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Disclaimer: This set of notes does not claim to be either authoritative, correct, or even satisfactory. You should, at all times, exercise your own judgment and disagree with what I’ve written when appropriate. There may errors, omissions, or outright fabrications that should be ignored and ridiculed at all times. I make no warranty or condition as to the veracity of my notes and only a fool would think otherwise. Please forgive any colourful language. Good luck, I sincerely hope you don’t need it.

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Secured Transactions Master Key

Secured Transactions

General Rule

A security interest arises when, in exchange for a loan, a borrower agrees in a security agreement that the lender (Secured party) may take specified collateral owned by the borrower if he should default on the loan

By gaining a security interest, the secured party has the comfort of knowing that they may seize the asset, thereby realizing all or a large part of their security interest in comparison to unsecured creditors who will receive the scraps at a pro-rata rate

Applicable Legislation

BC PPSA: Serves to establish and regulate the filing of registries, priority rules, requirements for attachment, perfection, etcCommon Law: Serves to clarify the scope of certain provisionsBank Act: Regulation of banking and the financial industry, sets out specific rules and definitions for registration of securities, authorized securities, etcSecurities Transfer Act: Deals with stocks, bonds etc, defines them as securities interests

Terminology

Creditor: The creditor is the lender or the person/institution or company that advances the funds and aspires to gain a security interest in the debtors assets

Debtor: A person or institution that owes a sum of money or other obligation to the creditor. The debtor may owe money to several creditors

Unsecured Credit: This is a loan that is issued and supported only by the borrowers creditworthiness, rather than by a type of collateral

As such, there is no secured transaction as the loan is predicated on a clear promise to pay the loan back itself, not to exchange in asset in the event of default

Unsecured creditors rely on ratings agencies (such as S&P, Moody’s, etc) to determine the debtors credit history and to what extent they would like to extend their risk in loaning money to the debtor.

o Unsecured creditors take a larger risk by virtue of the information asymmetry (debtors could be masking their creditworthiness) have to offset this with higher rate of credit to hedge against default

o Higher rate of credit is more prone to make debtor default, but it is better to get the money in advance rather fight for scraps upon a bankruptcy

Unsecured Creditors Remedies Under normal circumstances, assuming the debtor has not become insolvent, an unsecured

creditor can pursue remedies such as:o Wage Garnishment: Have their employer pay you directly, rather than seek remittanceso Collections: Get some homies to call a homieo Personal Actions: Suing for breach of contract; invoking personal liability for the failure

to pay Special Note - Acceleration Clauses: An acceleration clause allows for immediate payment on

terms as included in the agreement. This may involve immediate full repayment of the entire loan upon an act of default. What constitutes an act of default will be determined by the contract

o Rather than seek full repayment, one might seek to put up more collateral or refinance the deal or seek alternative credit arrangements in order to meet the payment obligations

o Should someone threaten you with acceleration, it may be wise to ignore it. It may be the case that acceleration will bankrupt you, and the creditor will end up losing money in the long run – It may also spur on a debtor to liquidate their inventory

Should they show undue preference as per bankruptcy legislation, the creditor might be able to get money back, but would also have to sue to prove this happened, thereby depleting their funds even more

Note: This should show the need for due diligence when extending a loan, especially for unsecured parties.

Secured Creditor RemediesIn the event that a debtor is in default, a secured creditor as far more effective means of seeking financial compensation

A SP may unilaterally seize an asset, sell it and give back whatever excess may be left overo They may also contractually agree (and most likely will) to keep proceeds. This is

prudent given the extra agency costs involved in seizing the security and writing the security agreement (cover the overhead of the transaction)

o In the event money is left owing, they become a unsecured creditor for the balance A SP can sue for deficiencies as an in personam right in the event payments are not being made

o May be better to seize assets given this is likely to occur upon bankruptcy, don’t want to have asset go missing

Note: The nature of the good and the market industry will partially determine the prudent course of actions. Perishable or easily fungible goods may be wise to unilaterally seize so that their value can be more readily realized. Non-perishable or rare items may be wise to hold onto as they may appreciate in value. Immovables may be wise to let the debtor keep in the hopes that a receiver carrying on the business may be able to squeeze a bit more value from the asset prior to any complete seizure

Pre-PPSA Security Devices

Chattel Mortgage: Where the title to the item is the security itself Chattel mortgage is the legal term for a type of loan contract used in some states with legal

systems derived from English law Purchaser borrows funds for the purchase of movable personal property (the chattel) from the

lender. The lender then secures the loan with a mortgage over the chattel Legal ownership of the chattel is transferred to the purchaser at the time of purchase, and the

mortgage is removed once the loan has been repaid

Pledge of Goods / Pawn: The pledge involves the transfer by the debtor to the secured party of possession coupled with a right of resale of the collateral if the debtor defaults on its loan obligations

The substance of the transaction is that, due to the ability to lose the property, a security interest arises

Note: Use of pawns is perhaps the oldest form of security device and is still in existence todayo Historically, there was no security without possession. The easiest and most reliable way

for a secured party to operate was to hold the asset.o In many countries, pawn broking was used as a form of assistance for the poor. It should

come as no surprise that the poor continue to use the system as they are normally not able, due to bad credit, to access other forms of monetary assistance

o Historical pawnbroking was in many instances heavily regulated given its ubiquitous status as a lending institution, modern day pawn brokers and cheque-cashing institutions are less bound by moral or legal obligations

o In post-war or broken states, pawning is the most effective (and sometimes only) way to get credit. Given that you cannot use the law to uphold your agreement in a failed state, this is what most people rely on

Even if the state does have redress mechanisms, may be too poor to access

Special Note – Pledge vs Mortgage

1) Mortgage involves transfer of title by debtor to SP, but usually not possession. Pledge/pawn involves transfer of possession not title. Mortgage is a non-possessory security interest, pledge is a possessory security interest

a. Mortgage often involves the use of the item in ones business, hence the lack of concern with possessory rights

b. Pawn involves the use of chattel to secure funds for other means, hence the possessory rights

2) Mortgagee has a right of foreclosure and typically also a power of sale. At common law, the pledgee has a power of sale but not right of foreclosure.

3) For mortgages, the SP right to enforce its security interest is linked conceptually to its ownership of the collateral. In the case of a pledge, the SP does not own the collateral and its power of sale derives from an express or implied term in the pledge agreement

a. The power of sale is a contractual right derived at the exchange of the goods for the funds as a means of enforcing the security interest

Power of Sale: This stems from a provision which allows the lender the power to sell the property when the borrower defaults on the mortgage

When selling under the PoS, the following may occur:o Ownership: The ownership of the property does not change until the subject property is

sold to the new ownero Proceeds Return: Extra money may be given back to the owner; if there is a shortfall, the

original owner will still be on the hook

Foreclosure: Foreclosure is a legal proceeding where a lender gets a court order to take over the property. There are strict rules of foreclosure. In a foreclosure, ownership goes to the lender. The title to the property is registered in the name of the lender who accepts the property as a full payment of the loan

Foreclosure Sale: As the lender has become the owner, they will receive the profits of any house sale or suffer the losses as the foreclosure has satisfied their security interest. The owner may or may not care about the price or the ability to negotiate as they will want to liquidate the property as soon as possible to free up the proceeds for other concerns.

