a copy of the notice to the purchaser within the same time. //The name of the debtor or grantor and of the purchaser and a
description of the property shall be indicated in the notice.
2674 A hypothec on a universality of property subsists but extends to any property of the same nature which replaces property
that has been alienated in the ordinary course of business of an enterprise. // A hypothec on an individual property alienated in
the same way extends to property that replaces it, by the registration of a notice identifying the new property. // If no property
replaces the alienated property, the hypothec subsists but extends only to the proceeds of the alienation, provided they may be
identified.
[Two things (1) the final paragraph of 2674 applies to both universalities and individual hypothecs. (2) Hypothecs on
universalities extend automatically, but individual hypothecs require registration each time. Which is silly - why should a
hypothec of two motorcycles be automatic, when a hypothec over one is not? - Mike]
Future Property
2670 A hypothec on the property of another or on future property begins to affect it only when the grantor acquires title to the
hypothecated right.
Accession and Transformations Moveable/Immoveable
2671 A hypothec extends to everything united to the property by accession.
2672 Movables charged with a hypothec which are permanently physically attached or joined to an immovable without losing
their individuality and without being incorporated with the immovable are deemed, for the enforcement of the hypothec, to retain
their movable character for as long as the hypothec subsists.
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Note: jurisprudence allows the moveable hypothec to prime over the immoveable hypothec in the cases outlined in 2672, since
otherwise 2672 would be useless. Recall that 2672 is referring to 903 CCQ.
2673 A hypothec subsists on the new movable resulting from the transformation of property charged with a hypothec and extends
to property resulting from the mixture or combination of several movables of which some are so charged. A person acquiring
ownership of the new property, particularly through application of the rules on movable accession, is bound by such hypothecs.
2677 A hypothec on certain and determinate shares of the capital stock of a legal person subsists on the shares or other securities
received or issued on the purchase, redemption, conversion or cancellation or any other transformation of the hypothecated shares.
Publication of the hypothec by registration subsists only if the registration is renewed against the shares or other securities received or
issued. // The creditor may not object to the transformation on the ground of his hypothec.
2796 Where a movable property is incorporated in an immovable, the movable hypothec may subsist as an immovable hypothec,
notwithstanding the change of nature of the property, provided it is registered in the land register; it is ranked according to the rules set
out in the Book on Publication of Rights.
2953 But you have to republish your hypothec when there is accession/transformation.
Universalities
2674 A hypothec on a universality of property subsists but extends to any property of the same nature which replaces property
that has been alienated in the ordinary course of business of an enterprise. // A hypothec on an individual property alienated in the
same way extends to property that replaces it, by the registration of a notice identifying the new property. // If no property
replaces the alienated property, the hypothec subsists but extends only to the proceeds of the alienation, provided they may be
identified.
2675 A hypothec on a universality of property subsists notwithstanding the loss of the hypothecated property where the debtor or the
grantor replaces it in a reasonable time, having regard to the quantity and nature of the property.
2676 A hypothec on a universality of claims does not extend to the subsequent claims of the person granting the hypothec when such
claims result from the sale of his other property by a third person exercising his rights.// Nor does it extend to a claim under an
insurance contract on the other property of the grantor.
DC – Caisse populaire Laurier c Lunetterie des Galeries inc, 2000 QCCA [153]
Facts: The Caisse is attempting to seize and sell various pieces of property belonging to the gallery. The Caisse had a commercial
nantissement on all of the gallery’s property. One such item was a Harley Davison motorcycle that was transferred to the gallery by
it’s own in order to increase its asset base and obtain the loan. Prior to the Caisse bringing proceedings, the gallery sold the bike to
Motos Julien, and it then sold the bike to Kimpex Action. The gallery informed the Caisse of the sale nearly a year after it happened,
and even then only told the Caisse about Motos Julien, not Kimpex Action.
Issue: Can the Caisse assert a claim over the bike?
Holding: No.
Reasoning: The sale here from the gallery to MOtos Julien out of the ordinary course of business for a glasses store, so article 2700
CCQ comes into play. The notification to the Caisse was defective, in that it only told the Caisse about the original recipient of the
bike (the notice was delivered a year late). To be valid, the notice must provide the current owner of the property on the date the notice
was delivered. By the time the notice was delivered, Kimpex Action was the owner, but this fact was not disclosed in the notice to the
Caisse. Thus the Caisse can still exercise its rights. Additionally, the sale by Moto Julien to Kimpex was in the ordinary course of
Moto Julien’s business, so Kimpex acquires the bike free of any hypothec. The Caisse can claim the funds received by Moto Julien,
but that is all.
Ratio: (1) The notice under 2700 must give the name of the current owner of the hypothecated property; (2) Illustration of scope of
hypothec over time and across owners.
Comment: There’s a complicated droit transitoire issue I’m glossing over. I don’t think that’s important though.
DC – Alta Mura Construction c Société des parcs de sciences naturelles du Québec, 2003 QCCA [158]
Facts: The SPSNQ holds certain lands as an emphyteutic lessee of the State. Alta Mura attempts to register a legal hypothec against
the property.
Judicial History: The trial judge ruled that the legal hypothec was invalid, because the ultimate owner of the immoveable was the
state, and the SPSNQ was merely the emphyteutic lessee. Since the state’s property cannot be seized, the judge believed the legal
hypothec was invalid. The judge also concluded that a no-assignment clause under the emphyteutic lease constituted a valid
stipulation of inalienability.
Issue: (1) Can a legal hypothec be inscribed against an emphyteutic lessee? (2) Did the no-assignment clause constitute a stipulation
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of inalienability?
Holding: (1) Yes; (2) No.
Reasoning: (1) Article 2726 speaks of “the immoveable” which the trial judge took to mean “the physical building” and thus a
reference to the ultimate ownership of the property. Here though, a right which was inscribed with a legal hypothec was the right of
the emphyteutic lessee, not the state’s bare property. And the CCQ explicitly allows the seizure of emphyteutic rights separately from
the bare property right (1199 CCQ). It was an error for the trial judge to consider the state, and not SPSNQ’s property rights.
(2) The mere absence of price does not make a contract gratuitous. Indeed, an emphyteutic lease can never be gratuitous, since the
lessee always has an obligation to improve the property. Thus the contract between the State and SPSNQ was not gratuitous, thus any
stipulation of inalienability would be invalid and of no effect.
Ratio: The word “immoveable” in 2726 refers to the real right, not a physical object.
Comment: The analysis here would also apply to seizure of superficiary/subsoil rights.
1.3.5 Effects of Hypothecs
Pratte suggests that [211] the general provisions on the effects of hypothecs only applies to moveable hypothecs with dispossession.
Pratte also points out that 2737’s rule that the creditor collects the fruits and revenues is not a hypothecary recourse in the sense of
2748.
General Effects
GENERAL PROVISIONS
2733 A hypothec does not divest the grantor or the person in possession, who continue to enjoy their rights over the charged property
and may dispose of it, subject to the rights of the hypothecary creditor.
2734 Neither the grantor nor his successor may destroy or deteriorate the hypothecated property or materially reduce its value except
by normal use or in case of necessity. // Where he suffers a loss, the creditor may, in addition to his other remedies, and even though
his claim is neither liquid nor exigible, recover damages and interest in compensation up to the amount of his claim and with the same
right of hypothec; the amount so collected is imputed upon his claim.
2735 Hypothecary creditors may institute legal proceedings to have their hypothec recognized and interrupt prescription, even though
their claims are neither liquid nor exigible.
RIGHTS AND OBLIGATIONS OF CREDITORS IN POSSESSION OF HYPOTHECATED PROPERTY
2736 Where the creditor of a movable hypothec with delivery holds the property charged, he shall do whatever is necessary to
preserve it; he may not use it without the permission of the grantor.
2737 The fruits and revenues of the hypothecated property are collected by the creditor.// Unless otherwise stipulated, the creditor
hands over the fruits collected to the grantor, and applies the revenues collected, first, to expenses, then to any interest owing to him,
and lastly to the capital of the debt. [Fruits and revenues defined at 910 CCQ - Mike]
2738 Where shares of the capital stock of a legal person are redeemed for cash by the issuer, the creditor collecting the price applies it
as if it were revenue.
2739 The creditor is not liable for loss of the hypothecated property by superior force or as a result of its ageing, perishability, or
normal and authorized use.
2740 The grantor is bound to repay to the creditor his expenses incurred for the preservation of the property.
2741 The grantor may not recover possession of the hypothecated property until performance of his obligation, unless the creditor
abuses the property. // The creditor loses his hypothec upon a judgment compelling him to return the property.
2742 An heir of the debtor who has paid his share of the debt may not demand his share of the hypothecated property until the whole
debt is paid. //An heir of the creditor may not, on receiving his share of the debt, return the hypothecated property to the prejudice of
any unpaid coheir.
Universalities: Self-extending
2674 A hypothec on a universality of property subsists but extends to any property of the same nature which replaces property
that has been alienated in the ordinary course of business of an enterprise. // A hypothec on an individual property alienated in the
same way extends to property that replaces it, by the registration of a notice identifying the new property. // If no property
replaces the alienated property, the hypothec subsists but extends only to the proceeds of the alienation, provided they may be
identified.
Hypothecs over Claims: See 1.5.4
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1.3.6 Opposability and Priority
i) Opposability and Publication
General Rules
2663 Hypothecary rights may be set up against third persons only when the hypothec is published in accordance with this Book or the
Book on Publication of Rights.
2941 Publication of rights allows them to be set up against third persons, establishes their rank and, where the law so provides, gives
them effect. //Rights produce effects between the parties even before publication, unless the law expressly provides otherwise.
2699 Rules for moveable hypothecs on bills of landing and negotiable instruments.
2943 A right that is registered in a register in respect of property is presumed known to any person acquiring or publishing a right
in the same property. //A person who does not consult the appropriate register … may not invoke good faith to rebut the
presumption.
Protection for Buyers
(From Claire Gowdy’s summary) There is no general rule in the CCQ stating that a buyer of hypothecated property sold in the
ordinary course of business takes free from any hypothec. However, numerous articles in the CCQ assume this to be the case (most
obviously 2700, but also 2732). Title-based security (like leases and conditional/installment sales) explicitly state that buyers take free
from existing security interests CCQ 1713-1715).
Universalities and Sales in the Ordinary Course of Business
2674 A hypothec on a universality of property subsists but extends to any property of the same nature which replaces property
that has been alienated in the ordinary course of business of an enterprise. // A hypothec on an individual property alienated in
the same way extends to property that replaces it, by the registration of a notice identifying the new property. // If no property
replaces the alienated property, the hypothec subsists but extends only to the proceeds of the alienation, provided they may be
identified.
2700 A movable hypothec on property that is not alienated in the ordinary course of business of an enterprise and that is not
registered in a file opened under the description of the property is preserved by filing a notice of preservation of hypothec in the
register of personal and movable real rights.// The notice shall be registered within 15 days after the creditor is informed in writing of
the transfer of the property and the name of the purchaser, or after he consents in writing to the transfer. The creditor transmits a copy
of the notice to the purchaser within the same time. //The name of the debtor or grantor and of the purchaser and a description of the
property shall be indicated in the notice.
Moveable Hypothecs with Dispossession
2703 A movable hypothec with delivery is published by the creditor's holding the property or title, and remains so only as long
as he continues to hold it. (special rules for holding, interruption of holding at 2704)
2705 Delivery of the property to a third party can constitute holding by the creditor, but does not constitute publication except from
the moment the third party receives the written proof of the hypothec.
2707 A movable hypothec granted with delivery may be published by registration at a later date, provided publication is not
interrupted.
2945 Publication by delivery ranks at the time delivery is accomplised.
Moveable Hypothecs without Dispossession
2663 plus 2938 para 2 Must be published to be opposable.
Immoveable Hypothecs
2663 plus 2938 para 1 Must be published to be opposable.
2982 What counts as sufficient documentation for registry.
Legal Hypothecs
2725 Legal hypothecs of the state must be published to have effect.
2726 Construction hypothecs do not need to be published. Although they can expire quickly if not published (2727).
2729 Legal hypothecs of co-owners must be published
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2730 Judgment hypothecs must be published.
DC – Re Kleer Vu Banner Corp, [244]
Facts: Kleer is a federal CBCA company. It was originally called 3353184 Canada inc. It did not register under the Quebec business
registry using that name, although it was supposed to do so once it began operating in Quebec. On January 20, it changed its name to
Kleer Vu Banner Corp. On January 21, it granted a hypothec over all of its property to the Caisse. The Caisse registered this under the
debtor’s old name (3353184 Canada inc). Three years later, Kleer gave a hypothec to CTI, which CTI registered under the name
Kleer Vu Banner Corp. Kleer later went backrupt. CTI claims the Ciasse’s hypothec is not valid, because it was not registered under
the name of the debtor at the relevant time.
Issue: Did the Caisse’s failure to use the name “Kleer” render its hypothec invalid?
Holding: Yes.
Reasoning: The Court of Appeal has confirmed that the publication must occur under the correct name of the debtor, and that an error
in this respect will result in the nullity of the publication [246]. The name changed on the 20th of January. Thus on the 21st, date of
the signature of the loan agreement, and on the 28th, date of publication, the name used by the Caisse was incorrect, since the debtor’s
name was Kleer Vu. The Caisse’s various arguments based on corporate law and the failure to register under the Quebec registry must
be rejected. What is important here is the integrity of the register [251].
Ratio:
Comment: The judge makes numerous comments that imply he’s nullifying the hypothec on the basis of fault. He states that the
Caisse was negligent, and keeps underlining that they could have figured out the true name of the company. I’m not sure this was
necessary. The wrong name is the wrong name, no matter why it happened!
ii) Ranking and Priority
General
2945 Unless otherwise provided by law, rights rank according to the date, hour and minute entered on the memorial of presentation or,
in the case of an application for registration in the land register, in the book of presentation, provided that the entries have been made
in the proper registers.// Where publication by delivery is authorized by law, rights rank according to the time at which the property or
title is delivered to the creditor.
2956 Cession of rank between creditors must be published. The cession inverts the rank of their respective claims, but cannot
prejudice intervening creditors.
2947 Where several registrations concerning the same property and rights of the same nature are requested at the same time, the rights
rank concurrently.
2957 Publication does not interrupt prescription.
2963 Notice given or knowledge acquired of a right that has not been published never compensates for absence of publication.
2959-2960 Registration and the effect this has on the ranking of claims for interest on debts.7
Exceptions to the General Rule of First-to-register (all below)
2952 (Legal hypothecs for construction industry - most important exception); 2949-2950 (universalities); 2951, 2953
(accession/transformation issues); 2956 (cession of rank)
Example for 2956: A has a first-ranking hypothec for $100, B a second-ranking hypothec for $500 and C a third-ranking hypothec for
$500. If A cedes his rank to C, C’s entire claim can’t move into the first rank. Only $100 can. So the final result looks like this: C
$100 first-ranking, B $500 second-ranking, and then A $100/C $400 both tied for third-ranking.
Moveable Hypothecs
2945 General rule Ranks according to date, hour, and minute of publication.
2954 Special rule: A movable hypothec acquired on the movable of another or on a future movable ranks from the time of its
registration but after the vendor's hypothec, if any, created in the grantor's act of acquisition, provided it is published within 15 days
after the sale.
2951 Rank of hypothecs on moveable property that is incorporated into an immoveable.
2953 Hypothecs on moveables that are mixed or combined with other moveables to make new property or a mass. Need to republish
your hypothec after the transformation.
Immoveable Hypothecs
2945 General rule: ranks according to date, hour, and minute of publication.
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2948 Special rule: An immovable hypothec ranks only from registration of the grantor's title, but after the vendor's hypothec created in
the grantor's act of acquisition.// If several hypothecs have been registered before the grantor's title, they rank in the order of their
respective registrations.
Hypothecs on Universalities
2949 A hypothec affecting a universality of immovables ranks, in respect of each immovable, only from the time of registration of
the hypothec against each.// Registration of a hypothec against immovables acquired subsequently is obtained by presenting a notice
containing the description of the immovable acquired and a reference to the act creating the hypothec, and setting forth the specific
amount for which the hypothec was granted.// However, if the hypothec was not published in the land book for the registration
division in which the immovable acquired subsequently is located, its registration is obtained by means of a summary of the act
creating the hypothec, containing a description of the acquired immovable.
2950 A hypothec affecting a universality of movables ranks, in respect of each movable included in the universality, only from
registration thereof in the register, under the description of the grantor and under the indication of the nature of the universality.
Hypothecs on Claims
2710 A movable hypothec on a claim held by the grantor against a third person or on a universality of claims may be granted with or
without delivery. // However, in either case the creditor may not set up his hypothec against the debtors of hypothecated claims as
long as it may not be set up against them in the same way as an assignment of claim.
Floating Hypothecs
2955 Registration of the notice of crystallization determines the rank of a floating hypothec.//If several floating hypothecs are the
subject of notices of crystallization, they rank among themselves from their respective registrations, regardless of the registration of
the notices of crystallization.
Legal Hypothecs
2952 Legal hypothecs in favour of persons having taken part in the construction or renovation of an immovable are ranked
before any other published hypothec, for the increase in value added to the immovable; such hypothecs rank concurrently among
themselves, in proportion to the value of each claim.
Boodman, Quelques Problèmes de publicité (1995) [239]: Points out that errors in the name of the debtor will cause huge problems
for the integrity of the registry, and that erroneous registrations do not fulfill the requirements of 2981 as to accuracy of information
submitted. So this should normally be enough to invalidate the registration in question. For a person, an error in their birth-date will
render it impossible to find them using their real name and real birth-date, so this should invalidate a registration [241]. Errors in
names of physical and legal persons will sometimes find the correct debtor given that the search engine returns phonetically-similar
names. So it is difficult to transform this into a rule of law about the validity of publicity under a misspelled name. The result may
depend on how erroneous the name is (John and Jon aren’t as bad as John and Jean, and both are better than Jean and Javier)
DC – Massé c Cousineau, 1999 QCCA [255]
Facts: Lucien Poitras granted a series of hypothecs on his property. The first in time was to Blanche Poitras for $40,000 and the
contract specifically stated that his hypothec would rank second to a hypothec which would be granted to Rémi Cousineau. The
second in time was the hypothec to Rémi Cousineau for $75,000. Cousineau’s hypothec stated that it was first on the house and
second on the land. No official cession of rank was published by Poitras and Cousineau until much later. The third in time was to
Massé for $33,000. Blanche Poitras (the first in time) later ceded her rank to Massé (the last in time), and this cession was published
prior to the cession between Poitras and Cousineau.
Issue: Given that the cession between Poitras and Cousineau was not published, but the cession between Poitras and Massé was, do
Massé’s rights outrank those of Cousineau?
Holding: Massé’s hypothec is inferior to Cousineau’s hypothec.
Reasoning: Cessions of rank can be implicit. Here Poitras made an offer to cede her rank in her hypothec, and Cousineau accepted
that offer in his hypothec. At this point the reasoning become murky: it is not at all clear whether the QCCA thinks that Cousineau
wins because there the implicit cession was published, and is therefore opposable to everyone, or because even though the transfer was
not published, it still binds Massé. Under this section approach, it binds Massé because she can inherit only the rights that Poitras had,
and Poitras’ cession to Cousineau was valid between the two of them. So when Massé steps into Cousineau’s shoes, she is bound by
the cession to Cousineau
Ratio: (1) Cession of rank can be implicit; (2) A creditor who steps into the shoes of another credit via cession of rank is bound by any
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other cessions made by that creditor, even if these cessions are not opposable to third parties [Assuming that’s the basis of the decision
- Mike]
ii) Priority and Ranking
The general rule is that all hypothecs rank from the date, hour, and minute of their publication in the appropriate register. Possession
counts as publication for the pledge. There are special rules for some legal hypothecs and for some kinds of conventional hypothecs.
Hypothecs on universalities
2950 A hypothec affecting a universality of movables ranks, in respect of each movable included in the universality, only from
registration thereof in the register, under the description of the grantor and under the indication of the nature of the universality.
Hypothecs of Indeterminate or Unliquidated Claims
2680 In the case of distribution or collocation among several hypothecary creditors, the creditor of an indeterminate, unliquidated or
conditional claim is collocated according to his rank, but subject to the conditions prescribed in the Code of Civil Procedure (chapter
C-25).
1.3.7 Hypothecary Remedies
General CCQ Provisions
1375 All contractual obligations must be performed and extinguished in good faith.
1743 Sellers of immoveables wishing to invoke a resolutory clause must put their buyer en demeure, giving them a 60 day notice and
registering the notice against the property. The rules relating to the hypothecary remedy of taking in payment apply.
1594 Procedure for mise en demeure.
1626 The creditor can take all necessary or useful measures to protect his rights.
1627 Oblique action: allows creditor to act in the debtor’s name to assert patrimonial rights of the debtor that will have the effect of
protecting the creditor’s own rights.
1631 Paulian Action: Creditors can set aside transactions taken by debtors if those transactions were fraudulent and intended to defeat
the rights of creditors, such as by rendering the debtor insolvent or selling off valuable property to friends and family for a pittance.
CCQ Provisions on Hypothecary Rights
2748 In addition to their personal right of action and the provisional measures provided in the Code of Civil Procedure (chapter C25), creditors have only the hypothecary rights provided in this chapter for the enforcement and realization of their security.//
Thus, where their debtor is in default and their claim is liquid and exigible, they may exercise the following hypothecary rights: [i]
they may take possession of the charged property to administer it, [ii] take it in payment of their claim, [iii] have it sold by judicial
authority or [iv] sell it themselves.
2749 Creditors may not exercise hypothecary rights before the period in article 2758 for surrender of the property has expired.
2750 Earlier ranking creditors take priority over later creditors when exercising their hypothecary rights. // …
2754 Where later ranking creditors are secured by a hypothec on only one of the properties charged in favour of one and the same
creditor, his hypothec is spread among them, where two or more of the properties are sold under judicial authority and the proceeds
still to be distributed are sufficient to pay his claim, proportionately over what remains to be distributed of their respective prices. [I
have no idea what this means… the French version is not much clearer! - Mike]
2757 Creditor intending to exercise a hypothecary right must file notice with the registry, plus evidence the notice was served on
the debtor.
2758 The notice must include: a description of the hypothecated property; any failure by the debtor to fulfil his obligations; a
reminder that the debtor can remedy the default; the amount of the claim in capital and interest; and the nature of the hypothecary right
which the creditor intends to exercise. The notice must include call on the person against whom the right is to be exercised to
surrender the property before the expiry of the period specified in the notice. //
This period is of 20 days after registration for movable property; 60 days for immovable property, or 10 days if the creditor intends
to take possession of the property. It for consumer moveable property the period is always 30 days.
2760 The voluntary alienation of property charged with a hypothec, effected after the creditor has registered a prior notice of the
exercise of a hypothecary right, may not be set up against the creditor unless the acquirer, with the consent of the creditor, personally
assumes the debt, or unless a sum sufficient to cover the amount of the debt, interest and costs due to the creditor is deposited.
2761 Anyone can defeat the rights of the hypothecary creditor by paying the money that remains to be paid, curing any default, etc.
This right can be exercised at any time prior to the taking in payment/sale, or if the creditor has chosen administration, at any time.
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Summary of Requirements to Invoke Hypothecary Rights
From 2748 we see that the debtor must be in default (see 1594 CCQ) and the claim must be both liquid and exigible. The hypothecary
creditor must also give the required notice under 2757 and register the notice. The creditor must also allow the time period under 2758
to cure the default. These are all preconditions for the right to invoke hypothecary recourses. Many of the recourses below will also be
preceded by the surrender (voluntary or forced) of the property.
Surrender of Property (Délaissement)
2763 Surrender is voluntary or forced.
2764 Surrender is voluntary where, before the period indicated in the prior notice expires, the person against whom the hypothecary
right is exercised abandons the property to the creditor in order that the creditor may take possession of it or consents in writing to turn
it over to the creditor at the agreed time.// If the hypothecary right exercised is taking in payment, voluntary surrender shall be attested
in a deed made by the person surrendering the property and accepted by the creditor.
2765 Surrender is forced where the court orders it after ascertaining the existence of the claim, the debtor's default, the refusal to
surrender voluntarily and the absence of a valid cause for objection …
2767 Surrender is also forced where the court … orders surrender of the property before the period indicated in the prior notice
expires, where there is reason to fear that otherwise recovery of his claim may be endangered, or where the property may perish or
deteriorate rapidly. In the latter cases, the creditor is authorized to exercise his hypothecary rights immediately. // …
2768 A creditor who has obtained surrender of the property has simple administration thereof until the hypothecary right he intends
to exercise has in fact been exercised.
2769 The person against whom the hypothecary right is exercised and who is not responsible for the debt becomes personally liable
therefor if he fails to surrender the property within the time allotted by the judgment.
Payette (quoted in Fiducie Desjardins c Société immobilière Goyer) [345]: Surrender means “le fait pour le détenteur du bien qu’il
soit le débiteur, le constituant, ou un tiers, d’abandonner le bien entre les mains du créancier hypothécaire pour que celui-ci puisse
exercer ses recours.”
Fiducie Desjardins c Société immobilière Goyer) [345]: “Le tribunal est d’avis que pour qu’un délaissement soit effectif, un geste
positif doit être posé par le détenteur de l’immeuble. Le geste positif doit indiquer l’intention du détenteur de ne pas faire échec au
droit du créancier au délaissement. Le simple fait de quitter l’immeuble [ne suffit pas].”
NOTE: If the debtor is an insolvent company, and the creditor plans to exercise a hypothecary remedy against all or substantially all of
the company’s property, accounts receivables, or inventory , the provisions of section 244 of the Bankruptcy and Insolvency Act come
into play (these are three separate categories - if you are going to seize all or almost all of any of them, 244 applies). In particular a
ten-day notice is required. Presumably this is on top of the CCQ notice periods.
i) Administration
This is a remedy that only applies to the property of an enterprise (2773). The whole business needs to be seized and administered, at
which point the creditor has full administration.
ii) Taking in Possession (Foreclosure)
2782 Taking in payment extinguishes the obligation.// A creditor who has taken property in payment may not claim what he pays to
a prior or previous hypothecary creditor. In such a case, he is not entitled to subrogation against his former debtor.
2781 Taking in payment formalized by a judgment (if surrender is involuntary) or by a deed of surrender (if surrender voluntary).
2783 Taking in payment makes the creditor the owner. Taking in payment also extinguishes all hypothecs inferior in rank to that of
the creditor who takes the property, and any real rights created after he registered his notice are not opposable to him.
2779 Subsequent creditors may require the creditor attempting to take in possession to sell the property instead.
2780 If forced to sell the property, the seizing creditor can instead pay off the hypothecs of those who ask that the property be sold.
2778 If at least half of the obligation is discharged, taking in payment requires court approval, unless the person against whom the
right is exercised has voluntarily surrendered the property.
iii) Judicial Sale
2791 A sale takes place by judicial authority where the court designates the person who will proceed with it, fixes the conditions and
21
charges of the sale, indicates whether it may be made by agreement, a call for tenders or public auction and, if it considers it
expedient, after enquiring as to the value of the property, fixes the upset price.
2792 No creditor may require that the sale be subject to his hypothec.
2793 CCP rules on sale of property to another apply. Interested parties must be notified.
2794 Sale by judicial authority purges the real rights to the extent provided by the Code of Civil Procedure (chapter C-25) in respect
of the effect of the order to sell.
iv) Sale by Creditor
2784 A creditor who holds a hypothec on the property of an enterprise and who has filed a prior notice at the registry office
indicating his intention to sell the charged property himself may, after obtaining surrender of the property, proceed with the sale by
agreement, by a call for tenders or by public auction.
2785 The creditor shall sell the property without unnecessary delay, at a commercially reasonable price, and in the best interest of the
person against whom the hypothecary right is exercised.// If there is more than one property, he may sell them together or separately.
v) Debtor’s Rights
2761 A debtor or a person against whom a hypothecary right is exercised, or any other interested person, may defeat exercise of the
right by paying the creditor the amount due to him or, where that is the case, by remedying the omission or breach set forth in the prior
notice and any subsequent omission or breach, and, in either case, by paying the costs incurred.// This right may be exercised before
the property is taken in payment or sold, or, if the right exercised is taking in possession, at any time.
vi) Doctrine and Case Law
Pratte, Les sûretés dans le Code civil du Québec, 2006 [307]: Jurists from Continental civilian countries would be astonished at the
wide range of hypothecary recourses available in Québec. CCBC remedies differed depending on whether they applied to moveable or
immoveable property, but the CCQ has a unified remedies regime. A hypothecary creditor’s rights are always in addition to any
personal rights. It is important to keep in mind that conservatory measures (1626) can often be very important “remedies” even if they
aren’t subject to the hypothecary recourse regime. The creditor can also ask for declaratory judgments to avoid prescription without
going through the whole préavis process. And if someone else seizes the building and sells it, the hypothecary creditor can demand his
share of the proceeds.
