PPSA SKILLS SESSION
PPSA and Leases of
Personal Property
by Andrew McFarlane
Application of PPSA to Leased
Personal Property
• PPSA, s. 2(a) - PPSA applies to every transaction
without regard to its form and without regard to
the person who has title to the collateral that in
substance creates a security interest, including a
lease that secures payment or performance of an
obligation.
• True Lease v. Financing Lease Distinction
Application of PPSA to
Absolute Assignments of Leases
• PPSA, s. 2(b) - PPSA applies to a transfer of an account or
chattel paper even though the transfer may not secure
payment or performance of an obligation.
• PPSA, s. 1(1) - A “chattel paper” means one or more than
one writing that evidences both a monetary obligation and
a security interest in or a lease of specific goods.
Absolute Assignments of Leases
(cont.)
• PPSA, s. 1(1) - A “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, the
interest of a transferee of an account or chattel paper.
Assignments of Leases as Security
• Straightforward - PPSA applies to security interests
granted in leases.
• However, the lease itself is “chattel paper” in the hands of
the lessor/debtor - collateral classification is “Other”.
• Need to ensure that a security interest is granted in and
registered against lessor’s interest in both the lease/chattel
paper and in the leased property.
Four Scenarios
• Straight lease of equipment.
• Sub-lease of equipment.
• Grant of security interest in lease
(assignment of lease by way of security).
• Absolute assignment of lease.
Lease
PPSA Registration:
“Equipment”
(potentially
“Inventory”)
LESSOR
Lease
Rent
LESSEE
Possession and
use of property
Sub-Lease
Event of Default
PPSA Registration:
“Equipment”
(potentially
“Inventory”)
LESSOR
Lease;
Security
Assignment
of Lease
New PPSA
Registration:
“Other”, “Inventory”
PPSA Registration: “Equipment”
(potentially “Inventory”);
Lessor added as additional
secured party.
Rent
Rent
LESSEE
Sub-lease
SUB LESSEE
Possession and
use of property
Security Interest
in Lease
SECURED
PARTY
PPSA Registration:
“Other”, “Equipment”,
“Inventory”
Security Assignment
of Lease
Event of Default
PPSA Registration:
“Equipment”
(potentially
“Inventory”)
LESSOR
Lease
Rent
LESSEE
Possession and
use of property
Absolute Assignment
of Lease
Assignment
of security
interest
PPSA Registration:
“Equipment”
(potentially
“Inventory”)
ASSIGNEE
PPSA Registration:
“Other”
Absolute Assignment
of Lease; Sale
of Leased
Property
LESSOR /
ASSIGNOR
Lease
Rent
LESSEE
Possession and
use of property
Lease
Rent
On to Movable Goods. . . .
PPSA SKILLS SESSION
Movable Goods
by Andrew McFarlane
Problem with Movable Goods
• They can move from jurisdiction to jurisdiction!
• The cost of borrowing would be increased substantially if
the secured party had to register in potentially every
jurisdiction where the goods might conceivably end up.
• If the goods are leased by the debtor to third parties, the
secured party has no way of controlling where those third
parties move the goods.
PPSA’s Conflict of Law Rules
• Section 7(1): The validity, perfection and effect of perfection or nonperfection,
(a) of a security interest in,
(ii)
goods that are of a type that are normally used in
more than one jurisdiction, if the goods are equipment
or inventory leased or held for lease by a debtor to
others,
shall be governed by the law of the jurisdiction where the debtor is
located at the time the security interest attaches.
Solution: Register in One Place
• The result of the section 7(1) rules for movable
goods is that the secured party only has to register
in one jurisdiction in order to perfect its security
interest in the movable goods.
• Sounds straightforward, right?
Issues Raised by the Section 7
• What are “goods that are of a type that are normally used
in more than one jurisdiction”?
• How does one determine where the debtor was located at
the time the security interest attached?
• What happens if the debtor subsequently changes its
location?
Goods Normally Used in More Than
One Jurisdiction?
• No additional clarification by PPSA.
• Very little judicial consideration in Canada.
