CHAPTER 1: SECURITY INTERESTS IN PERSONAL PROPERTY

Financing Techniques Loan Credit: Bank makes a loan to a the debtor. Outside of the loan agreement is a security

agreement (borrower grants security interest in the debtor’s property) Sales Credit: Seller obtains a security interest in the goods until it is paid off. KEY TO REMEMBER = lenders ONLY have secured interests in the particular property the debtor

has agreed to provide a secured interest in (i.e. not necessarily all of the debtor’s property) Leasing: Sometimes these are security interests. Two different situations:

o (1) Lessor assigns the lease payments to a finance company and the lessee makes payments to the finance company

o (2) Lessee specifies to the leasing company the type of goods it wishes to lease. A leasing company goes out and purchases that from a supplier, and turns around a leases it to the lessee

Accounts Financing: Customers have payment obligations to a business (ie an account). If the business obtained a loan from the bank, they could grant security of the accounts.

Factoring: Business sells goods to its customers who them owe them money in connection with that. Instead of obtaining third party loans by giving security in the accounts, you can simply sell the accounts to a third party.

o The factoring company will pay a reduced price.o THIS IS A DEEMED SECURITY INTEREST (TRANSFER OF ACCOUNTS)

Three Superior rights of the Secured Party The Right of Enforcement:

o SP has superior right to proceed against the collateral in the event of a default, w/out needing to acquire a judgment against the debtor before doing so

The Right of Priority:o Gives secured creditors higher ranking claims than unsecured creditors

The right to pursue/follow:o As a secured interest is a proprietary right, it is exigible against the debtor AND the

world (i.e. third parties) o This is the case even against third parties who acquire the secured property (in good

faith) from the debtor (subject to certain statutory exceptions)

Categories of Collateral: (1) Chattel Paper

o writings that evidence both a monetary obligation and security interest in or lease of specific goods (ex. it is a right to receive money as a product of a sale OR lease of property in which a security interest is held)

(2) Intangibleso personal property OTHER THAN goods, chattel paper, investment property, a document of

title, an instrument and money- residual category (3) Goods -tangible property OTHER THAN chattel paper, a document of title, an instrument,

investment property and money, and includes fixtures, growing crops and the unborn young of animals, but does NOT include trees that are not crops until they are severed or minerals until they are extracted “crops” = whether matured or otherwise, and whether naturally grown or planted, attached to

land by roots or forming part of trees or plants attached to land (i.e. pretty liberal with definition – and doesn't matter if still in ground or attached to plant/tree)

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o NOTE – definition includes “trees” only if they are (i) nursery stock, (ii) trees being grown for uses other than the production of lumber or wood products, or (iii) trees being grown for use in reforestation of land other than the land on which the trees are growing

o But trees must be severed from the land (only once they are detached are they considered personal property)

Inventory Goods held for sale or lease by a person; (ii) raw goods that are works in

progress; (iii) used or consumed in a business Equipment

Goods held by a debtor other than consumer or inventory. If partly personal use it must be used moreso (50% or more for the equipment purpose).

Consumer Use Goods used primarily for personal, household, or family uses.

(4) Investment Propertyo a security, whether certified or uncertificated, security entitlement, securities account, futures

contract or futures account (5) Instruments

o writings that provide for the right to be paid money (6) Documents of Title

o Essentially receipts issued by bailees that evidence the fact that the bailee is holding the goods for a named person or to the transferee of that person

o Bills of Lading; Warehouse receipts o Documents of title are transferable in that the person who obtains the document of title (with

any necessary endorsement) will have the right to obtain delivery of the goods from the bailee (7) Money

o medium of exchange authorized by the Parliament of Canada or authorized or adopted by a foreign government as part of its currency”

o does NOT cover bank accounts, bonds or promises to pay money

CHAPTER 2: THE SCOPE OF THE PPSA

Application of the PPSA If you fall outside of the PPSA, it does not govern the right and remedies of the situation.

3(1)- True Security Interests Every transaction that in substance, creates a security interest, without regard to its form.

o If yes we will treat it as on

Requirements: Section 3 together with the definitions of “security interest” and “security agreement” impose the

following four requirements before the transactions will be considered a true security interest for the purposes of the PPSA:

o (1) The transaction creates a property interest in an asset (i.e., a real right)o (2) The asset is personal propertyo (3) The transaction secures payment or performance of an obligationo (4) The interest arises out of an agreement between the parties

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Examples of this: o (1) Lease arrangement for a car, at the end of the term, you have an option to buy it for

markedly less that its market value. (purchase price significantly lower than market)o (2) Lease arrangement where at the end of the term the goods are not expected to have any

real value. You have obtained the full value of the goods (Essentially just paid a purchase price)

o (3) Leasing arrangement where at the end of the lease the goods are sold. Any surplus the lessee keeps, and deficiency the lessee must fund.

It is about whether the lessee has the risk of loss/chance of gaino (4) Consignment where you give possession of goods to business and the business has to pay

you regardless of whether they find a buyer.

Daimler Chrysler Service Canada Inc v Cameron Facts: Vernon Chrysler Dodge Ltd leased goods to Cameron and assigned the lease to

DaimlerChrysler Services Inc. It looked like a lease, there was an option price, but the option price reflected the expected value of

the goods at the end of the term option price is a fair representation/prediction of what the value is going to be

BUT there was an acceleration clause Issue: Is this a security lease under 3(1); or a deemed lease under 3(2) Held: The simple presence of an acceleration clause is not enough to make it a true lease.

Re Cronin Fire Equipment Ltd Facts: TLS inc bought goods and leased them to Cronin Fire. At the end of the term the leasing company sold the goods for a price set before the sale. If the leasing

company sells for a higher price, they pay that back to the lessee. If there is a deficiency, the lessee pays

3(2)- Deemed Security Interests o Established categories under the PPSA:

Transfers of Accounts OR chattel paper (these are absolute sales) Leases of goods for more than 1 year (lessor must be regularly engaged in the business of

leasing goods) Commercial Consignments (that do not secure payment or performance of obligation)

If they do then they are under 3(1)

Definition of Lease more than 1 year: o (i) a lease for an indefinite term even though the lease is determinable by one or both

parties within one year after its executiono (ii) subject to (iii), A lease for less than a year, after which time the lessee is supposed to

return the goods. BUT the lessee doesn’t return it, with consent of the lessor. If the lessee holds it for longer than one year, at the one year point, it falls within the definition of a 3(2) deemed security interest.

o (iii) A lease for a term of one year or less that is automatically renewable or that is renewable at the option of one of the parties, or by agreement for one or more terms.

Does not include:o (iv) a lease involving a lessor who is not regularly engaged in the business of leasing goodso (v) A lease of household furnishing or appliances as part of a lease of land where the goods

are incidental to the use and enjoyment

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Definition of Commercial Consignment: NOTE: This is not talking about a security agreement disguised as a consignment this is under 3(1).

KEEP THIS IN MIND Definition: 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,

o (i) In the ordinary course of the consignor’s business , deals in goods of that description ando (ii) Reserves an interest in the goods after they have been delivered,

But does not include an agreement under which goods are delivered to an auctioneer for sale or to a consignee for sale, lease or other disposition if it is generally known to the creditors of the consignee that the consignee is in the business of selling or leasing goods of others If all the creditors know that it is a consignment store, the creditors are not misled into thinking that the business is selling its own goods

Requirements:o Must have:

1. A consignee who in the ordinary course of business deals in goods of that descriptions

2. Delivered by a consignor who in the ordinary course of business deals in those goods and who retains the interest

3. BUT cannot be delivered to an auctioneer, or a consignee known to be in the business of consignment by its creditors

SO if the creditors generally know that the consignee typically does not own the goods, but is a consignee (selling goods that belong to someone else) then you are outside of the definition of 3(2).

IT IS ABOUT WHAT THE GENERAL CREDITOR KNOW NOT WHAT THE SPECIFIC CREDITOR KNEW

CIBC v Westfield Industries Ltd Facts: Consignment agreement between West to Schuzke’s Service. CIBC takes a GSA in Schuzke’s service Issue: Priority issue between CIBC and West. IS IT A DEEMED SECURTIY INTEREST?

o If yes they would have to register Held: This was a deemed security interest. As a commercial Consignment

Transactions on the Periphery Is it property?Saulnier v Royal Bank of Canada Dealing with licenses and quotas Facts: Department of fisheries grants a license to Saulnier Royal Bank of Canada has a general security agreement Issue: Is the fishing license property? Discussion: How does this fit into the PPSA?

o Under the PPSA there are 7 categories of property. If it is property it would be classified as an intangible

Other courts took more of a commercial approach, they held that if the licenses can be traded and negotiated then this is property

o SK Courts approach: if the reality is that these are used as property, we are going to recognize that and allow them to be used as property

SCC: not going to adopt the commercial realities test. Treat it as a property right if it is sufficiently similar in character or nature to a recognized property right (PROFIT A PRENDRE)

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BUT NOTE: This SCC decision would not give milk quota holders (i.e. those with right to sell milk) a property right that could be used as collateral because it does not give the holder a property right to the resource (i.e. a property right to the farmer’s cows or the milk itself) – it merely gives you the right to purchase milk and sell it for profit

o This is different from a fishing license which gives you a right to access and claim property that you would not otherwise be able to – and to PROFIT from said property = such is why it is considered personal property to be used as a form of security/collateral

Flawed Asset ArrangementsFlawed asset arrangements occur in the following situation: Customer (C) has a bank account with Bank (B) = in reality, when someone has a bank account, they

are effectively LENDING the bank their moneyo But in this case, the Bank ALSO loans money to C in a separate transaction (this bank is also

creditor while customer is also debtor) A Flawed Asset Arrangement occurs where the bank wants to be able to/have the right to resort to the

funds in the account (i.e. directly draw from them) to reduce the risk of default o The bank uses THREE possible devices for this – the “Triple Cocktail”

(i) security interest – i.e. bank takes security interest in bank account (ii) contractual right of “set-off” (i.e. a right that, upon default, allows the bank to

seize the money in the customers account to apply the amount to the sum owed to the bank = a form of “reconciliation”)

(iii) condition on repayment (flawed asset) (where bank would not be required to provide the customer with the money in his account until the debt is paid off = like a hold)

o Issue with #1 = seems contradictory for bank to have a security interest in money that they themselves owe

i.e. the bank would essentially be giving itself a right to sue itself = doesn't seem sensible

Eventually this was litigated = held that you CAN create a security interest in the very debt you owe = a “Flawed Asset Arrangement” (Note: banks do this)

Caisse Populaire Desjardins v Canada Facts: CP loans $277k to Canvrac, who then deposits $200k in the bank And then the CRA swoops in on the term deposit as a deemed trust for unremitted source deductions.

o Reminder- the deemed trust prevails over any secured party under section 227(4.1) of the ITA. So the CRA will scoop this $200,000, meaning that the lender will not be able to exercise the rights of set off.

Held: The SCC correctly states that a right of set off does not on its own not constitute a security interest. But it may if combined with other features that prevent the depositor from withdrawing funds from the account be treated as a security interest.

o HERE, there were those types of encumbrances that prevents the depositor from withdrawing the funds. This is different than a simple right of set off.

The case is relevant in that these types of “set off” allow for security interests SO WHAT THIS MEANS is that a lender, if they are creating this type of interest, registration

is required to protect the right

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CHAPTER 3: CONFLICT OF LAWS Question: Where do you register your security interest if there is a cross-border flavor to the

transaction?o If you register in the wrong jurisdiction, you are liable to lose your priority

Location of the Collateral Rule s 5- Looking at the location of the goods (lex situs) What collateral do we use this for?

1. For ALL GOODS (other than highly mobile goods held as equipment or lease inventory) we use the location of the collateral at the time the security interest attaches (created)

2. For Possessory security interests in chattel paper, negotiable documents of title, instruments and money

So the SP needs to have taken possession of the collateral, and then it is that jurisdiction which governs

Location of the debtor s 7- Looking at where the debtor is located What collateral do we use this for?

1. Highly mobile goods held as equipment or lease inventory (those goods normally used in more than one jurisdiction that are equipment, or inventory leased or held for lease by the debtor to others)

Does not apply to consumer goods, or goods held for sale 2. For intangibles (this doesn’t have a location)- most regularly this applies to accounts3. And for Non-possessory security interest in chattel Paper, negotiable documents of title,

instruments, and money IF the creditor is not in possession, then it is the location of the debtor

What is the location of the debtor? Mellon Bank:

o 7(1) the debtor location is: the place of business or the chief executive office if there is more than one place of business, or the debtor’s principle residence if they do not have a chief executive office

o Chief executive office= place from which the debtor manages the main part of its business operations or other affairs.

o To requires creditors to analyze and understand the internal power structure of related corporations to determine would be unfair. Don’t worry if there is a parent subsid relationship, just look at the place of business.

Subsidiary corporations are their own corporations Look at the managerial decisions and where the persons dealing with the debtor

would normally look

Gimli Auto Ltd v BDO Dunwoody Ltd Facts: Bankrupt company with Chief Executive office in AB leased 3 trucks from a Manitoba Lessor.

It rented these trucks out to customers on short term rental contracts. It also leased an automobile from a BC lessor for it operations in Surry (exclusively used by BC staff) Issue: Where are the lessor’s required to register? Held:

o The automobile: Had to be registered in in the location of the debtor (AB) as the care is highly mobile and was used as equipment. IT is not about how the car was particularly used, it is how the collateral is ordinarily used

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Relocation of the goods post registration s 5(2) covers the situation where the goods are properly registered under s 5 and then they are

subsequently moved to another province The registration will continue for specified period of time:

o (a) not later than 60 days after the goods are brought into the province (maximum)o (b) not later that 15 days after the SP knew that the goods had been brought into the new

provinceo (c) if your original registration comes to an end

BUT: The security interest that remains perfected is subordinate to the interests of a buyer or lessee of the goods who acquires them without knowledge of the security interest AND before it is perfected in the new jurisdiction

Immediate re-location of the goods S. 6 provides an exception to the choice of law rule in s. 5 it applies only if the parties understand

that the goods are going to be located in another jurisdiction and the goods are removed to that new jurisdiction no later than 30 days after the security interest attaches

o In this case, the validity and perfection of the security interest is governed by the law of the jurisdiction into which the goods are re-located

Ex.) Suppose that a farmer in AB purchases a piece of agricultural machinery from an agricultural dealer in SK. The dealer is told that the farmer plans to take the goods into AB, and the farmer transports the goods into AB 10 days later. S. 6 applies and AB is the proper place for perfection of the security interest

Relocation of the debtor post registration If the debtor relocates to another jurisdictions or transfers interest to a person in the other province

and where that debtor location was required to be the place of registration (under section 7) The registration will continue for specified period of time

o (a) not later than 60 days after the goods are brought into the province (maximum)o (b) not later that 15 days after the SP knew that the goods had been brought into the new

provinceo (c) if your original registration comes to an end

NOTE: THERE IS NO SPECIAL RULE FOR A BUYER WITHOUT KNOWLEDGE HERE

Hughes (Re), 2017 ONSC 2421 Poor decision- if we are talking about relocation of goods if it is a section 5 interest look at where the

goods are relocated to. If section 7 look to where the debtor relocated to.