Jacques, Droit comparé : mode d’exécution d’une sûreté mobilière en Ontario et Quebec” 2005 [310]: His thesis is that it is too
difficult to seize property quickly in the event of a default in Québec. Often a creditor’s only option is 2767 - délaissement forcé - if
the creditor wishes to obtain the property quickly.
Belleau, Précis de procédure civile du Québec, 2003 [315]: Describes the CCP provisions for forced execution against an
immovable. Notes that you can’t use contempt of court as a means of forced execution.
DC – Boyer c Société en commandite Acquiville, 1996 QCCS [317]
Facts: Several shareholders of Acquiville guaranteed the real estate purchase their partnership signed with Boyer. When the
partnership stopped making its payments, Boyer asked for, and received, forced surrender of the building. However, Boyer never
proceeded with his hypothecary recourse, and instead sued the partners personally. Another hypothecary creditor subsequently took
the building in payment. The partners plead that having obtained forced surrender, Boyer cannot sue them personally.
Issue: Is a creditor who obtains forced surrender of the hypothecated property restricted to his hypothecary rights?
Holding: No.
Reasoning: Article 2748 is clear that the hypothecary rights of the parties are in addition to their personal rights. Jurisprudence has
always affirmed this point of view. “Un créancier hypothecaire ayant déjà donné un préavis peut changer d’idée et exercer un autre
recours hypothécaire…. C’est sa créance, et non son hypothèque, qui lui attribue le droit à un recours personnel.”
Ratio: A hypothecary creditor does not forgo a personal recourse by seeking forced surrender of the hypothecated property.
DC – Fiducie Desjardins c Société immobilière Goyer, 1994 QCCS [339]
Facts: Desjardins asks for a forced surrender order after Goyer defaulted on several payments under an immoveable hypothec. Goyer
admits the defaults but opposes the order, stating that it has already voluntarily left the premises, so there was voluntary surrender.
Issue: Was there a volutnary surrender?
Holding: No.
22
Reasoning: Goyer’s position is ridiculous. If Goyer is not occupying the immoveable, how can it oppose this order? Moreover, there
has not been voluntary surrender here. “La délaissement voluntaire dans le cadre d’une action hypothecaire se faisait par la
production au greffe d’une déclaration de celui appelé à délaisser à l’effet qu’il entendait délaisser voluntairement.” Thus a positive
act is needed. The debtor must not just abandon the property, but rather put it into the creditor’s control.
Ratio: (1) Voluntary surrender is a positive act of putting the creditor in charge of the property, not merely leaving it.
Comment: The French translation of “Surrender” in this part of the CCQ is “Délaissement”… of the two terms I think the English one
captures the idea of a positive act on the debtor’s part more clearly, since you always “surrender to” someone or something.
DC – Quebec (Sous Ministre de revenue) c Industrielle Alliance, 2002 QCCA [323]
Facts: Alliance began taking in payment procedures against a building owned by a tax-debtor and over which it had a hypothec. The
building was rented by a government agency. On 29 May, Alliance began proceedings. On the 6 July, it obtained voluntary surrender.
On 13 August it published a summary of the voluntary surrender agreement. The government had ordered the agency renting the
building to pay its rent straight to the State, which it is allowed to do if the building was still owned by the tax debtor. Alliance asks to
recover the rent money all the way back to 29 May.
Issue: At what point did Alliance become owner of the building?
Holding: The 13th of August.
Reasoning: Even once surrender is accepted, the creditor cannot become owner of the building until the delays imposed by the CCQ
are finished, since otherwise the other hypothecary creditors would be unable to exercise their rights within the time period provided.
Thus while voluntary surrender constitutes the title of the hypothecary creditor, this title cannot exist until after the delays have run.
Article 2783 seems to have retroactive effect, but only as regards real rights. The rental payments here are personal rights and the
payment by the lessee can be set up against Alliance. Alliance’s argument that it is entitled to the rent as a possessor in good faith (931
CCQ) must be rejected, since 2783 is public order. Moreover, it is only the publication of the surrender/judgment that renders the
taking in payment opposable, so here it was only on August 13th that Alliance became owner of the building.
Ratio: (1) Taking in payment does not make the hypothecary creditor owner until publication of the judgment/; (2) Personal rights
accruing prior to publication of the judgment/surrender agreement (and after publication of the notice) are opposable to the creditor.
1.3.8 Extinction
2795 Hypothecs are extinguished by the loss, change of nature, exclusion from being an object of commerce or expropriation
of the charged property, where such events affect the property as a whole.
2796 Where a movable property is incorporated in an immovable, the movable hypothec may subsist as an immovable
hypothec, notwithstanding the change of nature of the property, provided it is registered in the land register; it is ranked according to
the rules set out in the Book on Publication of Rights.
2797 A hypothec is extinguished by the extinction of the obligation whose performance it secures. In the case of a line of
credit or in any other case where the debtor obligates himself again under a provision of the deed of hypothec, the hypothec, unless
cancelled, subsists notwithstanding the extinction of the obligation.
2798 A movable hypothec is extinguished not later than 10 years after the date of its registration or registration of a notice
giving it effect or renewing it. // Pledge is extinguished upon termination of detention.
2799 An immovable hypothec is extinguished not later than 30 years after the date of its registration or registration of a
notice giving it effect or renewing it. // This rule does not apply in the case of hypothecs securing the price of emphyteusis, a rent
constituted for the price of an immovable, a life annuity or a usufruct for life, hypothecs given in favour of La Financière agricole du
Québec or the Société d'habitation du Québec, or hypothecs in favour of a person holding a power of attorney from the creditors to
secure payment of bonds or other evidences of indebtedness.
2800 The legal hypothec of a syndicate of co-owners on the fraction of a co-owner is extinguished three years after it is
registered, unless the syndicate publishes an action in default against the owner to preserve it or registers a prior notice of the exercise
of a hypothecary right.
2802 Other causes of extinction of hypothecs are provided by law. [i.e. the list is not closed - Mike]
Section 1.4: Special Types of Hypothecs
1.4.1 Legal Hypothecs
Legal hypothecs are accorded as of right/by operation of law. There is no need for the consent of the other party.
Creation
2664 Hypothecation may take place only on the conditions and according to the formalities authorized by law. // A hypothec is
conventional or legal.
2724 Only the following claims may give rise to a legal hypothec:
(1) claims of the State for sums due under fiscal laws, and certain other claims of the State or of legal persons established in
23
the public interest, under specific provision of law;
(2) claims of persons having taken part in the construction or renovation of an immovable;
(3) the claim of a syndicate of co-owners for payment of the common expenses and contributions to the contingency fund;
(4) claims under a judgment.
2726 It is not necessary to publish a construction hypothec for it to exist.
2725 The state’s hypothecs must be published. Limited publication content requirements provided.
2727 However, the construction hypothec will expire 30 days after the end of construction unless you publish a notice describing
the amount claimed and the immoveable. This must be served on the owner of the immoveable.
2726 Capacity to register construction hypothec: A legal hypothec in favour of the persons having taken part in the construction or
renovation of an immovable may not charge any other immovable. It exists only in favour of the architect, engineer, supplier of
materials, workman and contractor or sub-contractor in proportion to the work requested by the owner of the immovable or to the
materials or services supplied or prepared by them for the work. It is not necessary to publish a legal hypothec for it to exist.
2729 The legal hypothec of a syndicate of co-owners must be registered.
2730 Every creditor in whose favour a judgment awarding a sum of money has been rendered by a court having jurisdiction in
Québec [Québec courts or the Federal Court - Mike] may acquire a legal hypothec on the movable or immovable property of his
debtor.// He may acquire it by registering a notice describing the property charged with the hypothec and specifying the amount of
the obligation, and, in the case of an annuity or support, the amount of the instalments and, where applicable, the annual Pension
Index. The notice is filed with a copy of the judgment; it must be served on the debtor.
Scope
2725 The state’s hypothecs can charge moveable or immoveable property.
2726 (Property charged) A construction hypothec only affects the immoveable the work was performed on.
2728 (Financial scope) The construction hypothec secures the increase in value added to the immovable by the work, materials
or services supplied or prepared for the work. However, where those in favour of whom it exists did not themselves enter into a
contract with the owner, the hypothec is limited to the work, materials or services supplied after written declaration of the contract to
the owner. A workman is not bound to declare his contract.
2729 The legal hypothec of a syndicate of co-owners charges the fraction of the co-owner who has defaulted for more than 30 days
on payment of his common expenses or his contribution to the contingency fund, and has effect only upon registration of a notice
indicating the nature of the claim, the amount exigible on the day the notice is registered, and the expected amount of charges and
claims for the current financial year and the next two years.
2730 Judgment hypothecs affect moveable or immoveable property.
2732 A creditor who has registered his legal hypothec preserves his right to follow it on movable property which is not alienated
in the ordinary course of business of an enterprise, as though he were the holder of a conventional hypothec.
Priority
2952 Legal hypothecs in favour of persons having taken part in the construction or renovation of an immovable are ranked
before any other published hypothec, for the increase in value added to the immovable; such hypothecs rank concurrently among
themselves, in proportion to the value of each claim.
For the other legal hypothecs, the general rule is that all rights which must be published rank will from the date of publication (2941,
2945). Government (2725), judgment (2730), and co-owner hypothecs (2729) must be published. Therefore they rank from
publication unless otherwise specified (2945). But for these legal hypothecs there is no exemption from the ranks-from-publication
rule, so the default rule applies (2945). In contrast 2952 explicitly exempts construction hypothecs from this issue.
Remedies
Same as regular hypothecs, as a general rule
2725 The state maintains a prior claim even if it also registers a tax debt as a hypothec.
2731 (This is a kind of anti-remedy, since it gives rights to the debtor!) Except in the case of the legal hypothec of the State or of a
legal person established in the public interest, the court, on application of the owner of the property charged with a legal hypothec,
may determine which property the hypothec may charge, reduce the number of the properties or give leave to the applicant to
substitute other security for the hypothec sufficient to secure payment; it may thereupon order the registration of the legal hypothec to
be cancelled.
24
Extinction
2727 para 1/2 A construction hypothec expires 30 days after the end of construction unless you publish a notice describing the
amount claimed and the immoveable. This must be served on the owner of the immoveable.
2727 para 3 Even if registered, a construction hypothec lasts only six months, unless a lawsuit is started over the unpaid money or the
construction hypothec creditor registers a notice of hypothecary remedy.
Case Law
DC – 3181588 Canada inc c Duntel Management, QCCA [119]
Facts: 3181588 leased construction equipment to contractors who were constructing a building for Duntel. 3181588 now claims a
construction hypothec as someone who “took part in” the construction of an immoveable, specifically by “supplier of materials” under
2726. 3181588’s equipment was operated by the contractor’s personnel according to the contractor’s instructions.
Issue: Do lessors of construction equipment qualify for a construction hypothec under 2724(2)?
Holding: No.
Reasoning: Article 2726 is deliberately narrow in scope. Not all persons involved in the construction industry have the right to a
construction hypothec. While 2726 does mention “services” in addition to “materials” being supplied to the construction, this must
mean services in the sense of 2098. And 3181588 is a lessor, not a provider of services. Nor does it supply “materials” in the sense
that this term is commonly understood in construction. So it cannot fall within 2726.
Ratio: (1) Entitlement to a legal hypothec under 2726 should be narrowly interpreted; (2) Only “suppliers” who have a contract of
services under the sense of 2098 qualify under 2726.
Beylerian c Construction et Renovation Willico [Slide] : 2 aspects de la plus value :
1) condition d’existence de l’hypotheque de la construction; [you only get it if you add plus value]
2) assiette du droit privilegié des créanciers de la construction lors de la realisation. [plus value determines assiette]
There is unicité du plus value, which means we look at the plus-value of the all the construction work as a whole, without trying to
figure out how much each individual worker contributed. The formula for calculating the share of each construction creditor if there
are multiple creditors is :
(plus value relative x creance de chacun)/(total construction hypothec claims)
Exemple. Nous avons un objet vendu à 132$, même si sa Juste Valeur Marchand est de 180$. La plus-value (brute) est fixée à
60$. La banque a une créance hypothécaire de 90$ et des frais de justice (qui est une priorité) 12$. Les fournisseurs de matériaux 20$
et l'entrepreneur, 30$. Plus-value relative: ([132-12] x 60)/180 = 40.
Distribution: (1) créances prioritaires (banque pour frais de justice, art. 2650 et 2651(1°)) = 12; (2) fournisseurs et
entrepreneur sur leur assiette (art. 2952 CcQ), donc respectivement 20x40/30+20 = 16 et 30x40/(30+20) = 24. (3) résiduairement, la
banque pour sa créance hypothécaire, donc 132-12-16-24 = 80$. La banque, à qui l'on doit 90$, aura un manque à gagner de 10$.
1.4.2 Open Hypothecs
An open hypothec “est donc une hypothèque don’t certains des effets sont suspendus” [215]. It is the civil law equivalent to the
floating charge in common law. The general rules of hypothecs, including those affecting moveable and immoveable hypothecs, also
apply to open hypothecs. Weirdly, while the CCQ avoids using common-law derived terminology in the French section, it using
“floating hypothec” instead of “open hypothec” in the English section. I’ve used open hypothec here.
Pratte, Priorités et Hypothecs [211]: Open hypothecs have the advantage of a flexible assiette/scope, but very bad priority, since they
rank not from the date of creation, but rather from the date of closing. There are a few procedural advantage as well, namely the ability
to take possession of the goods immediately upon default by the debtor (basically analogous to appointing a common-law receiver),
and to signify debtors via newspaper if the open hypothec covers a universality of claims, thereby avoiding 1641 CCQ [216]. While
the hypothec takes effect between the parties immediately upon registration, in particular any prohibitions on alienation, this does not
affect third parties, who can acquire hypothecated goods free of any hypothec [217]. The exception to the rule that open hypothecs
have no effect on third parties prior to closure is 2720 CCQ, which states that the sale or merger of an enterprise is not opposable to
the open hypothec holder. Closure of the open hypothec ends its suspension and transforms it into a normal hypothec [219].
CCQ Provisions
2715 A hypothec is a floating hypothec when some of the effects are suspended until, the debtor or grantor having defaulted, the
creditor provokes crystallization of the hypothec by serving a notice of default and crystallization of the hypothec on the debtor or
grantor.// The floating character of the hypothec shall be expressly stipulated in the act.
2716 A floating hypothec has effect only if it was published beforehand and, if immovable properties are charged, only if it was
registered against each of them.// It may not be set up against third persons except by registration of the notice of crystallization.
25
2717 Any condition or restriction stipulated in the constituting act in respect of the right of the grantor to alienate, hypothecate or
dispose of the charged property has effect between the parties even before crystallization.
2718 A floating hypothec on more than one claim has effect in respect of the debtors of hypothecated claims, upon registration of
the notice of crystallization, provided the notice has been published in a newspaper circulated in the locality of the last known address
of the grantor of the floating hypothec or, where he carries on an enterprise, in the locality where the enterprise has its principal
establishment.//The notice need not be published if the hypothec and the notice of crystallization may be set up against the debtors of
the hypothecated claims in the same way as an assignment of claim.
2719 By crystallization, a floating hypothec has all the effects of a movable or immovable hypothec in respect of whatever rights the
grantor may have at that time in the charged property; if the property includes a universality, the hypothec also charges properties
acquired by the grantor after crystallization.
2720 The sale of an enterprise by the grantor may not be set up against the holder of a floating hypothec. The same applies to a
merger or reorganization of an enterprise.
2721 The creditor holding a floating hypothec on a universality of property may, from registration of the notice of crystallization,
take possession of the property to administer it in preference to any other creditor having published his hypothec after the date of
registration of the floating hypothec.
2722 Where there are several floating hypothecs on the same property, crystallization of one of them enables the creditors holding the
others to register their own notice of crystallization at the registry office.
2723 Where the default of the debtor has been remedied, the creditor requires the registrar to cancel the notice of crystallization.// The
effects of crystallization cease with the cancellation, and the effects of the hypothec are again suspended.
2955 Registration of the notice of crystallization determines the rank of a floating hypothec. // If several floating hypothecs are the
subject of notices of crystallization, they rank among themselves from their respective registrations, regardless of the registration of
the notices of crystallization.
1.4.3 Hypothecs Over Claims (Créances)
CCQ Provisions
2710 A movable hypothec on a claim held by the grantor against a third person or on a universality of claims may be granted with or
without delivery. // However, in either case the creditor may not set up his hypothec against the debtors of hypothecated claims as long
as it may not be set up against them in the same way as an assignment of claim [that’s article 1641 CCQ - Mike].
2743 A creditor holding a hypothec on a claim collects the revenues it produces, together with the capital falling due while the
hypothec is in effect; he also gives an acquittance for the sums he collects. // Unless otherwise stipulated, he applies the amounts
collected to payment of the obligation, even if it is not yet exigible, according to the rules governing payment generally.
2744 The creditor may, in the act constituting the hypothec, authorize the grantor to collect repayments of capital or the revenues from
the hypothecated claims as they fall due.
2745 The creditor may at any time withdraw his authorization to the grantor to collect. To do so he shall notify the grantor and the
debtor of the hypothecated rights that he himself will thenceforth collect the sums falling due. The withdrawal of authorization shall
be registered.
2746 While the hypothec is in effect, the creditor need not sue in order to recover the capital or interest of the hypothecated rights, but
he shall inform the grantor within a reasonable time of any irregularity in the payment of any sums exigible on the rights.
2747 The creditor remits to the grantor any sums collected over and above the obligation owed in capital, interest and expenses,
notwithstanding any stipulation by which the creditor may keep them on any ground whatever.
2713 In all cases, either the creditor or the grantor may institute proceedings in recovery of a hypothecated claim, provided he
impleads the other.
2461, 2478 special rules for hypothecating claims under an insurance contract.
2695 special rules for hypothecs over rents.
1641 An assignment may be set up against the debtor and the third person as soon as the debtor has acquiesced in it or received a copy
or a pertinent extract of the deed of assignment or any other evidence of the assignment which may be set up against the assignor. //
Where the debtor cannot be located, the assignment can be published in a local newspaper.
Doctrine
Payette, Les sûretés réels dans le Code civil du Québec (2006) [144]: This is an important kind of hypothec, since many short-term
loans are guaranteed by hypothecs on a business’s accounts payable. Various kinds of common-law-inspired securities were used in
Québec under the CCBC and various special laws. The CCQ replaces these other securities with the moveable hypothec, which seems
to be the only way to give security over intangibles such as claims (other than maybe federal law stuff like Bank Act security).
Hypothecs over claims can be accomplished by dispossession, with “dispossession” in this case referring to whatever actions give the
creditor the effective control (“maîtrise de fait”) over the claim. Thus a negotiable instrument must be physically transferred; for other
kinds of claims it occurs when the debtor receives notice of the hypothecation (citing to 2003 SCC 31).
A claim may be monetary, or a piece of property, or the claim may be a claim for the specific performance of an obligation
[148]. It may even be a right of action [149]. It is also possible to hypothecate only the fruits and revenues of a claim, rather than the
claim itself; this is typically done when parties are unsure of their right to hypothecate the underlying claim [149]. In such case, the
hypothecary creditor has a right over any money that is generated by the claim, but cannot take legal action to enforce the underlying
26
claim, or to force the debtor to do so.
Pratte, “Cing ans après la réforme, nos sûretés sont-elles sûres?” 1998 [150]: I didn’t find this article useful at all.
Pratte, “Priorités et hypothèques” [212]: Pratte notes that if a creditor removes his authorization under 2745, this must be published.
2747 is public order and may not be derogated from. The assignment of claims by way of guarantee is not allowed in Québec under
the CCQ - the only way to grant security over a claim is by hypothec (citing Re Boisclair, 2001 QCCA). Other mechanisms like
security trusts and conditional sales are still permissible though.
CHAPTER 2: Other Civil Law Security Mechanisms
Summary Table for Civil Law Secured Transactions (Credit Claire Gowdy)
Publication Required?
Subject to Hypothecary
Enforcement Regime?
Hypothec
Yes
Yes
Sale with Redemption Right
Yes
Yes
Installment Sale
Yes
Yes
Lease
Yes*
No
Leasing
Yes
No
Security Trust
Yes
No
Datation en paiement
Null- Such clauses are prohibited
* If the lease is longer than one year, and the property is either for the use of an enterprise or is prescribed by regulation.
Section 2.1: Security Trust
1263 Security trusts must be published to be opposable.
Section 2.2: Conditional/Installment Sale, Leases
INSTALLMENT SALE
1745 An instalment sale is a term sale by which the seller reserves ownership of the property until full payment of the sale price.//
A reservation of ownership in respect of a road vehicle or other movable property determined by regulation, or in respect of any
movable property acquired for the service or operation of an enterprise, has effect against third persons only if it has been
published; effect against third persons operates from the date of the sale provided the reservation of ownership is published within 15
days. As well, the transfer of such a reservation has effect against third persons only if it has been published.
1749 A seller or transferee who, upon the default of the buyer, elects to take back the property sold is governed by the rules
regarding the exercise of hypothecary rights set out in the Book on Prior Claims and Hypothecs; however, in the case of a
consumer contract, only the rules contained in the Consumer Protection Act (chapter P-40.1) are applicable to the exercise by the
seller or transferee of the right of repossession.
If the reservation of ownership required publication but was not published, the seller or transferee may take the property
back only if it is in the hands of the original buyer; the seller or transferee takes the property back in its existing condition and
subject to the rights and charges with which the buyer may have encumbered it.
If the reservation of ownership required publication but was published late, the seller or transferee may likewise take the
property back only if it is in the hands of the original buyer, unless the reservation was published before the sale of the property by the
original buyer, in which case the seller or transferee may also take the property back if it is in the hands of a subsequent acquirer; in all
cases, the seller or transferee takes the property back in its existing condition, but subject only to such rights and charges with which
the original buyer may have encumbered it at the time of the publication of the reservation of ownership and which had already been
published.
SALE WITH RIGHT OF REDEMPTION
1750 A sale with a right of redemption is a sale under a resolutory condition by which the seller transfers ownership of property
to the buyer while reserving the right to redeem it.
A right of redemption in respect of a road vehicle or other movable property determined by regulation, or in respect of
any movable property acquired for the service or operation of an enterprise, has effect against third persons only if it has been
published; effect against third persons operates from the date of the sale provided the right of redemption is published within 15 days.
As well, the transfer of such a right of redemption has effect against third persons only if it has been published.
1756 Where the object of the right of redemption is to secure a loan, the seller is deemed to be a borrower and the acquirer is
27
deemed to be a hypothecary creditor. The seller does not, however, lose the right to exercise his right of redemption unless the
acquirer follows the rules respecting the exercise of hypothecary rights laid down in the Book on Prior Claims and Hypothecs.
DATATION EN PAIEMENT
1801 Any clause by which a creditor, with a view to securing the performance of the obligation of his debtor, reserves the right to
become the irrevocable owner of the property or to dispose of it is deemed not written.
LEASING
Remember that the CCQ has two nominate contracts with very similar names: lease (CCQ 1851) and leasing (CCQ 1842). Leasing is a
three-party transaction that only exists for security interest purposes. There is a supplier (chosen by the lessor), the lessor (who buys
the rental property from the supplier), and the lessee (who rents directly from the lessor). The supplier benefits from immediate
payment by the lessor, and the lessor-lessee are then left in a regular lease-style relationship. Contracts of leasing are subject to
publication, but not the enforcement regime for hypothecs.
1847 The rights of ownership of the lessor have effect against third persons only if they have been published; effect against third
persons operates from the date of the leasing contract provided the rights are published within 15 days.
As well, the transfer of the lessor's rights of ownership has effect against third persons only if it has been published.
LEASE
This is the standard lessor-lessee relationship we’re all familiar with.
1852 The rights resulting from the lease may be published.
Publication is required, however, in the case of rights under a lease with a term of more than one year in respect of a
road vehicle or other movable property determined by regulation, or of any movable property required for the service or
operation of an enterprise, subject, in the latter case, to regulatory exclusions; effect of such rights against third persons operates
from the date of the lease provided they are published within 15 days. A lease with a term of one year or less is deemed to have a term
of more than one year if, by the operation of a renewal clause or other covenant to the same effect, the term of the lease may be
increased to more than one year.
The transfer of rights under a lease requires or is open to publication, according to whether the rights themselves require or
are open to publication.
Civil Code Regulations on the Register of Personal and Moveable Property Rights
15.01 In addition to where they pertain to property acquired or required for the service or operation of an enterprise, reservations of
ownership, rights of redemption and rights under a lease of more than one year, as well as any transfer of those reservations or rights,
require publication in the register in accordance with articles 1745, 1750 and 1852 of the Civil Code where they pertain to the
following property:
(1) a road vehicle that is a passenger vehicle, motorcycle, motor home with a licence plate, snowmobils made after 1988,
recreational ATVs that weigh less than 600 kilograms [why the weight requirement? - Mike].
(2) a caravan or a fifth-wheel;
(3) a mobile home;
(4) a boat;
(5) a personal watercraft;
(6) an aircraft.
CHAPTER 3: COMMON LAW (PPSA)
Section 3.1: Introduction
PPSAs do not adopt the principle of nemo dat quod non habet (no one can give that which he does not have). The Bank Act security
apparently does.
3.1.1 History and Purpose of PPSAs
The functionalist approach of the PPSAs is inspired by article 9 of the Uniform Commercial Code of the United States, the relevant
part of which reads:
§ 9-102. Policy and Subject Matter of Article.
(1) Except as otherwise provided in Section 9-104 on excluded transactions, this Article applies
(a) to any transaction (regardless of its form) which is intended to create a security interest in personal property or
fixtures including goods, documents, instruments, general intangibles, chattel paper or accounts; and also
(b) to any sale of accounts or chattel paper.
(2) This Article applies to security interests created by contract including pledge, assignment, chattel mortgage, chattel trust,
trust deed, factor's lien, equipment trust, conditional sale, trust receipt, other lien or title retention contract and lease or
consignment intended as security. This Article does not apply to statutory liens except as provided in Section 9-310.
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[Note: At [81] there is a definition of “security” from the UCC, but this is from the wrong part! It’s from article 8, which deals with
securities in the sense of “shares in a corporation.” The correct definition is above - Mike]
3.1.2 Definitions
Chattel Mortgage [82]: A pre-PPSA security device under which the debtor (mortgagor) conveyed ownership of the property to the
secured party (mortgagee) until the obligation was performed. If the chattel mortgage conveyed a legal title, it was a legal chattel
mortgage; if it conveyed an equitable title, it was an equitable chattel mortgage. Equitable chattel mortgages were more flexible, in
that they could be taken on after-acquired property, but was inferior to legal chattel mortgages in terms of priority competitions [and
like all equitable interests, it would have been extinguished by a sale to a good faith purchaser without notice - Mike]. Attempting to
create a chattel mortgage these days will create a security interest subject to the PPSAs.
Chattel Paper: This is a category of property created by the PPSAs to reflect commercial practice. Chattel paper arises when a secured
party gives a security interest in or sells his security interest. The PPSA treats the seller/borrower of the security interest as the debtor.
There are special priority rules for chattel paper to reflect its unique status: NBPPSA 31(6), OPPSA 28(3).
Collateral [178]: Collateral is the general term adopted by the Act to designate “personal property that is subject to a security interest.”
OPPSA s 1(1), NBPPSA s 1. Collateral is divided into many subcategories: goods, documents of tile, chattel paper, securities,
instruments, money, and intangibles. The category of intangible is a residual one, so any personal property that does not fit elsewhere
is classified as an intangible.
Consumer goods [179]: “Goods that are used or acquired for use primarily for personal, family or household purposes.” This is
different from the concept as used in consumer protection legislation. It depends on the actual use to which the buyer will put them. A
wholesaler buying toiletpaper in bulk is inventory, but when consumers purchase the toilet paper from him, they buy a consumer
good. But another merchant buying from the wholesaler is also buying inventory. If goods are used for both business and personal
purposes, the primary purpose determines their classification.
Debtor [197]: In both PPSAs, the debtor is a person who owes obligations under the security agreement, and the person who owns
rights in the collateral. Where these are the same person, there are no interpretative difficulties, since all meanings of “debtor” point to
the same person. Where these are different people, the definition of debtor explains which sense the word is used in, but specifies that
“where context permits” it should be read as referring to both.
Document of Title: A written document that allows the bearer to obtain possession of personal property by presenting the document to
the bailee of that property. Example: a warehouse receipt, a bill of lading.
Equipment [179]: “Means goods that are held by a debtor other than as inventory or consumer goods.” Note that this is a residual
category within goods, since anything that is not consumer goods or inventory belongs here, even if it isn’t what we would normally
think of as “equipment.”