Special Note – Power of Sale v Foreclosure

1) PoS: the borrower remains the title holder – Foreclosure: title transferred2) PoS: property often sold by realtor – Foreclosure: auction3) PoS: borrower remains responsible for losses – Foreclosure: Borrower no longer liable4) PoS: Extra proceeds go to borrower – Foreclosure: Extra proceeds go to owner lender

Documentary Pledges: These are often for short term financing purposes using negotiable instruments such as promissory notes or debentures. The risks are low and transaction costs are low, but they are basically obsolete.

Charges/Liens: A lien is created by:1) An agreement between the parties;2) A court order, or3) Statute

Charges and Liens are non-possessory security interests and must be registered against the property. These will allow the property to be purchased subject to paying off the charge/lienholders, effectively giving them a priority interest over unsecured creditors.

Conditional Sales Agreement: This is basically a lease agreement, which banks can offer to business customers that wish to

finance purchases of new equipment The business is able to take possession of the property as soon as the agreement is in force, but

does not own the property until it has paid for it, which is usually done in installments. If the business defaults on its payments, the bank will take possession of the item.

Hire Purchase and Lease Agreement: Financial lease is commonly used in commercial dealings to facilitate the acquisition of vehicles and other equipment. The debtor can get tax write offs if the goods are used for business purposes and so long as rentals claimed as tax deductions are where the leased equipment was for the purpose of the production of assessable income.

The government effectively subsidizes leases as it wants businesses to be able to get access to new equipment and technology so as to increase competitiveness and productivity, but knows that not all businesses want to or need to make large capital outlays

The lessor (SP) benefits from being able to claim depreciation of the goods as a tax deduction and being able to pass on that benefit in the form of a reduced interest rate to the lessee (debtor)

o Effectively, the SP gets the double bonus of writing down tax deductions as well as getting interest from the debtor.

Accounts Receivable Financing Includes trade debts, books debts, receivables A type of asset-financing arrangement in which a company uses its receivables – which is money

owed by customers – as collateral in a financing agreement. The company receives an amount that is equal to a reduced value of the receivables pledged. The age of the receivable have a large effect on the amount a company will receive. The older the receivables, the less a company can expect.

o Selling receivables will often involve a ~10% cut or more, depending on the market or ripeness of the books. Often worth it given the present time value of money plus the additional knowledge of not having to go after the owing party and possibly even pursue litigation

Security Interests in Circulating Assets: These are often referring to the inventory, assets or accounts with which the business deals with every day. The SP would like to have a security interest in the items of the debtor, but knows that these will be turned over quickly and are unlikely to stick around as they are used to produce income for the business.

Issues with Circulating Assets as Collateral After-Acquired Property Concerns

o Secured Parties will often want to have rights over new assets that the debtor possesses. These may come from suppliers who also wish to retain a security interst.

o Otherwise the production of new items which was generated by current operations was where the SP’s wanted to gain traction.

o The common law was inefficient to deal with the constant turn-over of rights which were often affected by equitable concerns – The PPSA substitutes this with clearer distinctions about where security interests may attach

Right of Disposal Concernso The debtor wants to be able to dispose of their inventory during the normal course of the

business, but a constant security interest could prevent them from doing so, would endanger their business and might needlessly prejudice them in relation to all other creditors

o The question arose – how could a debtor give a security interest in inventory, accounts, etc, but at the same time reserve a right of disposal?

The answer: the Floating Charge

Floating Charge: Is a security that has an underlying asset or group of assets which is subject to change in quantity or value. The floating charge served to secure an interest without affecting the companies ability to use the asset

The floating charge was a perpetual cloud that would hang over the inventory of the debtor. In the event of default or insolvency, the charge would crystallize, thereby preventing further distribution of the SP’s new assets

Note: the PPSA mimics the floating charge but more strictly defines its ambit viz circulating assets. The result is that the floating charge itself is no longer applicable as a security interest.

Bank Act Security S.427 – Determines to whom a bank may lend money and make advances (basically anyone but

predominantly for the acquisition of goods, wares, merchandise, etc) The scheme was designed to facilitate the development of the natural resource industry in Canada

through secured lending. Provisions should be interpreted in a “fair, large, and liberal manner” to “best ensure the attainment of the object of the act”

o The section includes references to fish, natural minerals and moreo Given how heavily regulated banks are, the legislature is incentivized to allow them as

much freedom as possible in their lending activities as they are the catalyst for allowing businesses to grow (Credit Suisse Canada v 1133 Yonge Street Holdings Ltd)

BC PPSA

Objectives 1) Structural integration: common law issues mostly resolved2) Conceptual Unity

a. Allows for the definition and expansion on what a security interest is or is not.3) Comprehensiveness

a. Deals with as many possible issues that may arise as possible, primarily through the first-to-file mechanisms but also through priority mechanisms

4) Legal Predictabilitya. Give more definite answer about what remedies are available, lowers risk in lending

transactions.b. Helpful in preventing more litigation from coming through the doors of the courthouse

5) Accommodation of Modern Business Financing Techniquesa. Helps to facilitate cross border transactions by harmonizing practices and procedures

i. Especially true given the fact that it is entirely predicated on the US Commercial Code regarding security interests

6) Regulation of default rights and remediesa. Debtor knows what will happen if they don’t pay or will pay

i. How do you get rid of their interest when you’re paid up

Significant Components of the PPSA

Security Interest: is defined by the PPSA in functional terms to mean an interest in personal property that secures payment or performance of an obligation, without regard to the form of the transaction and without regard to the location of title to the collateral as between the secured party and the debtor

Some formalities, but doesn’t need to be boilerplate. Doesn’t matter where location of title is.

Third Party NoticeEveryone will know what you’re up to

Protection of a secured party’s proprietary rights must be balanced against the need to ensure that third parties are not prejudiced by the existence of undisclosed secret liens in assets in a debtors possession

The effective use of electronic registration systems helps to constructively provide notice such that, under normal circumstances, an objective reasonable person would not have been prejudiced as they would have access to said notice.

o Ultimate goal is to avoid entering into agreements where the property is encumbered secretly

System unifies and streamlines the transaction processo No longer need to deal with chattel mortgages, assignments of books, etc which had their

own registration regimes System will also locate the priority of payments, scope of control and lenders entitlements over

the assetso Many registrations are left vague in order to obfuscate true nature of entitlement,

increases risk to both newer SP’s and older SP, hoping to increase transaction cost beyond reasonable value for any new SP’s

Registration System: Mechanism through which everyone can see what interest lies where, displaces old schemes in equity regarding unknown security interests

Unlikely to be any delay in registration of security interest other than in the event of PMSI situations

Helps to show first in time, first in right status

Theories of Secured Credit – John Amour, “Law and Economics Debate About Secured Lending”

Why are debtors motivated to offer security to their creditors? In theory, the risk is lower for the creditor, can take the collateral in the event of a default Collateral substitutes for the information asymmetry in a transaction. The creditor does not know

if you will do business effectively.o This may also bridge the gap if you have no credit or bad credit