Investment Property 7.1(2) provides a choice of law rule for perfection and priorities

o In the case of a certificated security, it is the jurisdiction in which the certificate is located BUT if the security certificate is perfected only by registration (an inferior method of perfection since priority is easily lost through transfer of certificate to a purchaser), then the location of the debtor governs

o In the case of an uncertificated security, it is the issuer’s jurisdictiono In the case of a security entitlement, it is the intermediary’s jurisdiction

NOTE ABOUT ONTAIRO LOCATION OF DEBTOR TEST In Ontario, for determining the location of the debtor we look to place of incorporation

o So if the litigation is brought in an Ontario Court, and section 7 was at issue, the SP would need to have registered in the place of incorporation.

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CHAPTER 4: THE SECURITY AGREEMENT

The Enforceability of the Agreement In order to be enforceable against a third party the security agreement must satisfy the requirements

under section 10:o (i) The SP must either have possession of the collateral (not by virtue of seizure or

repossession (10(2)); ORo (ii) The writing requirements of the section must be satisfied

Writing requirements:

o Written security agreemento Must have the signature of the debtor

The Electronic Transactions Act validates the use of documents and signatures in electronic form

A corporation will be bound if the person signing the agreement had the actual or apparent authority to bind the corporation

o A description of the collateral

Collateral Descriptions S. 10(1)(d) sets out the methods by which this description requirement may be satisfied:

o (1) Description by item Identifies each specific piece of property

o (2) Description by kind Uses a generic class description Ex.) The security agreement may provide for a security interest in “all computers”

o (3) All- inclusive description A security agreement may provide for a security interest in all present and after

acquired personal property Ex.) All present and after acquired goods

o (4) All- inclusive description subject to specified exceptions Alternatively, the security agreement may provide for an all-encompassing security

agreement, but except from this specific items or kinds of collateral Certain descriptions for collateral are inadequate:

o 10(3)- If it describes the collateral as consumer goods or equipment without further reference to the kind of collateral- this is no good

BUT 10(4) You can describe goods as “inventory” however, if the debtor changed the nature of the use from inventory to something else you may lose your security interest

Granting Clause The whole point of the writing requirement is to show a potential third party that the debtor gave a

security interest in the collateral to the secured party This is ordinarily done through the inclusion of a charging provision, which provides words to the

effect that the debtor grants a security interest in the collateral to the secured party o There is no special form of words that must be used, so long as this intention is made clear on

the face of the document Guntel v Kocian- Make sure that the granting clause is clear and it granting an interest in the

collateral to the SP

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Attachment of the Security Interest s 12(1) the security interest attaches (created) when:

o (a) Value is given Value is defined as consideration sufficient to support a simple contact CAN BE A PROMISE TO ADVANCE MONEY IN THE FUTURE Also includes and antecedent debt or liability (past consideration)

o (b) Debtor has right in collateral or power to transfer rights to a SP The debtor has rights in goods when they are leased or consigned to the debtor

o (c) Enforceability requirements of section 10 are satisfied This is the presumptive rule UNLESS the parties specifically agree in writing to postpone the

time of attachment

Checklist for attachment: (1) Is there value given (or promised) (2) Section 10 requirements satisfied? (3) Does the debtor have rights in the collateral?

o Note the order of these does not matter

Issue about debtor having rights in collateral What if D grants security interest to SP in all property owned by the D

o This has limited the description, it only covers ownership rights

Sprung Instant Structures v Caswan Environmental Facts: Srung leases tent structure to Caswan. Caswan grants a GSA to Royal bank. Sprung does not

register an interest in the tent. The GSA gave the royal bank a security agreement in all present and after acquired property

Including without limitation instruments, intangibles, money and securities now owned or hereafter owned or acquired (this is introducing a possible limitation).

Issue: Who has priority? Does this language limit the collateral available to Royal bank CA: It seems very doubtful GSA broad enough to cover leased goods.

o Wood: This is wrong the CA fails to address why the opening, general language doesn’t cover the interest?

What do we do in AB?o All the other provinces just ignore Sprung. o The SCC has subsequently reject the second part of the decision regarding leases in the

PPSA. BUT what about the first part? I think the answer is that if you clearly limit the security interest to

only owned goods then it probably does not attach to these. But it must be very clear

i trade Finance Inc v BMO Facts: I-Trade (IT) advanced funds to W, under a fraudulent scheme perpetuated by the president of

W. The president used the money advanced to W to purchase shares which they fraudulently transferred to BMO (innocent victim of the fraud). Upon discovery of the fraud, judge ordered that the president’s shares be sold and the proceeds of the sale be put in constructive trust pending further order of the court. It is the allocation of this money that is in dispute.

Issue: Who has priority to the funds held in trust? Will largely be determined by whether BMO is a bona fide purchaser – depends on whether the debtor (i.e. W) had property rights in the collateral

Held: W did have property rights in the shares How? Because when you acquire property by fraud, you do technically acquire title

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Thus, the transaction is not automatically void, but is “voidable ”o THUS – the right to rescind has to be exercised BEFORE any subsequent transfer of

the property’s title to a bona fide/innocent purchaser

After Acquired Property: Section 13(1) where a security agreement provides of a security interest in after-acquired property,

the interest attaches in accordance with section 12, without the need for specific appropriation BUT- 2 EXCEPTIONS

o 13(2) A security interest does not attach to after-acquired property that is (a) crops that becomes growing crops more than one year after the security

agreement has been entered into IMPORTANT (b) consumer goods (other than 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

o Example: A makes a purchase-money loan to B to finance B’s purchase of a sail boat. A

security agreement is executed and money is advanced to B. The agreement contains a provision under which B purports to grant a security interest in “any automobile hereafter acquired by debtor”. B buys a sail boat. B later buys a car for personal use.

Both the sail boat and car are classed as “consumer goods” and both were acquired after the security agreement was executed and are considered after-acquired property

The security interest in the sail boat is a purchase money security interest and thus attaches to the sail boat, despite it being an after-acquired consumer goods

HOWEVER, The security interest in the car is not a purchase money security interest and the after-acquired property clause is ineffective

Future Advances It is very important to specify which obligations are secured by the security interest

o Example: SP obtains a security interest in goods to secure repayment of a loan of $50,000. Later SP makes a second loan of $20,000 to D. Under the terms of the security agreement, SP’s security interest only secures the initial loan. SP has the status of an ordinary unsecured creditor in respect of the subsequent $20,000 loan

BUT:o a security agreement may provide for future advances:o 14(1) Parties may create a security interest that secures later advances if that is the

intention. BUT NOTE The provision of 14(1) doesn’t on its own do this, you must provide for it in the agreement

Eagle Eye Investments Facts: CPC grants GSA to Bank of Canada. GSA secures payment of all obligations

including future. Eagle Eye loaned CPC 456k on an unsecured basis. Eagle Eye then obtained an assignment of the Bank of Canada secured interest.

Language in the agreement:o This Security Agreeement shall be general and continuing security for the payment and

performance of all indebtedness, liabilities and obligations of the Borrower to BDC (including interest thereon), whether incurred prior to, at the time of or after the signing of this Security Agreement….

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Issue: Can Eagle eye use the all obligations clause in the security agreement to cover the 456k unsecured debt?

Held: If you wanted it to be able to achieve this surprising result you need to use clearer language

What if a smart security agreement drafts around this? Will the court allow this?o We aren’t really sure yet. There seem to be basis for the court to intervene but it is beyond the

PPSA.

CHAPTER 5: PERFECTION

General Points: Perfection is really about publication. Letting the public know that you have an interest Perfection is a step necessary to get into the highest financial position but it is not a guarantee that

you will have top priority

The language of perfection S. 19 makes it clear that a security interest is not perfected until it has attached and a step

required for perfection has been taken “Perfection step” – to denote a procedure, most commonly registration that will have the effect of

perfecting an attached security interest “Perfection” – refers to a security interest that has attached and in respect of which a perfection step

has been completed

Methods of perfection Perfection by registration (most common)

o S. 25 of the PPSA provides that a secured party may perfect a security interest by registration o Registration is a universal perfection step in that it can be used to perfect a security interest in

all categories of collateral Perfection by possession (superior for negotiable docs/money see ch 11.)

o Taking possession of the collateral during the financing relationshipo Does not apply to all types. Does not include intangibles or investment property. o Goods,

Chattel paper, Negotiable document of title An instrument Money

o What happens if the secured party releases possession and gives it back to the debtor? Might have a temporary perfection in your favor for a period of time But you have to perfect by some other means eventually – such as registration

o S. 24(1) of the PPSA provides that possession resulting from a seizure or repossession of the collateral by a secured party will NOT BE RECOGNIZED as a valid perfection step

o 24(2) The control by the secured parry must be actual and apparent- ie it must be public

Temporary perfection o Short period of time (15 days) which you can them take up another form of perfection o s 26(1) a security interest perfected under section 24 (control) in a certificated security or a

negotiable document of title will remain perfected for 15 days after the collateral comes under control of the debtor

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in this time you should register Although temporary perfection will give a secured party priority over the debtor’s

trustee in bankruptcy, it is not effective where the competing party is a buyer of goods who has acquired the interest for value and without knowledge of the security interest

Timing of Perfection: s 19 states that it is perfected when (1) it is attached; and (2) there is a perfection

completed o THE ORDER DOES NOT MATTER

Registration itself isn’t perfection, it’s a means of obtaining the status of being perfectedo Ex. Secured party enters into GSA. Section 12 requirements are satisfied then the

registration occurs o Ex. Person registers financing statement. Then the GSA is executed with value.

Then it is perfected BUT notice that there is no point in time here where the security interest is

unperfected. Because registration happens first, the security interest comes into existence it is immediately perfected.

It is a good idea to do a financing this way. There is not point of vulnerability

Change in perfection method 23(1) if a security interest is perfected under this act, and then perfected in another manner without a

period in which it was unperfected- the security interest is continuously perfected for the purposes of the Act.

o Ex. Security interest perfected by possession. Then you release possession to the debtor. And then perfects by registration 20 days later. So it is not continuously perfected because there is only a 15 day temporary window. So there is a 5 day gap of un-perfection

The effect of Non-perfection This generally results in a loss of priority. Not that it isn’t valid, it just drops on the ranking list

Priority competitions- with non-perfected security interest (1) Secured Party vs Secured party (s 35)

o 35(1)(b) – a perfected security interest has priority over an unperfected security interest and first/earliest to register = has priority (s 35(a))

o NOTE – priority between two unperfected security interest holders is determined by the order of attachment of the security interests (first to attach wins)

(2) Secured Party v Writ Creditoro if you have unperfected security interest, and then writ is registered before your interest is

perfected = writ has priority o imperfect interest = subordinate to registered writ

NOTE – if the perfection step has been taken (e.g. interest has been registered), attachment can actually occur AFTER the registration of the writ of enforcement

(3) Secured Party v Trustee in Bankruptcy o s 20(a)(i), a trustee in bankruptcy will have priority to assets over a secured party IF the

secured interest is unperfected at the date if bankruptcy date of bankruptcy can be established in one of two ways:

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(i) voluntary bankruptcy (i.e. the date when the assignment is filed by the debtor)

(ii) involuntary bankruptcy (i.e. date is when an order for bankruptcy is granted by the court. This occurs after the creditor files application to court for bankruptcy order)

(4) Secured Party v Buyer s 20(b) an unperfected interest of a secured party is subordinate to the interest of a buyer purchasing

goods, chattel paper, a negotiable document of title, an instrument, an intangible or money IF three factors are present:

o (i) the buyer acquires the interest under a transaction that is not a security agreement,o (ii) value/consideration was exchanged (i.e. cant be a donation/gift), AND o (iii) the buyer acquired the interest without knowledge of the other security interest and

before the security interest is perfected

Re Giffen Why does trustee in bankruptcy prevail over unperfected SP Facts: Lessor leases goods to Giffen. It would have been a deemed security interest under s 3. BUT it

was not registered. o SO s 20 would say that it was ineffective against the trustee in bankruptcy

Issue: Does this violate the BIA. Ie provincial law violating federal law? Held: No. this approach is correct and consistent with bankruptcy policy. Public disclosure of the security interest is required to prevent innocent third parties from granting

credit to the debtor or otherwise acquiring an interest in the collateral.o trustees are given the capacity to defeat unperfected security interests because of the

“representative capacity of the trustee and the effect of bankruptcy on the enforcement rights of unsecured creditor”

o Prior to a bankruptcy, unsecured creditors can make claims against the debtor through provincial judgment enforcement measures. Successful claims will rank prior to unperfected security interests pursuant to s. 20 (because they would get a judgement and become a writ creditor). Once a bankruptcy occurs, however, all claims are frozen and the unsecured creditors must look to the trustee in bankruptcy to assert their claims.

Two Debtor problem Situation: Does s 20 operate only in respect of the initial sale by the debtor?

o Or does it apply to a further sale by the buyer to another party? EX. SP has an unperfected security interest in the debtor property. The debtor sells to B1 who has

knowledge (so they don’t beat out SP). BUT then B1 sells to B2 without any knowledge. What about B2? Can they assert s 20(b)? In principle it would seem that s 20(b) should not be so

limited. There is nothing that says that the section is only limited to the first sale. There is no clear cut case. BUT for us, we will allow B2 to assert the provision and assert priority over the unperfected secured party.

Under the “nemo dat” approach one might argue that s. 20 operates only in respect of a sale between the debtor and the first buyer (B1). If B1 obtains a flawed title, s. 20 has no further application and B2 can only obtain the interest that B1 had (i.e. an interest subject to SP’s security interest)

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CHAPTER 6: REGISTRATION

Fundamental Principles of Registration (1) The basic idea of the PPSA is that it uses a notice filing system rather than a document filing

systemo With PPSA you register a financing statement that give details of the transaction

(2) It is possible to pre-register. You can file the financing statement before you enter into a security agreement as a result of 43(4)

o This is good because you can complete the perfection step, so it will attach as soon as the security agreement is perfected

(3) The PPSA allows for “blanket registration”- so you can register once for future interest if the description remains consistent. A single registration will so so long as the information in it is sufficient to cover the subsequent registrations 43(5)

(4) With the notice filing system, you don’t get to see the contents of the security agreement. If you want to, section 18 creates an obligation on the SP to disclose this information.

o This information is not limited to a copy of the security agreement e.g. the inquiring party can determine the current amount of the obligations secured

o If the secured party fails to comply with a demand for information, the inquiring party may seek a court order requiring compliance pursuant to s. 18(7)

In addition, the secured party may be liable for damages for any loss caused by the failure to comply

o If the secured party communicates inaccurate information, a statutory estoppel principle comes into play

S. 18(9) provides that the secured party will be estopped from denying the accuracy of the information as against the person making the demand and any other person who can reasonably be expected to rely upon that information

(5) Under section 35, unless there is some other priority rule, it is the first to register as between perfected security interest

Example: o SP 1 registers first. SP 2 comes along, registers, enters into a SA and it attaches. SP 1 then

comes along and enters into SA and it attaches. o SO SP 2 perfected first. BUT SP 1 registered first. So SP 1 would win the priority contest.

SP 2 should have done a search and seen that there was a registration and been warned off.