Instrument: This includes negotiable instruments, bills of exchange, and debt instruments that have to be physically handed over
before the debt will be paid.
Intangible: “means personal property that is not goods, a document of title, chattel paper, investment property, an instrument or
money.” The OPPSA states that it includes choses in action; that is probably implicit in the NBPPSA.
Inventory [179]: “means goods that are: (a) held by a person for sale or lease, or that have been leased by that person as lessor; (b) to
be furnished or that have been furnished under a contract of service; (c) raw materials or work in progress, or (d) materials used or
consumed in a business or profession.” Here the word “used or consumed” means “used up” in the process of conducting the business.
Investment Property: “means a security, whether certificated or uncertificated, security entitlement, securities account, futures contract
or futures account.” All of the listed terms which have the word “security” in them refer to the province’s Securities Transfer Act for
definitions. Futures accounts and futures contracts are defined in the PPSA itself.
Goods [179]: This is the general category for “tangible personal property.” The statutory definition adds fixtures, growing crops, and
unborn animals. The NBPPSA states that it excludes minerals and hydrocarbons prior to their extraction, while the OPPSA explicitly
includes “minerals and hydrocarbons to be extracted” in its definition of goods. Goods are divided into consumer goods, equipment,
and inventory (both inventory and equipment must be used in business). Equipment is a residual category within goods.
Money: Means any official unit of exchange, either as adopted by Parliament or by the government of a foreign country.
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Mortgage [82]: A transfer of ownership to a creditor upon an express or implied condition that the debtor will recover the asset once
the obligation has been performed.
Pledge [82]: The oldest known security device, by which a debtor gives property to the creditor as security for a debt. These
transactions are subject to the PPSAs, and create security interests perfected by possession.
Secured Party [199]: The secured party is the holder of the security interest. This person may hold the security interest for their own
benefit (bank holding a security interest to secure a car loan), or the secured party may represent the interests of other creditors
(syndicated loan structured via trust indenture). The definition of secured party often extends to receivers in the enforcement
provisions.
Security: Both PPSAs refer to the provincial Securities Transfer Act, which has a very complicated definition. Basically it means
stocks in companies, units of an income trust, etc.
Security Agreement [201]: The OPPSA and NBPPSA adopt the same definition: “an agreement that creates or provides for a security
interest and includes a document evidencing a security interest.” Section 9(1) of the OPPSA declares that security agreements are
effective against third parties, although it’s not clear what that really means.
Value [204]: “any consideration sufficient to support a simple contract and includes a [past] debt or liability.” This means you can
secure existing debts without the lender needing to provide fresh consideration!
Summary: Categories of Collateral
Collateral
Goods [all tangible items]
Consumer goods
Equipment [residual within goods - if it’s a tangible (physical) item and not inventory/consumer goods, it goes here]
Inventory
Documents of Title
Chattel Papers
Instruments
Securities
Money
Intangibles [residual overall - anything that doesn’t fit in any other category goes here]
3.1.3 PPSAs and the Common Law/Equity
The rules of common law and equity are explicitly preserved to the extent that they don’t conflict with the PPSAs (NBPPSA 65(1);
OPPSA 72). So this means for the purpose of determining what is real/personal property, or whether a contract is invalid because of
duress, you would use the common law or equity. Note that the PPSAs modify common-law and equitable rules in subtle ways:
consideration (called “value” in the PPSAs) is still required for contracts, but existed indebtedness can serve as “value” - which means
that past consideration is sufficient. That contradicts the common law position that a new agreement requires fresh (new)
consideration (NBPPSA 1(1) “value”; OPPSA 1(1) “value”).
Section 3.2: Scope of PPSAs: What is a Secured Transaction?
3.2.1 General
All Canadian PPSAs contain a functional definition of security interests: a security interest is created whenever the parties to a
contract create (e.g. a lien, a charge, or a trust interest), retain (title retention or conditional sale), transfer (chattel mortgage, security
assignment), or otherwise manipulate an interest in personal property in order to secure the performance of an obligation. The exact
legal form of their transaction is unimportant. What matters is the effect.
In addition to the functionalist definition, all PPSAs include certain deemed security interests in the definition, such as leases over one
year (both acts), transfers of accounts and chattel paper (both), and some other transactions like consignments (NBPPSA only).
Certain transactions are excluded from the security interest concept under both acts (see section 2.2.4 below).
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Walsh Text 2005 [83+]
[83, 197] “The concept of consensual security interest adopted by the Act is intended to be exhaustive. A transaction will give rise to a
security interest within the meaning of the Act if the following four requirements are satisfied:
(1) The transaction creates or evidences a proprietary interest in an asset in favour of a creditor;
(2) The asset is personal property.
(3) The creditor’s proprietary interest functions to secure payment or performance of an obligation
(4) The interest arises out of an agreement between the parties.”
[84] “In the context of the PPSA itself, there is no need to determine the nature of a security interest other than to recognize that it is
an interest that gives to the secured party the rights against specific kinds of competing claimants and against the debtor that are set
out in the Act. However it is relevant in other contexts to identify the central concept of the PPSA. … [W]hen the rights of a secured
party or debtor come into conflict with those of a third-party claimant in a context not regulated by the PPSA, it may be necessary to
determine the nature of a security interest in order to determine the outcome of the conflict.” [84] [ex: someone vandalized a car being
rented for a three year period; who can sue from trespass to chattels, the lesee or the lessor? This kind of tort issue isn’t covered by the
PPSAs - Mike]
[85] The security interest is analogous to a roman law hypothec or an equitable charge. It is an encumbrance on property belonging at
least in part to the debtor. A security interest is clearly independent of title to the property; either the creditor or the debtor or someone
else can have legal ownership of the property (NBPPSA 3(1); OPPSA 2(a)). The security interest is also free from the common law
maxim of nemo dat quod non habet (i.e. that no one can give what they do not have), since the PPSA priority system determines the
rights of parties. The security interest can be either possessory or non-possessory.
[180] Although the PPSA can apply to debts, bonds, and other intangible obligations to pay, almost all land-related rights fall outside
the PPSAs. This was a legislative choice, since it was felt that most people interested in ownership of a mortgage would check the
land registry for second mortgages, rather than the PPSA to see if someone had taken out a security interest on the mortgage. As a
result, competing interests related to land are normally determined by land law. Ontario did things a little differently though: “The
Ontario Act permits a secured party with a PPSA interest in a right to payment under a lease, mortgage or charge of real property to
register a notice of the interest in the personal property security registry and in the land registry for the district in which the relevant
parcel of land is located (OPPSE 54(1)(b)). If only PPSA interests are in conflict, PPSA law governs. If the conflict is between a
security interest in the right to receive money and an interest in the land itself, whoever registers first against the land.
OPPSA Definition of Security Interest
“security interest” means an interest in personal property that secures payment or performance of an obligation, and includes, whether
or not the interest secures payment or performance of an obligation,
(a) the interest of a transferee of an account or chattel paper, and
(b) the interest of a lessor of goods under a lease for a term of more than one year;
NBPPSA Definition of Security Interest
“security interest” means
(a) an interest in personal property that secures payment or performance of an obligation, but does not include the interest of
a seller who has shipped goods to a buyer under a negotiable bill of lading or its equivalent to the order of the seller or to the
order of an agent of the seller, unless the parties have otherwise evidenced an intention to create or provide for a security
interest in the goods, and
(b) the interest of
(i) a consignor who delivers goods to a consignee under a commercial consignment,
(ii) a lessor under a lease for a term of more than one year,
(iii) a transferee under a transfer of an account or a transfer of chattel paper, and
(iv) a buyer under a sale of goods without a change of possession,
that does not secure payment or performance of an obligation;
3.2.2 Special Cases
As the authors of the Walsh text point out, the following transactions are included because the PPSAs are basically functional regimes,
and the transactions below achieve the same outcomes as traditional common law security contracts. In all cases a creditor retains title
to an item, and while the debtor is in possession of the item, it does not fully belong to the debtor. Thus third parties relying on the
debtor’s apparent ownership of the item when advancing credit could be deceived. Similarly, the creditor could be prejudiced by a
seizure of the debtor’s apparent assets carried out by another creditor.
In general, the various deemed security interests are subject to the PPSAs for perfection and priority purposes, but are excluded from
its enforcement provisions, because the “debtor” of the deemed security agreement does not have a proprietary interest in the collateral
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that needs protection from overly aggressive creditors [Walsh text; 83].
i) Conditional Sales [87+]
Walsh text [87] points out that the condition sale is not a kind of transaction that really fits with the hypothecation concept of the
security interest. With a conditional sale there is no interest for the debtor to grant to the creditor, since the debtor has no interest in the
property beyond possessory rights which are inferior to the creditors’ rights. So conditional sales contracts (also known as title
retention agreements). However, there is abundant case law concluding that conditional sales are covered by the PPSAs. They are
subject to all PPSA provisions, including perfection, priority, and enforcement.
ii) Leases and Financing Leases [88+]
Leases with a duration of more than one year are deemed to create security interests by both PPSAs. Leases with a shorter duration
may also be security interests, if they have the effect of creating a security interest. In both cases the perfection and priority regime
will apply to the lease. However, the enforcement parts of the PPSA will not apply to deemed leases (OPPSA 57.1; NBPPSA
55(1)(a)). So the characterization of a lease is important both for leases shorter than one year, or to determine whether the enforcement
provisions apply to leases that are longer than one year.
Answering this question requires the judge to decide whether the lease in question is a “true lease” or a “financing lease.” This is a
question of substance: is the lease closer to a conditional sale or other financing mechanism than it is to a regular lease? In general, if
the lessee are equivalent to those of a buyer of a good, the transaction will be treated as creating a financing lease.
Factors pointing towards a security lease include:
(1) automatic vesting of ownership or a very cheap option to purchase at the end of the lease, or if the contract obliges the
lessee to buy the property, it will be a financing lease regardless of other factors;
(2) does the lease last for substantially all of the item’s useful life? If yes, this points to a financing lease;
(3) If the cost to the lessee is equivalent or greater than the capital cost of the item, this suggests a financing lease;
(4) If the lease has an option to renew, is the price of the option and the length of the option such that it is below the market
rate for sale/rental of the item? If yes, this suggests the lessor has already recovered most of the value of the transaction from
the rental payments, which means factor (3) above is satisfied, which points towards a financing lease;
(5) An “open-ended lease,” which is a special kind of lease, not an indefinite lease, points to a security transaction [92-93];
(6) The role of the lessor can be a strong indicator, if the lessor does not behave like a regular rental business (example, lessor
buys property lessee wants, then rents it out, rather than holding an inventory of goods for rent);
(7) Contractual remedies that give the lessor remedies inconsistent with a normal lease (like an acceleration clause) point
towards a financing transaction.
Under both the OPPSA and the NBPPSA, the lessor of goods for more than one year has a “purchase money security interest,”
(PMSI) with the exception of a sale and lease back transaction. This is important because a PMSI is the strongest form of security
interest, and if registered correctly, will outrank all other PPSA security interests, regardless of when they were perfected.
OPPSA Definition of a Lease
“lease for a term of more than one year” includes,
(a) a lease for an indefinite term, even if the lease is determinable by one of the parties or by agreement of two or more of the
parties within one year from the date of its execution,
(b) a lease for a term of one year or less if the lessee, with the consent of the lessor, retains uninterrupted or substantially
uninterrupted possession of the leased goods for a continuous period of more than one year, but a lease described in this
clause is not a lease for a term of more than one year during the period before the day the lessee’s possession of the leased
goods exceeds one year,
(c) a lease for a term of one year or less if,
(i) the lease provides that it is renewable for one or more terms at the option of one of the parties or by agreement of
all of the parties, and
(ii) it is possible for the total of the original term and the renewed terms to exceed one year,
but does not include,
(d) a lease by a lessor who is not regularly engaged in the business of leasing goods, or
(e) a lease of household furnishings or appliances as part of a lease of land, if the use and enjoyment of the household
furnishings or appliances is incidental to the use and enjoyment of the land;
NBPPSA Lease Provisions
The NBPPSA definition of leases is the same as the OPPSA, with one additional “does not include” clause: “(f) a lease of goods of a
prescribed kind, regardless of the length of the term of the lease.” There do not seem to have been any such regulations passed.
The NBPPSA also states that a debtor acquires possession of leased goods when they are transferred to the debtor under the terms of
32
the lease (NBPPSA 12(3)).
21 If a lessor for more than one year loses a priority contest with someone claiming the collateral under 20(a) or 20(b), and if the
collateral is seized pursuant to the execution of a judgment against by someone with priority over the lessor under 20(1), the lessor has
an action in damages against the lessee equal to
(a) the value of the leased goods at the time of the bankruptcy, winding-up order or seizure, and
(b) the amount of any loss beyond that stated in (a) that resulted from termination of the lease
iii) Consignments and Security Consignments [92+]
In Ontario, a security consignment will be subject to all PPSA provisions (perfection, priority, and enforcement), while a regular
consignment will not (OPPSA 2(a)(ii)).
In New Brunswick, only commercial consignments and security consignments are subject to the PPSA [93]. A commercial
consignment is subject to the perfection and priority provisions, but not the enforcement ones (NBPPSA 3(2)(a); 55(1)(a)). A security
consignment is subject to all aspects of the act (NBPPSA 3(1)(b)). A debtor acquires possession of consigned goods when they are
transferred to the debtor under the terms of the consignment (NBPPSA 12(3)).
Under both the OPPSA and NBPPSA, the consignor has a purchase money security interest. Again, this is important because
purchase money security interests are superior to all other perfected PPSA security interests, even those perfected before the PMSI.
It is an accepted rule of evidence that the creditor must prove that the consignment is a true consignment, and not a security
consignment [93]. In a true consignment, the merchant is the agent of the supplier, and sells goods belonging to the supplier on the
supplier’s account. When the goods are sold, title passes directly from the supplier to the buyer. The merchant has no obligation to pay
for the goods before they are purchased by the third party. The supplier has the right to demand the return of the goods at any time.
The merchant has the right to return unsold goods to the supplier at any time. The merchant has to keep the supplier’s goods separate
from his own. The goods are shown as an asset in the accounting records of the supplier, but not of the merchant. The merchant
acknowledges the title of the supplier when dealing with others interested in the goods. Shipping documents refer to the documents as
consigned goods, and any insurance on them is taken out by the supplier, not the merchant.
By contrast, a security consignment will lack many of the above features. Additionally there is a determinative feature of a security
consignment: the merchant has an obligation to purchase the consigned goods, or to pay a fixed fee regardless of whether the goods
are sold or not [94]. The text suggests that if an agreement does not contain this kind of obligation, it cannot be a security
consignment.
NB PPSA Consignment Provisions
1 … “commercial consignment” means a consignment under which goods are delivered for sale, lease or other disposition to a
consignee who, in the ordinary course of the consignee’s business, deals in goods of that description, by a consignor who,
(a)in the ordinary course of the consignor’s business, deals in goods of that description, and
(b)reserves an interest in the goods after they have been delivered,
but does not include an agreement under which goods are delivered
(c)to an auctioneer for sale, or
(d)to a consignee for sale, lease or other disposition if the consignee is generally known to the creditors of the consignee to be
selling or leasing goods of others;
21 If a commercial consignor loses a priority contest with someone claiming the collateral under 20(a) or 20(b), and if the collateral is
seized pursuant to the execution of a judgment against by someone with priority over the consignor under 20(1), the consignor has an
action in damages against the consignee equal to
(a) the value of the leased or consigned goods at the time of the bankruptcy, winding-up order or seizure, and
(b) the amount of any loss beyond that stated in (a) that resulted from termination of the consignment
iv) Trusts and Security Trusts [95+]
The New Brunswick PPSA specifically mentions trusts as potential sources of security interests (3(1)(b)). The Ontario PPSA only
mentions “equipment trusts,” “trust receipts,” and “trust indentures” at (2(a)(i)), but the general definition of security interest in the
2(a) would catch security trusts.
A trust will fall within the scope of the PPSA only if it is a security trust, that is, a trust that secures the performance of an obligation.
The text provides several examples of security trusts [96] and non-security trusts [96-97]. The question which must be asked is
whether the beneficiary’s interest in the trust has the effect of securing an obligation. This obligation must be external to the trust,
because the beneficiary’s interest always secures the performance of equitable obligations internal to the trust itself by the trustee.
Characterizing a trust as a security trust is a factual analysis that includes consideration of purpose of the transaction which created the
33
trust; the role and relationship of the parties; practicality and commercial reality; and the intention of the parties with respect to the
transactions which created the trust (Skybridge (Appeal)). There is some authority that Quistclose trusts are not security trusts (Gignac,
Sutts; Carevest Capital), but I think these cases are wrongly decided. A Quistclose trust exists in order to restrict how debtors use
loaned funds, and to protect those funds from bankruptcy. So it definitely seems like a trust that exists to secure the performance of an
obligation, namely an obligation to spend trust money on an approved purpose and to repay the lender.
Gignac, Sutts v National Bank of Canada, [1987] OJ no 298, 5 CBR (4th) 44 (SC).
Re Skybridge Holidays Inc, [1998] BCJ no 1296, 13 PPSAC (2d) 387 (SC), aff’d 1999 BCCA 185.
Carevest Capital Inc v 1262459 Alberta Ltd, 2011 CarswellAlta 391 (Master), rev’d 2012 ABCA 161 (the appeal decision
arguably per incuriam, since Twinsectra does not seem to have been cited to the court).
There is a judgment by the Ontario Court of Appeal which allowed a trustee to avoid the PPSA entirely (Re Berman). The decision has
been treated as allowing trustees to elect between the PPSA regime and the law of trusts, but has been criticized and not followed in
other provinces (McMahon).
Re Berman, [1979] OJ 4407 (CA).
McMahon v Canada Permanent Trust Co, [1979] BCJ 1951 (CA).
Trust Indentures
Security trusts should not be confused with “trust indentures” which are a completely different institution. Trust indentures are a way
of holding bonds. One trustee is the legal owner of the bonds, and investors are beneficial owners. This allows the trustee to act for all
bondholders.
v) Floating Charges
Floating charges fall under the PPSAs because they are clearly security interests. Even though the traditional floating charge had to be
“crystallized” before it could be asserted against third parties, modern courts have not treated the pre-crystallization floating charge as
a voluntary delay of attachment [206; 225]. The modern PPSAs explicitly state that floating charges follow the same attachment rules
as other security agreements (OPPSA 11(2); NBPPSA 12(1)).
In general a floating charge carries an implied licence to sell property in the ordinary course of business, so buyers take free of the
charge (Professor Smith lecture). Historically floating charges were often combined with fixed charges on existing property, giving
creditors two levels of security.
[206; Walsh Commentary] “An equitable security interest in the nature of a so-called ‘floating charge’ is classically described as
hovering over the collateral without attaching to any specific asset until the charge is crystallized.” A floating charge is much like an
open hypothec. It is a charge against all of a debtor’s current and future property, but whose effects are suspended until the charge is
“crystallized” by the creditor. Once it crystallizes, the floating charge gives the right to seize and sell property, or to manage the
business under a receiver. Issues of whether the debtor could sell inventory free of the floating charge were typically resolved in
favour of innocent buyers.
Wood, “The Floating Charge in Canada” (1989) [222]: Floating charges are being abandoned in the PPSA provinces, since lenders
now use a “General Security Agreement” which grants a security interest in all of the debtor’s current and future property. This GSA
will be much like a floating charge, but with far superior priority, since it ranks just like any other PPSA interest. Importantly, there is
no such thing as a “floating security interest” - just fixed ones. This can make conceptualizing certain features of a floating charge
difficult under the PPSAs [226]. For example, payment of wages by an employer who granted a floating charge/general security
agreement will generate deemed trusts over amounts the employer is supposed to withhold and pay to the government, like EI and
pension deductions. Do these deemed trusts have priority over the GSA/floating charge? The answer has typically been yes, and courts
have reasoned that the GSA holder authorized payment of wages to employees, which must also authorize payroll deductions, so the
deemed trusts are exempted from the GSA/floating charge. Hence there is no priority conflict.
vi) Security Assignment
Security assignments look a lot like a mortgage. The debtor assigns property to the lender, who may keep it if the loan is not paid.
Where the assignment property is a debt, the assignment can be with recourse (the debtor has to pay the debts go bad or otherwise
can’t be collected) or without recourse (the debtor has not obligation to make up for bad debts).
3.2.3 Deemed Security Interests
The PPSAs apply to three types of transactions that are not functionally security interests, but which are deemed into the act:
assignments (sales) of accounts; assignments (sales) of chattel paper, and leases longer than one year. The New Brunswick PPSA also
34
applies to commercial consignments (see section 3.2.1(iii) above) and a sale of goods without change of possession. The deemed
security transactions are subject to the attachment, priority, and perfection regimes, but not to the enforcement provisions (NB 55(1),
OPPSA 57.1). They are enforced like any other common-law right.
The policy reasons for including these transactions is that in each case the debtor is in apparent possession and control of property
without actually owning it. So to allow creditors and third parties notice of these interests, it is necessary that they be registered.
NBPPSA Deemed Security Interests
3(2) Subject to sections 4 and 55, this Act applies
(a) to a commercial consignment,
(b) to a lease for a term of more than one year,
(c) to a transfer of an account or chattel paper, and
(d) to a sale of goods without a change of possession,
that do not secure payment or performance of an obligation.
OPPSA Deemed Security Interests
2 Subject to subsection 4 (1), this Act applies to, …
(b) a transfer of an account or chattel paper even though the transfer may not secure payment or performance of an obligation; and
(c) 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
(i) Assignment of Accounts
“account” means a monetary obligation not evidenced by chattel paper, a security or an instrument, whether or not the obligation has
been earned by performance, but does not include investment property;
The PPSAs basically create a mechanism which tracks ownership of obligations to pay.
(ii) Assignment of Chattel Paper
Apparently the reason chattel papers were included was to create a clear legal regime for dealing with changes in ownership of chattel
paper, because the law had previously been quite murky. I don’t think we need to know any more than that. Commercial practice is
that transfer of the document counts as transfer of the interest in the chattel, so the PPSA reflects this, but imposes a security interest
regime in order to publicize ownership of the chattel paper, since this can transfer independently of the chattels.
(iii) Leases Longer than One Year
The OPPSA and NBPPSA provide identical, elaborate, definitions of leases longer than one year in the interests of clarity.
“lease for a term of more than one year” includes
(a) a lease of goods for an indefinite term including a lease for an indefinite term that is determinable by one or both parties
within one year after its execution,
(b) a lease of goods initially for a term of one year or less if the lessee, with the consent of the lessor, retains uninterrupted or
substantially uninterrupted possession of the leased goods for more than one year after the lessee, with the consent of the lessor,
first acquired possession of the goods, but the lease does not become a lease for a term of more than one year until the lessee’s
possession extends beyond one year, and
(c) a lease of goods for a term of one year or less where the lease provides that it is renewable for one or more terms
automatically or at the option of one of the parties or by agreement of the parties if the total terms, including the original term,
may exceed one year,
but does not include
(d) a lease of goods by a lessor who is not regularly engaged in the business of leasing goods,
(e) a lease of household furnishings or appliances as part of a lease of land where the goods are incidental to the use and
enjoyment of the land, or
(f) a lease of goods of a prescribed kind, regardless of the length of the term of the lease;
(iv) Commercial Consignments
These are dealt with in section 3.2.2(iii), above.
(v) Sales without Change of Possession
Under the NBPPSA (but not OPPSA!) the buyer of personal property who does not go into possession of the property must register
the sale as if he had acquired a security interest. Otherwise, his interest in the goods can be defeated by a subsequent purchaser who
does register the sale, or a good faith purchaser who takes possession, or indeed any intervening creditor with rights superior to an
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unperfected secured party.
Note the VERY large definition of “sale” which effectively means “any transfer of any kind not intended to secure performance of an
obligation”
1 … “sale of goods without a change of possession” means a sale of goods that is not accompanied by an immediate delivery and an
actual, apparent and continued change of possession of the goods sold, but does not include a sale of goods in the ordinary course
of business of the seller, and for the purposes of this definition, “sale” includes an assignment, transfer, conveyance, declaration of
trust or any other agreement or transaction, not intended to secure payment or performance of an obligation, by which an interest in
goods is conferred;
3.2.4 Excluded Transactions
Various transactions are excluded from the statute. The most important are liens/charges/other interests (like deemed trusts) arising by
operation of law or by other statutes, and the exclusion of land-related security interests.
OPPSA Provisions
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);
(c) some, but not all, transfers or creation of rights under an insurance contract or a contract or annuity];
(d) to a transaction under the Pawnbrokers Act;
(e) to the creation or assignment of an interest in real property, including a mortgage, charge or lease of real property, other
than,
(i) an interest in a fixture, or
(ii) an assignment of a right to payment under a mortgage, charge or lease where the assignment does not convey or
transfer the assignor’s interest in the real property;
(f) assignment for the general benefit of creditors to which the Assignments and Preferences Act applies;
(g) sale of accounts or chattel paper as part of a transaction to which the Bulk Sales Act applies;
(h) assignment of accounts made solely to facilitate the collection of accounts for the assignor; or
(i) assignment of an unearned right to payment under a contract to a transferee who will perform the transferor’s obligations.
NBPPSA Provisions
4 Except as otherwise provided in this Act, this Act does not apply to the following:
(a) a lien, charge or other interest given by rule of law or statute unless the statute provides that this Act applies;
(b) [some, but not all, transfers or creation of rights under an insurance contract];
(b.1[annuity contract exceptions];
(c) the creation or transfer of an interest in present/future wages if that creation/transfer is prohibited by statute;
(d) transfer of an unearned right to payment under a contract to a transferee who will perform the transferor’s obligations;
(e) the creation or transfer of an interest in land including a lease;
(f) the creation or transfer of an interest in a right to payment that arises in connection with an interest in or a lease of land other
than an interest in a right to payment evidenced by investment property or an instrument;
(g) a sale of accounts, chattel paper or goods as part of a sale of the business out of which they arose unless the vendor
remains in apparent control of the business after the sale;
(h) a transfer of accounts made solely to facilitate the collection of accounts for the transferor;
(i) the creation or transfer of a right to damages in tort;
(k-(l) [federal law exceptions for maritime law stuff, Bank Act security, etc]
Section 3.3: Creation of Security Interests
Claire Gowdy’s Summary of Attachment (PPSA (NB PPSA 10, 12; ON PPSA 11)
(1) Value is given by the creditor.
(2) The debtor has rights in asset or power to transfer.
(3) Evidentiary requirement: There must be some objective evidence of the existence of security interest in the asset.
a. General Rule: security agreement with minimum content (universal rule for any collateral).
OR
b. For corporeal assets: delivery/possession (which means no written agreement is necessary).
OR
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c. Special types of property:
For a certified security, the security certificate must be “delivered” as per Securities Transfer Act.
For investment property: the SC must have “control” of the property.
The requirements for the minimum content of a security agreement are: (1) written (paper or electronic); (2) description of collateral
“by item or kind or by reference to [a PPSA category like “inventory” or “accounts”]”; (3) signature of debtor (ink or electronic); (4)
“charging clause” that creates the security interest (this can sometimes be satisfied by a reference to an external document that creates
the security interest, like a standard terms sheet) (NBPPSA 10(1)(b); OPPSA 11(2)).
Note that the “writing or possession” requirement is only needed when the secured creditor attempts to enforce the security against a
third party. An oral agreement without dispossession between debtor and creditor is effective according to its terms (OPPSA 9;
NBPPSA 9).
3.3.1 Capacity
The common law rules on capacity apply. The definition of debtor below shows that third parties can grant security for others’ debts.
The PPSAs do not have any special rules on capacity to grant security interests in ones’ property (in contrast to the CCQ), except for
provisions on future crops (NBPPSA 13(2)(a), OPPSA 12(2)(a)) and after-acquired consumer property (NBPPSA 13(2)(b) (unless the
security interest in question is a Purchase Money Security Interest); OPPSA 12(2)(b) (unless the consumer takes title within ten days
of the secured creditor giving value)).
The justification behind the crops exception is to allow farmers to sell their yearly crops on the market free of any security interest,
even if they have granted a general security agreement on all current and future property. (note: Saskatchewan got rid of this
exception, reasoning that the federal Bank Act doesn’t contain such an exception, so the banks were getting around it that way, and
hence the PPSA restriction just discouraged lending to farmers).
The justification behind the consumer property exception is that one lender should not be able to use a single general security
agreement to monopolize the property of a non-commercial debtor.
Another limitation on consumer-created security interests is the unseizability rules (NBPPSA 58(3)-(7)).