“Signalling Theory”: Demonstrates the seriousness of their commitment, you can hold my property hostage

o The inverse however could be true as the creditor will lose the property in the event of bankruptcy anyways, here they are just getting a big loan for free. The loan itself may signal a lack of seriousness as the only real obligation is between creditors

However, things are not so simple:

The granting of a secured interest will lower the rate for that transaction but will increase the rates for unsecured creditors as they need to more heavily leverage against property they know will not be part of the assets of the estate upon bankruptcy

o The “redistributive” theory posits that unsecured creditors who do not give you additional rates serve to provide the benefit from the secured transaction

Visa won’t know or care if you are secured as a small business, rate will be the same

The granting of a security interest with prohibitions may prevent the debtor from taking risky behaviour that will lower the value of the business endeavor and/or asset

o This will serve to increase the social benefit to all creditors as a bigger piece of the pie is maintained

o But it also restricts the business operations and may increase agency costs (although it is designed to do the opposite)

Classification of Goods Classification of goods as consumer goods, inventory or equipment does not depend upon any

essential characteristic of the goods involved, but upon the use being made of the goods at the relevant time by the debtor in possession

o Ex: a truck can be consumer goods if used personally, inventory at a car dealership or equipment if used at a work site

o Note: goods can be and often are stated and classified under the financing statement

Scope of the PPSA

2 (1) Subject to section 4, this Act applies(a) to every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral, and(b) without limiting paragraph (a), to a chattel mortgage, a conditional sale, a floating charge, a pledge, a trust indenture, a trust receipt, an assignment, a consignment, a lease, a trust, and a transfer of chattel paper if they secure payment or performance of an obligation.

(2) Despite section 4 (g), this Act applies to a security interest in a security or instrument, but does not apply to(a) a security or instrument that is a mortgage or charge on land if the land mortgaged or charged is described in the security or instrument or in documents held by the issuer of an uncertificated security, or(b) a security or an instrument that is a mortgage or charge registered under the Land Title Act or with respect to which an application for registration has been made under the Land Title Act.

In order for there to be a security agreement, there must be consent. Without it, the PPSA is likely not triggered

The scope and ambit of the provision is expansive. Unlikely to include anything to do with land but may apply to profits a prendre from it (especially where the land has severable assets)

S.3 Security interests that do not Secure Payment or Performance

3 Subject to sections 4 and 55, this Act applies to(a) a transfer of an account or chattel paper,(b) a commercial consignment, and(c) a lease for a term of more than one year,that do not secure payment or performance of an obligation.

Exclusions from scope of Act

http://www.bclaws.ca/civix/document/id/complete/statreg/96250_00


4 Except as otherwise provided in this Act, this Act does not apply to the following:(a) a lien, charge or other interest given by a rule of law or by an enactment unless the enactment contains an express provision that this Act applies;(b) a security agreement governed by an Act of the Parliament of Canada that deals with rights of parties to the agreement or the rights of third parties affected by a security interest created by the agreement, including but without limitation

(i) a mortgage under the Canada Shipping Act, and(ii) any agreement governed by Part V, Division B of the Bank Act (Canada);

(c) the creation or transfer of an interest or claim in or under a policy of insurance except the transfer of a right to money or other value payable under a policy of insurance as indemnity or compensation for loss of or damage to collateral;(c.1) a transfer of an interest or claim in or under a contract of annuity, other than a contract of annuity held by a securities intermediary for another person in a securities account;(d) the creation or transfer of an interest in present or future wages, salary, pay, commission or any other compensation for labour or personal services other than fees for professional services;(e) the transfer of an interest in an unearned right to payment under a contract to a transferee who is to perform the transferor's obligations under the contract;(f) the creation or transfer of an interest in land, other than an interest arising under a forest agreement, including

(i) a lease,(ii) a petroleum and natural gas lease under the Petroleum and Natural Gas Act,(iii) a lease, issued under the Coal Act, that confers the right to produce coal, or(iv) any similar interest that is prescribed for the purposes of this section;

(g) the creation or transfer of an interest in a right to payment that arises in connection with an interest in land, including an interest in rental payments payable under a lease of land;(h) a sale of accounts or chattel paper as part of a sale of a business out of which they arose unless the vendor remains in apparent control of the business after the sale;(i) a transfer of accounts made solely to facilitate the collection of the accounts for the assignor;(j) the creation or transfer of an interest in a right to damages in tort;(k) an assignment for the general benefit of creditors made in accordance with an Act of the Parliament of Canada relating to insolvency;(l) a mineral claim or a placer claim as those terms are defined in the Mineral Tenure Act.

Transaction: Refers to a concluded security agreement12 (1) A security interest, including a security interest in the nature of a floating charge, attaches when

(a) value is given,(b) the debtor has rights in the collateral or power to transfer rights in the collateral to a secured party, and(c) except for the purpose of enforcing rights between the parties to the security agreement, the security interest becomes enforceable under section 10,

There must be a concluded agreement, otherwise the Act will not apply (Ellingsen (Trustee of) v Hallmark Ford Sales Ltd)

o Should there be a condition precedent that is unfulfilled, this will prevent security interests

o The form of the agreement is of little significance, it is not determinative that terms such as “lease, lessor, lessee, leasepayments” or “security agreement” are used

Note on Collateral: How can one prove rights in collateral?1) Receipt of purchase2) Contractual agreements3) Have the owner or user of the asset confirm the scope of your possessory rights4) Affidavit, authorized by notary

a. Would be fraud to lie

Security Interests

Security InterestsCan be separated into two categories: (1) A true security interest; and (2) a deemed security interest

True Security Interest: Is created in transactions that are explicitly entered into by both parties in order to give a secured party a security interest in the property of the debtor

This is normally predicated on the exchange of promises, consideration, etc.

Deemed Security Interest: Is a security interest that is still valid whether or not it secures payment or performance of an obligation. In essence, the debtor is still retaining control of an asset or vesting an asset without accompanying responsibilities

Transfers of an account (unpaid bills/debt) / Transfer of chattel paper A person who delivers goods to another person under a commercial consignment A lessor under a lease for a term of more than 1 year

Note: The creation of a security interests constitutes a “purchase” within the meaning of the term in the PPSA:

“Purchase” means taking by sale, lease, discount, assignment, negotiation, mortgage, pledge, lien, issue, reissue, gift or any other consensual transaction creating an interest in property

Substance in Security Interests

Trusts: Do not generally serve to create a creditor/debtor relationship, but may fall into the PPSA based on the context of the transaction. The relationship between the parties may be indicative of whether a security interest arose

Y gives the property to X to be held in trust for Z, X makes payments back to Y (like a lease or mortgage), security interest might arise as the transaction is a sham

A gives property to B to be held in trust for A with the property vesting in B if A defaults

Commercial transactions may give rise to a resulting trust if the consumers never intended to gain a security agreement (Re Skybridge Holidays Inc

Set-Off: Is the right of a debtor who is owed money by his creditor on another account or dealing to ensure payment from what is owed to him by setting this off in reduction of his own liability.

Both debts must be for liquidated amounts and they must be mutual X gives to Y, in the event Y defaults, X will no longer owe Y a debt previously incurred

Flawed Assets Arrangement: A flawed asset arrangement is an arrangement between a debtor and a creditor imposing conditions on a creditor’s repayment obligation. Normally this occurs between a bank and its customer when the customer deposits funds and the funds are not repayed until the banks indebtedness is covered.