(6) Controlling abuse of the system: It is possible for a person to abuse the registry system in the following situations:

o By including an over-reaching collateral description in a financing statemento By maintaining a registration after it is clear that there is no reasonable expectation that the

debtor will execute a security agreement in favor of the secured party o By maintaining a registration after the obligation secured by the security agreement has been

discharged S. 50 of the PPSA provides a mechanism to prevent such abuses

S. 50(3) permits a debtor or other person with an interest in the collateral to demand that the registration be discharged or that an overbroad collateral description be amended by narrowing the collateral description

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o If the secured party fails to comply with the demand within 40 days, the person making the demand may discharge or amend the registration unless the secured party obtains a court order under s. 50(7) confirming that the registration may be maintained

o The secured party is liable under s. 67(2) to pay deemed damages as well as damages for any additional loss caused by a failure to comply with the demand

Contents of the RegistrationThrough the financing statement there are 5 key components: (1) Variable Registration life

o Identify the length of the registration. o Anywhere between 1-25 years, or infinity (fee increases with the years)o You can amend this by a financing change statement for additional years

(2) Secured party name and address (not as important as debtor name)o S. 20(2) provides that in the case of an individual, the registering party shall specify the last

name, followed by the first name and the middle name In the case of a corporation, the corporate name is used In the case of other artificial entities, the Regulation specifies the form in which the

name is to be recorded

(3) Debtor name and addresso This is hugely important. Incorrect name can invalidate the registration. o Individual:

Registration requirements: s. 20(2) Determination of the legal name: s. 20(7) S. 20(7) sets out a hierarchy of what a person’s name is

Starts with name on birth certificate, then passport, then SINo Names of Artificial Bodies:

Registration requirements: s. 21(2) Be careful – sometimes you have a corporate entity that carries business under a trade

name use business name NOT trade name During registration, you look at the current name of the corporation at the time of

registration A subsequent change of name deals with s. 51

Whenever there is uncertainty, you can add an additional debtor name - i.e. Trade name

(4) Accurate Collateral DescriptionSerial number goods

o There are special rules for serial # goods. This is not any good that has a serial numbero It is defined in the reg. s 1(1)(y)

Motor vehicle Trailer Mobile home Aircraft Boat Boat motor

o Also need the year and the make and model, as well as the individual code for each item o BUT- THIS IS ALSO DEPENDANT ON THE SUB-CATEGORIZATION OF THE

GOODS:

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o ONLY REQUIRED FOR CONSUMER GOODS. If it is not registered by security number it is not properly perfected

but if held as “Inventory” = registration by serial number is optional (most people don't)

if held as “EQUIPMENT ” = also optional to register by serial number although it is highly recommended because a buyer without knowledge or

another secured party registered by serial number can have priority if you don't register by serial number

o i.e. s 35(4) = if you fail to register the serial number of one of the listed goods held as equipment, then you are still perfected against claimants under s 20(a) (i.e. trustees in bankruptcy) BUT you are not considered perfected for the purposes of s 35(1) – i.e. will not have priority against secured creditors who have registered the equipment by serial number

o !!! will also lose to a BFP/innocent buyero NOTE: YOU MAKE THIS DETERMINATION AT THE TIME THE SECURITY

INTEREST ATTACHES, SUBSEQUENT CHANGES DO NOT CHANGE THE NATURE OF THE GOODS (IE CONSUMER, INVENTORY, EQUIPMENT)

General Collateral S. 36(2) of the Regulations adopts substantially the same formulation as s. 10(2) of the PPSA in

setting out requirements for a valid collateral descriptiono The collateral may be described by: item, by kind, through use of an “all present and after-

acquired personal property” description, or that with an exceptiono The use of “consumer goods” or “equipment” are NOT sufficient o Inventory is sufficient as long as there is no change in the useo The use of an “all present and after-acquired personal property” description is not sufficient

where serial number registration is mandatory, or where serial number registration is required to give the secured party an enhanced priority

(5) Authorized Signature (usually electronic)

Amendments to Registrations Registrations may be amended through the registration of a financing change statement pursuant to s.

44(3) of the PPSAo The amendment is effective from the date of registration of the financing change statement.

The registration will be valid from the date of change. So you are perfected only as of the date that you amended the form

A financing statement may also be used to renew a registration by extending its registration life pursuant to s. 44(2)

o time is added to the end of the original life, not the date of extension

Transfers and Changes of Name S. 51 of the PPSA deals with the situation where a registration correctly records the debtor’s name,

but subsequently there is a transfer of the collateral by the debtor to another person or there is a change to the debtor’s name

A transfer or change of name does not result in a loss of perfection of the security interest The secured party is given a grace period of 15 days after obtaining knowledge to register the

financing change statement. Thereafter, the security interest will be subordinate to a third party who

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acquires an interest in the collateral or a competing secured party who registers or perfects a security interest

o A competing secured party who registers or perfects within the 15 day grace period will also prevail over the secured party if the secured party fails to register a financing change statement within the 15 day period

However, an innocent buyer will take priority

The Legal Effect of Registration Errors If you do not register properly? Multiple situations (1) 43(9) Errors of non-inclusion e.g. describe the collateral as “farming goods” and there are lots

of other goods that aren’t farming goods. Properly perfected in the stuff you did describe, but unperfected in the things you didn’t describe

(2) 43(6) Seriously misleading errors: The validity of the registration of a financing statement is not affected by a defect, irregularity, omission or error in the financing statement or in the registration of it unless the defect, irregularity, omission or error is seriously misleading

o Note: it is an objective test. No one needs to actually been mis-lead by it

What is “seriously misleading” Case power: Majority test for what a seriously misleading error is:

o (i) (the error) would likely prevent a reasonable search from disclosing the existence of the registration, OR

covering a search where it does not come up as an exact or inexact match. o (ii) (the error) would make a person who somehow become aware of the registration think it

was likely not the same chattel (or debtor) it does disclose the registration as an inexact match. BUT it may still be seriously

misleading

Dual Search Criteria Many registrations contain a serial number description in addition to the debtor name the issue is

whether an error in one of the two available search criteria will be cured by correctly disclosing the other

S. 43(7) provides that both the debtor name and the serial number must be free of seriously misleading errors

Case Power Getting the serial number correct does not cure a seriously misleading error in the debtor name. The

debtor name must be free from a seriously misleading error

Error in the serial number All courts have come to the conclusion that an error in a serial number is not cured by getting the

debtor name correct in cases where serial number registration is required

Stevenson v GMAC Leasco Ltd The ONCA and BCCA has held that a correct serial number can fix a debtor name, but all the other

provinces have not. The BC court of appeal has pretty much ignored 43(7). o AB Case Power says no.

Debtor name must be free from seriously misleading error and will not be saved by a correct serial number

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Harder v Alberta Treasury Branches Facts: Registration of the motor vehicle. It is held as the debtor as consumer goods Problem: Incorrect serial number (off by 1 letter) If you did a search it did not come up as a match or an inexact match.

o Theoretically based on the Case power test this would fail the first test Held: Court concludes otherwise They purport to apply the test.

o The trustee in bankruptcy would have known about the interest of the secured party. Why? Because it was an involuntary bankruptcy so they would have had to disclose the assets and liabilities of the debtor.

o Because the trustee would have known, they did not satisfy (ii) test of Case Power. o But what this is doing is changing the test from an objective one to a subjective one.

Most provinces ignore this case.

John Deer Credit inc v Standard Oilfield Error in creditor name The secured party name on the registered financing statement was wrong (was “John Deere” – but

should have been “Deeremart”) The court determined that the error was “seriously misleading” because, by not being able to contact

the SP, the searching parties could not inquire into the nature of the agreement as allowed for under s 18

As parties do not search interests by secured party name, and error in it will not invalidate the interest – BUT it COULD if registration directs searcher to an entirely different person/entity upon attempting to contact the SP

Service Foods Manawatu Overly broad financing statement description Issue: Is this overbroad and seriously misleading? No. It is overbroad. But the secured party would not be misled to believe that all goods would not be

covered. This does not mean that all parties should go out and use the widest possible description. It

won’t invalidate your practice, but it is not the best Ideao BUT s 50 of the PPSA enables debtor to force creditor to change the description/registration

(so as to not restrict them from acquiring further financing elsewhere)

CHAPTER 7: COMPETITION WITH BUYERS

The Cut-off or Extinction rules Competitions between SP and buyers are treated differently than between SPs

o With buyers, a rule that favours the buyer will result in the extinction of the security interest

o With SP v SP, this does not involve a loss of the subordinate claim, but merely an invoking a the priority of the other claim

STARTING POINT FOR BUYERS Buyer over unperfected security interest: s 20 (a) of the PPSA provides that an unperfected

security interest is subordinate to a buyer who is without knowledge of the security interest

Buyer over temporarily perfected security interest: o s 5(2) grace period that takes place when collateral caught under s. 5 is transferred into

Alberta is NOT effective against a buyer.

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o s 51- the temporary grace period afforded under s. 51 is subordinate to innocent buyer under s. 30(5) so long as they bought the goods without knowledge of the agreement and for value

s 28(1)(a) codifies the nemo dat rule. IE the Secured Party has the right to follow their right into the third party. They have an interest they can assert against some third party UNLESS THERE IS SOME OTHER PROVISION THAT PROVIDES OTHERWISE

o NOTE: There is often overlap between these exceptions: For example- if the sale was not authorized under 28(1)(a) then you would look to 30(2)

Exception #1- An authorized sale (applies to all collateral) s 28(1)(a)- Provides that where a sale is authorized (expressly or impliedly) buy the secured party the

buyer will wino Could be express (words orally or written) oro Implied-

Example: If the debtor is a retailer and you sell the inventory. The security agreement may be silent but it may have been intended that the SP is giving the debtor permission to sell (otherwise the business would be paralyzed)

Difficulties may arise where the security agreement contains a negative covenant that prohibits the dealing, but the course of dealings between the parties show that the secured party consented to the transactions

o Where this occurs: court must determine if there had been a contractual variation or waiver of the negative covenant

Lanson v Saskatchewan Valley Credit Union Ltd FACTS: Security agreement given by Nickel to Lanson for mobile home. Nickel sells it to SMT,

SMT sells it to Rempel, and Rempel give a security agreement in the mobile home to Credit union Held: If the secured party authorizes the sale, the fact that it stipulates something has to be done

with the proceeds, doesn’t mean that the seller is not authorized

Exception #2- Ordinary course buyer (lessee) rule (only applies to goods) A buyer or lessee of goods sold or leased in the ordinary course of business of the seller takes free of

any perfected or unperfected security interest in the goods given by the seller (TO THE SP)o UNLESS the buyer or lessee has knowledge that the sale constitutes a breach of the

security agreement Requirements:

o (1) Buyer of goodso (2) Ordinary course of business of the sellero (3) Security interest given by the seller (ie only sales by the original D)o (4) Knowledge aspect – This refers to whether the buyer knew it was a breach of the security

agreement, not whether the simply knew the agreement existed **in cases where there is no authorization of the sale from the secured party, this is the section that

will likely be argued** why? because buyer will win even if it is not authorized (so long as they don't know it’s not authorized)

Important: For this exception the security interest you are taking clear of must be granted by the seller S. 30(2) provides that an ordinary course buyer takes free of a security interest “given by the seller”

this provision does not apply where it was not the seller, but some other person who granted the security interest

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o Ex.) SP takes a security interest in a combine used in D’s farming operation. D, without authorization, sold the combine to B1 who operates a new and used farm implement dealership, B1 resells the combine to B2, who acquires it in the ordinary course of B1’s business

Although the sale to B2 occurred in the ordinary course of B1’s business, the security interest in question was not one that was given by the seller (B1). Rather, it was a former owner (D) who granted the security interest. S. 30(2) therefore does not apply and SP may assert the security interest against the combine in the hands of B2

Bank of New Zealand v Waewaepa Facts: Te Rimu grants a GSA to the bank of New Zealand. Te Rimu then sells a bunch of farm

animals to WaeWaepa Issue: Was the sale ordinary course? Analysis: Ask, (1) What is the ordinary course of the debtor; (2) was this sale in that?

o What made this sale outside of the ordinary course of business was that the sale was to a related party (not a necessary factor) and the price was reduced (because of a past debt). The consequence is that W was an unsecured creditor for that debt prior to the purchase, but after, its debt is reduced so it is essentially granting security in collateral

Camco Inc v Francis Olson Facts: M grants security agreement to Camco. Camco sells large quantity of appliance to M. M then

sold condo units with the appliances in them. M was not purchasing the equipment for resale (so it is not authorized).

Issue: Was this sale in the ordinary course of business? Factors to consider:

o Where/when the agreement was made? If in ordinary business hours/at location for business it looks more like ordinary

courseo Parties? Is this the usual type consumero Reason for the transaction? Selling solely to raise money or part of business?

Here, this was an ordinary course sale. This was M’s business model. Look at the actual business and the nature of the business and how they go about doing it. NOTE: The fact that the seller has never done a sale of that nature before does not preclude it from

being an ordinary course business, so long as it is a usual course of business, that is typically enough.

Royal Bank v Wheaton Pontiac Facts: Keywest granted a security interest the RB. Keywest then sells in non-ordinary course to

Stieben, who sells to D, who sells to Wheaton Pontiac. Pontiac then sells in an ordinary course sale to Morin.

Issue: RB wants to claim priority, is this ordinary course sale. o Stieben – does not take free of the security interest Royal Bank could repossesso Morin wouldn’t take free – Wheaton Pontiac didn’t give it free of a security interesto Royal Bank has the right to recover from Wheaton Pontiac

Royal Bank of Canada v 21600 AB when do you become the buyer When applying 30(2) in order to be a sale, property must have passed. This means that you go to sales law. When does property pass?

o SGA provides that the presumptive rule subject to 1 limitation, property passes when the parties intended it to pass

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o The 1 limitation is that the goods need to be ascertainable. If the property isn’t ascertainable yet, then it cannot pass.

If the parties don’t specify, for identified goods pass when the contract is entered into.

Spittlehouse v NorthShore Marine Inc NOT a good approach Facts: Northshore Marine grants GSA to Transamerica Finance. Northshore marine sells in the

ordinary course of business to Spittlehouse. BUT the sale retained a title retention clause (until 100% of the money was paid title was retained by

Northshore marine) If we look at sales law we would say that the seller still has title, so Spittle house cant be an ordinary

course buyer Issue: Did title pass to Spittlehouse The court held that the buyer had priority per s 30(2) of the PPSA – even though the debtor still

technically had title

Exception #3- Low Value Garage Goods protection for buyer of low value goods 30(3) Low value garage goods- Buyer or lessee of goods that are acquired as consumer goods takes

free from any perfected or unperfected security interest in the goods if the buyer or lessee:o (a) gave value for the interest o (b) bought or leased the goods without knowledge of the security interest

30(4)- BUT 30(3) DOES NOT APPLY IF o (a) the interest was in a fixtureo (b) or the goods exceed $1000 (or market value in case of lease)

Exception #4- Buyer of serial number equipment goods S. 30(6) Serial number goods which, held as equipment, and not properly described by serial

number- Where goods are sold or leased, the buyer or lessee takes free from any security interest in the goods perfected if,

o (a) The buyer or lessee bought or leased the goods without knowledge of the security interest, and

o (b) The goods were not described by serial number in the registration relating to the security interest

Exception #5- Temporary Perfection S. 30(5) A buyer or lessee of goods takes free from a security interest that is temporarily perfected

under section 26, 28(3) or 29(4) or a security interest the perfection of which is continued under section 51 during any of the 15-day periods referred to in those sections, if the buyer or lessee

o (a) Gave value for the interest acquired, ando (b) Bought or leased the goods without knowledge of the security interest

Ex.) SP is given a security interest in a piece of heavy equipment owned by D. SP registers a financing statement recording D as the debtor. On March 10, D effects a legal change of name. On March 20, SP learns of the change of name. On March 25, D sells the equipment to B. On March 30, SP registers a financing change statement which adds D’s new legal name

o B takes free of SP’s security interest by virtue of s. 30(5). Although the 15 day grace period which runs from the time SP obtains knowledge is effective against a trustee in bankruptcy or another secured party, it is not effective against a buyer

IMPORTANT NOTES: Shelter Principle: Once you acquire good title (through one of the buyer rules) you are able to pass

on this title free and clear of any past interest

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Conversion Action: if secured party takes and perfects a valid interest in a debtors collateral, and the debtor sells the collateral to a buyer in a manner that does NOT allow the buyer to “take free” the secured party has access to a common law remedy that allows them to bring a personal action against the buyer (and all subsequent possessors/buyers) in the tort of conversion.

o In order to establish the cause of action: (i) the secured party must have had an immediate right to possession (i.e. there

must have been a default) and (ii) there must have been an intentional exercise of control over the property

which is so serious that the transferee must justly be required to pay its full value

CHAPTER 8: COMPETITION WITH OTHER SECURED PARTIES

The structure of the Priority Rules The general rule is residual in the sense that it applies unless some other special rules is applicable. Perfected vs perfected: 35(1)(a) tells us that these competitions are determined by:

o (i) the registration of a financing statement/ possession/ or some other perfection step Perfected vs perfected: 35(1)(b) perfected over unperfected Unperfected vs unperfected: 35(1)(c) The first to attach. BUT often times this will attach at the

same time so we look to common law and equity.