OPPSA Provisions
1 debtor” means,
(a) a person who, [main definition]
(i) owes payment or other performance of the obligation secured, and
(ii) owns or has rights in the collateral, including a transferee of or successor to a debtor’s interest in collateral,
(b) if the person who owes payment or other performance of the obligation secured and the person who owns or has rights in the
collateral are not the same person, [i.e. third party guarantees]
(i) in a provision dealing with the obligation secured, the person who owes payment or other performance of the obligation
secured,
(ii) in a provision dealing with collateral, the person who owns or has rights in the collateral, including a transferee of or
successor to a debtor’s interest in collateral, or
(iii) if the context permits, both the person who owes payment or other performance of the obligation secured and the person
who owns or has rights in the collateral, including a transferee of or successor to a debtor’s interest in collateral,
(c) a lessee of goods under a lease for a term of more than one year, or
(d) a transferor of an account or chattel paper.
NBPPSA PRovisions
1 “debtor” means
(a) a person who owes payment or performance of an obligation secured, whether or not that person owns or has rights in the
collateral, [main definition]
(b) [consignees]; (c) [lessees of leases for more than one year]; (d) [transferee of chattel paper or accounts]; (e) [sellers of goods
without change of possession]; (f) [a provision that deems a tranferee of collateral to be the debtor for some sections - look it up!]
(g) if the person referred to in paragraph (a) and the owner of the collateral are not the same person, [i.e. third-party guarantees]
(i) where the word “debtor” is used in a provision dealing with the collateral, an owner of the collateral,
(ii) where the word “debtor” is used in a provision dealing with the obligation, the obligor, and
(iii) where the context permits, both the owner and the obligor
3.3.2 Attachment
The basic requirements for attachment under both PPSAs is:
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(a) Value is given: There must be consideration sufficient to support a regular common law contract. A binding promise to
extend credit is value, and the definition of value allows existing/past debts to serve as value [204]. This means past
unsecured indebtedness can be converted into secured indebtedness without any additional consideration.
(b) The debtor has acquired rights in the collateral or power to transfer rights in the collateral to a secured party: The debtor
must be able to grant the security interest, which requires some sort of proprietary right in the collateral. This also requires
that the collateral exist.
(c) The security interest is enforceable against third parties: Basically this means that either the secured party has taken
possession of the collateral (NBPPSA 10(1)(a); OPPSA 11(2)(a)), or there is a security agreement that gives a sufficient
description of the collateral (NBPPSA 10(1)(b); OPPSA 11(2)(b)). The sufficient description requirement in Ontario seems
laxer than New Brunswick, but I could be wrong.
[199; Walsh text] “The PPSA uses the term “attachment” to describe the creation of the security interest as distinct from the entry into
force of the security agreement. Until attachment occurs, no security interest exists and the secured party’s rights against the debtor are
purely personal and contractual. Conversely, once a secured interest attaches, the secured party acquires proprietary rights in the
collateral.”
[200; Walsh NBPPSA Commentary] The NBPPSA article 9 confirms that the basic rule is freedom of contract, subject to the Act
itself and any other applicable act. In addition to the PPSA, the most significant source of restrictions on creditors’ rights comes from
statutory liens, deemed trusts and other non-consensual encumbrances in favour of the Crown, or which are in favour of private parties
but exempted from the Act. And of course the Bankruptcy and Insolvency Act.
[205; Walsh PPSA Commentary] The expression “rights in the collateral” signals that ownership isn’t necessary. Any real right in the
collateral will suffice. [87 ; Walsh text] Note that just because the PPSA gives a right of redemption to the buyer does not mean that
this right can be used to trigger attachment by substituting for the rights of the debtor in the collateral. Otherwise the argument gets
circular: I have rights so it attaches, and the rights I have the ones the PPSA gives me once there is attachment.
[206; Walsh Commentary] Postponement will not be implied merely because a floating charge is used as the underlying security
mechanism.
NBPPSA Provisions
9 Except as otherwise provided for in this or any other Act, a security agreement is effective according to its terms.
12(1) A security interest, including a security interest in the nature of a floating charge, attaches when
(a) value is given,
(b) the debtor has rights in the collateral or power to transfer rights in the collateral to a secured party, and
(c) except for the purpose of enforcing rights as between the parties to the security agreement, the security interest becomes
enforceable within the meaning of section 10.
12(2) Notwithstanding subsection (1), if the parties have specifically agreed to postpone the time of attachment, the security interest
attaches at the agreed time.
12(3) Lessees and consignees deemed to acquire rights in the collateral when they take possession from lessor/consignor.
12(4) Debtor doesn’t have rights in crops before harvest, young animals before conception, minerals before extraction, or uncut trees.
12(5)-(6) Special provisions for securities and futures accounts.
10(1) A security interest is enforceable against a third party only where
(a) the collateral is
(i) not a certificated security and is in the possession of the secured party or an agent of the secured party,
(ii) [complex provisions for securities]; (iii) [investment property provision], or
(b) the debtor has signed a security agreement that contains
(i) a description of the collateral by item or kind or by reference to one or more of the following: “goods”,
“document of title”, “chattel paper”, “investment property”, “instrument”, “money” or “intangible”,
(ii) a description of collateral that is a security entitlement, securities account, or futures account if it describes the
collateral by those terms or as “investment property” or if it describes the underlying financial asset or futures
contract,
(iii) a statement that a security interest is taken in all of the debtor’s present and after-acquired personal property, or
(iv) a statement that a security interest is taken in all of the debtor’s present and after-acquired personal property
except specified items or kinds of personal property or except one or more of the following: “goods”, “document of
title”, “chattel paper”, “investment property”, “instrument”, “money” or “intangible”.
10(2) A secured party does not have possession of collateral for the purposes of subparagraph (1)(a)(i), if the collateral is in the
apparent possession or control of the debtor or the debtor’s agent.
10(3) A description is inadequate for the purposes of subparagraph (1)(b)(i) if it describes the collateral as consumer goods or
equipment without further describing the item or kind of collateral, but where the personal property to be excluded from a description
of collateral under subparagraph (1)(b)(iv) is the consumer goods of the debtor, the excluded property may be described simply as
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consumer goods.
10(4) A description of collateral as inventory is adequate for the purposes of paragraph (1)(b) only while it is held by the debtor as
inventory.
10(5) A security interest in proceeds is enforceable against a third party whether or not the security agreement contains a description
of the proceeds.
OPPSA Provisions
9(1) Except as otherwise provided by this or any other Act, a security agreement is effective according to its terms between the parties
to it and against third parties.
11(1) A security interest is not enforceable against a third party unless it has attached
When security interest attaches to collateral
(2) Subject to section 11.1, a security interest, including a security interest in the nature of a floating charge, attaches to collateral only
when value is given, the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party and,
(a) the debtor has signed a security agreement that contains,
(i) a description of the collateral sufficient to enable it to be identified, or
(ii) a description of collateral that is a security entitlement, securities account or futures account, if it describes the
collateral by any of those terms or as investment property or if it describes the underlying financial asset or futures
contract;
(b) the collateral is not a certificated security and is in the possession of the secured party or a person on behalf of the secured
party other than the debtor or the debtor’s agent pursuant to the debtor’s security agreement;
(c) [exception for securities]; or (d) [investent property provision]
(3) If the parties have agreed to postpone the time for attachment, the security interest attaches at the agreed time instead of at the time
determined under subsection
(4)-(5) Securities accounts and futures accounts provisions.
Both acts define “value” to mean “consideration sufficient to support a simple contract.” Which is strange - why not just use the term
consideration? And for that matter, why choose “value” as your defined term, given that it already has a special meaning in equity (i.e.
non-nominal consideration; consideration roughly equivalent to the value of the thing given in exchange).
3.3.3 Perfection
[262; Walsh Commentary] “As a general rule, secured parties have only two methods of perfection available to them under the Act:
registration or taking possession of the collateral. Exceptionally, the Act recognizes a security interest as perfect for a temporary
period would either possession or registration (NBPPSA 5, 7, 26, 28, 29, 35(7), 51). However, because the security interest is not
publicized, buyers and lessees for value without notice take free of the security interest if the sale or lease occurred during that period
of temporary perfection.”
Registration of a financing statement is the main way to perfect a security interest (NBPPSA 25; OPPSA 23), and applies to any
type of collateral. Financing statements can be registered prior to attachment (43(5) NBPPSA; 45(2) OPPSA). Registration does not
create a presumption of knowledge of the interest (OPPSA 46(5)(a); NBPPSA 47); nor of validity; nor of the fact that the PPSA
applies to the transaction (OPPSA 46(5)(b)).
Errors in the registration (OPPSSA 46(4); NBPPSA 43(7)-(10)) do not affect the validity of the registration unless they are
“seriously misleading” NBPPSA 43(7) or are likely to “materially mislead” others (OPPSA 46(4)). Getting the debtor’s name wrong
will generally invalidate the registration. Indeed, the PPSAs impose a re-registration requirement if the debtor’s name changes
(48(3) OPPSA, 51(1) NBPPSA)!
Transfers and subordinations can also be registered (45(1) NBPPSA).
Possession can be used too, although it does not apply to all types of collateral (NBPPSA 24; OPPSA 22). More specifically, only
collateral which can be transferred physically or symbolically can be possessed or perfection by possession. The “subject to section
19” language” in both acts means that possession does not perfect a security interest until the interest has attached [265]. Walsh
discusses perfection via possession at [264].
Note that information rights under the PPSA are much more restricted than Québec’s open registries (18 OPPSA/NBPPSA).
NBPPSA/OPPSA Core Provisions (identical)
19 A security interest attaches at the later of the following two dates: (a) it attaches; (b) all perfection steps have been completed.
19.1-19.2 special rules for investment property and security accounts/futures accounts
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OPPSA Provisions
21(1) Continuous perfection: If a security interest is originally perfected in any way permitted under this Act and is again perfected
in some way under this Act without an intermediate period when it was unperfected, the security interest shall be deemed to be
perfected continuously for the purposes of this Act.
21(2) Transferability of perfection: An assignee of a security interest succeeds in so far as its perfection is concerned to the position
of the assignor at the time of the assignment.
22 Perfection by possession, repossession, or delivery.
23 Registration perfects a security interest in any type of collateral
24 Temporary perfection.
25 Perfecting over proceeds
NBPPSA
25 Subject to section 19, registration of a financing statement perfects a security interest in collateral.
22 Grace period for the registration of purchase money security interests.
23(1) Continuity of Perfection: If a security interest is originally perfected under this Act and is again perfected in some other way
under this Act without an intermediate period when it is unperfected, the security interest shall be deemed to be perfected continuously
for the purposes of this Act.
23(2) A transferee of a security interest has the same priority in relation to perfection of the security interest as the transferor had
at the time of the transfer.
24 Rules for perfection by possession or delivery.
26 Temporary perfection rules for collateral returned to debtor or third parties for short periods.
27 Perfection for goods held by bailee.
Section 3.4: Scope of the Security Interest
3.4.1 General
The security interest extends to the goods described in the security agreement. In the event the debtor transfers the goods or otherwise
receives “proceeds” the security interest attaches to both the original collateral and the proceeds (see section 3.4.2 below). It also can
apply to future property (see section 3.4.3 below), in which case the security interest attaches as soon as the debtor acquires rights in
the property.
Common law recognizes three kinds of mixing between different property: fixture (chattel united with real estate); accession (chattel
united with another chattel but is still identifiable); mixing/mass (chattel mixed with other chattels to the extent that it loses its
individuality).
The test for fixtures is given in Hellawell v Eastwood (1856), 155 ER 554. This was a case in which a lessor had seized cotton
machines belonging to the lessee. Lessors only have the right to seize moveables at common law. So if the cotton machines were
fixtures, they were unseizable. Some were bolted to the ground with screws, others were sealed in with molten lead. “The only
question therefore, is, whether the machines when fixed were parcel of the freehold, and this is a question of fact, depending on the
circumstances of each case, and principally on two considerations. First, the mode of annexation to the soil or fabric of the house,
and the extent to which it is united to them, whether it can be easily removed, … without injury to itself or the fabric of the
building. Secondly, on the object and purpose of the annexation, whether it was for the permanent and susbtantial improvement of
the dwelling, in the language of the Civil Law, perpetu usus causa, or in that of the Year Book, pour un profit del inheritance, or
merely for a temporary purpose, or the more complete enjoyment and use of it [the fixture] as a chattel.” On the facts of the case, no
fixtures were found.
MASS/COMINGLING
OPPSA 37; NBPPSA 39(2): 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.
FIXTURES
See NBPPSA 36; OPPSA 34. The security interest subsists, but could be subordinate to other interests.Recall that the Ontario
definition allows unmined minerals to qualify.
ACCESSION
See NBPPSA 38, OPPSA 35. The security interest of chattels used in the accession subsists and attaches to the goods as a whole, but
there are some possible prioirity/execution issues. It seems that the secured creditor has a right to remove the part of the accession
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affected by his security interest.
CROPS AND ANIMALS
See NBPPSA 37; OPPSA 32
3.4.2 Proceeds and Tracing
i) Proceeds [165+]
Whenever collateral is sold, transferred or otherwise replaced with “proceeds” (which could also include insurance money if the
collateral is damaged or destroyed), two things happen: First, the security interest attaches to the proceeds, and second, if the
disposition was unauthorized the security interest continues in the collateral too (NBPPSA 28(1); OPPSA 25(1)). If the disposition
was authorized, the security interest only attaches to the proceeds, and the collateral is transferred free of the security interest.
New Brunswick restricts the value that the security interest protects to the market value of the collateral when it is enforced against
both the collateral and proceeds (28(2)). In other words, if the value of the collateral falls, the fact that it was disposed of without
authorization can’t put you in a better position. There does not seem to be a corresponding provision for Ontario.
New Brunswick reduces the extent of the value secured by the security interest when the creditor enforces the security against both the
proceeds and the collateral (28(2)). The value secured is reduced to the market price on the date of the unauthorized sale. Note that
market value may or may not be identical to the actual consideration received by the debtor [167].
New Brunswick also imposes a requirement that the debtor “acquire an interest” in the proceeds. This word limits how far along the
chain of title the creditor can trace proceeds. Walsh gives a good example at [168]. There is no corresponding limitation in Ontario,
allowing secured creditors to follow the collateral or its proceeds along a very long chain of title [168 fn 10]. Also, be aware that this
rule only applies to proceeds, not the original collateral [169] .
Both PPSAs contain provisions dealing with the perfection of interests in proceeds. Security interests over proceeds need to be
perfected independently of security interests over the original collateral, even though attachment is automatic. New Brunswick seems
to make it fairly difficult for security interests in proceeds to be considered continuously perfected (28(3)-(4)), but Ontario is far more
generous (OPPSA 25(2)-(3)). [see Walsh discussion at 171 fn 22]
Keep in mind that third party purchasers are protected under other provisions of the act (30 NBPPSA; 28, 28.1 OPPSA). So just
because the security interest survives under the relevant provision does not mean it is enforceable against all buyers.
NBPPSA Provisions
1 … “proceeds” means
(a) identifiable or traceable personal property that is derived directly or indirectly from any dealing with collateral or
proceeds of collateral and in which the debtor acquires an interest,
(b) an insurance or other payment that represents indemnity or compensation for loss of or damage to collateral or proceeds
of collateral, or a right to such a payment,
(c) a payment made in total or partial discharge or redemption of chattel paper, investment property, an instrument or an
intangible, and
(d) rights arising out of, or property collected on, or distributed on account of, collateral that is investment property;
2(3) Proceeds are traceable whether or not there is a fiduciary relationship between the person who has a security interest in the
proceeds as provided in section 28 and the person who has rights in or has dealt with the proceeds.
20(3) An unperfected security interest in collateral that is not investment property is subordinate to the interest of a transferee of
the collateral if the transferee
(a) acquires the interest under a transaction that is not a security agreement,
(b) gives value, and
(c) acquires the interest without knowledge of the security interest and before the security interest is perfected.
20(4) For the purposes of subsection (3), a purchaser of an instrument or a holder of a negotiable document of title who acquires it
under a transaction entered into in the ordinary course of the transferor’s business has knowledge only if the purchaser or holder
acquires the interest with knowledge that the transaction violates the terms of the security agreement creating or providing for the
security interest.
28(1) Subject to this Act, if collateral is dealt with or otherwise gives rise to proceeds, the security interest
(a) continues in the collateral unless the secured party expressly or impliedly authorizes the dealing, and
(b) extends to the proceeds.
28(2) If a secured party enforces a security interest against both the collateral and the proceeds, the amount secured by the security
interest in the collateral and the proceeds is limited to the market value of the collateral at the date of the dealing.
28(2.1) The limitation of the amount secured by a security interest as provided in subsection (2) does not apply where the collateral is
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investment property.
28(3) A security interest in proceeds is a continuously perfected security interest if the interest in the original collateral is perfected by
registration of a financing statement under section 25 that
(a) includes a description of the proceeds that would be sufficient to perfect a security interest in original collateral of the
same kind,
(b) includes a description of the original collateral, if the proceeds are of a kind that are within the description of the original
collateral, or
(c) includes a description of the original collateral, if the proceeds consist of money, cheques or deposit accounts in a bank,
credit union or similar financial institution.
28(4) If the security interest in the original collateral is perfected other than in a manner referred to in subsection (3), the security
interest in the proceeds is a continuously perfected security interest for the first fifteen days after the security interest in the original
collateral attaches to the proceeds but becomes unperfected on the expiry of that period, unless the security interest in the proceeds is
otherwise perfected by any of the methods and under the circumstances specified in this Act for original collateral of the same kind.
35(3) The time of perfection of proceeds is considered the time of perfection of the original security interest over the collateral.
34(5) Priority among PMSI holders of original collateral and PMSI holders of that collateral as proceeds.
OPPSA Provisions
[note lack of requirement that the debtor acquire an interest in the Ontario definition of proceeds - Mike]
1 … “proceeds” means identifiable or traceable personal property in any form derived directly or indirectly from any dealing with
collateral or the proceeds therefrom, and includes,
(a) any payment representing indemnity or compensation for loss of or damage to the collateral or proceeds therefrom,
(b) any payment made in total or partial discharge or redemption of an intangible, chattel paper, an instrument or investment
property, and
(c) rights arising out of, or property collected on, or distributed on account of, collateral that is investment property;
25(1) Where collateral gives rise to proceeds, the security interest therein,
(a) continues as to the collateral, unless the secured party expressly or impliedly authorized the dealing with the collateral
free of the security interest; and
(b) extends to the proceeds.
25(2) Where the security interest was perfected by registration when the proceeds arose, the security interest in the proceeds remains
continuously perfected so long as the registration remains effective or, where the security interest is perfected with respect to the
proceeds by any other method permitted under this Act, for so long as the conditions of such perfection are satisfied.
25(3) A security interest in proceeds is a continuously perfected security interest if the interest in the collateral was perfected when
the proceeds arose.
25(4) If a security interest in collateral was perfected otherwise than by registration, the security interest in the proceeds becomes
unperfected ten days after the debtor acquires an interest in the proceeds unless the security interest in the proceeds is perfected under
this Act. [Walsh suggests that this provision could perform the limiting function as similar language in the NB definition of proceeds
does [168 fn 10]]
25(5) Special rule for motor vehicles sold to third parties as consumer goods.
30(5) The date for registration or perfection as to the original collateral is also the date for registration or perfection as to proceeds.
ii) Sale of the Collateral
In New Brunswick, the debtor may sell or otherwise transfer the collateral, and this right may not be restricted (33(2) NBPPSA). The
transfer does not affect the rights of the secured party, so the security interest over the collateral remains intact. However, the creditor
must update the registry if the security interest was perfected by registration within fifteen days, otherwise the security interest will
become unperfected (51 NBPPSA).
In Ontario, there is a similar protection against restrictions of the right to sell the collateral (39 OPPSA). Where collateral is
transferred or sold with the consent of the secured party, there is a similar re-registration requirement (48 OPPSA).
iii) Protection for Third Party Buyers/Lessees [146+]
Section 30(2) NBPPSA provides protection for any kind of purchaser of goods sold in the ordinary course of business, but only if the
buyer either did not know about the security agreement, or didn’t know that the sale was unauthorized (if the sale was authorized, no
problems arise, since the security is extinguished by 28(1)). Section 30(3) protects sales made outside the ordinary course of business,
but only to consumers without knowledge of the security agreement, and only if the value of the goods is under $1,000 (30(4)).
Section 30(5) creates exceptions in favour of buyers and lessees during fifteen-day “grace periods” included in the act.
Ontario’s 28(1) and 28(2) provide similar protection to 30(1). However, Ontario does not have a “yard sale” exception like 30(3). And
Ontario also imposes an “identification” requirement on the purchased/leased goods. The identification requirement is only likely to
cause problems if the sales/leases aren’t followed by immediate possession of the collateral by the buyer/lessee.
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Section 31 NBPPSA and 29 OPPSA deal with priority of “holders and purchasers of money, instruments, documents of title or chattel
paper.” In order to preserve the negotiability of these documents, it provides a far broader level of protection.
NBPPSA Provisions
30(1) [definitions omitted; most had to do with fixtures and accessions]
30(2) A buyer or lessee of goods sold or leased in the ordinary course of business of the seller or lessor takes free of any perfected or
unperfected security interest given by the seller or lessor or arising under section 28 or 29, whether or not the buyer or lessee knows of
it, unless the buyer or lessee also knows that the sale or lease constitutes a breach of the security agreement under which the security
interest was created.
30(3) A buyer or lessee of goods that are acquired as consumer goods takes free of a perfected or unperfected security interest in the
goods if the buyer or lessee
(a) gave value for the interest acquired, and
(b) bought or leased the goods without knowledge of the security interest.
30(4) Subsection (3) does not apply to a security interest in
(a) a fixture, or
(b) goods if the purchase price of the goods exceeds one thousand dollars or if the market value of the goods, in the case of a
lease, exceeds one thousand dollars.
30(5) A buyer or lessee of goods who buys or leases the goods during any of the fifteen day periods referred to in subsection 26(1)(2), 28(4), 29(4) or section 51 takes free of the security referred to in those provisions, if the buyer or lessee
(a) gave value for the interest acquired, and
(b) bought or leased the goods without knowledge of the security interest and
(i)in a case within subsection 26(1) or (2), 28(4) or 29(4), before the security interest was perfected by possession
under section 24 or by registration under section 25, or
(ii)in a case within section 51, before the registration of the security interest was amended in accordance with that
section or the secured party took possession of the collateral.
30(6) A buyer or lessee of goods takes free of a security interest in the goods perfected by registration under section 25 if
(a) the buyer or lessee bought or leased the goods without knowledge of the security interest, and
(b) in the registration relating to the security interest, the goods were not described by serial number entered into the field
labelled for the receipt of serial numbers.
30(7) Subsection (6) applies only to goods that are equipment and that are of a kind that are prescribed as serial numbered goods.
30(8) A sale or lease under subsection (2), (3), (5) or (6) may be for cash, credit, or exchange of property. Does not include transfer of
goods as security for or total/full payment of a past debt.
OPPSA Provisions
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.
28(1.1) Section 28(1) applies whether or not the buyer took possession, the seller was ever in possession, title passed to the buyer, or
the seller retained a security interest in the goods.
28(1.2) However, section 28(1) only applies if the goods are “identified to the contract” which means either identified and agreed
upon by the parties at the time the contract was made, or marked as being identified to the contract (by a sticker or something)
afterwards.
28(2) A lessee of goods from a lessor who leases the goods in the ordinary course of business holds the goods, to the extent of the
lessee’s rights under the lease, free from any security interest 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.
28(2.1)-(2.23) are equivalent to (1.1)-(1.3) except for lessees rather than purchasers.
28(3) Rules for purchasers of chattel paper
28(4) Rules for purchasers of instruments
28(5) special rules for motor vehicles.
28(6)-(10) and 28.1 special rules for securities (i.e. stocks in companies)
iv) A Primer on Tracing
This is copy-pasted from my Trusts summary, with minor editing. Page number references in this section are to Oosterhoff on Trusts.
Although the PPSAs use the general rules of equitable tracing, the rule that equitable interests can’t be asserted against good faith
purchasers for value without notice does not apply in the PPSA context [171 fn 21]. Good faith third parties receive explicit statutory
protection (see above). Anyone falling the scope of those protections is out of luck.
There are three concepts at play here: following, tracing, and claiming [1209 citing Lionel Smith’s The Law of Tracing]. It is
important to distinguish between them:
 Following is the act of locating a specific piece of property (the book limits this to tangible property) as it changes hands
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

between multiple people.
Tracing is the act of identifying the underlying value of a piece of property as that value is converted from one asset to
another (e.g. if a car is sold, then you can trace the value of the car into the cash received on the sale; if that cash is used to
buy government bonds you trace the value of the cash into the bonds). Obviously, tracing will be futile when money is spend
on consumables or services.
Claiming is the end result of a successful following or tracing process, and is the act by which a person asserts a proprietary
right in the followed or traced property. Thus claiming is the right/remedy, whereas following and tracing are merely legal
processes and not rights or remedies themselves.
Some of the older readings in the textbook suggest there are separate rules for legal and equitable tracing. This distinction doesn’t
matter in New Brunswick, since the PPSA adopts equitable tracing rules, which are the more flexible of the two (NBPPSA 2(3)). In
Ontario, even though the OPPSA is silent on this issue, the Supreme Court merged common law and equitable tracing (BMP Global
Distribution v Bank of Nova Scotia, 2009 SCC 15). So the rules below apply in both provinces.
At the end of a successful tracing exercise, the creditor has the remedies available under the PPSA. The cases below just discuss how
to trace and what tracing means.
Foskett v McKeown, 2000 UKHL [1214]
Facts: The plaintiffs are investors who gave money to a Timothy Murphy in trust to buy land in Portugal. Instead of doing that, he
spent the money on a variety of things that were not land in Portugal. One of those things was 2 of 5 payments of his life insurance
premiums. The trust money payments would have passed through his bank accounts. The other three payments were from his own
money, or at least weren’t clearly trust money. When Murphy committed suicide, this resulted in a £1 million payout. The defrauded
investors now claim 40% of that amount via tracing. The insurance policy was held on trust for Murphy’s children, so they oppose the
investors.
Issue: Can the investors trace the embezzled funds into the proceeds of the life insurance policy?
Holding: Yes.
Reasoning: Lord Millet (Leading judgment on tracing): “Following is the process of following the same asset as it moves from hand
to hand. Tracing is the process of identifying a new asset as the substitute for the old. Where one asset is exchanged for another, a
claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the
hands of the same owner.” Tracing is part of the law of property, not the law of unjust enrichment. There is no need to show unjust
enrichment to invoke tracing. Nor should equitable and legal tracing be thought of as distinct; there should be but one law of tracing
which follows equitable rules. Because trust moneys represented only 2 of 5 premium payments, they should receive only 40% of the
amount. The fact that the life insurance policy was held on trust for the children changes nothing - they are volunteers and cannot
defeat the equitable title of the investor-beneficiaries. It is irrelevant that the trustee mixed trust money with his own prior to making
the purchase; the mixing would occur at the moment trust funds and personal funds were used to buy a single asset anyways. Because
a lien can be asserted only against a wrongdoer and those asserting title through him, it will be unavailable where the mixed fund is
deficient and there are other innocent claimants against the fund [1221]. That problem does not arise here because the children are
donees and claim under Murphy’s title. Additionally, the rule that a fiduciary may not profit from the breach requires that the entirety
of the property purchased with mixed assets go to the beneficiaries if it is no possible to divide in pro rata.
Browne-Wilkinson (plus Hoffman): This case involves only an express trust and tracing from it. There is no resulting or constructive
trust. Equitable property rights are not discretionary any more than legal property rights would be. The children argue that paying the
premiums was more like repairs or maintenance than the purchase of a new asset, so the only remedy allowed should be a lien equal to
the value of the two payments, not a 40% ownership stake. This must be rejected for the reasons given by Lord Millet.
Lord Hope of Craighead (Dissenting in part): The children try to argue that the plaintiffs are recovering twice for the same loss,
because they already received £600,000 from Lloyd’s Bank for allowing Murphy’s misappropriation to occur. This argument fails to
distinguish between proprietary and personal remedies. Here the plaintiffs seek to recover property that belongs to them. That is very
different from the settlement they received for their claim in damages. But the plaintiffs should not receive 40% of the payout, because
the rights which Murphy acquired crystallized when he paid the first premium with his own money. The remaining premiums did not
contribute to the creation of new property rights, so it would be unfair to allow tracing [note that he seems to go with discretionary
approach to tracing - Mike].
Ratio: (1) Tracing/following/claiming distinction; (2) A person has the same rights in traceable proceeds that he would have in the
property before it was exchanged; (3) Tracing rules for law and equity should be the same; (4) Where traceable funds are only part of
the purchase price of a new asset, the beneficiaries can only claim that portion of the value of the asset either as partial ownership or as
a lien; (5) Innocent contributors to a mixed asset must be treated equally between each other, so the lien is unavailable where the fund
is deficient; (6) Where a pro rata division of assets between beneficiary and trustee after improper mixing of assets is impossible, the
beneficiary gets all of it.