In practice this will restrict or completely occlude the debtors ability to use the fundso Obviously if the obligations are not performed, the restrictions ensure that the deposit

moneys remain available until the bank exercises set-off to act on its securityo This will constitute a security interest when the substance of the transaction secures the

payment or performance of an obligation

Banks will attempt to classify these as security agreements when it suits them, but may also attempt to classify these as unsecured interests when, in doing so, they may be able to exercise the right of set-off to avoid having their position undermined (Caisse Populaire Desjardins de l’Est de Drummond v Canada)

Triple Cocktail Remedies A triple cocktail gives the deposit-taking institution three sets of entitlements

o Setoff rights; Often done without your permission, even though you signed boilerplate. Most

likely didn’t anticipate this would occur (although this most likely doesn’t matter to the debtor as they know that the money is gone if they default

o A flawed asset entitlement; and Conditional arrangement combined with right of set-off

o A security interest in the deposit account Physical control with contractual agreement viz security agreement gives bank

first priority.

GuaranteesGuarantees function such that when A owes B an obligation, C will promise to pay in the event that B is unable to/defaults/doesn’t feel like paying

Guarantees reduce the risk of lending by giving the creditor an alternative source of payment That being said, a guarantee is NOT a security interest because it only gives an in personam right

against the guarantoro However, this can be modified if the guarantor gives a guarantee against their own

property

Negative PledgeA negative pledge is a promise by the debtor not to create a security interest in favour of a third party or not to create any such security interest that would rank in priority to, or pari passu with the creditor’s own security interest

Pari-Passu: Treat them all on equal footing A negative covenant in an indenture stating that the corporation will not pledge any of its assets if

doing so gives the lenders less security. Also be referred to as a “covenant of equal coverage” No doubt included in all good contracts

Note: Guarantees and Negative Pledge Agreements are essentially unsecured credit transactions, the only rights lay in personal actions

Licensing ConcernsA license refers to a number of different rights, everything from contractual, statutory, transferrable (or not) to a license to perform or not perform some act.

Currently, a license can only be collateral which can be subjected to a security interest if it is personal property

Thus, in order to gain a right to use a license for PPSA purposes, it must be able to be construed as property.

A license which will be able to fulfill the goals and ambits of related legislation may be found to be property for the purposes of the PPSA (Saulnier v Royal Bank of Canada)

o Determining whether a license can be collateral requires an understanding of the legislation and the commercial reality surrounding the situation

o A fishing license would help to gain access to credit as the license is readily transferrable, worth a lot of money and the construction of the license is not only the permission to do something, but also to profit from ones activities (hence, more valuable)

Note on Licensing: Purely private or statutory licenses may be PPSA compliant Other statutory licenses such as a nursing home license cannot be bought or sold at will. As such,

the value of such a license is not only much lower, but its transferability is not in keeping with the PPSA and legislative desire to free up collateral for investing purposes.

o Transferability is key to the PPSA, the more transferable (and essentially fungible) the asset it, the more likely it is (As a baseline) subject to PPSA security attachment.

Statutory licenses may be completely prohibited or may be subject to the discretion of a minister or other body to accept or reject. If the ability to rescind is unilateral and exercised freely, such a license may not be one in keeping with the goals of the PPSA

BC PPSA Distinction The BC legislature has amended the PPSA such that transferable licenses are considered property

o This will permit the creation of security interests and the further provision of credit by lenders who can attach a security interest to the collateral of the license itself.

"licence" means a right, whether or not exclusive, that may be transferred by the holder with or without restriction or the consent of the grantor and that entitles the holder to do any of the following:

(a) manufacture, produce, sell, transport, grow, harvest or otherwise deal with personal property;(b) provide services;(c) acquire personal property;(d) harvest timber, or grow and harvest Christmas trees, under an agreement referred to in section 12 of the Forest Act;

Consideration: Human Materials Can human materials be the subject of a security interest? Sperm has been seen as property in a number of cases (Lam v UBC; JCM v ANA)

o This was because the sperm was seen and handled as property throughout the entire transaction

o It is unlikely that any other body party other than renewables (hair, mucus, blood, etc) could be treated as property at this point in time due to ethical concerns surrounding the subject of human body ownership

If someone had a security interest in your arm, how would they enforce that? Technically SP’s can unilaterally seize your arm. What about unsecured creditors, how would they enforce?

o What about body parts that are not necessary for human survival? Appendix is vestigial organ, humans have the same life expectancy and quality of life with one organ as they have with two.

Insurance has not been allowed to place value against human lives (gambling against lives) but does exist to insure certain body parts. How would this affect the market?

o Market would incentivize people to damage their “property” in order to make claims, would create a moral hazard

o As societal stratification continues, there may be more and more reason for poorer or disadvantaged people to yield organs or body parts, perhaps due to undue influence. Would not have the proper mechanisms to secure their body


General Security Agreements

A general security agreement is a lending agreement in which a security interest is created. The debtor agrees to give the lender a lien on his real (not included in PPSA) or personal property in the event he defaults on the loan.

o Note that mortgages do not need to be registered either (Re Urman) A general security agreement is the most common form of personal property security used to

secure commercial loans and other business obligations owed to a financial institution or other creditor (SP). A GSA is an effective and efficient way to obtain security over business assets to secure commercial obligations

o Anything that has value should be capturedo De Facto lien over debtors property

GSA normally includeso Debtors representations, warranties and covenantso A description of the personal property assets secured by the GSAo Terms and conditions of the GSA; ando The enforcement rights in the event of default

GSA can secure most types of personal property, both present and future, includingo Machinery and equipment the debtor uses in carrying on its businesso Inventoryo Accounts receivableo Trademarks and other IP; ando Securities such as stocks, bonds and investment accounts

Often, a GSA states that it secures all of the debtors present and after-acquired personal property, followed by a list of specific categories of personal property charged

o Huge omission, most of the value may actually accrue after original loan (especially as an original loan may give rise to the appreciation and improvement of the business and its operations)

Good for debtor if clause not there Power imbalance, unlikely to be able to remove this term.

Deemed Security Interests

Transfers of Accounts – Accounts are intangible, can be made subject to a security agreement and vest a security interest. If the transfer of an account secures payment or performance of an obligation, the act applies.

Stale debt – someone might owe money to you but hasn’t paid, debt may not actually be worth the amount that you are owed

Could sell debt at a discount, see if someone wants to take it over

Due diligence – want to make sure they aren’t in receivership, see what their accounts receivable are and likelihood of capturing debts.