Continuity of Perfection A security interest can be perfected by any one of the three methods: possession, registration or

temporary perfectiono A secured party may change the method of perfection

S. 23 provides that a change in the method of perfection will not alter the priority status of the security interest so long as the security interest is continuously perfected

BUT s 26(1): A security interest perfected under section 24 in an instrument, or a negotiable document title of goods, remains perfected for the first 15 days after the collateral goes under control of the debtor

Future advances Reminder s 14: Allows for a security agreement to cover future monies owing. SP1 will prevail over

SP2 regardless of knowledgeo BUT you need to have a future advances clause in the initial security agreement. If you do

then the priority will attach to future advances despite intervening loans by other parties BUT exception for WRIT HOLDERS

o SP1 would only win out if they did not have knowledge of the writ creditor. You should notify the SPs that there is a writ. This is going to give actual knowledge

o ALSO, because a secured party who knows of a writ is no longer assured priority, the secured party is released from any contractual obligation to make a previously agreed upon advance to the debtor

Lapse or Discharge and RE-REGISTRATION under 35(8) Lapse= registration life comes to an end; Discharge= before the natural life of registration ends, the

SP files a financing statement to discharge it SO in the situation where SP1 registers first, followed by SP2, where SP1 lapse or was discharged,

SP2 would normally take priority. BUT there is an exception that gives a limited break to SP1

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o Gives SP1 a period of 30 days following lapse or discharge where SP1 can re-register to retake priority over SP2

A special registration procedure under s. 18 of the Regulation identifies the financing statement as a re-registration and gives the registration number of the lapsed or discharged registration

Priority competitions re: lapse/discharge (1) Subsequent Secured Party: DOES NOT APPLY TO 3RD PARTY INTERVENING

REGISTRATIONSo It doesn’t cover a new interest (one that was not registered prior to 30 day period) that arises

in the 30 day periodo If you have an intervening party, you give priority to the intervening partyo This would result in circular priority system. SO we put loss on SP1 who was at fault

(2) Bankruptcy = if the debtor goes bankrupt within the 30 Day Gap, the priority will be between the secured party and the trustee in bankruptcy. As per s 20(1), security interest was unperfected at the time of the bankruptcy = the trustee has priority

(3) Buyer = if the debtor sells the collateral to a innocent buyer during the 30 day gap = then s 20(b) applies and the secured party ‘s interest is held as subordinate to the buyer (i.e. buyer has priority)

Two Debtor problem Situation: Competing security interest granted by different debtors. One debtor sells goods to another

o D1 gives SP1 a security interest in all present and after-acquired goods which is registered on April 1. D2 gives SP2 a security interest in all present and after-acquired goods which is registered on February 1. D1 then sells office furnishings to D2.

Reminder: buyer rules, if the buyer rules cut off SP1 (authorized, ordinary course sale) thereafter SP2 could shelter under D2 good title.

BUT assuming none of these applied, o So now we do have a priority competition between two secured parties

35(9) gives Priority to SP1 despite SP2 earlier registration, unless:o (a) transferee takes free of SP1's security interest [see s 35(10) (shelter principle); oro (b) (i) SP1 knows of the transfer and

(ii) SP2 makes a future advance if this occurs 15 days after SP1 has knowledge but before SP1 amends the registration to disclose the transferee as debtor.

o SO: IF SP1 learns of the sale to D2, it needs to register D2 as the new debtor within 15 days. If they do not, and SP2 makes a future advance (after the 15 days but before SP1 registers) then SP2 beats out SP1 but only in respect of the amount of the advance.

Multiple Security Agreements s 43(5) Reminder: A single registration can cover more than one security agreement if the collateral

description is sufficient stillo This can allow secured party to take advantage of previous (earlier registration)

Agricultrual Credit Corp of Sask v Royal Bank of Canada Facts: ACS enters into GSA with the debtor, and provides Loan A (i.e. $90K). This is immediately

registered first in line BUT the security agreement did NOT cover future advances. Later on, in exchange for Loan B, RBC is granted a GSA by the same debtor, which it then registered

(second in line to ACS). AFTER this, ACS makes a future advance – i.e. Loan C (but with a new security agreement. This is

then registered). Debtor then defaults on loans, and priority competition ensues. ACS clearly has priority to Loan A, but who has priority between Loan B and C?

Held: ACS has priority over EVERYTHING – WHY???

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o Because they registered first, and s 43(5) states that registration covers subsequent security agreements (i.e. don't need a second registration for the second security agreement – even though they did register a second financing statement, it didn't affect their earlier registration)

o And under s 35 – first to register wins ONLY limitation = the initial registration’s description must be sufficient to cover subsequent

security agreements created for future advances (in this case, the initial was a general security agreement = covers the future advances)

Change of Name or Transfer by Debtor s 51 applies where the SP knows of a change of name or transfer by the debtor The SP can lose priority to subsequently created interest UNLESS IT ACTS QUICKLY The SP has 15 days from the date the had knowledge of this change or transfer to amend its

registration o At the end of the 15 day period if another SP2 registers an interest before SP has amended

they have priority. CLOCK DOES NOT START UNTIL SP HAS KNOWLEDGE REMINDER: IF A SALE OCCURS AND THE BUYER TAKES FREE SP1 IS OUT Competitors – listed under s 51(3):

o (i) trustee in bankruptcy (or writ holder): will have priority if date of bankruptcy occurs AFTER the 15 day period is over (but before the SP re-registers)

BUT if date of bankruptcy occurs DURING the 15 day period, SP will have priority even if they do not re-register by the end of the 15 day period

o (ii) buyer w/o knowledge: who acquires the collateral at any point DURING (or after) the 15 day period (but before the SP re-registers = will have priority)

o (iii) a competing SP: can register DURING the 15 days (but will not have priority if the prior SP re-registers at any point during the 15 day period) but if the prior SP fails to re-register = SP2 will have priority as soon as the 15 day period is over

THE APPLICATION OF COMMON LAW PRINICPLES IN PPSAFraud: s 66(1) there is an obligation to act with good faith and in a commercially reasonably manner

o BUT 66(2) a person does not act in bad faith merely because they act with knowledge of the interest of some other person

LIMITATION = if you are engaged in conduct that is fraudulent, then you can be precluded from enforcing your priority

o i.e. if your conduct goes beyond “mere knowledge” o e.g. will be considered “bad faith” IF - the SP deliberately misled another SP into thinking its

security interest was properly perfected (e.g. misrepresented the name of the debtor) OR by performing some act which has the effect of delaying the perfection of the other party’s security interest

Carson Restaurants International Ltd v A-1 United Restaurant Supply Facts: A1 takes a security interest in Yorkton. BUT there was incorrect registration. Mr. Scooter, the directing mind of Carson restaurants, communicates with A-1 and seeks to delay the

enforcement of the security agreement. He does a search and finds out A-1 hasn’t registered properly so he registers Carson Restaurants security agreement. A-1 notices their error and amends it later (becomes perfected on date of amendment AFTER Carson)

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A1 ammends too late. Applying the typical 35(1) rules, Carson would have priority with earlier registration

Held: Carson and Yorkton are related parties. They persuaded A1 not to enforce and in the mean time went ahead and registered (taking priority) themselves.

RATIO: this is more than mere knowledge and constitutes bad faith (Carson was prevented from exercising their s 35(1) priority

Subrogation: This is the principle of substitution. Ie one person in the place of another. Person becomes subrogated

to the rights of that other. The principle: Where a third party with the consent of the debtor pays off another secured party with

a view of becoming himself a first secured party of the collateral, he becomes, in default of evidence of intention to the contrary, entitled in equity to stand, as against the collateral, in the shoes of the first secured party

o Note: You could do the same to have SP1 assign the rights to SP2 after paying them out. (Don’t just rely on equitable subrogation)

Re N’Amerix Facts: BNS had a security interest with priority. EBF then paid out BNS interest. However, after

debtor goes into bankruptcy, they discover there is an invalidating error in the registration of EBF. Priority competition between trustee in bankruptcy and EBF ensues

Issue: Was EBF subrogated into the perfected security interest of BNS? Held: YES. EBF steps into the shoes of the perfected interest (so long as it was still valid at the

time).

Marshalling of Securities: This principle applies where a senior creditor has a higher ranking security interest in two different

forms of collateral, and the junior creditor has a lower ranking security interest in only one of the forms of collateral

o Example: SP1 has $100k security interest in D Goods ($150k) and Accounts ($50k). SP2 has a $50k security interest in Accounts. SO if SP1 chooses to enforce against the accounts first, he will deplete it and there will be none left for SP2. But if SP1 enforced against the goods, SP2 could be covered still

Two theories:o (1) Coercion theory: NOT MUCH USED IN CANADA. Marshelling compels a party to

enforce against the interest where it alone has an interest. o (2) Subrogation theory: DOMINANT THEORY. SP1 can choose which it wishes to go

against. If SP1 wishes to go against the accounts, it can do so. BUT if it does, SP2 becomes subrogated to SP1 in respect of the goods up to the amount of their initial secured interest.

Wood’s view: The subrogation theory is not inconsistent with the priority system. The coercion forces you to go against one good, this is more likely to conflict with the priority system. But note, the case law is thin. It is arguable either way.

o The issue only comes where you have a senior secured party in 2 assets, and a junior secured party with only and interest in 1 of the assets.

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CHAPTER 9: PURCHASE MONEY SECURITY INTERSTSIE. Super Priority

PMSI Generally S 34 provides special priority rules that alter the residual (first to register) rule under section 35

o A PMSI has priority over an ordinary security interest even though it is not registered firsto The PMSI must be given by the same debtor

IMPORTANT NOTE = super priority can only be granted in respect to the new asset acquired (NOTHING ELSE)( Wheatland Industrias Ltd)

The situation:o SP2 is financing the acquisition of a particular asset. So it should prevail over that asset. o This only arises because SP1 is able to take a security interest in future assets (ie present and

after acquired property). SO we need some way to protect a future financier.

What PMSI are covered under section 34(i) Vendor Based Financing (Secured Credit Sales) seller sells goods to a buyer and reserves a security interest in the goods that are sold in order to

secure the unpaid purchase price

(ii) Lender Based Financing **lender advances funds to a debtor for the purpose of allowing the debtor to acquire a specific,

NEW asset AND the funds are indeed used for this purpose – consists of TWO ELEMENTS:**o purpose requirement = credit must have been given to permit the debtor to acquire the new

asset o tracing requirement = the funds must have in fact been used for the purpose

NOTE – often the SP will make the advance directly to the seller rather than the buyer in order to ensure this requirement is satisfied

(iii) A lease for a term of more than one year (i.e. a deemed security interest under s 3(2)) The lessor of the goods- if you fall within this definition, then you have a deemed PMSI although, must be registered to beat out existing secured interests

(iv) a commercial consignment (deemed SI under s 3(2)) The interest of the person who delivers to another under a commercial consignment. If you fall within

this definition, then you have a deemed PMSI although, must be registered to beat out existing secured interests

NOTE: Emphasis on SUBSTANCE (over Form) = whether a transaction creates a PMSI depends on substance over form. Therefore, it is irrelevant whether parties refer to a deal as a PMSI, or fail to do so

[Wheatland v Baschuk]

PMSI in Equipment, consumer goods, document of title, or instrument 34(2)(a) A PMSI in collateral, and its proceeds (subject to s 28), other than intangibles or inventory,

that is perfected not later than 15 days after the day the debtor or another person, at the request of the debtor obtains possession of the collateral

o It is the date of possession of the debtor, not the date the PMSI is entered into o If they do not register PMSI in the 15 days, they do not have the super-priority

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PMSI in Intangibles (accounts) Different rule here because you can’t possess intangibles an intangible or, subject to section 28, its proceeds, that is perfected not later than 15 days after the

day the security interest in the intangible attacheso Must register within 15 days of attachment

PMSI in Inventory 34(3) VERY DIFFERENT RULE 34(3) provides that there will be super priority if:

o (a) The PMSI in the inventory is perfected at the time the debtor obtains possession o (b) The SP must also give notice to any other SPs who, before registration, has registered a

financing statement containing a descriptions that includes the same item or kind of collateral The notice must include: (a) the person expects to acquire a PMSI in the inventory (b) describes the inventory by kind or item (c) must be given to the SP before the debtor (or another person at the request of the

debtor) obtains possession

IDEAL APPROACH- SUMMARY OF STEPS WHEN ACQUIRING A PMSI: (1) REGISTER – always register first (2) then SEARCH the registry – will be able to see your own registration, and anyone else who has an

earlier registration (3) if applicable (e.g. dealing with inventory) = provide previous secured parties notice of impending

PMSI (4) then go through the standard steps of perfection (s 10 req’s, attachment) (5) THEN, and only then, release possession to the debtor (this eliminates any concern over the 15

day clock)

TRICKY PMSI SITUATIONS

(1) Two Debtor scenario (PMSI not given by the original debtor) Super priority in s 34(2) and (3) only applies where the competition is with a security interest in the

same collateral, given by the same debtor = by its very nature, PMSI’s cannot apply to two debtor problem

o EXAMPLE = SP1 is given a security interest in D’s commercial bakery oven which SP1 perfects by registration. D sells the oven to B without authorization and outside of D’s ordinary course of business. SP2 made a purchase-money loan to B to enable B to acquire the oven from D. SP2 registers within the requisite 15-day period

In such a case, s 34 does NOT apply to give priority to SP2, even though SP2 has a PMSI in the oven

o Why? because a PMSI is inapplicable in two-debtor situations (the competing security interests must be given by the same debtor in the same collateral)

(2) Competition between 2 PMSI Lenders s 34 does not resolve this, so we revert to the default rule s 35 the first to register

(3) Competition between 2 PMSI (1 Lender 1 Seller)

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PMSI Seller = the seller of the specific asset who provides financing to the buyer/debtor to purchase the asset (and is granted a PMSI interest to secure the unpaid purchase price)

PMSI Lender = third party lender who provides financing to debtor for the purchase of the specific asset (and is granted a PMSI in the asset in return

S 34(5) deals with this:o E.g. $30K car = debtor tells lender he is paying 15 and needs 15 loaned. After acquiring this,

debtor goes to seller and gives the 15 from the lender, and asks for 15 from them (grants PMSI’s to both)

In such situations, s 34(5) states that the seller based PMSI has priority over the lender based PMSI (so long as it is procedural steps are adhered to and it is properly registered)

o IMPORTANT NOTE – this ONLY APPLIES TO “GOODS” BUT: REMINDER IF 1 OF THESE PMSIs is not registered within 15 day window, then the

other would have priority Examples: Ex.) Lender registers PMSI on May 20. Seller registers PMSI on May 30. Debtor obtains possession

on May 18 o Seller perfects within 15 days of possession, as does lendero So by virtue of s. 34(5), the seller has priority over the lender

Ex.) Same question but what if debtor obtained possession on May 10?o Seller Not within 15 days o Seller loses the benefit of the priority rule – doesn’t lose its status

Ex.) Same question but what if the debtor obtained possession on May 1?o Neither lender or seller have complied with the procedural requirements o Seller didn’t register within 15 days o Neither of them can provoke the super priority o Go to residual rule if s. 34 isn’t available if the special rule doesn’t apply, we go to the

general rule in s. 35 – go to who was first to register

(4) Competition between PMSI holder and Trustee in bankruptcy/buyer In a PMSI context, what happens if the debtor enters into bankruptcy within the 15 day window in

which the secured party has to register, which he does, but only AFTER the date of bankruptcy? (which occurred earlier in the 15 day period)

o trustee in bankruptcy: S 22 states that secured party with PMSI has priority over trustee in bankruptcy so

long as they do eventually register the interest within the 15 day period (even if it occurs after the date of bankruptcy)

S 22 extends super priority over trustees in bankruptcy (if properly registered/procedures complied with)

Even though PMSI was unperfected at date of bankruptcy, so long as the secured party perfects it within the 15 day period, then they still have priority over trustee in bankruptcy

o BUT Innocent buyer without knowledge: if the goods were sold to an innocent buyer without knowledge within the 15 day

grace period (i.e. but before the PMSI was registered) innocent buyer wins authority for this is s 20(b) = as the interest is “unperfected”

If there was a regular SP in the mix as well would want to consider buyer rules.