Comment: This is a good example of Professor Smith’s encumbrance theory of the beneficiary’s interest.
Taylor v Plummer, 1815 UKHL [1210]: Plummer had given money to Walsh, a stockbroker, to buy English securities. Instead, Walsh
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bought American securities and gold, and tried to flee the country. Walsh was apprehended before he could put his plan into action,
and the gold/securities were given to Plummer. Taylor, Walsh’s trustee in bankruptcy, tried to get the assets back, claiming that
Plummer merely had a debt claim against Walsh, and would have to get in line with the other unsecured creditors. The House of Lords
disagreed, saying that:
“It makes no difference in reason or law into what other form, different from the original, the change may have been made,
whether it be into that of promissory notes for the security of the money which was produced by sale of the goods of the
principal… or into other merchandise… for the product or substitute for the original thing still follows the nature of the thing
itself, as long as it can be ascertained to be such, and the right only ceases when the means of ascertainment fail, which is the
case when the subject is turned into money, and mixed or confounded in a general mass of [money].” [1211]
Tracing Through Wrongful Mixing of Assets
Where secured property assets are only part of the purchase price, there is a mixing of traceable secured property with other property.
Most mixing occurs in the context of bank accounts. The courts have developed several rules that attempt to deal with the evidentiary
difficulties this creates.
 The Rule in Clayton’s Case [bottom of 1239]: This is a first-in-first-out rule that says you line up all the deposits and
withdrawals in the order that they occur. The oldest withdrawals will be matched against the oldest deposits so that the oldest
deposits are withdrawn first. This was a default common law rule developed for general banking law purposes and lead to
extremely arbitrary results, so it has been abandoned in the trust context [1248; Greyhawk].
 The Rule in Hallet’s Case [1239]: This case is very confusing and could have been interpreted two different ways, either: (1)
the trustee spends his own money first, or (2) the court will draw the most unfavourable conclusions possible for the trustee,
whether that involves him spending his money first or last or sometime in between.
 Principle in Re Oatway [1241]: A fraudulent trustee was held to have withdrawn trust funds from his account first, in order to
allow the beneficiaries to claim against the assets he purchased with those funds. This case is consistent with Hallet only if
the rule both applied is that the courts apply the presumption most favourable to the beneficiaries and least favourable to the
trustee.
 The Lowest Intermediate Balance Rule (LBIR): This is currently the dominant approach in Canada. “The lowest intermediate
balance rule essentially says that a person cannot get out a mixture more than he contributed to it” [1243]. See numerical
example at [1242]. Essentially a trust beneficiary can claim the lowest amount in the account between the time of the
wrongful mixing and the brining of the action, because this is the most trust money that can possibly be in the account. For
LIBR and multiple innocent claimants, see [1249]. Note that by invoking the LBIR, you are not performing tracing, because
you could always trace out of the bank account instead of asking for the money that remains therein. See [1242 n 284] for the
interaction of LBIR and tracing.
o Example: a bank account starts with $10, then $15 in trust property is added, resulting in a total of $25. Then there is
a withdrawal down to $8, then a deposit of $10, for a final balance of $18. The lowest intermediate balance rule says
that because the account once only held $8, the most of your money that can still be in the account is $8, even if
more money was added later to bring it to $18.
Boughner v Greyhawk Equity Partners Limited Partnership (Millenium), 2012 ONSC [PDF]
Facts: Greyhawk was an investment firm that perpetuated a large-scale fraud. When the fraud was discovered, the firm was put into
receivership [a kind of contractual, creditor-initiated bankruptcy regime - Mike]. As part of the liquidation process, the receiver is
attempting to pay off the debts of the firm occasioned by the fraud, but there is a large shortfall. Certain defrauded investors argue that
each creditor should receive their pro rata share of the remaining money in proportion to the amount they invested (called the pro rata
ex post facto approach in the). Other creditors argue for the lowest intermediate balance rule. Choosing one method over the other will
have a massive impact on the recovery each group receives. The receiver had enough data to calculate reimbursements under either
method.
Issue: How should the funds be distributed?
Holding: Following the lowest intermediate balance rule (LIBR).
Reasoning: The basic rule of tracing is the LIBR. This rule is to be applied by courts whenever the evidentiary basis is sufficient to
apply it. However, if courts lack the information necessary to do this, they may use pro rata shares. The rule in Clayton’s case has
consistently been rejected by Canadian courts, and should never be applied in any circumstance.
Ratio: (1) The lowest intermediate balance rule is the default rule of tracing that should be applied by courts wherever possible; (2)
Where it is impossible to apply the LIBR, pro rata ex post facto calculations should be used; (3) Under no condition should LIFO/the
Rule in Clayton’s Case be used.
3.4.3 Future Property
Generally common law PPSA agreements require the express use of the word future to charge future property [Class]. “All my cars”
when you have two cars will create a security interest against your two cars, and this will not include a third car you acquire later.
OPPSA Provisions
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12(1) A security agreement may cover after-acquired property.
12(2) No security interest attaches under an after-acquired property clause in a security agreement,
(a) to crops that become such more than one year after the security agreement has been executed, except that a security
interest in crops that is given in conjunction with a lease, purchase or mortgage of land … ; or
(b) to consumer goods, other than accessions, unless the debtor acquires rights in them within ten days after the secured party
gives value.
NBPPSA Provisions
13(1) Subject to section 12 [attachment in general] and subsection (2), a security agreement that provides for a security interest in
after-acquired personal property attaches to that property in accordance with the terms of the agreement….
13(2) A security interest does not attach under an after-acquired property clause in a security agreement to after-acquired personal
property that is
(a) to crops that become such more than one year after the security agreement has been executed, except that a security
interest in crops that is given in conjunction with a lease, purchase or mortgage of land … ; or
(b) consumer goods, other than an accession, unless the security interest is a purchase money security interest or a security
interest in collateral obtained by the debtor as replacement for collateral described in the security agreement
Section 3.5: Effects of Security Interests
3.5.1 General
The basic principle of the PPSAs is freedom to contract (9 NBPPSA; 9 OPPSA), thus the security has whatever effects the contract
provides for. However, there are several clause that are either regulated, banned, or implied into security agreements.
First, the modern PPSAs impose a duty of good faith and commercial reasonableness on the parties (65(2) NBPPSA). Ontario
does not seem to create a general duty of good faith and commercial reasonableness, but imposes specific duties on various rights or
obligations (e.g. OPPSA 16, 63).
Second, most PPSAs give the debtor the right to cure any defect prior to the sale of the collateral, which will reinstate the
security agreement and return the parties to the status quo (62(4) NBPPSA).
In Ontario, this right is slightly different; section 66(1) OPPSA creates a right to redeem the collateral by curing the default and
“tendering the fulfillment of all obligations secured by the collateral” [not sure if this means offering to assume ongoing debt
payments, or to pay the debt all off at once - Mike]. This right is available to more people than just the debtor (specifically, to
everyone listed in 63(4)). If multiple people wish to redeem, their priority ranking determines who gets to exercise the rede mption
right [does that mean the debtor always goes last, since technically the debtor doesn’t have any priority under the PPSA, given that the
debtor doesn’t have a security interest in the collateral? - Mike].
The OPPSA also creates a right to reinstate the contract (not just redeem the collateral) under 66(2), but this right only applies to the
debtor and then only if the collateral is consumer goods. The reinstatement requires the debtor to cure the default and pay any
reasonable expenses of the creditor.
Third, the PPSAs limit the ability of creditors to invoke acceleration clauses (16 NBPPSA; 16 OPPSA) except where the secured
party believes in good faith and on commercially reasonable grounds that the collateral is in jeopardy or that the prospect of
payment/performance of the secured obligation is about to be impaired. The debtor can also use the statutory right to cure the default
(62(4) NBPPSA; 66(1)-(2) OPPSA) and thereby cancel the acceleration.
Other Effects
Debtor has a right to a copy of the contract (NBPPSA 11; OPPSA 10, with fines for failure to do so)
Debtor (and a very small number of third parties) has right to information (NBPPSA 18; OPPSA 18)
3.5.2 With Respect to Collateral
The PPSAs impose basic obligations on secured parties who hold collateral. This includes a duty preserve the collateral (NBPPSA
17(2)). The debtor bears the risk of any loss that occurs otherwise than by the secured creditor’s negligence (17(3)(b)) unless the
contract states otherwise. The creditor does not have an inherent right to use the collateral, unless conferred by one of the sources
listed in NBPPSA 17(4).
NBPPSA Provisions
17(2) Secured party must exercise reasonable care to preserve collateral in that party’s possession. In the case of chattel paper,
securities, or instruments, reasonable care extends to preserving rights against third persons (i.e. suing and avoiding limitation periods,
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filing claims if the debtor of the instrument/security/chattel paper goes bankrupt).
17(3) Unless otherwise agreed: (a) the secured party can charge various reasonable expenses to the debtor; (b) the risk of loss or
damage is on the debtor, unless the secured party was the one who caused the loss; (c) the secured party may hold any profit or
increase in the collateral as additional security, except for money it produces; (d) speaking of money, any money generated by the
collateral is applied to the debt, unless the secured party gives it to the debtor; (e) the secured party must keep the property
identifiable, although fungible collateral may be mixed with the secured party’s property.
17(4) Subject to 17(2), the secured party can use the collateral in the manner set out in the security agreement, or to preserve its value,
or in accordance with a Court order. There is no inherent right to use the collateral beyond these three sources.
OPPSA Provisions
17(1) Equivalent to NBPPSA 17(2) duty of care.
17(2) Equivalent to NBPPSA 17(3) default rules; can be contracted out of.
17(3) Liability of secured party for loss/damage of collateral does not cause loss of security interest.
17(4) Equivalent to NBPPSA 17(4) powers of use.
3.5.3 Opposability
To Debtor
A security interest is opposable to the debtor as soon as it attaches [259], and the security agreement is effective between the parties as
soon as it is signed, unless the PPSA provides otherwise (9 NBPPSA/OPPSA).
To Third Parties
[263; Walsh Commentary] “As against judgment creditors, a trustee in bankruptcy, and a purchaser for value without notice (other
than another secured party), the effect of failing to perfect is… [that] the security interest is ineffective until it has attached and is
registered or otherwise perfected. But if the priority contest is between a perfected and an unperfected security interest, the position is
different. … [U]nder the PPSA, an unperfected security interest is subordinate to all perfected security interests in the collateral,
regardless of when they attach and regardless of knowledge. Moreover, priority between perfected security interests is ranked, as a
general rule, according to the order of [the perfection step], again regardless of the order of attachment and regardless of knowledge. ”
3.5.4 Priority Conflicts
Don’t forget the rules about protecting buyers and security interests over proceeds (above). Also, keep in mind that the Bankruptcy
and Insolvency Act overrules all of this and creates a new system of priorities that apply when the debtor is bankrupt.
i) General Rule
In contrast to the CCQ, which sets out a list of priority for creditors holding various types of claims, priorities, and hypothecs, the
PPSA doesn’t give one general list. Instead, it is set up as a series of one-off “A takes precedence over B” statements. This probably
flows from the litigation-focussed nature of the common-law, in contrast to the civil law’s more systematic approach.
In essence: perfected securities have priority over unperfected securities. Between perfected securities, the one which is perfected first
(which normally means the one that registers first) has priority. Between unperfected securities, the one that attaches first has priority.
There’s a also a special rule for purchase money security interests (PMSIs), which take precedence over all other security interests,
regardless of the order in which they are perfected (but PMSIs can only be taken out on certain kinds of collateral).
In a conflict between a perfected creditor and a third-party claimant not claiming through the PPSA, the perfected creditor is generally
protected. By contrast, an unperfected security holder will be displaced by a judgment creditor, trustee in bankruptcy, purchaser, etc.
This can be turned into the following ordered list of PPSA priority: Certain non-PPSA securities → PMSI → perfected security
interest (by order of perfection) → certain non-PPSA creditors → unperfected security interest (by order of attachment)
It is possible for secured parties to make subordinate their claims to other secured parties (OPPSA 38; NBPPSA 40). In New
Brunswick, subordination agreements can be enforced by third party beneficiaries (NBPPSA 40(2)).
NBPPSA Provisions
35(1) Where this Act provides no other method for determining priority between competing security interests in the same collateral,
the following priority rules apply:
(a) priority between perfected security interests is determined by the order of the occurrence of the following:
(i) the registration of a financing statement under section 25 without regard to the time of attachment of the security
interest,
(ii) possession of the collateral under section 24 without regard to the time of attachment of the security interest, or
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(iii) perfection under sections 5, 7, 7.1, 26, 29 or 74,
whichever is earliest;
(b) a perfected security interest has priority over an unperfected security interest; and
(c) priority between unperfected security interests is determined by the order of attachment of the security interests.
35(2) Continuously perfected security interests are considered to be perfected by the method by which they were first perfected.
35(3) The time of perfection of proceeds is considered the time of perfection over the collateral.
35(4) Special rules for equipment that is “serial numbered goods” (defined by regulation to be “a motor vehicle, trailer, mobile home,
aircraft, boat or an outboard motor for a boat”)
35(5) Advances have the same priority as the original debt.
OPPSA Provisions
30(1) If no other provision of this Act is applicable, the following priority rules apply to security interests in the same collateral:
1. Where priority is to be determined between security interests perfected by registration, priority shall be determined by
the order of registration regardless of the order of perfection.
2. Where priority is to be determined between a security interest perfected by registration and a security interest
perfected otherwise than by registration,
i. the security interest perfected by registration has priority over the other security interest if the registration
occurred before the perfection of the other security interest, and
ii. the security interest perfected otherwise than by registration has priority over the other security interest, if the
security interest perfected otherwise than by registration was perfected before the registration of a financing
statement related to the other security interest.
3. Where priority is to be determined between security interests perfected otherwise than by registration, priority shall
be determined by the order of perfection.
4. Where priority is to be determined between unperfected security interests, priority shall be determined by the order of
attachment.
[this importance of 30(1)2.(ii) is that you can pre-register your security agreement, which is important if your security
agreement covers future property, or property not yet belonging to the debtor. This provision allows you to use the date of
registration, rather than the date of perfection, which would be later in both the examples given above. So the main effect of
this provision is to benefit creditors who perfect via registration over those who perfect via possession. - Mike]
30(2) Continuous perfection: a security interest keeps its original mode of perfection.
30(3) Advances: Security interest over advances has the same priority as over the first advance.
30(5) For the purpose of subsection (1), the date for registration or perfection as to collateral is also the date for registration or
perfection as to proceeds.
30(6) Perfection and reperfection by registration: 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.
27(1) When a debtor sells or leases goods that are subject to a security interest and (a) the sale/lease was free of hte security interest
under section 28; (b) the goods are returned or repossessed by the debtor; and (c) the obligation secured remains unpaid or
unperformed, then the security interest re-attaches.
27(2) The perfection and priority of the re-attached security is determined as if the sale/lease never happened.
ii) Purchase Money Security Interests
With the emergence of general security agreements, debtors faced a problem: once they had granted a single GSA over their current
and future property, no one would lend them money anymore, since there was no collateral left. The purchase money security interest
(PMSI) solves this problem by creating an exception to the normal priority regime. Both Ontario and New Brunswick define a PMSI
as a security interest created when a creditor extends credit to a debtor to buy a specific piece of collateral, and then takes a security
interest in the specific collateral purchased with the creditor’s funds (paragraph (a) of both definitions).
The economics of PMSIs are clear: the debtor benefits by being able to attract new secured creditors despite having granted a general
security agreement; the PMSI creditor benefits by getting first ranking security on the collateral it financed, and the existing creditor(s)
suffers no prejudice, since the PMSI only covers the new asset and doesn’t affect any other assets that were previously in the debtor’s
possession.
There are also deemed PMSIs that map onto the deemed security interests of each act. This ensures that lessors/consignors are not
prejudiced by the PPSA.
OPPSA Definition of a PMSI
1 “purchase-money security interest” means,
(a) a security interest taken or reserved in collateral, other than investment property, to secure payment of all or part of its
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price,
(b) a security interest taken in collateral, other than investment property, by a person who gives value for the purpose of
enabling the debtor to acquire rights in or to the collateral, to the extent that the value is applied to acquire the rights, or
(c) the interest of a lessor of goods under a lease for a term of more than one year,
but does not include a transaction of sale by and lease back to the seller.
NBPPSA Definition of a PMSI
1 “purchase money security interest” means
(a) a security interest taken in collateral, other than investment property, to the extent that it secures all or part of the purchase
price of the collateral,
(b) a security interest taken in collateral, other than investment property, by a person who gives value for the purpose of
enabling the debtor to acquire rights in the collateral, to the extent that the value is applied to acquire the rights,
(c) the interest of a lessor of goods under a lease for a term of more than one year, and
(d) the interest of a consignor who delivers goods to a consignee under a commercial consignment,
but does not include a transaction of sale by and lease back to the seller, and for the purposes of this definition, “purchase price” and
“value” include interest, credit costs and other charges payable for the purchase or loan credit
iii) Specific Rules NBPPSA
There’s no easy way to summarize these rules. You have to identify whether you are in a special case, then apply the rules of that case.
Note that the PPSAs are set up to deal with binary conflicts, answering the question of “does X have priority over Y?” rather than
providing a single unified list of priorities like the CCQ.
Proceeds
NBPPSA 28; see section 2.4.2(i) above.
Buyers
NBPPSA 30; see section 2.4.2(ii) above. Returned goods are dealt with by section 29 of the NBPPSA.
Unperfected Security Interest
20(1) An unperfected security interest in collateral is subordinate to the interest of
(a) a judgment creditor who has registered a notice of judgment in the Registry pursuant to subsection 2.2(1) of the
Creditors Relief Act if the security interest is unperfected when the notice is registered,
(b) all persons entitled by the Creditors Relief Act or otherwise to participate in a distribution of personal property subject to
the interest of a creditor referred to in paragraph (a), and
(c) a sheriff and a representative of creditors for the purpose of enforcing the rights of a creditor referred to in paragraph (a).
20(2) An unperfected security interest in collateral is not effective against
(a) a trustee in bankruptcy if the security interest is unperfected at the time of the bankruptcy,
(b) a liquidator under the Federal Winding-up and Restructuring Act if the security interest is unperfected when the windingup order is made
(c) a creditor, assignee or sheriff who has registered a notice of claim in the Registry pursuant to subsection 2.4(1) of the
Creditors Relief Act for the purposes of any enforcement proceedings commenced under the Acts referred to in that
subsection if the security interest is unperfected at the time the notice of claim is registered.
20(3) An unperfected security interest in collateral that is not investment property is subordinate to the interest of a transferee of the
collateral if the transferee
(a) acquires the interest under a transaction that is not a security agreement,
(b) gives value, and
(c) acquires the interest without knowledge of the security interest and before the security interest is perfected.
20(4) For the purposes of subsection (3), a purchaser of an instrument or a holder of a negotiable document of title who acquires it
under a transaction entered into in the ordinary course of the transferor’s business has knowledge only if the purchaser or holder
acquires the interest with knowledge that the transaction violates the terms of the security agreement creating or providing for the
security interest.
Judgment Creditors
35(6) A perfected security interest has priority over the interest of a judgment creditor referred to in paragraph 20(1)(a) only to the
extent of
(a) advances made before the judgment creditor registers the notice of judgment referred to in paragraph 20(1)(a),
(b) advances made before the secured party has knowledge of the registration of the notice of judgment referred to in paragraph
20(1)(a),
(c) advances made in accordance with a statutory requirement, or a legally binding obligation owing to a person other than the
debtor entered into by the secured party before acquiring the knowledge referred to in paragraph (b), and
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(d) reasonable costs and expenses incurred by the secured party for the protection, preservation, maintenance or repair of the
collateral.
Transferees of Collateral
35(8) If a debtor transfers an interest in collateral that, at the time of the transfer, is subject to a perfected security interest, that security
interest has priority over any other security interest granted by the transferee before the transfer except to the extent that the security
interest granted by the transferee secures advances made or contracted for
(a) after the expiry of fifteen days from when the secured party who holds the security interest in the transferred collateral has
knowledge of the information required to register a financing change statement in accordance with section 51 disclosing the
transferee as the new debtor, and
(b) before the secured party referred to in paragraph (a) takes possession of the collateral or registers a financing change
statement in accordance with section 51 disclosing the transferee as the new debtor.
35(9) Subsection (8) does not apply if the transferee acquires the debtor’s interest free of the security interest granted by the debtor.
Purchase Money Security Interest
Note that inventory PMSIs (34(2)) have to be perfected prior to delivery and notice must be given to existing creditors. Non-inventory
PMSIs only need to be perfected within 15 days of delivery (so more time and no notice requirement).
34(1) Subject to section 28, a purchase money security interest in
(a) collateral or its proceeds, other than intangibles or inventory, that is perfected not later than fifteen days after the debtor,
or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier, or
(b) an intangible or its proceeds that is perfected not later than fifteen days after the security interest in the intangible
attaches,
has priority over any other security interest in the same collateral given by the same debtor.
34(2) Special rules only for PMSI in inventory. More onerous requirements than 34(1).
34(4) Priority among PMSI holders.
34(5) Priority among PMSI holders of original collateral and PMSI holders of that collateral as proceeds.
34(7) A purchase money security interest in an item of collateral does not extend to or continue in the proceeds of the item after the
obligation to pay the purchase price of the item or repay the value given for the purposes of enabling the debtor to acquire rights in it
has been discharged.
Fixtures
36(2) Except as provided in section 30 and subsections (3) [purchaser of the land without notice of security interest], (4) [mortgagees
without notice in some circumstances], and (9) [judgment creditor who registers against the land], a security interest in goods that
attaches before or when the goods become fixtures has priority with respect to the goods over a claim to the goods made by a person
with an interest in the land.
36(7)-36(8) If security interest attaches after the goods become fixtures is subordinated to most other creditors and transferees.
36(10) Priority of purchase money security interest in fixtures.
37 Security interests in crops.
Negotiable Instruments
31(1) Anyone who becomes a holder of money subject to a security interest has priority over the secured party if (a) the money was
acquired without knowledge of the security interest or (b) the money was acquired for value, regardless of knowledge.
31(2) Subordinates the security interest to almost any other creditor who receives the negotiable instrument as payment for a debt,
even if the creditor knew of the security interest.
31(3) If the instrument is purchased, the creditor has priority over the secured party If the creditor gave value, took possession of the
instrument, and did not have knowledge of the security interest.
31(4) A holder to whom a negotiable document of title is negotiated has priority over the secured party if (a) the instrument was
acquired without knowledge of the security interest or (b) the instrument was acquired for value, regardless of knowledge.
31(5) Under sections (3)-(4), knowledge of the security interest means knowledge that the transfer breaches the security agreement.
Repairer’s Lien
32A lien on goods that arises as a result of the provision, in the ordinary course of business, of materials or services in respect of the
goods, has priority over a perfected or unperfected security interest in the goods unless the lien arises under an Act that provides that it
is not to have such priority.
iv) Specific Rules OPPSA
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There’s no easy way to summarize these rules. You have to identify whether you are in a special case, then apply the rules of that case.
Note that the PPSAs are set up to deal with binary conflicts, answering the question of “does X have priority over Y?” rather than
providing a single unified list of priorities like the CCQ.
Proceeds
OPPPSA 25; see section 2.4.2(i) above.
Buyers
OPPSA 28; see section 2.4.2(ii) above.
Unperfected Security Interests
21(1) subordinates an unperfected security interest to perfected interests (21(1)(a)(i)), judgment creditors (20(1)(a)(ii)-(iii)), the trustee
in bankruptcy (20(1)(b)). 20(1)(c)-(d) give a very wide exemption for transfers who give value and take without notice of the security
interest, as long as the transferee is not seeking to create a security interest himself.
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 perfected security interest in the same collateral or 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
(ii) [Judgment creditors]
(iii) all persons entitled by the Creditors’ Relief Act, 2010 or otherwise to participate in the distribution of the
property by [judgment creditors], or the proceeds of such property;
(b) in collateral is not effective against a person who represents the creditors of the debtor, including an assignee for the
benefit of creditors and a trustee in bankruptcy;
(c) in chattel paper, documents of title, instruments or goods is not effective against a transferee thereof who takes under a
transaction that does not secure payment or performance of an obligation and who gives value and receives delivery
thereof without knowledge of the security interest;
(d) in intangibles other than accounts is not effective against a transferee thereof who takes under a transaction that does
not secure payment or performance of an obligation and who gives value without knowledge of the security interest.
20(2) Timing issues for statutory liens and representatives of debtors.
20(3) A purchase-money security interest that is perfected by registration,
(a) in collateral, other than an intangible, before or within 15 days after,
(i) the debtor obtains possession of the collateral, or
(ii) a third party, at the request of the debtor, obtains possession of the collateral,
whichever is earlier; or
(b) in an intangible before or within 15 days after the attachment of the security interest in the intangible,
has priority over,
(c) an interest set out in subclause (1) (a) (ii) and is effective against a person described in clause (1) (b); and
(d) the interest of a transferee of collateral that forms all or part of a sale in bulk within the meaning of the Bulk Sales Act.
Judgment Creditors
30(4) A future advance under a perfected security interest is subordinate to the rights of judgment creditors (20(1)(a)(ii)) if the
advance was made after the secured party received written notification of the interest of any such person unless,
(a) the secured party makes the advance for the purpose of paying reasonable expenses, including the cost of insurance and
payment of taxes or other charges incurred in obtaining and maintaining possession of the collateral and its preservation; or
(b) the secured party is bound to make the advance, whether or not a subsequent event of default or other event not within the
secured party’s control has relieved or may relieve the secured party from the obligation.
Liens
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.
Purchase Money Security Interest
Note that inventory PMSIs (33(1)) have to be perfected prior to delivery and notice must be given to existing creditors. Non-inventory
PMSIs only need to be perfected within 15 days of delivery (so more time and no notice requirement).
33(1) A purchase-money security interest in inventory or its proceeds has priority over any other security interest in the same
collateral given by the same debtor, if,
(a) the purchase-money security interest was perfected at the time that the debtor or the debtor’s agent obtained or held
possession of the inventory
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(b) before the debtor receives possession of the inventory, the purchase-money secured party gives notice in writing to
every other secured party who has, before the date of registration by the purchase-money secured party, registered a
financing statement that describes the collateral as, or as including,
(i) items or types of inventory, all or some of which are the same as the items or types of inventory that will be
subject to the purchase money security interest,
(ii) inventory, or
(iii) accounts; and
(c) the notice referred to in clause (b) states that the person giving it has or expects to acquire a purchase-money security
interest in inventory of the debtor, describing such inventory by item or type.
33(2) Except where the collateral or its proceeds is inventory or its proceeds, a purchase-money security interest in collateral
or its proceeds has priority over any other security interest in the same collateral given by the same debtor if the purchasemoney security interest,
(a) in the case of collateral, other than an intangible, was perfected before or within 15 days after the debtor or the debtor’s
agent obtained or held possession of the inventory whichever is earlier; or
(b) in the case of an intangible, was perfected before or within 15 days after the attachment of the purchase-money security
interest in the intangible.
33(3) Where more than one purchase-money security interest is given priority by subsections (1) and (2), the purchase-money
security interest, if any, of the seller has priority over any other purchase-money security interest given by the same debtor.
20(3) PMSI and unperfected security interests
35(3) PMSI and accessions.
Negotiable Instruments
29 The rights of a person who is, (a) a holder in due course of a bill, note or cheque within the meaning of the Bills of Exchange Act
(Canada); or (b) a transferee from the debtor of money, are to be determined without regard to this Act.
Fixtures (Personal property joined to real estate)
34(1) A security interest in goods that attached,
(a) before the goods became a fixture, has priority as to the fixture over the claim of any person who has an interest in the
real property; or
(b) after the goods became a fixture, has priority as to the fixture over the claim of any person who subsequently acquired
an interest in the real property, but not over any person who had a registered interest in the real property at the time the
security interest in the goods attached and who has not consented in writing to the security interest or disclaimed an interest
in the fixture.
34(2) A security interest mentioned in subsection (1) is subordinate to the interest of,
(a) a subsequent purchaser for value of an interest in the real property; or
(b) a creditor with a prior encumbrance of record on the real property to the extent that the creditor makes subsequent
advances,
if the subsequent purchase or subsequent advance under a prior encumbrance of record is made or contracted for without
knowledge of the security interest and before notice of it is registered in accordance with section 54.
34(3)-(5) Ability of person with security interest in fixture to remove fixture. Responses of land owner.
Accessions (Personal property joined to other personal property)
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.
35(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
befeore 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.
35(3) Despite clause (2)(b), a purchase-money security interest in an accession that is perfected before or within 15 days after the
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debtor obtains possession of the accession has priority over the interest of a creditor referred to in that clause.