If you take out a loan against transfer of accounts with a security agreement or sell outright, PPSA still applies (Deemed)

Leases

Leases are extremely valuable, especially for biomedicine, heavy equipment, etc Leases have been used as vehicles to trade the capital cost allowance for a reduced finance

charge. Under a leasing arrangement, the financier buys the equipment from the supplier and leases it to the lessee at a credit cost to the less below what it would pay if it borrowed the purchase price of the equipment

o More liquidity, don’t need to use cash to pay taxes through use of deductionso Leases CCA, depends on whether it is better to own the item outright

1 year cut off – exclude short term rentals – BC PPSA S.3o Don’t want it to be under the PPSA for short term leaseo Increased agency costs, decreased efficiencyo No one wants to extend a loan for a week rental

Failure to Register Financing Statement SP leases to D, during the lease, D sells to T who has no knowledge of SP’s security. If SP fails

to register, T will get title and SP’s title will be extinguishedo Financing statement is supposed to evidence security obligation, would be unreasonable

for a buyer to claim “without notice” if they easily could have searched the PPSAo Test is whether a reasonable person would have been misled as to the security interest

when they searched (this would clearly happen if they had never registered)o Note also if they register initially but the registration lapses, T could gain a valid interest

if the purchase happened Bona Fide prior to the re-registration of the interest

Common Law Remedies SP rents for a weekend to D, no security interest as it is less than one year. D sells to T as a

BFPV. SP claims the item from To Common law rules would apply, SP would either seize item (basically stolen/fraud) or

sue D – Nemo Dat

Consignment In a true consignment relationship, the parties act as principal and agent, not as buyer and seller.

The delivery of assets is so that the other party can sell them and return the funds minus a cut. The obligations of sale do not constitute a purchase, license or retained ownership right and as such don’t attract a security interest. The relationship will be contractually determined.

Statutory Exclusions An important category of interests excluded from the scope of the PPSA includes security interest

in or claims in or under annuity contracts or insurance contractso Landlord/Mechanics liens excludedo What is excluded from the act is a contract under which a stated sum of money is payable

at regular intervals

Re Stelco Inc – In regards to insurance premium contracts (which may give rise to contractual rights but not security interests or priority)

GE Canada Equipment – Dealt with salvage rights which are not security rights but are in personam rights against the lessee or car owner.

The lien created when a landlord exercises a right of distress is excluded from the acto Commercial Credit Corp v Harry D Shields Ltd

Note: Just because it isn’t under the PPSA, doesn’t mean it can’t be used as collateralNote on Insurance Exclusion – Policy Rationale

Theory: assignments of insurance interests were adequately covered in relevant insurance law statutes and cases; no need to include in PPSA’s

Consideration: Insurance proceeds are not unlike other intangibles, seems odd that they should be subject to a regime that is different than those considered in the PPSA

o Counter: Insurance is unique in its ability to be subject to a moral hazard. Parties defaulting may intentionally trigger insurance provisions so as to pay off their creditors

o Furthermore, insurance is not the only thing monitored under alternative regimes, there must eventually be some intangible, and perhaps even tangible property (such as human materials), that are subject to alternative statutory requirements

Validity and Enforceability of a Security Interest

In order to have a valid security interest, you must satisfy 4 requirements:1) There must be a concluded security agreement

a. No condition precedent/subsequent – Ellingseni. Failure to have a concluded security interest will allow the asset to fall into the

hands of the estate by virtue of bankruptcy (Ellingsen)ii. Possession by itself is not enough to trigger a security interest (994814)

b. The goal is for the parties to become ad idem with regards to what collateral is being exchanged for what capital (356447 British Columbia Ltd v CIBC)

2) The agreement must comply with Statute of Frauds requirementa. Most likely needs to be in writing, must satisfy any other requirements

i. S.9 – A security agreement is effective according to its terms. Intention will be inferred from the agreement as a whole, as well as in its forms and substance (994814 Ontario Inc v RSL Canada Inc and En-Plas Inc; see also 356447)

3) There must be attachment – value attributed to the collaterala. Security interest must attach to the collateral

i. Must satisfy statute of fraudsii. Must be a value exchange (iTrade)

iii. Debtor must have rights in the collateral (iTrade Finance Inc v BMO)4) Security Interest must be perfected

a. Give notice to the world that SP has rights to the collaterali. Registration

ii. Possession

Insolvency Concerns

Insolvency is defined as: (1) the condition of being unable to pay debts as they fall due or in the usual courts of business, or (2) the inability to pay debts as they matures, also termed as a failure to eet obligations

Once the debtor becomes “insolvent”, they may further become “bankrupt” (after being petitioned or submitting to bankruptcy proceedings) and subject to “receivership” actions

Receivership is a formal legal state of an insolvent debtor where a receiver is appointed over the assets of the debtor

Receivers are normally sponsored by creditors who hold security over the assetso Receivership itself can be assented to by the debtor or the creditor can seek a court order

Receivers bring the assets of the debtor together so that they can be accumulated to pay off the various debts accruing

o S.64(1) of the PPSA provides that a receiver must be licensed as a trustee under the BIA, however, receivers are not necessarily trustees nor do they take the same obligations as trustees might have in a bankruptcy proceeding

Bankruptcy is a formal legal state of an insolvent debtor where there is an assignment (voluntary or forced) of their assets to a trustee in bankruptcy. The trustee is then vested with the property directly and is tasked with selling or assigning the assets such that the creditors can be paid

Enforcement of security interests often occurs at the time of insolvency. A such, it is important that a security agreement is in place and executed appropriately, otherwise the property may become subject to competing claims between both creditors and the trustee in bankruptcy

Where a condition of sale is not satisfied, the title of an item will not pass and will therefore not be available to the trustee in bankruptcy as part of the bankrupts estate (94814 Ontario Inc v RSL Canada Inc and En-Plas Inc)

o Although a party gains rights in possession of an item, mere possession doesn’t equate to title possession such that other creditors can access the item in bankruptcy (En-Plas)

Cases Special words or phrases are not required to create a security interest. One must look to the

intent/substance of the agreement and whether the parties intended to convey a security interest (356447 British Columbia Ltd v Canadian Imperial Bank of Commerce)

Parties can intend to turn unsecured debt into secured debt by a number of different mechanisms, but such a mechanism must be consensual and clearly anticipated by the parties to the agreement (Eagle-Eye Investments Inc v CPC Networks)

o Here the parties didn’t anticipate that the non-secured debt would thereafter be foisted into the GSA such that they would treat it as secured for liquidation purposes (from the all obligations clause).

o Courts will also consider the virtue of the claimants making such a claim as they bear the onus of showing the intention of a party that they might not have dealt with at first instance

Note on “All-Obligations Clauses”: The intent is to consolidate past debts as part of the new obligations such that it becomes part of the security interest. While this is possible, it must be done with consent and the inception of the deal. Otherwise this is unfair to creditors as one party could, down the road, leapfrog

everyone and become secured. This would leave creditors with a risk bargain they had not anticipated and one that could not have been accounted for.