Wheatland Industrias Ltd v Baschuk Must be “new” goods

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Facts: Owner of a piece of equipment wanted to get it repaired. Could not afford it. So it goes into a transaction where Owner sell it to W, W sells it back and reserves a security interest.

Issue: Is this a PMSI? Held: Although it is technically within the definition, it is not really a PMSI. The whole idea is that it

is financing the acquisition of a new good. This is not expanding the debtor’s finance pool Ratio: It needs to be the acquisition of a new piece of collateral so as to fall within definition of

PMSI.

Mack Canada Inc v Essential Concrete Ltd What is “possession” of the debtor Facts: Mack delivered vehicles to Essentials on June 28 (i.e. took possession). In September, having still not been paid for the vehicles, Mack determined it was necessary to take a

security interest in the collateral in order to protect its rights. On Sept 14, Essential executed the vehicle purchase and a conditional sale agreement. Mack notified pre=existing secured parties of their intention to acquire a PMSI. Mack registered its security interest in the vehicles on Sept 19.

Issue: When did Essentials take possession? Held: Mack has priority due to his status as a valid PMSI holder

o This is because Essential did not gain possession of the vehicles in their capacity as a debtor until Sept 14 (i.e. when security agreement was created) = only at this point were they considered debtors with an obligation to a secured party

o It is from this point that the 15 day period to register commences Ratio: It is not just possession, it is possession of the collateral as a debtor. On June 28, they were

not holding it as a debtor as Mack thought that they would be receiving payment immediately. o This could be the case in a “trial period”- It is not from the initial possession. It is not until

the debtor says “okay I’ll buy it”

Add-On Clauses “dual status” Can have transactions where secured party agrees to provide financing for debtor to buy asset, but

wants a security interest in the asset AND other property owned by the debtor (such an addition is considered an “add-on clause”)

o Issue = does presence of an add-on clause effectively terminate the creditor’s PMSI status in the asset that was financed?

There are different lines of authority for this – but typically, it is believed that add on clause does not terminate PMSI status, but creates a “dual status” situation

o i.e. creditor with have a PMSI in the asset purchased, and an ordinary security interest in the other property (i.e. and normal priority rules will apply to the interest in the additional property)

Add-on Obligationso Suppose I am selling you a very expensive combine. I as the seller take a PMSI in this.

Suppose the SA says that it also secured any other obligation that you may owe me. Suppose I have previously supplied you parts and you haven’t paid me yet.

o The same approach should be used here. It is only a PMSI in respect of the combine, it is just a regular security agreement in respect of the other portion.

Clark Equipment of Canada v BMO Add on clauses Facts: PSMI in equipment was properly registered under 34(3). BUT Clark’s security equipment did not limit itself to the PMSI equipment:

o It was in all present and after acquired products Issue: Did this result in losing the super-priority over the financed equipment? The “Add on” was not a PMSI so they could not rely on the super-priority for those aspects BUT the

add-on does not destroy the super-priority interest.

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The dual status approach= Creating a PMSI for one aspect and then just a regular security interest for the other aspect.

Consolidation of Security Interests To what extent will a PMSI survive a consolidation Loan Consolidation= the debtor has a number of different loans outstanding and consolidates them

all such that they become one big loan requiring one payment per montho Where debts are consolidated, the PMSI status will survive

Consolidation allows you to retain your status but does not improve it – i.e. you cannot obtain more than you would have had there not been a consolidation

PMSI example:o SP has two different PMSI, so the SP consolidates the loans. So there will be a single

payment each month as opposed to multiple different payments. The Debtor must agreeo So the loan for 20k and 10k are combined for a loan for 30k.

YOU RETAIN YOUR PMSI STATUS

Battleford Credit Union Ltd v Ilnicki

The value of the obligation owing is $16k, value of the collateral is $16k SP2 would only have a PMSI on $1k of the baler (SP1 would have priority on the remaining 5k), SP2 would only have $10k against the Auger (As that is all it is worth IE if it depreciates, SP loses

out) Just because you consolidate does not mean you get to combine the values. You treat it as if they

were separate obligations to pay out still. Two separate tanks to drain. YOU ARE LIMITED BY THE VALUE OF THE PMSI GOOD

How do we allocate payments on a consolidated Debt? One American approach- The First in/First out Rule- Clayton’s Case

o RULE (from RE Conn] = o (1) IF there is a statutory or contractual provision stipulating how the money is to be

allocated, then apply thato (2) BUT where no such formula exists, apply the “First in, first Out Rule” (from Clayton) =

payment are to be directed at the first in time obligation, and once that obligation has been extinguished, the payments are to be applied to the second (and so on)

There is another approach is being proposed in Canadao (i) Look to the contract o (ii) Or if the debtors specifies where the payment is to be applied. o (iii) Formula proposed:

(i) Payment is directed toward any unsecured obligation of the SP;

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(ii) after this, pay out non-PMSI in the order incurred; (iii) pay out the PMSI as they were incurred. This is the way SPs would want it

Can one party pay out another PMSI? Ex SP1 has a regular interest. SP2 has a PMSI. SP3 comes in and pays out SP2 PMSI (or advances

funds to D to pay back SP o Is SP3 now in the shoes of a PMSI? This is important if there is a SP1 out there with better

priority otherwise.

Battlefords Credit Union v Ilnicki Facts: BCU gives money to debtor to pay out the PMSI. Issue: After paying out the PMSI holder, what happens to the super-priority? Held: The, SP3 becomes the holder of the PMSI that was held by SP2 as a result of paying out SP2.

o BUT the way that they get there is problematic according to WOOD.o They said that the SP3 loan was an “enabling loan” so as to qualify as a PMSI (giving the

debtor the ability for the acquisition of “new property rights.”o But really all that is happening here is replacing one secured party with another, this is not

enabling the debtor to increase its collateral pool. This approach can be seen as overbroad if one considers the following situation: What would happen if the debt being paid out was NOT a PMSI, but just an ordinary security

interest?o By the court’s reasoning, such would still be considered an enabling loan = would give new

lender a PMSI interest where one didn't exist before i.e. by paying out a normal security interest, the new lender would get a PMSI

interest in return (i.e. would not be fair to other secured parties who had established priority

The real answer here is just subrogation. SP3 Steps into the shoes so SP2. o Practical point though: Don’t rely solely on subrogation, they should also attain an

assignment. But even if this is not done, the subrogation should theoretically work. Note: this is wood viewpoint. BUT we have to CA decisions that say that when you pay out a

PMSI of another you obtain a PMSI because it is an enabling loan.

CHAPTER 10: PROCEEDS

Introduction to proceeds Section 28 gives the secured party a security interest in the proceeds whether or not the security

interest in the original collateral is lost. o Because the original security interest of the SP will often be cut off (through one of the buyer

rules).o The approach of the PPSA is to give a security interest in the proceeds of the sale

Additionally= if the SP’s interest in the asset is NOT “cut-off” by the sale to the buyer, the secured party is permitted to enforce a security interest against BOTH the original collateral (in the hands of the buyer) as well as the proceeds held by the debtor (s 28(1)(b))

o You can’t get more than the market value at the time of the sale by the debtor (the price may fluctuate)

Proceeding Against the Original Collateral and Proceeds

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NOTE: It is not limited to cases where the original collateral was lost. You can still claim proceeds where your rights in the original collateral remain.

o But where the 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 original collateral at the time of the dealing

o Ex.) SP is given a security interest in D’s crane. D sells the crane to B for $50,000 under circumstances such that SP’s security interest in the crane is not lost. B pays for the crane by giving D a cheque for $20,000 and a bull-dozer in trade. Three years later, the debtor defaults. The crane presently has a value of $35,000, while the bull-dozer has a vale of $25,000

SP may claim a security interest in both the crane and the bull-dozer. However, SP may not recover more than $50,000 (the market value of the crane at the time of the sale by D to B)

Definition of Proceeds 4 requirements (1) the proceeds must be “identifiable or traceable”

o “identifiable” = when it is factually possible to point to the particular property resulting from the dealing

o “Traceable” = involves application of common law and equitable principle when proceeds are no longer identifiable (e.g. when mixed into debtor’s bank account with other funds)

(2) the proceeds must take the form of personal property o i.e. consider the categories at beginning of semester (e.g. cannot trace if the trade was for

land)o example include cheque, trade-in, money, chattel paper, etc.

(3) the proceeds must be derived directly or indirectly from a dealing with the original collateral or its proceeds

o i.e. this means that continued right to proceeds applies to second and third generation proceeds as well so long as there is a sufficient connection (i.e. proceeds of proceeds)

example = SP takes a security interest in D’s truck. D sells the truck to B and takes an automobile in the trade. D later sells the automobile to C and takes a snowmobile in trade.

The original collateral is the truck. It was sold to B, giving rise to proceeds in the form of an automobile (first-generation proceeds). When these proceeds are sold to C, the transaction gives rise to further proceeds in the form of a snowmobile (second-generation proceeds). Subject to the limitation in s. 28(1) and any buyer priority rules, SP could enforce the security interest against all three items (the truck in B’s hands, the automobile in C’s hands, and the snowmobile in D’s hands)

(4) the debtor must have acquired an interest in the proceeds o i.e. the debtor must have rights in the proceeds themselves (i.e. the proceeds must have

“passed through the debtor’s hands at some point”)

The requirement of Debtor Interest in Proceeds In order to fall within the definition of proceeds, the debtor must have an interest in the property

claimed as proceedso Example: SP take a security interest in a truck. D sells truck to B1 (Not cutting off D1

interest) and gives a trade in to D. o B1 then sells the truck to B2, B2 pays by way of cheque. o Can the SP claim interest in the cheque

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NO. because the debtor needs to have acquired interest in the proceeds in order for SP to have in interest (at some point)

o SO, if D sold the trade in to B3, SP can claim against the trade in because the Debtor had an interest at some point.

Second Generation Proceeds The definition of proceeds includes personal property derived from a dealing with proceeds. A

secured party may therefore claim a security interest in proceeds of proceeds Example: SP takes a security interest in the truck. D sells the truck to B1. B1 pays with a cheque and

trade in. D then sells the Trade in to B2, B2 pays with an account. o SP would have a security interest in the account.o Factually it may become difficult to show the connection of the transactions

**OTHER EXAMPLES OF PERSONAL PROPERTY THAT CAN QUALIFY AS “PROCEEDS”** Fixtures and crops Right to insurance payment from loss or damage to the collateral Payments made in discharge or redemption of assets

o i.e. cheques or other forms of payment received when an account is paid oro funds received when redeemable shares are redeemed by the issuing corp (i.e. money

received when shares to which secured party has an interest are sold)

PMSI IN PROCEEDS

Chrysler Credit Canada Ltd v Royal Bank of Canada Facts: RBC has a GSA with White Motors. Chrysler takes a PMSI in the inventory of White. They properly register. So they have priority in

respect of the vehicles. BUT then White motors sold the vehicles to customers and the customers would give trade in

vehicles as well as funds. There were 44 second-hand vehicles in stock when the Receiver assumed control of the business.

Their origins fell into one of three categories:o 1. 4 were identified as first trades on the sale of new cars - the loans for whose wholesale

purchase by White had not been repaid to Chrysler Credit.o 2. 31 were first or later trades traceable to the sale of new cars - the loans for whose

wholesale purchase by the dealer had been repaid to Chrysler Credit.o 3. 9 were incapable of being linked, either directly or indirectly, to the sale of new cars

Issue: CAN Chrysler claim a PMSI in the trade in vehicles? If Chrysler could show that they are proceeds, the superpriorty in the PMSI would extend to proceeds. How it works: Generally the dealership has an inventory list of all the new vehicles for sale. Once

sold the dealer would pay the wholesale price back to Chrysler, once this is done, the vehicle is crossed off the list.

In respect of the 4 identified as first trades on the sale of new cars - the loans for whose wholesale purchase by White had not been repaid to Chrysler Credit. CLEARLY HERE, CHRYLER WOULD HAVE A PMSI AS THEY HAD NOT BEEN PAID OUT

o The controversy surrounded the 31 that were first or later trades traceable to the sale of new cars - the loans for whose wholesale purchase by the dealer had been repaid to Chrysler Credit

o What happens when they haven’t paid out Chrysler. Can Chrysler go against a trade in vehicle from a transaction that has been paid out, to secure a transaction where no trade in was given?

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No. A PMSI can only secure a PMS obligation. Once the obligation is gone (paid out) then you have no PMSI

Summary : (i) Your super-priority extends to the proceeds; (ii) it is capable of extending the collateral you can recover against.

The Tracing Requirement- The FINAL ELEMENT Reminder, proceeds must be identifiable, or traceable

o Identifiable is easier- Are you able to point to something and say that it was obtained in an exchange

o The harder case is where you can’t do this. Where you can’t say for sure which funds they are The definition of proceeds incorporates the concept of tracing. This is where it is not possible to

identify the proceeds by virtue of them being mixed with other property o Ie When the debtor sells something, receives money and then deposits it in his bank account

THE RULES FOR INTERMINGLING FUNDS-o (i) First Proceeds Rule:

When the debtor mixes the debtor’s money with that of another, the debtor is presumed to withdraw the debtor’s own money first

o (ii) Intermediate Balance Rule: If after applying the presumption, the account balance dips below the total amount of

proceeds, the security interest is adjusted downwards. New additions of non-proceeds funds do not accrue to the proceeds

balance.