35(4)-(8) Ability of secured party to remove accession from the whole. Ability of others to block this.
Real Property
36(1) A security interest in a right to payment under a lease of real property, to which this Act applies, is subordinate to the interest of
a person who acquires for value the lessor’s interest in the lease or in the real property thereby demised if the interest, or notice
thereof, of the person is registered in the proper land registry office before the interest, or notice thereof, of the secured party is
registered in the proper land registry office.
36(2) A security interest in a right to payment under a mortgage or charge of real property, to which this Act applies, is subordinate to
the interest of a person who acquires for value the mortgagee’s or chargee’s interest in the mortgage or charge if the interest of the
person is registered in the proper land registry office before a notice of the security interest is registered in the proper land registry
office.
Comingled Property
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.
Account of Inventory and Employee/Payroll Claims
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.
30(8) Subsection (7) does not apply to a perfected purchase-money security interest in inventory or its proceeds.
Crops: section 32.
Section 3.6: Recourses and Remedies
Recall that the remedies rules do not apply to deemed security interests (like leases longer than one year) (OPPSA 57.1; NBPPSA
3(2), 55).
The definitions of “default” under both PPSAs provide for either default according to the terms of the security agreement, or failure to
make payments.
The Bankruptcy and Insolvency Act is also relevant here. A secured creditor who is planning to enforce a security that covers all or
substantially all of either (a) the debtor’s inventory, or (b) the debtor’s accounts receivable, or (c) the debtor’s property in general,
must give 10-day notice to the debtor if that debtor is insolvent. In practice, an intelligent debtor who receives a 10-day notice will
enter bankruptcy protection of some form, thereby short-circuiting the secured creditor’s remedies. However, the BIA notice
requirement only applies if the debtor is insolvent at the date on which the secured creditor begins to enforce security. If the debtor is
not insolvent, there is no need to send a notice.
In essence, a secured creditor can seize the collateral subject to the security interest as soon as the debtor defaults (58(2) NBPPSA; 62
OPPSA). At that point, the secured creditor has a several remedies:
- Sale of the collateral (NBPPSA 59; OPPSA 63).
- In New Brunswick, taking in payment/foreclosure (NBPPSA 61). In Ontario, the taking in payment remedy is limited to
consumer goods (OPPSA 65).
- In New Brunswick, collection of accounts receivable (NBPPSA 57(2)).
The PPSA also allows for certain optional rights to be included in security agreements, but they are not automatically available:
- In Ontario, collection of accounts receivable (OPPSA 61).
- Receivership of the debtor’s business (NBPPSA 64; OPPSA 60).
The debtor also has certain rights that are triggered by the enforcement process, including:
- A right of redemption: the debtor can buy out the security interest by tendering full performance of the obligation secured
by it (NBPPSA 62(2); OPPSA 66(1)).
- A right of reinstatement: the debtor can cure any defect or default and be returned to the contractual status quo. This will
end any existing enforcement proceedings (NBPSSA 62(4)). In Ontario, the right of reinstatement exists only for
consumer debts, and is limited to once in the life of the contract (OPPSA 66(2)). That said, secured creditors in Ontario can
purchase the collateral during the sale process (OPPSA 63(8)).
Bankruptcy and Insolvency Act
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244 (1) A secured creditor who intends to enforce a security on all or substantially all of
(a) the inventory,
(b) the accounts receivable, or
(c) the other property
of an insolvent person that was acquired for, or is used in relation to, a business carried on by the insolvent person shall send to that
insolvent person, in the prescribed form and manner, a notice of that intention.
(2) Where a notice is required to be sent under subsection (1), the secured creditor shall not enforce the security in respect of which
the notice is required until the expiry of ten days after sending that notice, unless the insolvent person consents to an earlier
enforcement of the security.
(2.1) For the purposes of subsection (2), consent to earlier enforcement of a security may not be obtained by a secured creditor prior to
the sending of the notice referred to in subsection (1).
(3) This section does not apply, or ceases to apply, in respect of a secured creditor
(a) whose right to realize or otherwise deal with his security is protected by subsection 69.1(5) or (6); or
(b) in respect of whom a stay under sections 69 to 69.2 has been lifted pursuant to section 69.4.
(4) This section does not apply where there is a receiver in respect of the insolvent person.
OPPSA
GENERAL
1 “default” means the failure to pay or otherwise perform the obligation secured when due or the occurrence of any event whereupon
under the terms of the security agreement the security becomes enforceable.
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 [i.e. it does not apply to deemed security interests like true leases longer than one year - Mike]
58 The rights and remedies mentioned in this Part are cumulative
59(1) Where the debtor is in default under a security agreement, the secured party has the rights and remedies provided in the security
agreement and the rights and remedies provided in this Part and, when in possession or control of the collateral, the rights, remedies
and duties provided in section 17 or 17.1, as the case may be.
59(2) The secured party may enforce a security interest by any method permitted by law and, if the collateral is or includes documents
of title, the secured party may proceed either as to the documents of title or as to the goods covered thereby, and any method of
enforcement that is permitted with respect to the documents of title is also permitted, with necessary modifications, with respect to the
goods covered thereby.
59(3) Where the debtor is in default under a security agreement, the debtor has the rights and remedies provided in the security
agreement and the rights and remedies provided in this Part and in section 17.
59(5) Debtors can’t waive rights beyond those that the PPSA allows them to waive.
59(6) Where the security agreement covers real property, the secured creditor can proceed under PPSA or under real property law
or both.
60 Receivers and receiver-managers may be appointed pursuant to the terms of the agreement or by the court in the right
circumstances. However, the act does not grant an automatic right to have a receiver/receiver-manager.
COLLECTION RIGHTS OF SECURED PARTY
61(1) The secured party, either after default or at any time if permitted by the agreement, can collect money from any person obligated
on an account or on chattel paper or any obligor on an instrument that is subject to the security interest.
SALE OF COLLATERAL ON DEFAULT
63(1) Upon default under a security agreement, the secured party may dispose of any of the collateral in its condition either
before or after any commercially reasonable repair, processing or preparation for disposition, and the proceeds of the
disposition shall be applied consecutively to,
(a) the reasonable expenses of the secured party, including the cost of insurance and payment of taxes and other charges
incurred in retaking, holding, repairing, processing and preparing for disposition and disposing of the collateral and, to the
extent provided for in the security agreement, any other reasonable expenses incurred by the secured party; and
(b) the satisfaction of the obligation secured by the security interest of the party making the disposition,
and the surplus, if any, shall be dealt with in accordance with section 64.
63(2) Collateral may be disposed of in whole or in part, and any such disposition may be by public sale, private sale, lease or
otherwise and, subject to subsection (4), may be made at any time and place and on any terms so long as every aspect of the
disposition is commercially reasonable.
63(3) Secured party may delay disposal of collateral for a commercially reasonable time.
63(4) Who has a right to receive notice of sale
63(5) What must be included in the notice (similar to NB requirements). At least fifteen days notice.
63(7) No notice required for emergencies, perishable collateral, etc.
63(8) The secured party may buy the collateral or any part thereof only at a public sale unless the Superior Court of Justice, on
application, orders otherwise
63(9) Where collateral is disposed of in accordance with this section, the disposition discharges the security interest of the secured
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party making the disposition and, if the disposition is made to a buyer who buys in good faith for value, discharges also any
subordinate security interest and terminates the debtor’s interest in the collateral
64 Secured party must account for surplus to debtor and others interested in the sale.
65(1) Compulsory disposition of consumer goods. If the collateral is consumer goods and at least 60% of the debt is paid, then the
secured party has to dispose of the goods within 90 days. Otherwise consumer can sue for damages [??].
TAKING IN PAYMENT
65(2) Except for cases covered by 65(1), the secured party can take the collateral in payment of the debt. Notice must be served on all
the parties mentioned in 63(4)(a)-(d)
65(3) Those receiving notice have fifteen days to object. The fifteen day period can be extended 65(3.1).
65(6) If no effective objection is made, the secured party shall be deemed to have irrevocably elected to accept the collateral in full
satisfaction of the obligation secured at the earlier of,
65(7) When a secured party disposes of the collateral after expiration of the period mentioned in subsection (6) to a buyer who buys
in good faith for value and who takes possession of it or, in the case of an intangible, receives an assignment of it, the buyer acquires
the collateral free from any interest of the secured party and the debtor and free from every interest subordinate to that of the secured
party, whether or not the requirements of this section have been complied with by the secured party.
66 Anyone entitled to receive notice under 63(4), which includes the debtor, can redeem the collateral by tendering payment of all
outstanding obligations, costs, etc.
NBPPSA
Walsh has a great table listing rights of the debtor and of the creditor at 358.
GENERAL
“default” means
(a) the failure to pay or otherwise perform the obligation secured when due, or
(b) the occurrence of any event or set of circumstances whereupon, under the terms of the security agreement, the security
interest becomes enforceable.
56(2) Rights of secured party: If the debtor is in default under a security agreement, the secured party has against the debtor only
(a) the rights and remedies provided in the security agreement,
(b) the rights and remedies provided in [the PPSA],
(c) when in possession of collateral other than investment property, the rights and remedies provided in section 17, and
(d) when in control of collateral that is investment property, the rights and remedies provided in section 17.1.
56(3) Debtor’s rights: If the debtor is in default under a security agreement, the debtor has against the secured party
(a) the rights and remedies provided in the security agreement,
(b) the rights and remedies provided by any other Act or rule of law not inconsistent with this Act, and
(c) the rights and remedies provided in this Part and in section 17 or 17.1.
56(4) The debtor cannot waive any protection under section 17, 17.1 or 57-66 unless provided otherwise in those sections..
57(2) NOTICE PRIOR TO SEIZURE If the debtor is in default under a security agreement, the secured party is entitled
(a) to notify a debtor on an intangible or chattel paper or an obligor on an instrument to make payment to the secured
party whether or not the assignor was making collections on the collateral before the notification,
(b) to apply any money taken as collateral or paid to the secured party under paragraph (a) to the satisfaction of the obligation
secured by the security interest, and
(c) subject to section 59, to take control of any proceeds to which the secured party is entitled under section 28.
57(3) A secured party who enforces a security interest by giving notice in accordance with paragraph (2)(a) shall notify the debtor
within fifteen days after doing so.
57(4) A secured party may deduct reasonable collection expenses from money collected under 57(2) or money held as collateral.
RIGHT TO TAKE POSSESSION
58(2) Subject to subsections (3) to (7), sections 36, 37 and 38, the Bankruptcy and Insolvency Act (Canada) and any other Act or rule
of law requiring a secured party to give prior notice of the intention to enforce a security interest, if the debtor is in default under a
security agreement,
(a) the secured party has, unless otherwise agreed, the right to take possession of the collateral or otherwise enforce the
security interest by any method permitted by law,
(b)-(c) Rules seizure of goods that are difficult/cannot be moved,
(d) Rules for when the collateral is a document of title.
58(3)-(9) Rules preventing seizure of basic necessities of life, with exception for the vendor’s purchase money security interest.
RIGHT TO SELL COLLATERAL
59(2) After seizing or repossessing the collateral, a secured party may dispose of it in its existing condition or after repair, processing
or preparation for disposition.
59(3) The proceeds of the disposition of collateral shall be applied consecutively to
(a)the reasonable expenses of seizing, repossessing, holding, repairing, processing or preparing for disposition and disposing
of the collateral and any other reasonable expenses incurred by the secured party, and
(b)the satisfaction of the obligations secured by the security interest of the party making the disposition.
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59(4) Any surplus proceeds of the disposition of collateral shall be dealt with in accordance with section 60.
59(5) Collateral may be disposed of
(a) by private sale,
(b) by public sale, including public auction or closed tender,
(c) as a whole or in commercial units or parts, or
(d) if the security agreement so provides, by lease.
59(6) If the security agreement so provides, the payment for the collateral being disposed of may be deferred.
59(7) The secured party may delay disposition of the collateral in whole or in part.
59(8) Not less than twenty days before disposition of the collateral, the secured party shall give a notice to
(a) the debtor and any other person who is known by the secured party to be an owner of the collateral,
(b) a creditor or person with a security interest in the collateral whose security interest is subordinate to that of the secured
party and
(i) who has registered, before the notice of disposition is given to the debtor, a financing statement that includes the
name of the debtor or that includes the serial number of the collateral if the collateral is goods of a kind that are
prescribed as serial numbered goods, or
(ii) whose security interest was perfected by possession when the secured party seized or repossessed the collateral,
(c) a judgment creditor whose interest in the collateral is subordinate to that of the secured party and who has registered,
before the notice of disposition is given to the debtor, a notice of judgment that includes the name of the debtor or that
includes the serial number of the collateral if the collateral is goods of a kind that are prescribed as serial numbered goods,
and
(d) any other person with an interest in the collateral who has given a written notice to the secured party of that person’s
interest in the collateral before the notice of disposition is given to the debtor.
59(9) NOTICE PRIOR TO SALE: A notice under subsection (8) shall contain
(a) a description of the collateral;
(b) a statement of the amount required to satisfy the obligation secured by the security interest;
(c) a statement of the sum actually in arrears, exclusive of the operation of an acceleration clause in the security agreement;
(d) a description of any default, other than non-payment, including the term of the security agreement which was breached;
(e) a statement of the expenses referred to in (3)(a) or, where the amount has not been determined, a reasonable estimate,
[(f)-(h) reminder of debtor’s rights and other provisions in the PPSA]
(i) information about the sale of the collateral
59(10) Notice given to non-debtors is different.
59(11)-(12) Notice rules for receivers.
59(14) The secured party may purchase the collateral or any part of it but only at public sale, including public auction or closed
tender, and only for a price that bears a reasonable relationship to the market value of the collateral.
59(15) If a secured party disposes of collateral to a purchaser for value and in good faith who takes possession of it, the purchaser
acquires the collateral, whether or not the requirements of this section have been complied with by the secured party, free from
(a) the interest of the debtor; (b) an interest subordinate to that of the debtor; (c) an interest subordinate to that of the secured party.
and all obligations secured by the subordinate interests shall be deemed to be performed for the purposes of sections 49 and 50.
59(16) Subsection (15) does not affect the rights of a person with a security interest that is deemed by section 74 to be registered under
this Act if the person has not been given a notice under this section.
59(18) Notice under subsection (8) or (11) need not be given in some situations, usually urgency or where notice unnecessary.
60 Secured party must account for surplus to debtor or other creditors.
60(3) Unless otherwise agreed in the security agreement, or unless otherwise provided under this or any other Act, the debtor is
liable for any deficiency. [i.e. you have a follow-up personal action]
TAKING OF COLLATERAL IN PAYMENT
61(1)After default, the secured party may propose to take the collateral in satisfaction of the obligation secured by it and shall give
notice of the proposal to [the debtor and various other people].
61(2) If the interest in the collateral of any person entitled to a notice under subsection (1) would be adversely affected by the secured
party’s proposal, that person may give to the secured party a notice of objection within fifteen days after the notice under subsection
(1) is given.
61(3) Subject to subsections (6) and (7), if a notice of objection is given under subsection (2), the secured party shall dispose of the
collateral under section 59.
61(4) If no notice of objection is given under subsection (2), the secured party
(a) shall be deemed, on the expiry of the fifteen day period or periods referred to in subsection (2), to have irrevocably
elected to take the collateral in satisfaction of the obligation secured by it, and
(b) is entitled to hold or dispose of the collateral free from all rights and interests of the debtor, any person entitled to receive
a notice under paragraph (1)(b) or (c) who has been given the notice and any person entitled to receive a notice under
paragraph (1)(d) whose interest is subordinate to that of the secured party.
and all obligations secured by such interests shall be deemed to have been performed for the purposes of sections 49 and 50.
61(5) A notice of a proposal under subsection (1) and a notice of objection under subsection (2) may be given in accordance with
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section 69 or, if the notice is to be given to a person who has registered a financing statement or a notice of judgment, by registered
mail addressed to the address of that person that was registered as part of the financing statement or notice of judgment.
61(6) The secured party may require any person who has made an objection to the proposal to furnish proof of that person’s interest in
the collateral and, unless the person furnishes the proof within ten days after the secured party’s request, the secured party may
proceed as if no objection had been made by that person.
61(7) On application by a secured party, the Court may determine that an objection to the proposal of a secured party is ineffective
because
(a) the person made the objection for a purpose other than the protection of an interest in the collateral or in the proceeds of a
disposition of the collateral, or
(b) the market value of the collateral is less than the total amount owing to the secured party together with the estimated
expenses recoverable under paragraph 59(3)(a).
61(8) If a secured party disposes of collateral to a purchaser for value and in good faith who takes possession of it, the purchaser
acquires the collateral, whether or not the requirements of this section have been complied with by the secured party, free from
(a) the interest of the debtor and the secured party, and
(b) any interest subordinate to that of the debtor and the secured party,
and all obligations secured by the subordinate interests shall be deemed to have been performed for the purposes of sections
49 and 50.
61(9) Subsection (8) does not affect the rights of a person with a security interest that is deemed by section 74 to be registered under
this Act if the person has not been given a notice under subsection (1).
64 Right to appoint receiver or receiver-manager.
Section 3.7: Extinction of Security Interests
This topic is covered implicitly in the sections above. Below is a summary. It is important to recall that often, rather than
extinguishing an interest, the PPSA will merely make it subordinate to someone else. But this often has the effect of extinguihsing the
interest. An unperfected security interest is unopposable against a trustee in bankruptcy. But the trustee will either sell the property (in
which case it passes free of the security interest), or if the property is not sold, the bankruptcy will discharge the security. So the
subordination effectively extinguishes the unperfected security interest.
A security interest is extinguished if:
- Authorized sale: implicit in both PPSAs that authorized sales pass clear title.
- Unauthorized sale: 30 NBPPSA if the requirements of that section are met; OPPSA 28
- Sale as remedy:
- Negotiable instruments: NBPPSA 31 OPPSA 29
- Bankruptcy: See Chapter 5. Unperfected interests are subordinated to the trustee in bankruptcy (OPPSA ; NBPPSA20)
CHAPTER 4: COMMON LAW (OTHER)
There is a good summary of basic common law property concepts at 99, along with the table below:
Real Estate
Corporeal
Hereditaments
(e.g. freehold estates)
Property
Chattels Real
Incorporeal
Hereditaments
(e.g. easements)
(e.g. leasehold estates)
Chattels (Personal Property)
Choses in possession
Choses in action
(corporeal property)
(incorporeal property)
(e.g. a car, furniture, pets) (e.g. contractual rights)
Section 4.1: Mortgages
We learned relatively little about mortgages in class, and there were almost no readings. What appears below is from the Ziff article at
360, with a little bit of extra information from Roach’s textbook on Mortgages. The Roach text is really good - the first 36 pages give
a great overview of the law of mortgages.
Legal Mortgages
Santley v Wilde on the definition of Mortgage [Slide]: “A mortgage is a conveyance of land or an assignment of chattels as a
security for the payment of a debt or the discharge of some obligation for which it is given… And the security is redeemable on the
57
payment or discharge of such debt or obligation.”
Roach Text, p 5, 7: “The mortgage is a transfer of property which becomes null and void upon payment of the mortgage debt or
discharge of the obligation which motivated the transaction. … The mortgage of land is a financial transaction comprising of two
important elements: a sealed promise for payment of a debt, and the transfer of land subject to a proviso that upon full payment of the
debt, in accordance with the terms of the mortgage, the title to the property will return to the grantor.” The grant of land to the creditor
is absolute - it is an actual title of the freehold estate in the land.
Oosterhoff & Rayner. Anger and Honsberger on Real Property [Slide]: “An equitable mortgage is one that does not transfer the
legal estate in the property to the mortgagee but creates in equity a charge upon the property. It may be created by mortgaging the
equity of redemption… It may also be created when the mortgage is insufficient to transfer the legal estate or because of an incorrect
description. An essential feature of an equitable mortage is a common intention that the property be made security for a debt due or for
future advances. It that intention is lacking, no equitable mortgage can be created.”
A few maxims: (1) “Once a mortgage always a mortgage” can’t change nature of mortgage transaction in order to get rid of equity of
redemption. (2) No “clogs on equity” are allowed - in other words, the creditor cannot do anything that would make it difficult or
impossible for the lender to exercise the equity of redemption.
Type of Mortgage
Statutory Mortgage+Torrens System: Alberta, British Columbia, Saskatchewan, NWT, Yukon.
Mixed: Ontario, New Brunswick Nova Scotia, Manitoba.
Traditional Mortgage+Registry System: Newfoundland and Labrador
4.1.1 Creation
Traditional Mortgage Jurisdictions
If the mortgagor creates a mortgage over the land, this passes title to the mortgagee.
The traditional mortgage and the land registry system go together.
Equitable mortgages can also be created if there is a failed attempt to create a legal mortgage. For example, if legal formalities are not
followed, the legal mortgage cannot be created
Mortgages will need to satisfy all the formalities of a land transfer - normally in writing and in the form of a deed (sealed contract).
Statutory Mortgage/ Mortgage as Charge Jurisdictions
The statutory mortgage is basically a replacement of the traditional common law mortgage, which involves a transfer of title, with a
new idea, closer to a hypothec or charge. This system normally preserves other aspects of mortgage law, by stating that the holder of
the statutory charge has the same rights as a mortgagee or something similar.
The statutory mortgage and the Torrens system go together.
Smith v National Trust Co, 45 SCR 618 [Slide]: “The mortgage contemplated and provided for by the Act is a real security which
derives its efficacy as a security of that character from the statute itself. … It is, consequently, to the statute that we must primarily
resort to ascertain what are the rights and powers incidental to such a security” Don’t analogize it to a real mortgage any more than the
statute commands you to do.
Other Information
The creation of a mortgage on future property is not possible in traditional jurisdictions, since common law did not recognize transfers
of title of things that did not exist. I think you could make an equitable mortgage on future property. In a Torrens system it is
somehow possible to create a future mortgage [class].
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4.1.2 Object and Scope of Security
In traditional mortgage jurisdictions, a mortgage passes title to the land. So anything that becomes a fixture in the land will be subject
to the mortgage. In statutory mortgage/charge jurisdictions presumably the same holds true - you have a charge on the land, so
anything becoming part of the land will be covered by your security. See the
4.1.3 Effects of Security
If the mortgagee remains in possession, he has a duty not to damage the property, nor make use of it in a way that reduces its value for
the mortgagee (the tort of waste, an example of which would be cutting down valuable timber) unless the mortgage states that the
mortgagor is “unimpeachable for waste” (that is, gives permission to commit what would otherwise be waste.
4.1.4 Opposability and Priority
Because the mortgagee holds the legal estate in the land, the common-law position is that it is opposable to anyone. The mortgagor’s
equity of redemption would be vulnerable to defeat if the legal estate is sold to a good faith third party without notice though.
Presumably statutory mortgages are not subject to this kind of defeat, particularly since they’re part of a Torrens system.
Mortgages rank in the order of their creation. Keep in mind that in traditional mortgage jurisdictions, the second mortgage and any
mortgages after that will be equitable mortgages, since the second mortgage is a mortgage on the equity of redemption, and any
subsequent mortgage will be a mortgage on the equity of redemption of the equity of redemption. This process can theoretically go on
forever.
Why would anyone accept a second mortgage? That’s a good question. In general there are only two scenarios that would incentivize
a lender to offer a second mortgage:
The first is if the mortgagee has made at least some payments on the first mortgage, since the equity of redemption
would then have economic value. Imagine the mortgagor borrows $1 million to buy a building worth $1 million. At this point
an equitable mortgage would be the right to assert an equity of redemption to buy a $1 million building for $1 million. Not
too interesting for a lender, since there’s no value to that right. But if the mortgagor has paid off half the loan, then the equity
of redemption is a right to buy a $1 million building for $500,000 (the remaining loan funds). That is a right with a value o f
$500,000.
The second is if the size of the loan secured by the first mortgage was less than the value of the land. The reasoning is
exactly the same as above. If the mortgagor secured a $300,000 loan against a building worth $1 million, then the second
mortgage is the right to acquire a building worth $1 million for $300,000. So there is up to $700,000
The economic rationale here is to conceive of the equity of redemption as a right to acquire the mortgaged property. This right has
value, and can be used to secure a loan, to the extent that the price of the equity of redemption is less than the value of the building.
Mortgagor-----> 1st Mortgagee (Mortgagee holds legal estate)
|
Mortgagor holds Equity of redemption (EOR) on legal estate -----> 2nd mortgagee (Equity of redemption)
|
Mortgagor holds EOR on the EOR to the legal estate-----> 3rd Mortgagee (holds EOR on the EOR to the legal estate)
|
And so on…
4.1.5 Remedies and Execution
Mortgagees have access to a wide variety of remedies. These remedies may be exercised concurrently [365], although often the effect
of pursuing one remedy is to foreclose others (the mortgagee can’t go into possession once the property is sold, for example). Alberta
law states that once a mortgagee has paid off any arrears, the mortgage is in good standing, and any payments due under an
acceleration clause do not count for the purpose of default [365]. Consumer protection laws and maximum interest rate laws may
provide some protection to mortgagees [365-366].
i) Action on the Covenant [360]
The mortgage is the security transaction itself, which is normally accompanied by a contract. The contract and the mortgage are
59
distinct, even if both are needed to make a sensible business transaction. The distinct nature of the contract means that any default can
be treated as a normal breach of contract.
Alberta passed legislation preventing action on the covenant, so that the mortgagee only has mortgage-based remedies, and no
personal ones [360].
ii) Take Possession [361+]
Because the mortgagee holds the legal estate in the land, the mortgagee technically always had a right to possession. However, almost
all mortgages include an “attornment clause” giving possession back to the mortgagor, typically as a tenant of the mortgagee.
Additionally, an equitable mortgagee does not have a right to possession, since the equitable mortgage does not involve a transfer of
the legal estate. Thus where there is an attornment clause, or in the case of an equitable mortgage, the mortgagee must seek a court
order to be put in possession.
Once a mortgagee is in possession, he has a right to collect rents from tenants whose leases predate the mortgage, and to terminate
leases that were granted after the mortgage by the mortgagor (although some provinces, including Ontario, protect lessees in this
situation ). The mortgagor is also entitled to charge reasonable expenses to the mortgage debt. The scope of “reasonable expenses” is
quite wide: necessary repairs and even the cost of improvements to the property, as long as the cost of the improvements do not make
it effectively impossible for the mortgagor to pay off the mortgage.
A mortgagee in possession has a duty to act as a reasonable owner, and to protect the equity of redemption of the mortgagor.
iii) Appoint a Receiver [362]
The appointment of a receiver is subject to the same rules that apply when the mortgagee takes possession directly. The right to
appoint a receiver may be included in the mortgage covenant, or it may be sought by court-order. In many cases court-appointed
receivers are preferable, since they immunize the creditor and receiver from certain forms of liability. In general, receivers are only
appointed by courts where the property is an income-producing commercial property. Residential homes aren’t the proper subject of a
receivership.
iv) Foreclosure [362+]
Foreclosure is the remedy by which the mortgagee becomes the owner of the property, so it is equivalent to civilian taking in payment.
It is obviously a “blunt instrument” that tends to either over- or under-compensate the mortgagee [363].
The foreclosure procedure is quite cumbersome in most jurisdictions, so much of the time it is preferable for a creditor to sell the land
instead. The right to foreclose first arises when there is a breach of the mortgage’s terms. The mortgagee may then seek an order of
foreclosure as long as the default continues. The mortgagor is generally given a wide window of time during which he can either
transform the foreclosure into a sale, or redeem the mortgage. Typically this means when the mortgagor asks for an initial order f
foreclosure, the court grants a nisi (temporary) order. This order gives the mortgagor a certain time to cure the default, after which the
mortgagee may proceed by foreclosure. Even after this period though, the equity of redemption can still be exercised, since the court
has discretion to allow the mortgagor to exercise the equity of redemption based on various factors [363]. However, keep in mind that
an equity of redemption, like all equitable interests, is extinguished by a sale to a bonafide purchaser for value without notice.
Foreclosure “operates downwards to destroy the equity of redemption and any interests [inferior to the foreclosing mortgage] founded
on that equity” [363]. This gives inferior mortgagees the incentive to pay off the mortgage of superior creditors, in order to step into
their shoes and protect their own interest in the land: “redeem up, foreclose down” [363].
iv) Sell the Property [363+]
The right of sale is used far more often than foreclosure. “Just as with foreclosure, the rules for court-ordered sales are somewhat
different across Canada. However, the essence of all the schemes is that there is a judicial power to either pursue a judicial sale or to
convert a foreclosure action into one allowing for sale, frequently with foreclosure as a backstop if the attempt to sell fails.” [363].