Allowing freedom of contract here must be tempered against the risk analysis these parties must engage in. To allow random leapfrogging would serve to raise transaction costs and slow down the market economyCourts have pointed out though that parties are free to arrange their affairs as they see fit within PPSA provisions (Credit Suisse v 1133 Yonge)

Statute of Frauds

The BC PPSA has codified and consolidated the concerns regarding statute of frauds writing requirements and has now laid out clearly what must be done in writing in order for a security agreement ot be valid

10 (1) Subject to subsection (2) and section 12.1, a security interest is only enforceable against a third party if(a) the collateral is not a certificated security and is in the possession of the secured party,(b) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under section 68 of the Securities Transfer Act in accordance with the debtor's security agreement,(c) the collateral is investment property and the secured party has control under section 1 (1.1) in accordance with the debtor's security agreement, or(d) the debtor has signed a security agreement that contains

(i) a description of the collateral by item or kind, or by reference to one or more of the following: goods, investment property, instruments, documents of title, chattel paper, intangibles, money, crops or licences,(ii) a description of collateral that is a security entitlement, securities account or futures account if it describes the collateral by those terms or as investment property or if it describes the underlying financial asset or futures contract,(iii) a statement that a security interest is taken in all of the debtor's present and after acquired personal property, or(iv) a statement that a security interest is taken in all of the debtor's present and after acquired personal property except

(A) specified items or kinds of personal property, or(B) one or more of the following: goods, investment property, instruments, documents of title, chattel paper, intangibles, money, crops or licences.

(2) For the purposes of subsection (1) (a), a secured party is deemed not to have taken possession of collateral that is in the apparent possession or control of the debtor or the debtor's agent.(3) Subject to subsection (6), a description is inadequate for the purposes of subsection (1) (d) if it describes the collateral as consumer goods or equipment without further reference to the kind of collateral.(4) A description of collateral as inventory is adequate for the purposes of subsection (1) (d) only while it is held by the debtor as inventory.(5) A security interest in proceeds is enforceable against a third party whether or not the security agreement contains a description of the proceeds.(6) If personal property is excluded from a description of collateral, the excluded property may be described as consumer goods without further reference to the item or kind of property excluded.

Unless secured party takes possession of the collateral, the SA must be in writing and signed by the debtor and it must contain a description of the collateral sufficient to identify it.

Where parties intend to enter into oral security agreements, the terms of the agreement must still be clear. There can also be a mix of oral and written sufficient to create a security agreement (MacEwan Agriculture Inc v Beriault et al)

Failure to comply means that the security agreement is unenforceable against third parties (MacEwan)

o Problems arise for bankruptcy for example A creditor cannot attempt to pass a bill of lading or receipt off as a security instrument unless it

was explicitly contemplated that such a document would stand as the security agreement evidence (Atlus Industries v Federal Business Development Bank)

Note – BC PPSA S.45(4): A financing charge statement disclosing a transfer of a security interest may be registered before or after the transfer


In many instances, a deal will be subject to credit approval from another lender which will also be extending credit. Registering the financing charge lets other creditors know that you are in serious negotiations and that you intend on completing the transaction. It also helps to establish your position viz filing

The Description of the Collateral

BC PPSA S.10(1)(d)(i): The debtors signed security agreement must contain a description of the collateral by item or kind, or by reference to one or more of the following: goods, investment property, instruments, documents of title, chattel paper, intangibles, money, crops or licenses

Forms often have check-boxes that you can fill out to indicate what the item covers Some description is advisable, but risk occurs with too little or too expansive definition

o Risk also occurs with oral determinations of which items in a class are supposed to be subject to the interest not laid out in the document (trucks, which trucks?)

Items with serial numbers will almost always be clearly laid out here

A collateral description is sufficient if, whether alone or in conjunction with extraneous materials, it enables a third party to corroborate the existence of the security interest (GE Capital Canada Acquisitions Inc v Dix Performance)

o In all likelihood the third party may be an appraiser or another member of the same business community, there may be some need for specialized appraisers or parties who know specific lingo or verbage of a particular industry

o For all intents and purposes, the description should be specific enough to identify the asset at first blush to avoid litigation or other issues with creditors

The bar could have been set higher but the legislature demurred In the event that a security agreement describes the collateral as “all products”, further

elaboration may be required to set out whether this refers to property that the debtor owns, comes into ownership of, produces, etc (Clark Equipment of Canada Ltd v Bank of Montreal)

BC PPSA S.11: If a security agreement is in writing, the secured party must deliver a copy of the security agreement to the debtor within 10 days after it is executed and, if the secured party fails to do so after a request by the debtor, a court may, on application by the debtor, order the delivery of the copy to the debtor

This section helps the debtor but it forces additional expenses on them and time wasting by virtue of the application. Particularly abhorrent behaviour may allow them to get their costs back, but who would want to do business with someone who won’t even give you the contract?

Attachment

Attachment marks the point at which the secured party’s security interest materializeso Whereas perfection relates to the publication of the security interest itself (which can’t

happen without attachment)

Attachment Requires:1) A security agreement which satisfies the Statute of Frauds requirements

a. Signed, describes the collateral, etcb. Unless in possession of the itemc. The attachment rule presupposed a consensual security interest as opposed to a charge or

lien operating by lawi. Also speaks to common law considerations of undue influence

2) The secured party must give value; anda. Value: means any consideration sufficient to support a simple contract and includes an

antecedent debt or liabilityi. Normally past consideration is no consideration, but forebearance on a past debt

is a form of value itself and may allow the debtor to stay in business.1. This helps to secure the debt, avoid stripping cash or collateral away

from the debtor and hopefully is for the betterment of the companyii. The inclusion of antecedent debt removes the need to prove forebearance or

estoppel, thereby avoiding litigation on a number of matters3) The debtor must have rights in the collateral or the power of transfer rights in the collateral to a

secured partya. Obviously, if the debtor has no rights in the collateral, there is nothing they can give the

secured party. This speaks to the nemo dat rule as well as the idea that the parties are exchanging value

b. Note: Full ownership is not required, only the relevant rights which allow a transfer to occur (iTrade Finance Inc v Bank of Montreal)

i. A party may have a voidable right, but if they transfer to a bona fide purchase for value without notice, it will still be sufficient to pass the property right, so long as it wasn’t previously voided (iTrade)

c. Note: A security interest is a proprietary interest, hence the requirement of rights in the collateral prior to transfer (before a security interest attaches)

i. The term rights spans the legal and equitable landscape and need only be sufficient to transfer (iTrade)

d. According to Sale of Goods case law, if a debtor acquires rights in the property in the kind described in an agreement after the fact, the security interest will attach appropriately

i. Serves to “perfect” the title

Note: This is unless the parties have specifically agreed to postpone the time for attachment in which case the security interest will attach at the time specified

Fraud Consideration Government and Banks dominate public policy through litigation and favourable rulings

o Incestuous relationship between government appointees for high level positions in important financial bodies

o Obviously they need lawyers and bankers who know about the law and banks, but oversight is needed to prevent corruption

White collar / normal civil litigation victims aren’t paido Seeking civil remedies is often a fruitless expense

Ex: Bernie Madoff Risk mitigation is huge in order to avoid lack of ability to collect

o Complex commercial parties should be cognizant of fraud issues Less commercially savvy parties may not fully appreciate the risk involved in a

transaction, may not have the ability to actually leverage resources to address ito iTrade could have noticed their fraud more readily, they advanced funds, their burden to

bear iTrade lead to people doing due diligence prior to deal even being drafted

How do Commercial lawyers perpetuate/prevent fraudo Lawyers may sign deals for their clients that they know they cannot uphold, they may

even sign multiple deals on the same security In some ways they are even incentivized to help with the fraud as they can claim

that they had no part in truly facilitating it and/or they need to squeeze the cash out of their client that they can before the inevitable bankruptcy

o Lawyers can prevent fraud by not signing contract they know their client can’t keep, may even be whistleblower programs

Lawyers operate under a lack of morals, should think about the betterment of the community, not just their clients interest

If fraud occurs, less money to divide amongst creditors.o Decreased funds subject to more competing claims

This is particularly relevant for SP’s who have attached to a particular asset that is now gone

o Ranking methods are irrelevant for underlying unsecured creditors They were going to get even less on a pro-rata scale than they were before

Fraudsters never have assets to pay you off, innocent parties bear loss May be information asymmetry with new companies who are less credit worthy Government legislates this way so that they aren’t involved, don’t force losses onto society

o Even though society bears the loss of increased interests, loss of jobs, etc.