Proceeds Deposited

Non-Proceeds Deposited

Withdrawals End Balance Proceeds Remaining

1. $50,000 $50,000 $50,000

2. $50,000 $0 $0

3. $50,000 $50,000 $0

4. $50,000 $100,00 $50,000

5. $60,000 40, 000 $40,000

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6. $50,000 $90,000 $40,000

What about in the case of competing Security Interests in proceeds? The SCC tells us we do a PRO-RATA sharing (Bougher v Greyhawk Equity Partners Limited

Partnership (Millenium) o = the individual SP’s contribution/ the total of the fundso Deplete the proceeds proportionally o NOT first in and first out

SP1 deposits 100k into the account SP2 deposits 100k into the account (200k total now) Withdrawal of 100k. So each SP notionally has 50k Sp2 deposits another 100k. This shouldn’t result in SP1s amount to increase. So we

apply pro rata only to the point it has been depleted. SP 1 50K, SP2 150K

Bougher v Greyhawk Equity Partners Limited Partnership (Millenium) Facts: Establishes the principle where there are multiple SPs A deposits 100 B deposits 300 Withdrawal 200

o Account balance = 200 Pro rata sharing= 50 for A 150 for B

What if the whole account was drained and then A deposits 200? Applying the intermediate balance rule, A would have 200

o It is not about redistribution, it’s a property analysis. There is one case where we would simply use the pro rata approach and that is where it is not

possible to determine the sequence of events and make that calculation. BUT always use the other approach first if you know the sequence of events.

ProceedsSP1

ProceedsSP2

Withdrawals End Balance

SP1 Proceeds Remaining

1.$50,000 $50,000 $50,000

2. $50,000 $0 $0

3. $50,000 500

4. $50,000100 50

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5. $60,00040 20

6. $50,00090 20

The Process for Tracing1. Apply the intermediate balance rule while funds are just mixed with debtor’s funds

Then remove the funds equally (i.e. proportionately) when withdrawals are made from the mixed proceeds

2. Then pro rata divide them = based on each party’s contribution (but not the total contribution made from each – just their contribution at the time when they were first mixed).

NOTE: 2 stages: (1) Do you have an interest in proceeds at all? (All of the info above)

o If the answer is no, then stop, no point in going furthero Use tracing rules if there is a mixture

(2) How do you perfect a SI in proceeds? And what is your priority? (All of the info below)

Perfection of Proceeds Assuming that you have an interest in the proceeds, you must determine whether it is a perfected

interest. (1) As between the Secured party and the debtor, it is unnecessary to perfect a security interest in

proceeds (the same as the original rule on perfection). o Perfection is about notice to the 3rd parties, not the debtor

(2) As between the secured party and third parties, a failure to perfect will usually result in a loss of priority as a result of s 20, and s 35

o Whether it is an interest in the original collateral, or in proceeds, without perfection you lose to a trustee in bankruptcy, a buyer without knowledge, or a perfected secured party

How do you perfect? THREE METHODS OF AUTOMATIC PERFECTION 28(2)- A security interest in proceeds is continuously perfected security interest if the interest in the

original collateral is perfected. o 28(2)(a) Proceeds Description: They will be automatically perfected if the financing

statement contains description of the proceeds that would be sufficient to perfect a security interest in the original collateral of the same kind

Ie if you are able to predict, or have a general idea what the proceeds will be you can fill this out

Ex, trade-ins, goods, accounts etc.o Note however, “goods” would not perfect serial number goods that

are the proceeds (ie consumer, or equipment)o 28(2)(b) Original Collateral Description: Registration of a financing statement that covers

the original collateral, if the proceeds are of a kind that are within description of the original collateral

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You have a financing statement that is “automobiles” and then the proceeds are trade ins, then the original financing statement would cover the proceeds as well. Here you don’t need a proceeds description at all.

o 28(2)(c) Automatic perfection for money, cheques, deposit accounts in financial institution: previously perfected interest will cover/continue if the proceeds of the collateral is in the form of “money, cheque, or deposit of accounts in a financial institution”

RESTRICTION = will not be able to enforce this perfected interest in the proceeds in the bank account if the account is in overdraft (i.e. see Flexicoil)

Safety Net perfection . TEMPORARY PERFECTION Only look here if you are not perfected under one of the 3 possibilities under 28(2) S. 28(3) provides a temporary perfection period where a security interest in proceeds is not perfected

in accordance with s. 28(2) o the secured party is given 15 days after the date of sale to perfect the security interest in the

proceeds – if this is done, the security interest will be continuously perfectedo IT IS 15 DAYS FROM THE SALE. SP DOES NOT NEED KNOWLEDGE OF SALE

Temporary perfection vs Trustee in Bankruptcy? o If the bankruptcy occurs within the 15 day “grace period” and before the SP has re-perfected

the financing statement, technically the SP is still “temporarily perfected.” So the SP wins BUT NOTE, if the bankruptcy occurred on day 16 onwards, and the SP had not yet

perfected, the trustee would win

Temporary Perfection vs Innocent buyer ? o A temporarily perfected interest will be defeated by a buyer without knowledge if sale of the

proceeds occurs during the 15 day period – regardless of the interest being temporarily perfected (i.e. s 30(5))

o EXAMPLE = original collateral sold, and 15 day period starts 2 days in the proceeds are sold

Even though the interest was temporarily perfected, the buyer takes free so long as the sale was for value, and the buyer had no knowledge that the sale would breach security agreement

Temporary Perfection vs Secured Party o If another secured party arises during the 15 day grace period, but original Secured Party

DOES register within the 15 days the prior/original SP will have priority (under s 35(3) o Only if the prior SP fails to register within the 15 days will the interest lapse = giving priority

to the competing SP

Priority of the Proceeds Security interest S. 35(3) and s. 34 provide that a security interest in proceeds enjoys the same priority as that of the

original security interest o 34(2) Priority in a PMSI will also continue

A security interest in proceeds that is continuously perfected will generally have the same priority ranking as a security interest in the original collateral the security interest in the proceeds is viewed as an extension of the security interest in the original collateral, and therefore it is given the same priority

Special Proceeds Priority Rules

(1) PMSI in accounts as proceeds vs Non proceeds interest in accounts

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EX. D grants a security interest in accounts to SP1. SP2 comes along and takes a PMSI in D inventory

o D sells some inventory. Customer does not pay immediately, so D acquires an account with the creditor. WHO HAS PRIORITY OVER THIS ACCOUNT?

s 34(6) = Contest btw Non-Proceeds Security Interest in Accounts (receivables) v PMSI in Accounts as Proceeds

o where a competition arises between an account financer and a secured party who claims a security interest in the proceeds of inventory (Note: this rule only applies to account receivables, not money in bank accounts)

RULE = the non-proceeds security interest has priority over a PMSI in the accounts as proceeds of inventory

**although the non-proceeds interest (e.g. GSA) will only win if it was registered FIRST**

o Why? because when you have a bank who registers first, and has accounts as its collateral, the bank should have priority to the accounts

The bank is making its loan on the basis that the accounts will be available upon default (would be unfair to preclude them the accounts

o NOTE: ONTARIO has adopted the different rule, giving priority to SP2. They cure this prejudice to SP1 by requiring SP2 to give a PMSI notice to SP1.

NOTE: This is not just where a SP has an interest in accounts. If they have a GSA (which includes accounts) then this will have priority over PMSI in the accounts (if registered first).

Transamerica v RBC Facts: RBC has perfected security interest in ALL of debtor’s present and after acquired personal

property from June 1982. Debtor had a bank account registered at RBC. Transamerica (T) had a PMSI with the debtor for

inventory provided which was perfected in April of 1988 (6 years later). Debtor made several dealings with the inventory and had received payments which were placed in the bank account with RBC (wrongly did not send them to T). Debtor then went bankrupt

Issue: Who takes priority between the inventory financier holding a PMSI and the bank holding a GSA.

Held: Inventory Financer takes priority o Court stated that s 34(6) did NOT apply o Why? because s 34(6) only applies to accounts in the form of funds that customers/third

parties owe to the debtor (NOT money the bank owed to the debtor)o Section 34(6) is designed to cover accounts generated by sale, where a third party rules the

account (e.g. accounts in form of money owed to dealer by customers of purchased inventory)

(2) Non- Proceeds PMSI vs Proceeds PMSI s 34(7)(2) Covers the situation where there are two PMSI interests. One in proceeds, one in original

collateral that are now covering the same collateral. Rule: non-proceeds PMSI has priority over a PMSI in the same collateral as proceeds if the non-

proceeds PMSI has followed the correct procedural steps to registero If collateral is inventory = must be perfected by the date debtor obtains possession of

the collateral o If NOT inventory = must be perfected no later than 15 days after the debtor obtains

possession

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Ex.) SP1 takes a PMSI in a truck. The debtor then purchases an automobile and gives to SP2 the truck in trade. The parties are fighting over the automobile

o SP1 has a PMSI in the truck, truck is sold and an automobile is taken in tradeo SP1 has a PMSI in the automobile as proceeds SP1 has a proceeds PMSI in the

automobile o SP2 has a PMSI in the automobile as the original collateral o Both have PMSI – one as proceeds and one as original collateralo We give priority to SP2 – the one who has taken a PMSI in the original collateral, so long as

the register according to the parameters provided in s. 34(7)

Final Note on Tracing

Agricultural Credit Corp of Sask v Pettyjohn Facts: Family raising cattle. They obtain financing for the original cattle. The bank financed the acquisition of the ordinary cows/collateral and took a PMSI in the original

cows. Before the money is actually provided by ACCS, debtor’s acquire a bridge loan with which they actually purchase the cattle. They then use the loan from ACCS to pay off the bridge loan. Thus when the loan was made by ACCS, the debtors actually already owned the cattle.

The original cows are then sold by the debtors without any authorization – and subsequently replaced with African cattle. Upon default of the debtor, the ACCS wants to claim they had a PMSI in the original cattle, and thus can trace their PMSI interest to the African cattle

Issue: Did ACCS have a PMSI in the original cattle? AND If so, can ACCS trace the PMSI to the African cattle?

o TWO ISSUES TO BE DETERMINED – i.e. steps to be taken in the analysis: (i) did creditor have a PMSI in the original cattle? If yes, go to next stage (ii) was creditor able to trace its PMSI to the African cattle?

Held: (i) Did the Creditor have a PMSI? (BRIDGE LOAN ISSUE) The lender extended $50k for the purpose of purchasing these cattle. A PMSI loan must be money

given for this purpose and it was used for that purpose. o The difficulty was that in one case, the family already owned one cow and then the loan was

used to pay it off. How can it be a PMSI if they already owned the cow. o however, Court said that it was unreasonable to divide the transactions = It was really

two steps in a SINGLE transaction (viewed the separate transactions as singular) = ACCS determined to have a PMSI in the original cattle (move to step 2)

o THUS = if bridge financer is used – still will be considered “one transaction” (at least this can be argued)

o IF YOU ARE USING THIS MAKE SURE THAT THE PROCEEDS DESCRIPTION IS ADEQUATE

(ii) Can the debtor trace the proceeds to the new cattle?o If you could show that you sold the first cattle and then took that money and bought the

cattle, no problemo BUT they were acquiring the new cattle before having even sold the old cattle.

Court Recognizes the “functional Equivalence Rule o The court said that The tracing under the PPSA may actually vary from the common law

rules in appropriate circumstances. o The court did not apply the standard equitable tracing rules

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If they had, Court would have concluded that some but not all of the proceeds were used to buy the African cattle

o INSTEAD They recognized a new rule for the PPSA. The “functional equivalence rule” We won’t be so concerned with the sequence of events IF the replacement asset is

functionally equivalent of the original asset. o Instead, you can look at the NATURE of the property and its function in the affairs of the

debtor E.g. old cattle sold, new cattle acquired = functionally equivalent Thus, don't need to look at the sequence of events – can just determine that the cattle

are functionally equivalent = they can be traced from one to the othero If property acquired by the debtor has the same function as the original collateral, then the

court will permit a secured creditor to claim it as proceeds The difficulty with this approach is twofold:

First, it introduces an uncertainty regarding when as asset is to be considered to be functionally equivalent.

Second, it is completely contrary to the conventional tracing principles that require a connection between the asset dealt with and the asset obtained as a result of this dealing.

This was a radical decision by the court. It required that you dealt your property and acquired something in exchange, this is not what the court is saying here.

o Suppose we have a case where the account balance is 0, original cattle are sold and the funds are put in the account. The debtor spends this money on something else. The debtor then deposits 100k of funds from another source, and acquires the new cattle. If you applied the functional equivalence test, then it would not matter the order or the funds. But this does not follow the traditional rules.

FOR THIS CASE, THE FIRST PART IS LAW , BUT THE “FUNCTIONAL EQUIVALENCE TEST IS QUESTIONABLE

CHAPTER 11: OTHER SPECIAL PRIORITY RULES Check to see if these apply, if not apply the typical rule under s 35 Not any theme here, just a bunch of different little rules

o Negotiable Assets – s 31o Non-Consensual Security Interests – s 32o Fixtures and accessions – ss 36-38o Commingled Goods – s 39o Subordination Agreements – s 40o Investment Property – s 35.1

SPECIAL RULE #1- NEGOTIABLE ASSETS Here we give special priority to the holder of certain asset. There are 5 key rules

o Holder of money – s 31(1)o Payments to creditors – s 31(2)o Holders of cheques – s 31(3)o Holder of documents of title – s 31(4)o Holder of chattel paper – s 31(5)

A. Holders of Money 31(1) and Payments to Creditors 31(2)

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Bank has taken a security interest in present and after acquired property. This might in inhibit the debtors from using their funds to pay their creditors. We don’t want the lender being able to do this

31(1) a holder of money has priority over any perfected security interest if the holder:o (a) acquired the money without knowledge that it was subject to a security interest, ORo (b) is a holder for value, whether or not the holder acquired the money without knowledge

that it was subject to a security interest. (i.e. doesn't matter if there was knowledge so long as value was given)

31(2) Payment to creditor: A creditor who receives an instrument drawn or made by a debtor and delivered in payment of a debt owing to the creditor by that debtor has priority over a security interest in the instrument whether or not the creditor has knowledge of the security interest at the time of delivery.

B. Holders of Instruments 31(3) A purchaser (including another secured party with possession) of an instrument has priority over a

security interest in the instrument perfected under section 25 or temporarily perfected under section 26 or 28(3) if the purchaser

o (a)  gave value for the instrument, o (b)  acquired the instrument without knowledge that it was subject to a security interest, and o (c)  took possession of the instrumento The word “purchasers” in this provision means ANYONE that acquires an interest in that

property (i.e. not just buyers) E.g. a bank accepting a cheque and providing money up front for it = is a “purchaser”

o i.e. if there is a contest between two parties, a party who acquires possession of the instrument without knowledge (and for value – e.g. a loan) is going to prevail

o thus, not all forms of perfection are equal when dealing with negotiable instruments = possession is superior to prior registration

Flexi Coil Ltd v Kindersley District Credit Union Ltd Facts: Flexi manufactures supplies and sells them to Churchill. Takes a PMSI in them. Churchill then

sells them to customers and obtains cheques Churchill deposits the cheques with Kindersely Credit Union. Issue: So we have Flexi with a proceed security interest in the cheques, is it defeated by the deposit in

the bank?o Is the bank a “purchaser” under 31(3)

Held: If the bank took the cheque and put a hold on it until it was cleared, then they are not “purchasing it.”

BUT if it is instantaneous, ie a short term advance of funds (prior to finding out if it is returned NSF) then this can be giving value and would satisfy 31(3).

o THIS IS WHAT HAPPENED HERE

ISSUE 2: Did Flexi-Coil have a security interest in the account as second generation proceeds? o NO. because the account was in overdraft. Here this cheque was simply used to pay down

past debt It would only work if the account was in the positive. (Because then the bank has an asset in return to

give which would be proceeds of the cheque). It has to be an asset, not a liability. If there was a positive balance then it could be second generation proceeds.