• The Alberta Court of Appeal has suggested that Article 9 of
the United States Uniform Commercial Code is a useful
guide.
See Gimli Auto Ltd. v. Canada Campers Inc. (1998), 219 A.R. 166 (Alta. C.A.) and
Northwest Equipment Inc. v. Daewoo Heavy Industries America Corp. [2002] A.J. No. 327,
2002 ABCA 79 (Alta. C.A.)
Uniform Commercial Code
• Article 9 of the Uniform Commercial Code provides
statutory examples of goods that are normally used in more
than one jurisdiction:
•
•
•
•
•
•
•
•
motor vehicles
trailers
rolling stock
aircraft
shipping containers
road building equipment
construction machinery
commercial harvesting machinery
What Is a “Motor Vehicle”
• The definition of “motor vehicle” under the PPSA Regulations means:
– an automobile
– a motorcycle
– a motorized snow vehicle
– any other vehicle that is self –propelled
except for the equipment explicitly excluded from the definition. . . .
What is Not a “Motor Vehicle”
• The definition of “motor vehicle” explicitly excludes the following:
– a street car or other vehicle running only upon rails
– a farm tractor
– an implement of husbandry
– a machine acquired for use or used as a road-building machine
– a craft intended primarily for use in the air or in or upon the water
•
These goods can still be “equipment normally used in more than one
jurisdiction” - however, would only have to be registered as “Equipment”.
•
I.E. WOULD NOT HAVE TO COMPLY WITH THE PPSA’S
REQUIREMENTS FOR REGISTERING MOTOR VEHICLES.
Collateral Classifications
• Goods that are normally used in more than one jurisdiction
which constitute equipment.
• Goods that are normally used in more than one jurisdiction
which constitute inventory leased or held for lease by a
debtor to others [i.e. not inventory that is SOLD to others].
• Therefore, secured party must register against debtor under
one or more of the following collateral classifications:
“Equipment”, “Inventory” and “Motor Vehicles Included”.
Location of Debtor
• Section 7(4):
For the purpose of this section [7], a debtor shall be
deemed to be located at
– the debtor’s place of business if there is one,
– at the debtor’s chief executive office if there is more than one place
of business, and
– otherwise at the debtor’s principal place of residence.
Multiple Places of Business
• Very often when dealing with large corporations or
businesses, they will have more than one place of business:
therefore, it is necessary to determine where their “chief
executive office” is located in order to figure out where to
register a security interest in movable property.
• There has been very little judicial consideration in Canada
of what is meant by a debtor’s “chief executive office”. It
is very much a case-by-case, factual determination.
Chief Executive Office Indicia
• Where is the corporation’s head office located?
• Where are all of the substantial administrative, management and
executive functions of the corporation located?
• Where is the registered office of the corporation located?
• Where are the substantial auditing and bookkeeping functions of the
corporation located?
 Where are the principal books and records of the corporation located?
 Which location is given as the corporation’s address in its material
agreements, contracts or other instruments?
Location of Debtor: Other Issues
• In Quebec, the conflict of law rule for determining perfection of
security interests in movable equipment is based on the domicile of the
debtor, which is deemed to be the jurisdiction in which its registered
office is located. If the debtor moves its chief executive office to
Ontario or another PPSA jurisdiction, this can create ambiguities.
• The UCC now has the same rule for corporations registered in the U.S.
and therefore has the potential for the same problem.
• BOTTOM LINE: WHEN IN DOUBT, REGISTER IN
BOTH JURISDICTIONS.
Change of Debtor’s Location
• Under section 7(2) of the PPSA, if a debtor changes its location from
another jurisdiction to Ontario, then a perfected security interest in the
movable goods continues perfected in Ontario if it is perfected in
Ontario
(a) within sixty (60) days from the day the debtor changes
its location;
(b) within fifteen (15) days from the day the secured party
receives notice that the debtor has changed location; or
(c) prior to the day that perfection ceases under the law of
the jurisdiction in which the debtor was previously located,
whichever is the earliest.
THANK YOU