After-Acquired Property

S.12 of the PPSA allows a security interest that covers after acquired property subject to exceptions for crops and consumer goods.

This is accomplished via the inclusion of a contract provision specifying that the collateral securing the debt includes whatever may come after the original collateral which was subject to the original contract

S.13(1) provides that an after acquired security interest attaches to the property in accordance with the terms of the agreement without any need for a specific appropriation by the debtor

Appropriation is the act of making something suitable such that it can be collected, no need for any kind of constructive delivery

13(2) – disallows security interest in crops

o Crops have their own legislative frameworko Powerful lobby groups work in the area and serves to prevent overlapping legislation

from ousting their control over the field 13(3) – disallows security interests other than an accession unless the SI is for a PMSI or if

accepted as collateral in lieu of the original collateralo The legislature was concerned over unscrupulous behaviour that may subject normal

goods to security interests, thereby creating a situation where toasters could be unilaterally seized

There is a strong consumer protection element here to be sure There is also inefficiency concerns. There is no point in seizing items of such low

value or allowing a regime that would attempt to seek injunctions or litigate in regards to toasters.

Note on Accession: Accessions means goods that are installed in or affixed to other goods. Some attached items are worth salvaging from an unpaid debtor such as fancy car parts or fancy house stuff.

The Floating ChargeThe floating charge existed as a way to attach a security interest to circulating assets. In the PPSA-era, all that needs to be done to gain such a charge is to specify in the security agreement that the debtor gives the SP an SI in the debtor’s present and after acquired inventory or its present and after-acquired accounts or all its present and after-acquired personal property and to make clear (either expressly or impliedly) that, in the absence of default, the debtor remains free to deal with the collateral in the ordinary course of its business

This effectively prevents the kind of concerns viz crystallization under the old regime. The SI has already crystallized by virtue of the agreement and there is almost a form of license or forbearance that allows the goods to be distributed accordingly

The right to control the assets will assuredly crystallize upon a default, such that the creditor may lay out what to do with the items or enter into negotiations to try and secure other collateral or debts in order to be more comfortable with their product going out the door

Note in RBC v Sparrow Electric: The bank won in this case by virtue of the fact that the non-payment to the government of payroll deductions did not truly occur until the items were sold. Since the items were sold, the money needed to be paid to the secured creditor and the government had to get in line with other creditors.

While this is pragmatic as an event of default may never occur, it seems strange that a statutory obligation could be ousted by a secured party upon the crystallization event. Their obligation is clearly ongoing and remittances should be made as per regulations. May serve to stand as a number of mini-crystallizations with forebearance.

Combined effect of S.427(2) [regarding taking of securities] and 435(2)(c) is tha the bank receives the same rights and title in collateral as the borrower enjoys

Perfection

“Perfection is an extra step that, in combination with attachment, will give the secured party’s interest the strongest position possible”

Perfection is the publication of a security interest in accordance with utilization of the PPSA registration system. This is done so as to register first-in-time status along with describing the security interest

Registration will include a description sufficient to identify the collateral, along with the name of the debtor (full legal) as well as any applicable serial numbers

PPSA - S.19A security interest is perfected when:

(a) it has attached, and(b) all steps required for perfection under this Act have been completed,regardless of the order of occurrence.

Attachment refers (obviously) to the value being given, the debtor having rights in the collateral or a power to transfer and the agreement satisfying the statute of frauds

o Note also, all of these things must occur before perfection occurs, but in no particular order. Attachment will often occur before or it may occur after, but perfection can occur later as perfection relates to preventing other parties from having a security interest

May be the result of possessing item prior to attachment All steps refers to the creation of the security interest along with the terms of the contract itself

plus the final registration

Note – S.19.1 Deals with securities, S.19.2 deals with future interests in investment propertiesPerfection is an extra step that in combination with attachment will give you the a secured party’s interest the strongest position possible

Perfection relates to the publication interesto Historically, it was thought that if the debtor transferred ownership but not possession,

there was an intent to perpetrate a fraud. This has the effect of preventing non-possessory security interests (Twynes Case)

o Nowadays with modern commerce, we need both the ability to have non-possessory interest and a way to indicate our security interest status against a collateral, hence the PPSA.

To hold the common law rule would severely restrict access to credit Furthermore, it would severely hamper the use of intangible goods as property

interests Finally, it would affect fixtures and immovable in mysterious ways

Raymond Darzinskas case: Constructive possession over an immovable was not possession

This led to the development of possessory techniques where debtor goods were held in separate areas or buildings in the US

o There were also historical concerns about lack of business savvy. While people are still idiots today, they at least appreciate concepts like collateral, credit, debt, legal obligations, etc

Principal use of the term perfection in the PPSA is to describe a priority status acquired by a secured interest

o This effect allows people to keep the collateral but also let the creditor secure their righto In the case of intangibles, the PPSA includes such things, including licenseso Registering also serves to avoid issues with fraud or misrepresentation as anyone can

unilaterally inspect the database to determine who has what security interests

4 Forms of Perfection

1) Perfection by Possession – BC PPSA s.24

Perfection by possession of collateral24 (1) Subject to section 19, possession of the collateral by the secured party, or on the secured party's behalf by another person, perfects a security interest in

(a) chattel paper,(b) goods,(c) an instrument,(d) [Repealed 2007-10-128.](e) a negotiable document of title, and(f) money,unless possession is a result of seizure or repossession.

(2) For the purposes of subsection (1), a secured party does not have possession of collateral that is in the actual or apparent possession or control of the debtor or the debtor's agent.(3) Subject to section 19, a secured party may perfect a security interest in a certificated security by taking delivery of the certificated security under section 68 of the Securities Transfer Act.(4) Subject to section 19 of this Act, a security interest in a certificated security in registered form is perfected by delivery when delivery of a certificated security occurs under section 68 of the Securities Transfer Act and remains perfected by delivery until the debtor obtains possession of the security certificate.

Sperry Inc v Canadian Imperial Bank of Commerce – A bank appointed receiver took control of the property of the debtor but continued the business, possession of the items was not clear as they did not hold the items as collateral, but rather as a business instrument.

2) Perfection by Registration – S.25Perfection by registration25 Subject to section 19, registration of a financing statement perfects a security interest in collateral.