C. Holders of NEGOTIABLE DOCUMENTS of title = s 31(4) = holder (SP w/possession or purchaser) of this collateral (e.g. bill of lading, warehouse receipt) has priority over a security interest that is perfected by registration or temporary perfection IF the holder:

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o (i) gave value for the document of title, AND o (ii) acquired it/retained possession without knowledge that the transaction would breach a

security agreement

SPECIAL RULE #2- NON-CONSENSUAL SECURITY INTERESTS The PPSA does not apply to non-consensual security interests BUT there is one priority rule that deals with conflict between a consensual security interest (covered

by the PPSA) and non-consensual security interests o i.e. to deal with priority competitions when they clash o cannot just apply s 35 – why? because NON-consensual SI’s are outside scope of the PPSA

and in most cases they do NOT have to be registered Examples:

o Lienso Landlord right of distress:

At common law you had the right to go onto the property to seize goods if rent was not paid.

o Deemed Trusts: Mostly in favour of the crown. Ie Business remitting money to taxation payment.

Methodology for Dealing with liens: 1) Determine if PPSA s 32 applies.

o This rule is not comprehensive. It only covers commercial liens on goods. If it applies, then use that.

(2) If not, determine if a non-PPSA priority rule existso Is there another rule outside of the PPSA, such as a statutory demand

(3) If not, determine priorities according to the order of attachment.o First interest to be created will prevail

Section 32 Gives priority to liens on goods 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 with respect to the materials or services has priority over a perfected (or unperfected) security interest in the goods

o UNLESS the lien is given by and Act that provides the lien does not have priority o NOTE**this ONLY applies to liens on “goods

(1) The interest must be in the form of a lien; (2) The lien must be in goods; (3) The lien must cover materials or services provided in respect of the goods; (4) The materials or services must have been provided in the ordinary course of

business of the lien-holder Covers common law and statutory liens so long as they are commercial (given in the ordinary course

of business) LIMITATION = The right to enforce the priority of the lien only survives if lien holder has

possession of the collateral (UNLESS the statute provides non-possessory status – e.g. see GKLA below)

o **For this reason, statutory lien was introduced that gave a non-possessory lien (Garage Keeper’s Lien Act)

Garage Keeper’s lien (non-possessory lien) Applies to a person who keeps a place of business for the housing, storage, or repair of a motor

vehicle or farm vehicle and who receives compensation for that housing storage or repair

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o states lien holder can release possession if you register your lien in the PPR within 21 days from releasing the goods

BUT: S 4: Every lien in a motor vehicle or farm vehicle under this act shall be postponed to an interest in or a charge lien or encumbrance on it

o if a new secured party is registered between (i.e. in the gap) when possession is released back to debtor and when the lien is registered = new secured party will have priority Craddock Trucking Ltd

why? because not fair to secured party who checks the Registry and see’s no interest registered

this also motivates lien holders to register as quickly as possible – i.e. not wait the entire 21 days

SPECIAL RULE #3- FIXTURES AND ACCESSIONS Common law provided that when chattels become affixed in land you would lose the interest in the

goods PPSA helps here with section 36- Despite becoming affixed to the land the SP may still have the right

to remove it. LIMITATION on right to remove = Definition of Fixtures does NOT include “building materials”

BUT WE MUST SEPARATE 3 DIFFERENT SCENARIOS:

Scenario 1: The materials are building materials that are incorporated in a building not fixtures Where this happens, the goods become part of the land and are considered fixtures. Section 36 will

not apply and the secured party does not have the right to removeo We don’t want person who financed the bricks and windows coming and dismantling the

buildings o IT IS A FUNCTIONAL TEST- IF it is important to the integrity of the structure

This does not include escalators, elevators, h-vac systems

Scenario 2: Materials are not or do not become fixtures under the common law test. So there is no competition,

SP retains priority

Scenario 3: The goods are fixtures and are not within the definition of "building materials". Section 36 PPSA applies and the secured party will have the right of removal if the requirements of

the section are satisfied. BUT what if you have a bank that has a mortgage in the real property. So you have the fixtures

financer and the real property interest holder

COMPETITIONS WITH INTEREST HOLDERS IN LAND (MORTGAGES) Here, the priority depends on the order of registrations

Scenario 1: mortgage interest in the land is created AND THEN the personal property in which there is a security

interest is affixed to land priority given to personal property Secured party

o rationale = because when mortgage interest was created, fixture was not there yet – thus, giving priority to PP secured party would not be depriving the real property SP from something they thought they had priority in when their interest was created

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o Ex. D owns land on which there is a manufacturing plant. The land is subject to a mortgage (M).

o SP supplies manufacturing equipment to D under a security agreement. The equipment is later affixed to the land. SP get priority

Scenario 2: personal property affixed to land AND THEN mortgage interest in land is created = priority will be

given to the subsequent mortgagee of the land UNLESS the secured party had previously registered a “fixtures notice” in the Land Titles registry (only way for PPSA secured party to truly protect themselves)

o The Fixture is already attached, so they expect it to be part of the value of the land that they are lending against. So now we give priority over the mortgagee

FUTURE ADVANCES by Mortgagee: if there is no fixtures notice registered, a person w/ a PRIOR registered mortgage who makes a

FUTURE ADVANCE (i.e. another loan) after the personal property SI attaches, will take priority with respect to the amount of that future advance

o i.e. although the mortgagee would not have priority to the fixture in respect to the principal amount they are owed, they would have priority to the fixture for the amount of their future advance

GMS Securities & Appraisals Ltd v Rich Wood Facts: National Trust took a real property mortgage. Rich-Wood took a security interest in cabinets

that it sold to the debtor but failed to register a fixtures notice. GMS took a second mortgage on the land

o SO 36(3)- RW would have priority over NT but, GMS would have priority over RW. Issue: How is this circular priority resolved? Held: Court’s Solution was to create a rule on this:

o If you are the party to enforce against the collateral, and by doing so you appropriate someone’s interest that has higher interest than you do (i.e. create circular issue), then you have to pay out that higher party

o BUT in doing so, you become subrogated to whatever right they would have against another party

In this case, NT was the party who enforced against the collateral (i.e. they appropriated Richwood’s rights = NT had to pay out Richwood)

o ISSUE = subrogation into Richwood’s rights were valueless as they did not provide priority over GMS

A BETTER APPROACH SUGGESTED BY PROF. WOOD = a “Fault Based Approach” Ask: who is the party that could have avoided this situation? Whoever they are, they are the party that

should bear the loss o in this case, Richwood could have registered a fixtures notice which would have allowed

them to prevail (and would have also served to warn the subsequent mortgagee) o THUS – put them at fault for not doing so

Implementing this Approach Just like you do for subrogation agreemento Put RW first in line NT GMS o BUT then let GMS subrogate RW’s rights (to the extent of what RW was owed) then give

priority to NT then to GMS for remaining debt then to RW if anything is left

Accessions The same rules apply to accessions. If you have security in the tires and they are put onto a truck, you

retain the right to remove

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S 38(2) = a security interest in goods that attaches BEFORE the good becomes an accession, has priority to those goods over a person with an interest in the dominant goods

o However, any damage done to remove/separate the goods = the responsibility of the removero NOTE: again (like w/fixtures), failure to perfect/register an interest in the subordinate goods

is irrelevant in regards to “right to separate” (but registration will be necessary to ensure priority over future advances and subsequent SP’s

Example = SP1 takes security interest in a truck, and SP2 takes interest in the engineo Engine is subsequently installed in the truck o Priority to the engine is given to SP2 o Rationale = when SP1 took their interest in the truck, they had no expectation of having an

interest in the engine

What about against SUBSEQUENT Secured Parties? (i.e. who take interest in the total item AFTER fusion)

Subsequent secured party with interest in TOTAL item will have priority in the entire asset UNLESS the prior interest in the individual component was registered in the PPR

E.g. if SP2 had an interest in the engine AND THEN the debtor provided SP3 with an interest in the entire truck (with the engine in it) = SP3 would have priority (as they took an interest expecting the engine to be part of the collateral

this is the case UNLESS SP2 had registered their interest with respect to the engine

Co-Mingled Goods Applies in TWO Situations: (1) where goods are mixed with other similar goods so that the goods can no longer be identified (e.g.

small amount of grain mixed with larger amount of grain), OR (2) where the goods become incorporated into a new product as a result of manufacturing, processing,

assembling, or commingling (e.g. leather supply turned into shoes; grapes into wine, etc.) S 39(1) A perfected security interest in goods that subsequently becomes party of a product or mass

continues in the product or mass if the goods are manufactured, processes, assembled or commingled that their identity is lost

o (2) You don’t need any other perfection step even though the description may have changed. 39(3) BUT you cannot get more than the value of the security interest, not the value of the product

that is created if that is more. 39(4) What about the situation where two different SP products (with different values) are co-

mingled into a mass and the value of the product is not sufficient to satisfy both?o Ex. SP1 has interest for 10k; SP2 has interest for 40k. The goods are only worth 25k.o If the value of the product remaining is not enough to pay out both, then we are directed

under 39(4) to do a pro rata calculation: SP1- 10,000/50,000= 1/5= 5k Sp2- 40,000/50,000-4/5= 20k

SPECIAL RULE #4- Subordination Agreements Contract concluded between a secured party and a third party where the secured party agrees to

subordinate its security interest to the third partyo SP1 may be willing to subordinate its interest to SP2. It may be complete, or restricted to

only a certain type of collateral. Ex. 1 SP1 makes a direct agreement with SP2 to subordinate Ex. 2 SP1 has an agreement with the Debtor that allows for a different priority scheme.

o No privity issue here s 40 says that so long as you are in the class of persons benefiting from it, then you can assert it.

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Interpretation of Subordination agreements In most cases, the subordination agreement is the type that is found in the security agreement (so it is

between SP1 and D)o It is often the case where SP2 will have a improperly registered PMSI. SO SP2 looks to the

security agreement of SP1 that may have subordinated its interest to SP2. Euroclean:

o (e) ...the Corporation may give mortgages or liens in connection with the acquisition of property after the date hereof...and any such mortgage lien or other encumbrance shall rank in priority to the charge hereby created.

Ie the debtor is permitted to give PMSI (acquisition of property) and those will rank in priority. This is definitely a subordination clause.

Chiips:o The company shall not create any other encumbrance ranking in priority to the security other

than a purchase money security interest. Is this giving priority to PMSI, or is it simply allowing the debtor to create PMSI, but

they will not have priority. The court found that this was a subordination.

Kubota Canada- This is a good oneo The Debtor warrants that the Debtor is the owner of the Collateral free of all encumbrances

and security other than Permitted Liens (this is a warranty) o The debtor agrees that it shall keep the Collateral free of liens, encumbrance or security

interests, other than Permitted Liens. Permitted liens will be described in the agreement (PMSI) So this is a negative covenant but it is creating a carveout for permitted liens

Subordination Agreement and Priorities Ex. Imagine that there are 3 different SPs

o The priority here is= sp1 sp2 sp3 SP1 enters into a subordination agreement with SP3 How do we operate this?

o (1) Set aside the amount of SP1s claim o (2) Satisfy SP3s claim out of this fundo (3) Anything remaining from this fund is paid to SP1o (4) SP2 is paid out of the original collateral (after SP1 was set aside)o (5) Any remaining balance is paid to SP3, then to SP1

**NOTE: SP2 maintains their middle position (they are no better or worse from the subordination agreement created between the other parties)

EXAMPLE = SP1 is owed 1.5 mil; SP2 is owed 1.5 mil; SP3 is owed 1 mil: Assets = 2.5 mil SP1 subordinates to SP3

o SP3 gets 1 milo SP1 gets 0.5 mil (what’s remaining after SP3’s debt has been paid) o SP2 gets 1 mil (as this is all that is left) = they are short 0.5 mil o SP3’s interest has already been fully satisfied (would be paid next if any still remaining)o SP1 gets nothing (although they would get something if there was anything left)

SPECIAL PRIORITY #5- SECURITY INTEREST IN INVESTMENT PRPOERTY

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The PPSA contains special rules that govern the perfection and priority of security interests in investment property. They are significantly different from the usual perfection and priority rules of the PPSA. Requires consideration of the Securities Transfer Act

o Perfection by control- This is superior to other methods of perfection, regardless of who registered first. If you have control, you beat out other parties.

Types of Investment Property o Certificated Securities PPSA, s 1.1; STA, s 23o Uncertificated Securities PPSA, s 1.1; STA, s 24o Security Entitlements PPSA, s 1.1; STA, s 25-26

“Indirect holding” The investors don’t have possession of the rights. They are held by intermediaries.

You have an entitlement to a portion of shares.

Perfecting a security interest in Investment Property The usual “first to register” rule for perfection is not applicable to Investment Property

o priority is generally based on “CONTROL” = happens when creditor has taken whatever steps are needed to be able to SELL the collateral without further action/approval by the debtor

person who perfects by control (regardless of if they know about other security interests in the property) will win

The concept of Control 3 methodso For certificated securities:

(i) Customer method: If you are registered as the owner (in the name of the creditor) then this is perfection by control

(ii) OR: Give possession of the certificated security with any necessary endorsement o For uncertificated securities:

(i) Customer method- Have the name of the owner changed with the issuer to the name of creditor.

(ii) Control agreement - Three parties. Issuer, SP and debtor agree that the issuer will follow the instructions of the SP. So the SP can direct the issuer to sell or dispose without authorization of the debtor.

o For securities entitlements: (i) Customer method : Have the intermediary change name the entitlement is in (ii) Control Agreement : Three party agreement-broker, SP debtor. Broker agrees to

follow the instructions of the SP without further authorization of the debtor.

Three Methods Of perfection for Investment Property Certificated Security:

o Customer method (control)o Possession with necessary endorsement (control)o Possession without necessary endorsemento Registration

if your interest in a certificated security is registered AND you obtain possession (but don't have the necessary endorsement) you will beat out another perfection by registration (as that will effectively constitute perfection by delivery)

But not perfection by control Uncertificated Security:

o Customer methodo Control agreement

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o Registration Least powerful method

Security entitlement:o Customer Methodo Control agreement

Determining Priority of security interests in investment property The non-temporal priority rules that govern investment property displace the ordinary PPSA priority

rules that govern competitions between secured parties. The PMSI concept has no application to security interests in investment property. The dominant rule is that a secured party who has perfected by control has priority over a

secured party who has not perfected by control. PPS s35.1(2)o So in other words. SP1 takes a GSA in ALLPAAP and registers properly. It is perfected in

terms of the investment property. o BUT the debtor company owns some investment property. They enter into a control

agreement with SP2 and the broker. So SP2 would have control. Perfection by registration is effective as against the trustee in bankruptcy, but is ineffective against

any other secured party who has perfected by some other means. PPSA, s 20(a), s 35.1(8) NOTE: Knowledge is NOT a factor:

o If someone perfects by registration and a subsequent party perfects by control, they will win even though they may have knowledge of the prior registration

CHAPTER 12: ENFORCEMENT REMEDIES

Enforcement and Application of PART 5 Here we are looking at the SP enforcing against the Debtor 1) Part 5 only applies to true security interest (PPSA 55(1))

o Does not apply to the deemed security interests. The remedy for these non “true” security interest are outside of the scope of the PPSA

2) The remedial scheme in Part 5 is mandatoryo For the most part the debtor cannot waive or contract out of this. Otherwise they all would

The enforcement remedies set out in Part 5 are subject to the supervisory power of the Court under PPSA, s.64

o On application, the Court may make any order necessary to ensure compliance w/ Part 5, give directions, and may also stay enforcement of rights and grant relief from compliance w/ Part 5.

o Although courts cannot provide greater rights – e.g. cant extend timelines for debtors

Enforcement Scheme (1) There must be a default. If there is no default there can be no seizure. (2) Assuming there is a default, the SP in respect of tangible property will want possession. This is

more a pragmatic step than a legal requirement. (3) Once you get to seizure you can either:

o Sell it (using proceeds to pay down the debt- if there is a deficiency you have action against the debtor), or

o Foreclose: You can acquire ownership of the property and the debt is extinguished (4) If you sell it and there is a deficiency you can usually sue for it.