Interestingly, it is permissible for a mortgagee to insert a clause stating that the mortgagee has the right to sell the mortgagor’s equity
of redemption. This is allowed, and is not considered a clog on the equity of redemption, as long as the power of sale is conditional on
60
the default of the mortgagor [363]. This remedy is severely restricted in Alberta [363-364]. Duties of a mortgagee selling the property
are ill-defined [364], although it is known that the mortgagee becomes trustee for any proceeds beyond what is needed to pay off the
mortgage, and the proceeds must be accounted for “fully, promptly, and accurately” [364]. Canadian courts sometimes impose a duty
of prudence and diligence, although the British position is that only a duty of good faith applies [364].
The Alberta “Rice order” approach is detailed at [363].
4.1.6 Extinction
Mortgages are extinguished when the loan is repaid and the legal estate is conveyed back to the debtor. They are also extinguished by
foreclosure, or sale by the creditor. An unauthorized sale by the creditor to a good faith purchaser for value without notice can also
extinguish the mortgage, since this will extinguish the equity of redemption.
Section 4.2: Pledge
This is the oldest secured transaction known to the common law. The debtor gives property to the lender, who holds that property as
collateral for the debt. If the debtor fails to discharge his obligations, the lender can sell or keep the pledged property.
Section 4.3: Liens
Liens1 began as a primitive form of security developed by the early common law, and were later used by equitable courts as well.
There is very little in common between common-law and equitable liens beyond their name. The terminology of “lien” was taken up
and used in various statutes like the provincial Mechanic’s Lien Act (called the Construction Lien Act in Ontario) and the Repair and
Storage Lien Act. Some of these acts modify the law of common-law liens, but others create new kinds of security interest that have
nothing to do with common-law concept of a lien (like the Mechanic’s Lien Act). So keep in mind that although various statutes use
the term “lien,” not all of them are using it to describe a possessory security interest. Liens can also be created contractually.
Liens arising by rule of law (so common-law and equitable liens) or by statute (assuming that statute doesn’t subordinate itself to the
PPSA). Contractual liens obviously are subject to the PPSAs.
Sources for this section: Alberta Law Reform Institute, A Report on Liens; Walsh’s PPSA Textbook (2012 edition, pages 506+); Ziff,
Property Law Reader (1027+); Oosterhoff on Trust (for equitable liens).
4.3.1 Common-law Liens
A common-law lien gives a creditor the right to retain property belonging to the debtor until the debtor pays a debt owed to the lienholder. They are non-consensual and do not require the debtor’s consent. Common-law liens are not subject to the PPSAs (NBPPSA
4(a); OPPSA 4(1)(a)).
Common-law liens can be seen as the functional equivalent to the civil-law priority given to persons with a right to retain moveable
property until paid (2651(3) CCQ, which applies to rights arising under articles 2003, 2058, 2185, 2293, 2302, 2324, etc).
The property must already be in the creditor’s possession (i.e. a lien is a right to retain property, not to seize it), and the debt secured
by the lien is almost always related to the retained property itself (e.g. the costs of repairing a piece of property). CL liens are
possessory, and the lien is normally lost if the creditor loses possession of the property for any reason, and reacquiring possession does
not reinstate the lien.
Liens may be general or specific. Specific means that a lien secures only property related to a particular debt. General means that the
lien covers all property belonging to the debtor that is currently in the creditor’s possession, regardless of its connection to the debt
which gave rise to the lien. Most common-law liens are specific.
Example: A jeweler performs repairs on a piece of jewelry and appraises another piece belonging to the same person. The
repair work generates a specific lien over the jewelry that was repaired. As his lien is specific, the jeweler can only retain the
repaired jewelry, and not the appraised jewelry, even though both are in his possession. Even if unpaid, the jeweler must
1
I’ve heard this word pronounced both “lean” and “lee-in” by profs. “Lean” seems to be the more popular, but I have no idea which is correct.
61
return the appraised jewelry to the client if asked, since a specific lien only attaches to the repaired jewel. If the lien were a
general one, the jeweler could have retained both jewels, since the lien would attach to both.
The lien was originally a purely passive right to retain property, without a power of sale. Nowadays, sale powers are often granted by
statute (see below).
Holders of common-law liens: (1) innkeepers (lien over property brought to hotel, including guests’ vehicle, until hotel fees are paid);
(2) common carriers (lien over the property that was to be delivered for delivery charges); (3) artificer’s/mechanic’s lien (despite the
name, it applies to anyone who improves or repairs property (but not just maintaining property in its current state, like feeding
animals) has a lien over that property for the repair/improvement charges).
Other classes of persons have liens, such as a solicitor’s lien over client documents as long as legal fees remain unpaid, or a
stockbroker’s lien over client’s securities as long as brokerage fees remain unpaid. However, it’s not clear if these liens are considered
common-law liens, or those arising from trade usage. This is important, because liens arising from trade usage are contractual liens
and thus subject to the PPSAs, but common-law liens are not (NBPPSA 4(a); OPPSA 4(1)(a)).
4.3.2 Contractual Liens
The parties to a contract can agree to give a creditor the power to retain certain property until payment. This right will be governed by
the terms of the agreement, which normally means it will be treated like a common-law lien, rather than an equitable or statutory one.
Contractual liens are subject to the PPSAs, since they create security interests and are not included in the exception for liens arising by
statute or operation of law.
A contractual lien can be either express or implied. Implicit contractual liens are known as “liens arising by usage of trade” - in other
words, liens that will be implied into a contract because they are customary in that industry, and reasonable persons in that industry
would assume that the lien will be granted unless the contract provides otherwise. Hence, if such a usage is proved, the lien will be
implied into the contract, unless it expressly excludes such a lien. However, courts generally require strict proof that such a trade
usage exists. Rights of sale may also be implied by trade usage (stockbroker’s lien apparently).
4.3.3 Statutory Liens
Various statutes create security interests called “liens” although not all of them actually resemble common law liens. Statutory liens
are not subject to the PPSAs unless the statute granting them expressly states that they are subject to the PPSA (NBPPSA 4(a);
OPPSA 4(1)(a)).
Below are some of the more important statutory liens still in force, but there are others, such as those in favour of forestry workers,
warehouse keepers, unpaid taxes, etc. Although there is some consistency between provinces over what types of statutory liens exist,
there have also been some very odd lien statutes, like Alberta’s Beet Lien Act (SA 1926, c B-3… sadly repealed). The proliferation of
statutory liens was one of the motivations for PPSAs.
Construction Lien Act (Ontario) ; Mechanic’s Lien Act (New Brunswick)
These acts use the term “lien,” but they create a non-possessory security over land, so really they have nothing to do with liens. A very
good summary of the Ontario Construction Lien Act is “The Construction Lien Act” by Don Short (no relation) of Fasken Martineau.
Google the title and it will show up as a free PDF online. The secured transaction stuff is from pages 1-6 and 11-14.
The Ontario CLA is interesting in that it also creates deemed trusts, like a Quistclose trust, over all money received by a building’s
owner that is intended to finance construction (s 7-13). The money is held in trust to pay the contractor (s 8). Turning back to liens, the
CLA creates the following lien: “A person who supplies services or materials to an improvement for an owner, contractor or
subcontractor, has a lien upon the interest of the owner in the premises improved for the price of those services or materials” (s 14(1)).
This is treated like a charge, rather than a true lien, since obviously the suppliers aren’t in possession of the land or building. The lien
expires under certain conditions (s 31) unless it is registered against the land in a land registry (s 34). Even after registration, if you
remain unpaid you have to sue within two years of registering your lien or it expires (s 37). Suing over a CLA lien follows a simplified
procedure (s 50-67) and can be heard by a master rather than a judge. You can order the property encumbered by the lien to be sold if
you win (s 62(5)), or you can get a personal judgment (s 63).
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The New Brunswick MLA is a lot shorter and simpler. It gives a lien to anyone who “does, or causes to be done any work upon or in
respect of an improvement, or furnishes any material to be used in an improvement” to land (s 4(1)). The lien covers wages or the
price of the work or material, as the case may be, and encumbers the estate or interest of the owner of the land (s 4(1)). This lien has a
super-priority over almost all other interests in land (s 9(1)). MLA lienholders rank equally among each other (s 10(1)), except for
liens over wages, which outrank other types of MLA liens (s 10(2)). While the lien exists, no part of the building can be removed to
the prejudice of the lienholder. Lienholders can ask that the owner pay them directly, rather than paying the contract (s 16). Liens must
be filed promptly, or the right to the lien is lost (s 24, 25). Filing allows ninety days to start litigation to recover the money (s 27), this
litigation can be registered against the property (s 28). In contrast to Ontario, the procedural vehicle is the normal rules of court with a
few modifications (s 33). Judgment on a MLA lien “may” result in sale of the property (s 44). but always results in personal liability
for the amounts secured by the lien (46).
Repair and Storage Liens Act (Ontario) ; Liens on Goods and Chattels Act & Storer’s Lien Act (New Brunswick)
The Ontario RSLA confers lien on anyone who stores or repairs personal property with the understanding that they will be paid for the
storage/repair (s 1, 3-4). These liens outrank the interests of “all other persons” in the article (s 6). The lien is specific (s 3-4) and lost
on dispossession (s 5). However, after dispossession, a new, non-possessory lien emerges (s 7), although only if the lienholder has a
written acknowledgement of debt from the debtor (s 7(5)). The non-possessory lien has to be registered under the PPSA to be
enforceable against third parties (s 9-10). The lienholder has a power of sale, but must give notice to various people (s 15-16). The
lienholder can also “foreclose” and just keep the article (s 17). The article can also be donated to charity (s 19).
The New Brunswick LGCA is essentially identical to the “repair” section of the Ontario RSLA. It’s not clear whether it is subject to the
PPSA, since section 12 states “12This Act applies to liens only where there is no provision in any other Act for sale or for determining
the rights of the owner and the bailee”. Presumably though a “bailment” does not secure an obligation, since the bailee has to return
the property when asked by the bailor. Which means that LGCA liens are not subject to the PPSA.
The New Brunswick SLA is a very short statute. It confirms the existence of a lien for persons who store goods in return for payment
(s 2), and gives them a power of sale (s 4).
4.3.4 Equitable Liens
This is a confusing kind of lien, since there seem to be two very different conceptions of what it is:
(1) An equitable lien is a lien over an equitable interest (just as common-law liens would be liens over common-law property
rights), in which case there are very few examples of equitable liens. (See Black’s Law Dictionary for some examples).
(2) An equitable lien is a kind of remedy granted by the courts when there has been a breach of an equitable obligation. If a
trustee stole $40,000 of trust money and used it, together with his own money, to buy a $100,000 home, the court could grant
an equitable lien of $40,000 on that house in favour of the trust beneficiary. (this was Prof Lionel Smith’s view)
I don’t have time to figure out which of these views applies in Canada, and I really doubt we need to know this anyways. One thing
everyone agrees on is that equitable liens are non-possessory, in contrast to common-law liens. Equitable liens are not subject to the
PPSAs (NBPPSA 4(a); OPPSA 4(1)(a)).
Section 4.4: Miscellaneous Common-law Security Interests
Bank Act Security
Pursuant to the Bank Act (Canada), Schedule I and Schedule II banks also have the ability to take security from certain borrowers over
certain property specified in the Act, such as raw materials, work in progress or finished goods in inventory of businesses. Certain
formal requirements must be met in order to take Bank Act (Canada) security, and a separate registration system is involved.
Bank Act security was created by the federal government to fill a void in Quebec law in the 19th century, namely the lack of a nonpossessory security interest. Banks obviously found it hard to operate without such a security interest. Now that Quebec allows
hypothecs without dispossession, there isn’t the same need for Bank Act security, but it has persisted through inertia. Banks are no
longer allowed to take out both federal Bank Act and provincial security on the same property.
Claire Gowdy’s summary contains good summaries of Bank Act cases scattered throughout the materials. In particular, section VI.2.E
deals with conflicts between the Bank Act and the PPSAs.
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Distress
At common law, a landlord could seize chattels that were on the leased property and sell them to make up for an missed rent
payments. This was a more powerful form of security than a lien, since it had an inherent power of sale. Distress is still available for
non-residential leases in common law Canada. It is an alternative to ending the lease and suing the debtor or re-leasing the property.
Charges
The charge is fairly close to the hypothec concept: it is a non-possessory real security that follows the property. It is the creation of a
new interest in the property, rather than the transfer of existing interest like a mortgage. There are probably deep historical reasons
why the common law used mortgages instead of charges.
The holder of a charge can seize and sell the property that is charged against the debtor’s obligation [98]. The holder has no right to
possession of the property, since charges do not convey an estate it land or otherwise pass title [361]. Beyond that, I haven’t been able
to find out much information about charges, despite the fact that “floating charges” came up a lot in our readings and are a well-known
financing technique.
Equitable charges suffer from similar problems to equitable liens. It’s not clear if an equitable charge like a common law charge, but
in equity, or whether it’s a kind of remedy granted by a court. Some sources seem to confuse equitable charges with constructive or
resulting trusts. Again, no time to research this in depth.
Section 4.5: Seizure of Property in Common-law Jurisdictions
We didn’t cover this at all in class, but the relevant acts in both Ontario and New Brunswick are the Creditors’ Relief Act (RSNB
1973, c C-33; SO 2010, c 16, Sch 4) and the Execution Act (called the Memorials and Execution Act, RSNB 1973, c M-9 in New
Brunswick; RSO 1990, c E.24).
The Execution Acts are relatively short (30-40 sections, depending on the province) and set out what property may be seized, what
property is exempt, as well as the procedure for carrying out a seizure. The Execution Acts cover sale of both land and personal
property to satisfy judgment creditors.
The Creditors’ Relief Acts are also short (20-40 sections), and govern the distribution of money to creditors, as well as any procedural
issues or disputes that might arise during this process. The Ontario Act is only 20 sections and is relatively straightforward; the New
Brunswick Act is 40 sections and seems to deal with a lot more issues, like registering judgments in the PPSA registry. These Acts
deal with the judicial sale of property and distribution of the proceeds among creditors. There are rules on priority and payment, and
the proof of claims by persons claiming to be creditors. The Acts also deal with garnishing wages or other income sources in order to
pay debts.
CHAPTER 5: BANKRUPTCY AND INSOLVENCY
Section 5.1: Introduction
The readings we have for bankruptcy are not great. The Auger article leaves out an entire category of creditors, for example (deferred
creditors)! We also don’t read Re Giffen, which is the leading SCC case on the interaction between the PPSAs and the BIA. Most of
what appears in this section is taken from my Bankruptcy and Insolvency Law summary.
5.1.1 The Bankruptcy and Insolvency Act
This is Canada’s oldest bankruptcy statute (dating from 1919), and the one that deals with core issues of liquidating insolvent
companies’ and persons’ estates. Proposals were added later, so that a debtor could avoid liquidation and the full brunt of bankruptcy
by offering a deal to creditors, but the BIA still remains liquidation-focused. Once you have gone through bankruptcy, you are fully
discharged and free from all pre-existing debts and liabilities that were considered “provable claims”. The BIA is applicable to almost
any entity in Canada except certain kinds financial services companies, which must use the Winding Up and Restructuring Act.
The main interest of the BIA for secured creditors is (1) they can face a stay of proceedings, which prevents them from exercising
their rights in some circumstances; (2) they have a right to be paid in preference to other creditors; (3) section 244 impacts their
ability to exercise certain rights against insolvent corporations.
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A note on terminology: “insolvent” means “the factual situation that arises when a debtor is unable to pay creditors.” (Century
Services v Canada (Attorney General), 2010 SCC 60). By contrast “Bankruptcy” means “the procedure by which an insolvent
debtor’s property is coercively brought under a judicial administration in the interests primarily of the creditors.” (Sam Levy &
Associates v Azco Mining, SCC). In other words, bankruptcy is a legal state attached to a debtor by the BIA itself, while insolvency is
the underlying factual state of being unable to pay one’s debts.
DC – Banque Canadienne Impériale de Commerce c Marcano, 1990 QCCA [396]
Facts: A married couple, Rochon-Crête and Crête, owed money to CIBC. CIBC got a personal judgment against them, and registered
the judgment against their house. Rochon-Crête and Crête sold their house to a third party, Marcano. They then went bankrupt and
were discharged from their bankruptcy a little while later. A discharge from bankruptcy clears your outstanding debts and obligations
(BIA 178(2)). CIBC apparently did not participate in the bankruptcy process. CIBC now attempts to enforce it’s legal hypothec
against Marcano.
Issue: Did the discharge from bankruptcy extinguish the obligation to which CIBC’s hypothec was accessory?
Holding: Yes.
Reasoning: CIBC makes two ridiculous arguments: (1) that the discharge does not extinguish the debt, but merely makes it
unenforceable against the debtor, so that CIBC can proceed against Marcano, and (2) a bankruptcy discharge is not a mode of
extinguishing obligations under the CCQ, so their claim still exists. As to the first argument, the bankruptcy regime discharges the
debt; this is clear and consistent case law. As to the second argument, it is well known that hypothecs are accessory rights. Thus if the
underlying debt is extinguished, so does the hypothec. While it is true that the list of causes of extinction of obligations does not
mention bankruptcy, doctrine is unanimous that this list is not closed. Furthermore, there would be no reason for the province to
include federal law in the CCQ.
Ratio: (1) The list of causes of extinction of obligations under the CCQ is not closed, and it includes bankruptcy discharges among
others; (2) Reaffirmation of the accessory character of hypothecs.
Comment: The CCQ now provides for other modes of extinction of hypothecs beyond those in the CCQ at 2802, although the article
on causes of extinction of obligations (1671 CCQ) is no clearer now than it was under the CCBC.
DC – Syndic d’Ouellet, 2004 SCC [428]
Facts: O bought some goods from a merchant under an installment sale contract. O then went bankrupt. The rights were never
published within the delay provided by 1745 CCQ. When creditor attempted to prove the claim for the goods in bankruptcy, O’s
trustee stated that because there was no publication, the claim was invalid and would not be honoured.
Issue: Is the creditor’s claim opposable to the trustee?
Holding: Yes.
Reasoning: It is important not to confuse an installment sale with a security in the sense of the CCQ, even though such creditors are
treated as secured by the BIA. Under the sales contract with O and the creditor, the creditor retained ownership of the property. The
publication requirements of 1745 are directed only at making the retention of property rights by the creditor effective against third
parties. Yet he trustee in bankruptcy is not a third party, since he steps into the shoes of the debtor. Thus even though there was no
publication, the creditor can still claim proprietary rights in the goods against the trustee.
Ratio: (1) Reserve of property rights under a conditional/installment sale contract will operate against the trustee in bankruptcy even
without publication; (2) Just because a claim is treated as a secured claim under the BIA does not mean that the CCQ rules on
securities apply if they would not otherwise apply.
DC – Syndic de Boisclair, 2001 QCCA [435]
Facts: Boisclair signed a loan agreement with BMO in which he gave irrevocable authorization to MBO to apply the product of his
RRSP to any loan deficiency that might arise. The loan was for $58,000 which would be applied towards a RRSP with BMO. When
Boisclair went bankrupt, the trustee asked for the money in the RRSP. BMO refused, invoking several different grounds: mandate,
assignment, etc. There’s also a corporate law issue about BMO’s divisions selling certain rights related to the RRSP between each
other.
Issue: Does BMO have a right to the RRSP as a secured creditor?
Holding: No.
Reasoning: BMO drafted the loan agreement, so there is no reason to interpret the “irrevocable authorization” as an assignment. BMP
therefore received no property rights in the RRSP. Nor can BMO reserve a right to become the owner of the RRSP, since this is
forbidden under 1801 CCQ. That leaves securities, which can be either priorities or hypothecs. There is no priority which might apply
here. Nor has BMO presented any proof of it’s registration of a hypothec or of taking steps necessary to render the hypothec over a
claim opposable to third parties. Thus it has no right to the RRSP and must give the money to the trustee.
Ratio: Provincial law determines the kinds of security interests which can be recognized under the BIA.
Comment: There are some important droit transitoire issues I’m glossing over.
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5.1.2 The Companies’ Creditors Arrangement Act
This is a rescue-style piece of legislation that was introduced in the 1930s. Its goal is to keep the company running by shielding it from
creditors long enough to come up with a plan to satisfy its existing liabilities. These plans generally involve compromising its debts
down from 100% to some lesser percentage (20%-50% being typical). In some cases money debts will be replaced with equity in the
debtor company, wiping out existing shareholders. Creditors typically agree because the alternative is bankruptcy and recovering close
to nothing.
It has numerous advantages for a company that invokes CCAA protection, including a stay of proceedings by all creditors
(including secured creditors) or any other lawsuit. It is more expensive to administer, since there is a lot of court-time, and the
debtor corporation has to hire a “Monitor” (typically an accounting firm) to supervise all of its activities during the CCAA process.
The CCAA is a skeletal statute, so courts have granted themselves wide-ranging discretion to make whatever orders seem appropriate
in the circumstances. The CCAA is available only to corporations, who must also have debts of more than $5 million.
Realistically though, we aren’t covering this statute at all in Secured Transactions.
5.1.3 The Winding-up and Restructuring Act
Not to be confused with provincial “Winding Up Acts” that deal with the voluntary dissolution of solvent companies.
The Federal WRA applies to certain kinds of companies: any corporation incorporated under federal jurisdiction, banks, trust
companies, insurance companies, some loan companies, some building societies, and “incorporated trading societies.” That said, it
does not apply to any railway or telegraph company, or any company incorporated under the Canada Business Corporations Act [so
the “any corporation incorporated under federal jurisdiction” part loses a lot of its scope… I think this would just leave federal
corporations incorporated under a Special Act of Parliament – Mike].
The WRA is not a preferred method of dissolving an insolvent corporation and paying off its debts in an orderly manner, especially
since it’s been left out of the last few rounds of statutory modernization, so it is ambiguous and archaic in many places. However, it’s
obligatory for the specific companies listed above [although I’m not sure why – Mike]. A company cannot opt for the WRA if BIA
proceedings are already underway (s 213).
5.1.4 The Wage Earner Protection Program Act
Enacted in 2008, WEPPA provides a mechanism to protect wage earners of bankrupt corporations and also addresses the power and
knowledge imbalance between individual employees and their employer’s creditors. Changes to the BIA following the introduction of
WEPPA give employees a first rank secured claim of $2,000 per employee over the current assets (inventory, accounts payable, cash)
of the employer who is bankrupt or subject to receivership (81.3 BIA for bankruptcy, 81.4 BIA for receivership). This is a secured
claim on very liquid assets that outranks all other claims, so there’s a high chance of full recovery. However, WEPPA allows the
employee to assign this bankruptcy claim to the government in return for a cash payment. The employee gets guaranteed cash
immediately, while the government takes the risk of non-recovery and also can aggregate all the employee claims together until they
are worth litigating to recover. Interestingly, the government pays a larger amount to the employee (currently over $3,000) than it
gains in terms of secured claims (still $2,000). Presumably this is to encourage employees to use WEPPA. WEPPA is a two step
process:
(i) Workers whose employer is bankrupt or subject to a receivership submit their claims for eligible wages to Service Canada
for payment. They currently receive up to $3,250.
(ii) The federal government then assumes the interests of the wage earners against the estate of the employer. This becomes a
super-priority secured claim ahead of all other creditors. The priority charge has a limit of $2,000 per employee and is over
the current assets of employer only.
For more details on this process, see sections 4.3(ii) (super-priorities) and 4.3(iii) (secured claims).
5.1.5 Constitutional Issues
While the federal government has jurisdiction over “Bankruptcy and Insolvency” by virtue of s 91(21) of the Constitution Act, 1867,
its legislation often interacts with provincial legislation passed under the “property and civil rights” power of 92(13). Section 3 of the
Bankruptcy and Insolvency General Rules also provide that “In cases not provided for in the Act or these Rules, the courts shall
apply… their ordinary procedure to the extent that that procedure is not inconsistent with the Act or these Rules.”
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Essentially, the provinces can define who owns property, who has a security right (lien, hypothec, etc). But only the BIA can set
priorities among creditors, and only the BIA can classify creditors as secured/unsecured.
Concurrent Remedies
BIA 72(1) “The provisions of this Act shall not be deemed to abrogate or supersede the substantive provisions of any other law or
statute relating to property and civil rights that are not in conflict with this Act, and the trustee is entitled to avail himself of all rights
and remedies provided by that law or statute as supplementary to and in addition to the rights and remedies provided by this Act.”
(2) BIA orders, assignments, and other documents aren’t covered by provincial laws on the registration of liens, charges, etc, unless
the Act otherwise specifies.
Husky Oil v MNR (1995 SCC): This case sets out six general principles governing the interaction of federal and provincial laws in the
realm of bankruptcy:
(1) provinces cannot create priorities between creditors or change the scheme of distribution on bankruptcy under s.136(1)…;
(2) while provincial legislation may validly affect priorities in a non-bankruptcy situation, once bankruptcy has occurred s.
136(1) of the BIA determines the status and priority of the claims specifically dealt with in that section;
(3) if the provinces could create their own priorities or affect priorities under the Bankruptcy Act this would invite a different
scheme of distribution on bankruptcy from province to province, an unacceptable situation;
(4) the definition of terms such as “secured creditor”, if defined under the Bankruptcy Act, must be interpreted in bankruptcy
cases as defined by the federal Parliament, not the provincial legislatures. Provinces cannot affect how such terms are defined
for the purposes of the Bankruptcy Act;
(5) in determining the relationship between provincial legislation and the Bankruptcy Act, the form of the provincial interest
created must not be allowed to triumph over its substance. The provinces are not entitled to do indirectly what they are
prohibited from doing directly; and
(6) there need not be any provincial intention to intrude into the exclusive federal sphere of bankruptcy and to conflict with
the order of priorities of the Bankruptcy Act in order to render the provincial law inapplicable. It is sufficient that the effect of
provincial legislation is to do so.
The fifth and sixth propositions bear a close resemblance to the doctrine of colourability, but with two fundamental
differences. First, the doctrine of colourability is a concept which only applies in assessing the pith and substance of the impugned
legislation whereas propositions 5 and 6 continue to apply after the validity of the impugned provincial law has been determined.
None of the quartet cases was concerned with colourable provincial legislation. Second, a legislative intention to intrude into an
exclusive federal sphere is neither necessary nor sufficient to scrutinize the applicability of provincial law. The intrusion, and not the
intention to intrude, is determinative for division of powers purposes.”
Robinson v Countrywide Factors (Majority judgment): Four things stand out. First, s. 91(21) is an exclusive federal power; second,
it is a power confided to the Parliament of Canada notwithstanding anything else in the Act; third, it is a power, like the criminal law
power, whose ambit, does not lie frozen under conceptions held of bankruptcy and insolvency in 1867; and, fourth, the term
“insolvency” in s. 91(21) has as much an independent operation in the reservation of an exclusive area of legislative competence to the
Parliament of Canada as the term “bankruptcy.”
CL – Robinson v Countrywide Factors, 1978 SCC
Facts: R is trustee in bankruptcy of K Co. Prior to R taking over, K Co made certain transactions with Countrywide. These
preferences were disputed by R under the province’s Fraudulent Preferences Act.
Issue: (1) Is the Fraudulent Preferences Act ultra vires? (2) If it is not, is it nonetheless rendered inoperant be a conflict with the BIA?
Holding: (1) No; (2) No.
Reasoning: Majority: The provincial legislation is valid (not much reasoning). The BIA, by granting a three-month window to reverse
transactions, did not intend to prohibit any longer window under provincial law. Hence there is no operational conflict here.
Concurring Minority: It is impossible to define the scope of valid provincial jurisdiction by looking merely to the federal bankruptcy
and insolvency power and giving the provinces “whatever is left.” Provinces need to be able to legislate over insolvency in the nonstatutory sense. They also need to be able to create coherent property and civil rights regimes, which will interact with the statutory
scheme. The Fraudulent Preferences Act is a valid property and civil rights law.
Dissenting Minority: The provincial legislation makes insolvency the trigger of certain reversible transactions. This is a direct invasion
of the federal competency over bankruptcy. The provincial legislation allows a creditor to interfere with the eventual distribution of
assets by reversing transactions that would not otherwise be reversible under the BIA. Hence it is ultra vires: “No more under
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bankruptcy and insolvency law than under the criminal law can a Province make unlawful what is lawful under valid federal
legislation, nor make lawful what is unlawful under valid federal legislation.”
Ratio: Provincial Fraudulent Preferences Acts are intra vires and applies concurrently with the BIA.
Comment: Fraudulent Preferences Acts or Fraudulent Conveyances Acts allow the trustee to set aside certain transactions if they
seems suspicious and were undertaken by a bankrupt corporation within a certain amount of time prior to bankruptcy. The time period
is longer than the time period available under the BIA.