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Note for intangibles: In the case of accounts, you are not seizing or selling these. You inform the debtor of the account to pay you instead of the other debtor. (Direct Collection s pg 51)

STEP 1: DEFAULT s 1(1)(n) The part 5 remedies are available to a secured party upon a default by the debtor.

o (i) Failure to pay or perform obligation secured when due, or o (ii) the occurrence of any other event or circumstances set out under the terms of the security

agreement.o There can be cross-default clauses. Ie debtor may have defaulted under a different Security

agreement. If provided for in security agreement, the default of another can constitute default Often in agreement, you may have provision that allows for event of default when SP is insecure, or

the collateral is in jeopardy. o Section 16 limits the use of provisions that give a secured party the right to accelerate

performance if the secured party considers that the secured party is insecure or that the collateral is in jeopardy (must be commercially reasonable)

If there has not been a default, the enforcement efforts of the secured party will be wrongful and the secured party may be liable to the debtor for damages (s 67(1))

o If you are acting unlawfully this is breach of contract, conversion, trespass, and 67(1) damages

STEP 2: SEIZURE S. 58(1)(a) provides that a secured party has a right to take possession of the collateral by any

method permitted by law A seizure must be carried out by a civil enforcement agency pursuant to Part 2 of the Civil

Enforcement Act. (CEA s 9).o Other provinces allow for “self-help” ie they can seize without going through an official

(civil enforcement agent, sheriff).Note there are limits to this, cannot “breach the peace” IN AB, there is no self-help remedy

Limitations on the right to seize o (i) Rule in Lister v Dunlop = in demand loan situations, if SP makes demand for payment,

they cannot expect the debtor to instantaneously come up with the money Must provide debtor a “reasonable time” to pay before seizure is allowed NOTE: the length of time depend on the circumstances = very vague/created

uncertainty for creditors (don't know how long they have to wait)

o (ii) Bankruptcy and Insolvency Act – s 244 = largely replaced the Lister v Dunlop rule requires the SP to give the debtor a 10-day notice of their intention to enforce/seize limitation to this rule = only applies to:

(i) GSA’s, (ii) security interests in inventory, and (iii) account receivables

o When the SP intends to enforce security on ALL (or substantially all) of the encumbered property of the debtor used in relation to a business

o NOTE: this section has PARAMOUNTCY over the PPSA = means that when s 244 applies, 10 day notice must be given

But Remember: It does not apply to all SIs. Those that it doesn’t apply to, the CL applies (i.e. rule in Lister v Dunlop)

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STEP 3: SALE OF COLLATERAL s 60(2) A sale of collateral may be undertaken by the SP in any commercially reasonable manner

o This used to be limited to only public auctions o BUT it was determined that the SP should be given greater latitude on methods of sale – as it

is in best interest of the SP and debtor to attain the highest sale price NOTE: There is a higher level of obligation on the SP to obtain the highest price that they can obtain.

o So long as you take all the proper steps, the fact that there is a big disparity between the sale price and the original price does not make it an improvident sale.

NOTICE REQUIREMENT: The SP must give a written notice 20 day notice prior to sale (s 60(4))

o must be given to the Debtor, other creditors, other subordinate SP’s, as well as to other 3Ps who are known to have an interest in the collateral

o There are exceptions that allow for immediate sale (perishables for ex)

Can the SP buy the goods?o The secured party may purchase the collateral only at a public sale and only for a price that

bears a reasonable relationship to its market value (S 60(11))o Because in this circumstance the SP and the debtor’s interests are not aligned. SP wants to

buy for lower price, debtor wants higher.

ONLINE Auctions – are these considered public or private? In CNH Capital Canada, the court determined that online auction is a public sale (e.g. secured party

could purchase the collateral)o However, still must give the debtor notice info on time/place of the sale – to give the debtor

ability to find other bidders to drive up the price

The Buyer takes free- The buyer takes free of the debtor’s interest and any interest subordinate to that of the secured party.

(60(12))o This makes it hard for the junior secured party to affect the sale because the that creditor can

only convey whatever interest they had in the collateral. If they were subordinate to the senior creditor, they would be selling an interest where the senior party still had priority.

They could technically buy out the senior secured creditor

Failure by the SP to act in good faith or in a commercially reasonable manner in respect of the sale will give debtor or a third party who has an interest in the collateral a right to recover any loss (pursuant to s 67(1)) must be able to show that “reasonable steps” were taken (e.g. advertised the sale in the expected places

STEP 3(a) SURPLUS OR DEFICIENCY Surplus: s 61(1) If there is a surplus following a sale, the SP must return it to a subordinate secured

party, claimant or the debtor Deficiency: s 61(4) If there is a deficiency the SP will normally be permitted to sue as an unsecured

creditoro This is subject to:

Any statutory right; or A contractual provision that disallowed suing on a deficiency

o Limitation on the Right to Sue for the Remainder = s 51 of the Law of Property Act

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Applies only to “seller based PMSI’s in CONSUMER GOODS – i.e. where the PMSI was granted to the actual seller of the consumer good

(e.g. car dealer who provides financing for family car) such holders of seller based PMSI’s = are limited to choosing either:

(i) to enforce the PMSI, or (ii) sue as an unsecured creditor (i.e. cannot enforce and then sue for the

remainder) Note: This limitation applies to those who have the PMSI assigned to them

STEP 3(b) FORECLOSURE The secured party may propose to take the collateral in satisfaction of the obligation secured by

giving a notice of intention to the debtor and other interest parties s 62(1) o Ie the SP takes ownership and the debt is extinguished

Potential detriment to the debtor, and a junior secured party if there was going to be a surplus. If SP1 acquires ownership and there is a surplus, then the SP has acquired a windfall gain.

o Objection to Notice (s 62(2)) = if the collateral is likely worth more, then upon receiving notice from the creditor, any interested party can OBJECT (within 15 days of receiving notice) to the foreclosure and demand sale + distribution of the proceeds

If there is no objection within the 15 days, the secured party takes free of the interest of the debtor AND the interests of all subordinate creditors (i.e. their interests in the property will be cut-off)

o Court may Block an Objection (s 62(6)) = if secured party doesn't agree with the objection, he may seek a court order that the objection was:

(i) not made for the purpose of protecting that person’s interest OR (ii) that the objection is senseless as the value of the collateral is less than the amount

owing to the senior secured party (i.e. no likelihood of surplus)

Direct Collection s 57 (for intangible- account) Sale and foreclosure is typically geared towards goods/tangible property (e.g. excavators,

automobiles, etc.) BUT – it is not the ideal action for other kinds of collateral

o E.g. chattel paper, accounts, a cheque, etc. THUS – when dealing with these kinds of assets, instead of seizing and selling, the creditor initiates

“Direct Collection”o i.e. Secured party indicates to customers who owe the debtor money, to pay the creditor

directly for the amounts they owe (i.e. by-pass the debtor)

Redemption and Reinstatement Redemption s 63(1)(a):

o The debtor or a third party may redeem the collateral by paying the obligation secured (extinguishing it) (63(1)(a)).

What we’re talking about is paying out the SP IN FULL. Usually the debtor is not able to do this. More commonly it will be the junior secured party. Ie they pay out the senior secured party, and they become subrogated to SP 1.

Reinstatement s 63(1)(b):o The debtor may reinstate the security agreement by paying the amount in arrears or by curing

the default. (s 63(1)(b)) (only the debtor can reinstate, not subordinate creditors) Here, NOT paying out the whole obligation. Just paying out the amount in default

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Supervisory power of the Court s 64 On application, the Court may make any order necessary to ensure compliance with Part 5, give

directions, and may also stay enforcement of rights and grant relief from compliance with Part 5. (ppsa s 64)

Receiverships A security agreement may provide for the appointment of a receiver who may take control and

manage the business in the event of a default (ppsa s 65(1))o This is when you get a license trustee to go in and manage the property. They take control

over the business operations. o Private appointment: Part 5 doesn’t automatically give you this right. You have to contract

for this right in the security agreement. In most GSA there are receivership provisions (ie they have the right to appoint a receiver). This should be included in all GSAs

A receiver can also be Court appointed: Common. Go to a court and get appointment

FINAL ISSUES TO WATCH OUT FOR

#1 Indian Act s 89 of the Indian Act:

o Real or personal property of an Indian which is situated on a reserve IS NOT subject to a security interest by anyone other than an Indian.

o So essentially if you are a NON INDIAN SP and the property is of an Indian and situated on the reserve this is where it applies

Wouldn’t apply to non-status Indian (like metis or Inuit) If the creditor is a first nation or a band they are not subject

o Loopholes: (1) 3 Appellate courts have held that this provision can be waved in the security

agreement. (2) “Situated on a reserve”- Where is it primarily located. You can’t simply shelter

assets there by moving them. Accounts= where the debtor is owing (so a bank owing an account would not

be covered) (3) If you have a seller reserves title to secure unpaid purchase price and if you

reserve title, then this provision does not apply

#2 Aircraft Financing Certain aircraft are subject to the Cape town convention (not the small 2 seaters). But 8 people and

above (5 or more passengers plus crew). 57 countries have adopted incl. Canada

o There is an overarching security regime, with more specific protocol. Adopted into Canadao 24/7 located in Ireland

SO if you are dealing with larger aircraft or larger engines helicopters etc. Regular PPSA will give you priority over Trustee in Bankruptcy. BUT if you haven’t registered in the Aircraft registry then other SP will beat you out who have.

#3 Bank Act Security What is it? Separate secured transactions regime that is federal, and it is only applicable to banks Although banks generally use the provincial PPSA systems when taking security interests in

collateral, there are certain circumstances where a bank will take Bank Act security o specifically with farming equipment (very popular in Sask)

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Why? because the paramountcy of the federal legislation allows banks to ignore provincial farm protection laws

This applies to Banks as an alternative kind of security covered by the Bank Act (427-429).o It is inferior to a PPSA security interest

Scope of the Act Section 427 Bank Act security can only be given to a bank (not credit unions) Only specified classes of debtors may grant the security on specified categories of goods

o BUT, the Bank Act only covers: inventory farm implements fishing boats/equipment aquaculture equipment forestry equipment

Nature of the Security 427(2) The bank obtains the same rights as if it had acquired a bill of lading or warehouse receipt covering

the property (ie it is non-possessory, but they obtain an interest in the goods) The security attaches to property owned by the debtor, upon delivery of the document to the bank.

o In respect of after-acquired property clauses, it attaches automatically once the debtor becomes the owner

Obligation Secured (1) Bank Act security cannot secure past advances

o Ie if a bank made an unsecured loan, it cannot later ask for Bank Act Security (2) Bank Act security permits the bank to tack future advances

o e.g. BAS created PPSA interest created BAS future advance BAS interest holder will have priority to the future advance debt over the PPSA

interest even though it was created AFTER the PPSA interest)

Attachment Attaches to the debtor’s property upon delivery of the document to the bank After acquired property attaches automatically The goods must be owned by the debtor

Registration Registration is effected in the Bank of Canada office in the province in which the principal place of

the debtor is locatedo The registry uses a notice filing system. The Notice of Intention discloses the name and

address of the bank and the name and address of the debtoro There is no collateral description (you’d have to make inquires to the bank to see what is

covered) A failure to register Bank Act security will subordinate the bank to subsequently created security

interests that are taken without knowledge of the bank’s security. (427(4)(a))o Key = do NOT lose to everyone if you don’t register

i.e. you can fail to register and still maintain priority against a registered competing interest so long as that party KNEW of your security interest (or a buyer WITH knowledge)

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NOTE: YOU WILL WANT TO DO A BANK ACT SEARCH ANY TIME THERE IS A POSSIBILITY THAT A BANK COULD HAVE TAKEN A SECURITY INTEREST THROUGH THE BANK ACT

Priorities (1) The Bank Act does not contain a complete set of priority rules (2) Priorities are not determined by a first to register rule of priority. The priorities are generally

determined by the Nemo dat rule. (First interest to come into existence).o This is not the first to register priority. It is an older property based approach

i.e. between two BAS interests, if SP1 registers first (but the interest has not attached yet), and then SP2’s interest attaches and then is registered (after which SP1’s interest attaches) = SP2 WINS

The rule: A Bank Act security has priority over subsequently created rights in the property as well as against a competing security interest that was unperfected at the time the Bank Act security was acquired (428(1))

Example Scenarios (1) BAS created first, and then PPSA second

o look to s 428(1) of the BA = states that the BAS has priority over subsequent interests so long as it is registered

very simple o although, the BAS would LOSE to the subsequent provincial interest if:

(i) the bank failed to register their interest AND (ii) the subsequent interest was taken without knowledge of the federal interest (s

427)

(2) PPSA interest is taken first, and the BAS is taken second o do NOT apply s 35 of the PPSA as the existence of the BAS means the PPSA does NOT

apply o if PPSA is unperfected at the time the BAS arises = BAS will win (due to amendment under s

428(1)o BUT if the PPSA interest is registered/perfected at the time = the PPSA security interest wins

(3) Priority competition between BAS and PPSA in respect of a GSA/after-acquired property o i.e. GSA given to the provincially secured party, then bank takes BAS, then new asset it

acquired who has priority to the new asset??

o Issue = when do these interests latch on to the new asset? Both at the same time – i.e. when the debtor acquires the new property

o Solution = where there is simultaneous attachment, give priority to the first security agreement that was entered into

i.e. so the PPSA interest one – as the security agreement for the GSA was created prior to the BAS security being taken

(4) BAS takes interest in “all-after acquired goods” (of the specific type within the scope of the Bank Act), then a PPSA secured party takes a PMSI in one such type of good

o who wins in a priority competition between these parties?? (assuming both parties are properly registered)

difficulty = the PMSI super priority is a product of provincial legislation which does not apply here (as the federal legislation applies)

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o THUS – a distinction is drawn on the basis of whether the PMSI has been taken by a “seller” or a “lender”

(a) SELLER: if PMSI holder is the seller of the property, you are essentially reserving title

until the full purchase price is paid and under the nemo dat principle, the BAS only applies to the extent of the

debtor’s interest (which from the outset is encumbered by the seller’s interest)

o thus the BAS interest is also encumbered from the beginning = subject to the superior PPSA interest

result = seller beats out the bank (AND it does so whether or not it is registered under the PPSA – as the provincial legislation is not being applied here, but rather the federal)

(b) LENDER if PMSI holder is a lender, then based on the nemo dat idea, at least for a

moment in time the debtor has ownership of the combine before the lender’s PMSI interest attaches (or they attach at the same time and the Bank Act secured party would win as a result of the first security agreement)

o i.e. just provides enough time for the BAS to arise and attach to an unencumbered title

result = BAS priority over lender based PMSI

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