CL – Pacar Financial Services v Sinco Trucking, 1989 Sask CA
Facts: P leased four trucks to S, and never perfected its lease as required under the PPSA. S leased and then later sold two trucks to
third parties. The third parties paid fair market value and had no notice of P’s interest in the trucks. S went bankrupt, and now both P
and the third parties claim the trucks from the estate of the bankrupt.
Issue: (1) Is the PPSA ultra vires? (2) If it is not, is it nonetheless rendered inoperant by a conflict with the BIA?
Holding: (1) No; (2) No.
Reasoning: (1) The PPSA is legislation concerning property and civil rights, since it deals with broad questions of property and
security interests. It is not disguised or colourable bankruptcy legislation. Furthermore, relying on Robinson, the court reasons that if
the trustee in bankruptcy can rely on provincial fraudulent preferences legislation, then the trustee can also use any other beneficial
aspects of provincial law without creating a constitutional conflict. (2) P argues that it is a secured creditor under the BIA, and that the
provincial legislation robs it of its secured status. However, applying the definition in the BIA, a lease is not a security interest for the
BIA’s purpose. Furthermore, the trustee has control over “property of the debtor” and this includes leased items. Lastly, the BIA does
not define secured creditors rights, it merely preserves them in bankruptcy. Under provincial law, P had no security rights because the
lease was unperfected.
Ratio: (1) The BIA merely preserves the rights of a secured creditor in bankruptcy, and the “determination of what rights a secured
creditor has in the collateral is made under provincial law”; (2) Legal integration of provincial and federal laws in this field is “not
only permissible, but desirable and essential.”
CL – Re Griffen, 1998 SCC
Facts: Telecom Leasing Co leased a car to a company, who then leased it to G, an employee. The lease was for more than one year
and allowed G to purchase the car at the end. TLC was not a party to the lease, but it played an active role in the terms and received a
deposit. TLC was also described as the lessor and G as the lessee on insurance documents. G went bankrupt. Neither the employer
company nor TLC had registered their security interest under the PPSA. G went bankrupt, the car was sold, and now G’s trustee and
TLC are disputing who gets the proceeds of the sale. TLC claims it owns the car since it never sold it to G, while the trustee relies on
the PPSA declaring him to have priority over the lessor of an unperfected lease.
Issue: Who has the right to the sale proceeds?
Holding: The trustee.
Reasoning: The PPSA effectively replaces the common-law “title” system with a system of “priority” for “security interests.” This
represents a radical departure from the common law of property. The PPSA deems all leases of more than one year to be security
interests. And the PPSA subordinates the interest of the unperfected security interest holder to that of the trustee once bankruptcy
occurs. TLC did not perfect its security interest. Hence the trustee is accorded “priority” over TLC. The trustee can pass valid title by
selling the car, because section 81 of the BIA applies, extinguishing all competing titles and encumbrances. The trustee is thus entitled
to the full proceeds.
Ratio: (1) Explanation of how PPSAs create and regulate security rights; (2) Agree with Paccar that leasehold interests are property;
(3) Reaffirms that the BIA is built on the foundation of provincial property and civil rights legislation which specifies what sorts of
rights exist between the parties, whereas the BIA merely sets out the order of payment in bankruptcy.
Comment: The SCC makes a big deal about the trustee not acquiring better title than the bankrupt, and says that the PPSA creates an
exception to this rule. Their reasoning gets very complicated at times, and I’m not sure that they needed to go down that road. It seems
to me that the PPSA could be interpreted as extinguishing or lowering the quality of the lessor’s title, rather than improving the quality
of the trustee’s title. Hence the trustee acquires exactly the same rights as the bankrupt, but we arrive at the same result in this case
because the relative title of the lessor was lowered below that of the lessee.
Section 5.2: Secured Creditors Under the BIA
Secured creditors can seize property during a bankruptcy, unless the bankrupt obtains a court order staying secured creditors as well.
However, if the bankrupt individual or company uses a proposal in bankruptcy, secured creditors will be stayed along with everyone
else.
5.2.1 Definition of Secured Creditor under the BIA
The definition of secured creditor is given in section 2 of the BIA (below). This is a two-part definition. It begins with a general
definition “a person holding a mortgage, hypothec, pledge, charge or lien on or against the property of the debtor…, or a person whose
claim is based on, or secured by, a negotiable instrument held as collateral security and on which the debtor is only indirectly or
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secondarily liable.” Then there is a supplementary Québec-only portion that adds several proprietary-security mechanisms, rights of
retention, plus priorities that are real rights.
“Secured creditor” means a person holding a mortgage, hypothec, pledge, charge or lien on or against the property of the debtor or
any part of that property as security for a debt due or accruing due to the person from the debtor, or a person whose claim is based
on, or secured by, a negotiable instrument held as collateral security and on which the debtor is only indirectly or secondarily liable,
and includes
(a) a person who has a right of retention or a prior claim constituting a real right, within the meaning of the Civil Code of
Québec or any other statute of the Province of Quebec, on or against the property of the debtor or any part of that property, or
(b) any of
(i) the vendor of any property sold to the debtor under a conditional or instalment sale,
(ii) the purchaser of any property from the debtor subject to a right of redemption, or
(iii) the trustee of a trust constituted by the debtor to secure the performance of an obligation,
if the exercise of the person’s rights is subject to the provisions of Book Six of the Civil Code of Québec entitled Prior
Claims and Hypothecs that deal with the exercise of hypothecary rights;
Civil Law
Paragraph (a) allows holders of certain rights of retention and prior claims to qualify as secured creditors. Note that the right of
retention doesn’t need to constitute a real right, but the priority must. This means most priorities will not apply, except for the
municipal taxes/schoolboard taxes priority, since it is a real right (CCQ 2654.1). However, some priorities, deemed trusts, and
statutory hypothecs can be registered as legal hypothecs, and this will have the effect of preserving them in bankruptcy.
Paragraph (b) includes most proprietary-security mechanisms, plus conditional/instalment sales. These would otherwise fall outside of
the definition of secured creditor. Keep in mind the requirement that the transaction be one of those listed in paragraph (b), and also
that it be subject to the hypothecary remedies of book six (which most of them are).
Common Law
The most important thing to note is that the definition does not say “security interest.” It instead lists various specific forms of
common-law security (mortgage, lien, etc). One of the reasons for this is that the BIA does not want to include deemed secured
creditors like lessors as secured creditors.
One might wonder whether a “security agreement” that only uses the term “security interest” (and not charge, hypothec, lien, etc)
would qualify someone as a secured creditor. I think the answer is yes, and the way of getting there would be to say that a security
interest is in the nature of a charge or hypothec, much like the Walsh text argues.
The common law definition has not been updated to catch proprietary securities, unlike the Québec definitions. Most obviously, a
security trust creates a secured creditor in Québec, but not in Ontario. That means a common law security trust beneficiary is not
subject to the stay of proceedings that affects secured creditors, and can take possession of trust property under 67(1)(a) BIA. Nor will
trust property be subject to BIA super-priorities.
5.2.2 Rights of Secured Creditors in Bankruptcy
Secured creditors are not affected by the general bankruptcy stay of proceedings (69.3(2)). However, on application by the debtor, a
court can delay realization on security by up to six months (69.3(2)(a-b)). This stay is usually easy to get. The stay created by a
bankruptcy proposal (69, 69.1) will affect secured creditors.
Regardless of whether there is a stay, the trustee must also be given a reasonable opportunity to inspect the property subject to security
and exercise the right of redemption if desired (79). All secured creditors have to provide reasonable notice at common law before
exercising their security. There are additional conditions for secured creditors planning to realize on a security that comprises all or
substantially all of the debtor’s property which apply regardless of whether there is a bankruptcy or not (244).
Speaking of 244, often when a secured creditor gives the required ten day notice, this often results in an NOI being filed and an
automatic stay of proceedings coming into place (69). Secured creditors must prove their security and estimate value of asset (128(1))
failure to do so results in loss of security (128(1.1)). Trustees can also redeem the asset for the estimated value if they wish (128(3)).
Secured creditors can also apply to have stays lifted 69(4).
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BIA Provisions
69.1 On filing proposal a similar stay of proceedings comes into effect. Lasts until trustee discharged or person becomes bankrupt.
69.1(5-6) Secured creditors can avoid the proposal stay if the proposal does not include them or if they vote against it.
69.3(2) Subject to subsection (3), sections 79 and 127 to 135 and subsection 248(1), the bankruptcy of a debtor does not prevent a
secured creditor from realizing or otherwise dealing with his or her security in the same manner as he or she would have been
entitled to realize or deal with it if this section had not been passed, unless the court otherwise orders, but in so ordering the
court shall not postpone the right of the secured creditor to realize or otherwise deal with his or her security, except as follows:
(a) in the case of a security for a debt that is due at the date the bankrupt became bankrupt or that becomes due not
later than six months thereafter, that right shall not be postponed for more than six months from that date; and
(b) in the case of a security for a debt that does not become due until more than six months after the date the bankrupt
became bankrupt, that right shall not be postponed for more than six months from that date, unless all instalments of
interest that are more than six months in arrears are paid and all other defaults of more than six months standing are cured,
and then only so long as no instalment of interest remains in arrears or defaults remain uncured for more than six months, but,
in any event, not beyond the date at which the debt secured by the security becomes payable under the instrument or law
creating the security.
69.3(2.1) Subsection (2) orders cannot be made if they would prevent secured creditors from realizing on “financial collateral.”
50.3 If someone goes bankrupt after making a proposal, the secured creditors need to refile proofs of claim.
70(1) Bankruptcy orders and assignments take precedence over most other judicial orders, but not the rights of secured creditors.
79 Trustee may give notice to secured creditors that the secured property is being inspected. Creditor cannot realize on that property
until trustee has had a reasonable time to inspect and possibly exercise trustee’s right of redemption.
128(1) Trustee can require secured creditors to prove their security, and give an estimated value of the security. (1.1) Failure to reply
by creditor within thirty days gives trustee power to sell property free of security. (3) Trustee can redeem security for value provided
by creditor.
132 Creditor can amend estimated value.
129-130 Trustee’s power to sell secured assets if not satisfied by creditor valuation. Court supervision of trustee actions.
244
(1) A secured creditor who intends to enforce a security on all or substantially all of
(a) the inventory,
(b) the accounts receivable, or
(c) the other property
of an insolvent person that was acquired for, or is used in relation to, a business carried on by the insolvent person shall send
to that insolvent person, in the prescribed form and manner, a notice of that intention.
(2) Where a notice is required to be sent under subsection (1), the secured creditor shall not enforce the security in respect of
which the notice is required until the expiry of ten days after sending that notice, unless the insolvent person consents to an
earlier enforcement of the security.
(2.1) Can’t obtain consent to a shorter notice period/waiver of notice prior to sending the notice itself.
(3) This section does not apply to secured creditors: (a) whose right to realize or otherwise deal with his security is protected
by subsection 69.1(5) or (6); or (b) in respect of whom a stay under sections 69 to 69.2 has been lifted pursuant to section
69.4.
(4) This section does not apply where there is a receiver in respect of the insolvent person.
252 In any proceeding where it is alleged that a secured creditor or a receiver contravened or failed to comply with any provision of
this Part, it is a defence if the secured creditor or the receiver, as the case may be, shows that, at the time of the alleged contravention
or failure to comply, he had reasonable grounds to believe that the debtor was not insolvent.
Section 5.3: Order of Payment under the BIA
The BIA replaces provincial order of payment rules with a new set of priorities. Which kind of makes a mockery of the CCQ order of
payment rules. If there’s enough money to go around, who cares what order people are paid in? And if there’s not enough money, the
debtor is bankrupt and the BIA rules apply! I’ve included the entire section on payments from my Bankruptcy summary, even though
we’re only interested in secured creditors.
i) Structure of BIA Categories
The general order for the payment of claims is: super-priority secured claims>secured claims>preferred claims>unsecured
claims>deferred claims. Technically secured creditors aren’t even part of the hierarchy, since their claims attach to particular pieces of
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property, but in a way this means that they go first – only property/money left after all secured creditors are paid will be available to
the unsecured creditors. All unsecured claims are paid proportionately (sometimes termed “rateably” or “on a pari pasu basis” or “on
a pro rata basis”). This just means that everyone recovers fractionally (e.g. 20% or 40%) and that they all recover the same fraction.
Example: A debtor has $100 in assets, and owes debts of $40, $100, and $160 to three different unsecured creditors. Thus total debts
are $300 and total assets are $100. So each debtor will recover 33% of the debt. The $40 debtor will receive $13 ($40*0.33), then
$100 debtor will get $33 ($100*0.33), and the $160 debtor will receive $53 ($160*0.33). This totals $100, resulting in a full pay out of
the debtors assets to all creditors in proportion to their debts.
ii) Super-priorities
There are a limited number of super-priorities in the BIA. They are secured claims that are imposed on top of existing secured
creditors (they have to be secured, because otherwise they’d merely become first in the preferred claims list). The regimes for the
most of the super-priorities is explained in the section on Special Categories of Claimants, below. Here is what appears to be the
ranking of the super-priorities as amongst themselves (same number means tied):
1. Environmental cleanup liability (immovables only) under 14.06(7-8).
1. Unpaid supplier repossession right 81.1 (movables only) (technically not a claim, but applies despite the rights of secured
creditors).
2. DIP Financing charge 50.6 (proposals) (technically the judge could choose not to accord super priority, but no one would
lend without one).
3. Farmer/Fisherman secured charge (81.2).
4. Employee charge for unpaid salary/wages/etc of up to $2,000 on current assets (cash, receivables, inventory) (81.3/81.4).
5. Pension plan claims (81.5/81.6).
6. The following could all be given super priority status, but not necessarily. They also can’t outrank the other superpriorities: directors charge (64.1); trustee/administration charge (64.2); 47.2 (Interim Receiver fees); Directors and officers
charge (64.1(2)). It’s unclear how they rank relative to each other.
Note that these super priorities can only apply to the property of the bankrupt, so property belonging to other persons that is claimed
under section 81 BIA can’t be subject to a super-priority. Nor can property under a real trust or a valid deemed trust under 67(3).
iii) Secured Claims and Creditors
This section deals with secured creditors’ participation in the distribution of assets. If everything works correctly, a secured creditor
doesn’t participate in the distribution, since distribution is the process by which unsecured claims are paid. But if a secured creditor
voluntarily reduced its security, or there was a problem with the validity of the security, or if the security asset fell in value, the
balance of the secured creditor’s claim will be unsecured. These unsecured claims are treated like all other unsecured claims, unless
they would be preferred claims for some reason (like 136(1)(d.01-d.02)). Secured creditors prove the unsecured balance of their
claims in the same manner as ordinary creditors.
BIA Provisions
127(1) Where a secured creditor realizes his security, he may prove the balance due to him after deducting the net amount realized.
127(2) Where a secured creditor surrenders his security, he may prove his whole claim.
133 Creditor that fails to comply with 127-132 cannot receive a dividend (payment of unsecured claims from bankruptcy estate)!
135(2) Secured creditors must prove their security to the trustee, who may disallow it if unsatisfied by proof.
135(4) Appeal to court.
iv) Preferred Claims and Creditors
Preferred claims are unsecured claims that are paid before other unsecured claims out of property left after secured creditors are paid.
So the order of payment is: supre-priority>secured claims>preferred claims>unsecured claims>deferred claims. Within preferred
claims the ones listed first in the section are paid first, then if money remains the next one on the list is paid. Remember that preferred
claimants are still unsecured, and so they are subject to the general bankruptcy stay in 69.3 and are paid rateably (141).
Section 136 sets out the preferred claims system under the BIA. This is the full and complete list – anything not listed here is not a
preferred claim. Note that if the preferred claim is only a portion of the creditor’s claim (like if unpaid wages or rent exceed the
amount allowed in the section) then the balance of the creditor’s claim is unsecured (136(3)).
BIA Provisions
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136 (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of
payment as follows:
(a) in the case of a deceased bankrupt, the reasonable funeral and testamentary expenses;
(b) the costs of administration, in the following order,
(i) the expenses and fees of any person acting under a direction made under paragraph 14.03(1)(a),
(ii) the expenses and fees of the trustee, and
(iii) legal costs;
(c) the levy to support the bankruptcy system payable under section 147;
(d) section 81.3/81.4 claims for wages/commissions/compensation/disbursements that were not paid by the secured charge;
(d.01) the amount lost by a secured creditor due to operation of 81.3-81.4.
(d.02) the amount lost by a secured creditor due to operation of 81.5-81.6.
(d.1) liabilities listed in 178(1)(b)-(c) (family law payments), if provable under 121(4), for periodic amounts accrued in the
year before the date of the bankruptcy that are payable, plus any lump sum amount that is payable;
(e) municipal taxes assessed or levied against the bankrupt, within the two years immediately preceding the bankruptcy,
that do not constitute a secured claim against the real property or immovables of the bankrupt, but not exceeding the value of
the interest or, in the Province of Quebec, the value of the right of the bankrupt in the property in respect of which the taxes
were imposed as declared by the trustee;
(f) landlords are entitled to 3 months arrears in rent (if there is any) and three months of accelerated rent (if there is an
accelerated rent clause in the lease). Any occupation rent paid by the trustee is deducted from the accelerated rent portion.
Also, the total preferred claim “shall not exceed the realization from the [movable] property on the premises under lease.”
(g) legal costs referred to in subsection 70(2) but only to the extent of the realization from the property exigible thereunder;
(h) in the case of a bankrupt who became bankrupt before the prescribed date, all indebtedness of the bankrupt under any
Act respecting workers’ compensation, under any Act respecting unemployment insurance or under any provision of the
Income Tax Act creating an obligation to pay to Her Majesty amounts that have been deducted or withheld (the latter
means payroll taxes) rateably;
(i) insurance monies for on the job injuries not covered by workers’ compensation;
(j) in the case of a bankrupt who became bankrupt before the prescribed date, claims of the Crown not mentioned in
paragraphs (a) to (i), in right of Canada or any province, rateably notwithstanding any statutory preference to the contrary.
(2) Subject to the retention of such sums as may be necessary for the costs of administration or otherwise, payment in accordance with
subsection (1) shall be made as soon as funds are available for the purpose.
(3) A creditor whose rights are restricted by this section is entitled to rank as an unsecured creditor for any balance of claim due him.
v) Unsecured Claims and Creditors
Remember that unsecured creditors are subject to the automatic bankruptcy stay (69.3). Claims are paid proportionately from
remaining funds after all preferred and secured creditors have been paid (144). These are the chirographic creditors of civil law.
vi) Deferred Claims and Creditors
The most common category of deferred claim is the claim of people who are owed money after the reversal/cancellation of
transactions at undervalue (137). Another important category is equity claims (140.1) which are below even all other deferred
claims. The idea here is that equity investors have potentially unlimited gains if the venture succeeds, but as a consequence they also
take a risk that the project will go bankrupt, so they should be paid last when the venture fails. Section 139 also creates a “silent
partner” deferred claim, applicable to a lot of venture capitalists (presumably this is deferred because it’s a lot like an equity claim).
Atlas: This can be structured around with smart drafting. Also, interest accruing after the date of the bankruptcy is treated as a
deferred claim, since only after all claims are satisfied will post-bankruptcy interest be paid (143).
As an example 137 claim: you are bought a car worth 20k for 5k from the bankrupt, the transaction can be reversed and you can be
forced to return the car. This then becomes a deferred claim for 5k against the estate.
BIA Provisions
137(1) A creditor who, at any time before the bankruptcy of a debtor, entered into a transaction with the debtor and who was not at
arm’s length with the debtor at that time is not entitled to claim a dividend in respect of a claim arising out of that transaction until all
claims of the other creditors have been satisfied, unless the transaction was in the opinion of the trustee or of the court a proper
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transaction.
139 Where a lender advances money to a borrower engaged or about to engage in trade or business under a contract with the borrower
that the lender shall receive a rate of interest varying with the profits or shall receive a share of the profits arising from carrying on the
trade or business, and the borrower subsequently becomes bankrupt, the lender of the money is not entitled to recover anything in
respect of the loan until the claims of all other creditors of the borrower have been satisfied.
140.1 A creditor is not entitled to a dividend in respect of an equity claim until all claims that are not equity claims have been
satisfied.
vii) Special Categories of Claimants
This section deals with a variety of special categories of claims, many of which are super-priorities.
Crown Claims (67, 86, 87)
Historically, the Crown gave itself generous preferences and securities, including many deemed trusts that removed a lot of assets
from the bankruptcy estate. This was problematic for two reasons: (1) ordinary creditors needed the money more than the government
did; and (2) because there was so little to recover for ordinary creditors, they had little interest in participating in the bankruptcy
process or supervising trustees as inspectors. So the Crown scaled back its powers substantially. Proposals must uphold preferential
payment of certain Crown claims or they cannot be approved: 60(1.1-1.2), 69(1)(c), 69 (1.1)(1)(c).
Section 67(2) eliminates all government deemed trusts in a bankruptcy situation with two exceptions: money that would be actually
considered held in trust under provincial private law, and a list of specific payments that are deemed held in trust despite 67(2).
 67(2) “Actual Trust” Exception: Amounts that are actually held in a trust-like capacity will be deemed held in trust. So if the
debtor company kept sales taxes in a separate bank account, this would allow the deemed trust to take effect on that money.
But if the sales tax funds were mixed in with the debtor’s main account, 67(2) would not apply, since under normal
provincial law, if trust property is mixed with non-trust property, a trust cannot form.
 67(3) “Statutory List” Exception: These are [i] tax deductions under the federal Income Tax Act, [ii] employer’s deductions of
Canada Pension Plan contributions from payroll, [iii] employer deductions of EI premiums from payroll. Provincially, the
list includes QPP payments (67(3)(b)) and deductions under any provincial income tax act (67(3)(b)).
Section 86(1) eliminates all secured creditor rights created by statute for the Crown with three exceptions: ordinary secured
creditor rights; registered statutory securities; a list of statutory exceptions [deemed trusts mean the property was never the property of
the bankrupt, so they aren’t security interests, hence the need for a separate section –Mike]. 86-87 also applies to all payments due to
workers’ compensation boards.
 86(2) Ordinary Secured Creditor Right: If the Crown became a secured creditor through standard channels that can apply to
everyone (like a contractual security clause) then it keeps this security right.
 87 Registered Statutory Securities: If the government registers an exceptional statutory security right in the same manner as a
regular commercial security right would be registered, then the exceptional statutory security right is preserved in
bankruptcy, but is subordinated to other security rights registered before it (87(2)(a)). The sums secured by registration
include only sums due at the time of registration, plus interest (87(2)(b)). This section is typically used for tax
liens/hypothecs registered against tax debtors.
 86(3) “Statutory List” Exception: A series of statutes that create security rights for the Crown are exempted from 86(1).
Again, much like 67(3), this list deals with CPP/QPP, EI, and income tax issues (this time, a provision allows the MNR to
intercept payments received by tax debtors).
For the CCAA, see section 37-40, which are substantially the same as what’s listed above.
Environmental Liability (14.06(7-8))
Claims by the government for environmental clean-up costs are super-priority secured charges on the property in question, and on all
adjacent property used for the same purpose. They are deemed provable claims. There’s also something in 14.06(6) about
environmental cleanup not being considered an administrative cost, but I’m not sure why it would have been considered that in the
first place. 14.06(8) allows these claims to be brought no matter when the damage occurred (like after the bankruptcy). This section
applies to receivers too.
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14.06(7) Any claim by Her Majesty in right of Canada or a province against the debtor in a bankruptcy, proposal or receivership for
costs of remedying any environmental condition or environmental damage affecting real property or an immovable of the debtor is
secured by security on the real property or immovable affected by the environmental condition or environmental damage and on any
other real property or immovable of the debtor that is contiguous with that real property or immovable and that is related to the
activity that caused the environmental condition or environmental damage, and the security
(a) is enforceable in accordance with the law of the jurisdiction in which the real property or immovable is located, in the
same way as a mortgage, hypothec or other security on real property or immovables; and
(b) ranks above any other claim, right, charge or security against the property, despite any other provision of this Act or
anything in any other federal or provincial law.
14.06(8) Despite subsection 121(1), a claim against a debtor in a bankruptcy or proposal for the costs of remedying any environmental
condition or environmental damage affecting real property or an immovable of the debtor shall be a provable claim, whether the
condition arose or the damage occurred before or after the date of the filing of the proposal or the date of the bankruptcy.
For the CCAA, see sections 11.8(3),(5)-(8). Similar, but not quite the same.
Unpaid Supplier Claims (81.1)
Technically not a claim, since it’s actually a right to take back certain property. But I’ve included it here because it defeats the rights
of secured creditors in the property. This applies to receivers too.
81.1(1) Suppliers of goods that have been delivered to the bankrupt or someone who filed a proposal/NOI, but not yet paid for in full,
can repossess the goods subject to the following conditions:
(a) the supplier presents a written demand for repossession to the purchaser, trustee or receiver…within 15 days after the
day on which the purchaser became bankrupt;
(b) the goods were delivered within 30 days of the date of the bankruptcy or receivership (or of the proposal/NOI (81.1(4))).
(c) at the time when the demand referred to in paragraph (a) is presented, the goods
(i) are in the possession of the purchaser, trustee or receiver,
(ii) are identifiable as the goods delivered by the supplier and not fully paid for,
(iii) are in the same state as they were on delivery,
(iv) have not been resold at arms’ length, and
(v) are not subject to any agreement for sale at arms’ length; and
(d) the purchaser, trustee or receiver does not pay to the supplier the entire balance owing after receiving the demand.
81.1(2) If the goods were paid for in part, the fraction that can be repossessed is equal to the fraction of the payment still owing.
81.1(6) This claim ranks above any other claim created by federal or provincial law. Only a good faith purchaser for value who did not
have notice of the repossession request cannot be forced to return the goods.
81.1(10) If you repossess goods you waive any right to payment for them.
Unpaid Farmer/Fisherman Claims (81.2)
Setting aside the question of what “inorganic life” means (see BIA 81.2(2) def “products of the seas, lakes, and rivers”), this section
gives farmers and fishermen a special secured claim for the products of their farming and fishing. It’s different from the unpaid
supplier claim because it’s an actual claim, not a right to repossess. It applies only to sales for use in business (81.2(1)), and while
fishermen are only those whose principal occupation is fishing, farmers have a broader definition (see definitions in 81.2(2)).
The farmer/fisherman gets a secured charge on the inventory of the purchaser that existed on the day the purchaser went bankrupt
or was placed in receivership (note: unlike 81.1, not triggered by a proposal!). There appears to be personal liability of the trustee or
receiver if the inventory is sold without paying the farmer/fisherman, with the trustee being subrogated to the rights of the
farmer/fisherman against the estate to the extent of the personal liability (81.2(1) final part of section).
Employee Claims For Unpaid Wages (81.3, 81.4)
These sections both deal with unpaid wages for employees. 81.3 is the general section, while 81.4 deals with receiverships. Under
81.3, an employee gains a secured claim on the current assets of the employer (inventory, accounts receivable, and cash – in other
words, the assets that are the easiest to find and liquidate). The charge covers wages/salary, commissions, and vacation pay
(81.3(1,9)), but it does not include severance pay (81.3(9)). The charge takes priority over any secured creditors charges, and any other
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charges or securities except those created by 81.1, 81.2, and 67(3) of the BIA (81.3(4)).
This secured claim is for a maximum of $2,000 per employee, minus any amounts paid to the employee by the trustee for the
employee’s services during this time (81.3(1)). Travelling salespersons can get an additional $1,000 for expenses during this period
(81.3(3)). Directors and officers cannot use this section (81.3(6)). Someone dealing with the trustee, but not at arms length, can only
use this section if the trustee thinks the claim is commercially reasonable (81.3(7)). This prohibition against directors and officers
using this section is repeated at BIA 140. If the secured claim doesn’t bring in the full amount, any remaining claims become
preferred claims. Secured creditors who lost out due to the employee claims also get preferred claims to the extent of their loss
of secured claims (136(1)(d.01).
This provision interacts with the WEPPA. Employees can get $3,250 from the government in exchange for transferring their secured
claim to the government. Yes, the government pays them more than they give up! The government is then subrogated in their rights
(only up to the $2,000 claim, not the $3,250 payout) and can recover the employee claims for itself.
Pension Payments by Employers (81.5, 81.6)
These provisions cover missed pension contributions by employers. 81.5 is the general provision, 81.6 is the receivership provision.
They create a secured charge on all the assets of the bankrupt that equal to either: the total of all amounts that the employer
deducted from payroll for the pension plan but never paid to the plan (81.5(1)(a)) or some technical amount described in the Canada
pension plan (81.5(1)(b-c). Note that 81.5(1)(a) is not limited to a specific time period before the bankruptcy – it covers all missed
payments. There is also the possibility of personal liability by the trustee (81.5(3))
This security outranks all other claims, secured or not, except for claims under 81.1, 81.2, 81.3, 81.4, or 67(3) (81.5(2)).
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