3) Perfection by Control (bank accounts) – s.24/24.1

24.1 (1) Subject to section 19, a security interest in investment property may be perfected by control of the collateral under section 1 (1.1).(2) Subject to section 19, a security interest in investment property is perfected by control under section 1 (1.1) from the time the secured party obtains control and remains perfected by control until

(a) the secured party does not have control, and(b) one of the following occurs:

(i) if the collateral is a certificated security, the debtor has or acquires possession of the security certificate;(ii) if the collateral is an uncertificated security, the issuer has registered or registers the debtor as the registered owner;(iii) if the collateral is a security entitlement, the debtor is or becomes the entitlement holder.

4) Temporary perfection - BC PPSA s.26

Temporary perfection26 (1) A security interest perfected under section 24 in

(a) an instrument or a certificated security that a secured party delivers to the debtor for the purpose of(i) ultimate sale or exchange,(ii) presentation, collection or renewal, or(iii) registration of transfer, or

(b) a negotiable document of title or goods held by a bailee that are not covered by a negotiable document of title, which document of title or goods the secured party makes available to the debtor for the purpose of

(i) ultimate sale or exchange,(ii) loading, unloading, storing, shipping or transshipping, or



(iii) manufacturing, processing, packaging or otherwise dealing with the goods in a manner preliminary to their sale or exchange,remains perfected, despite section 10, for the first 15 days after the collateral comes under the control of the debtor.

(2) After the 15 day period expires, a security interest referred to in this section is subject to the provisions of this Act relating to the perfection of a security interest.

Special BC Rules

Perfection if goods in hands of bailees27 (1) Subject to section 19, a security interest in goods in the possession of a bailee is perfected by

(a) issue of a document of title by the bailee in the name of the secured party,(b) if the bailee has issued a negotiable document of title to the goods, perfection of a security interest in the negotiable document of title,(c) holding by the bailee on behalf of the secured party in accordance with section 24,(d) deposit, by a secured party to whom a non-negotiable receipt has been transferred, of the transfer with the warehouser who issued the receipt in accordance with section 21 (2) of the Warehouse Receipt Act, or(e) registration of a financing statement relating to the goods.

(2) The issue of a negotiable document of title covering goods does not preclude any other security interest in the goods arising during the period that the negotiable document of title is outstanding.(3) A perfected security interest in a negotiable document of title covering goods takes priority over a security interest in goods otherwise perfected after the goods become covered by the negotiable document of title.

Security interests in proceeds28 (1) Subject to this Act, if collateral is dealt with or otherwise gives rise to proceeds, the security interest

(a) continues in the collateral unless the secured party expressly or impliedly authorizes the dealing, and(b) extends to the proceeds,but if 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 collateral at the date of the dealing.

(1.1) The limitation of the amount secured by a security interest as provided in subsection (1) does not apply if the collateral is investment property.(2) A security interest in proceeds is a continuously perfected security interest if the interest in the original collateral is perfected by registration of a financing statement that

(a) contains a description of the proceeds that would be sufficient to perfect a security interest in original collateral of the same kind,(b) covers the original collateral, if the proceeds are of a kind that are within the description of the original collateral, or(c) covers the original collateral, if the proceeds consist of money, cheques or deposit accounts in deposit taking institutions.

(3) If the security interest in the original collateral was perfected other than in a manner referred to in subsection (2), the security interest in the proceeds is a continuously perfected security interest, but becomes unperfected on the expiration of 15 days after the security interest in the original collateral attaches to the proceeds, unless the security interest in the proceeds is otherwise perfected by any of the methods and under the circumstances prescribed for original collateral of the same kind.

Continuity of perfection23 (1) If a security interest is perfected under this Act and is again perfected in some other way without an intermediate period during which it is unperfected, the security interest is continuously perfected for the purposes of this Act.(2) A transferee of a security interest has the same priority with respect to perfection of the security interest as the transferor had at the time of the transfer.

Note: where more than one method of perfection is permissible, the SP is free to switch from one method to the other without interrupting the continuity of perfection

Subordination of unperfected security interests20 A security interest

(a) in collateral is subordinate to the interest of(i) a person who causes the collateral to be seized under legal process to enforce a judgment including execution, garnishment or attachment, or who has obtained a charging order or equitable execution affecting or relating to the collateral,(ii) a sheriff who has seized or has a right to the collateral under the Creditor Assistance Act,(iii) a judgment creditor entitled by law to participate in the distribution of property or its proceeds seized under legal process as provided in the Creditor Assistance Act, and(iv) a representative of creditors, but only for the purposes of enforcing the rights of a person referred to in subparagraph (i), if that security interest is unperfected at the time(v) the interest of a person referred to in subparagraph (i), (ii) or (iv) arises, or




(vi) the judgment creditor referred to in subparagraph (iii) delivers a writ of execution or certificate to the sheriff under section 3 of the Creditor Assistance Act,

(b) in collateral is not effective against(i) a trustee in bankruptcy if the security interest is unperfected at the date of the bankruptcy, or(ii) a liquidator appointed under the Winding-up and Restructuring Act (Canada) if the security interest is unperfected at the date that the winding-up order is made, and

(c) in chattel paper, a document of title, an instrument, money, an intangible or goods is subordinate to the interest of a transferee who(i) acquires an interest under a transaction that is not a security agreement,(ii) gives value, and(iii) acquires the interest without knowledge of the security interest and before the security interest is perfected.

Note on Re Giffin: The PPSA and other provincial property legislation pieces must inform the BIA, but they cannot override creditor priorities. Here, the lease of over 4 years creates a deemed security interest which gives preferential treatment to the secured creditor (the lessor)

While title may be located elsewhere, the PPSA set aside the traditional concepts of title and ownership to a certain extend in order to facilitate the modern economic reality

Note on 1231640 Ontario Inc: The SP’s security interest was unperfected after the appoint of an interim receiver but before the appointment of the bankruptcy trustee. S.20(2)(b) of the ON PPSA indicated that the effective day of appointment for “persons representing the creditors” was the date of the trustee in bankruptcy (the date their representative status took effect).

The interim receiver does not represent the creditors as:o The assets don’t vest in themo It does not remove any rights for other creditors to pursue remedies (no stays)

Transferee of Collateral – S.20(1)(C)20 A security interest

(a) in collateral is subordinate to the interest of … (c) in chattel paper, a document of title, an instrument, money, an intangible or goods is subordinate to the interest of a transferee who

(i) acquires an interest under a transaction that is not a security agreement,(ii) gives value, and(iii) acquires the interest without knowledge of the security interest and before the security interest is perfected.

This serves to put the BPFV in the situation that if the SI is not perfected, they will gain the collateral free and clear of any security charges.

This creates an incentive to register names and monitor the registration often, as the SP needs to be able to track the collateral to the last link in line when possible

Registration

In BC, we use the Personal Property Registry in order to accommodate the need for perfection. This entity is created by virtue of the PPSA and is controlled by it (S.42).

This serves to satisfy the concerns about public disclosure (in order to satisfy ornery creditors) Note that S.47 points out that registration is NOT notice

o This serves to consolidate the fact that the test for prejudice is whether a reasonable person would have been prejudiced by a lack of information, not whether they had actual, constructive or implied knowledge

Fairbanx Corp v RBC – Here, they knew that a security interest was present but couldn’t find it, had subjective knowledge of its presence

Irrelevant, the question is whether a reasonable person would be materially misled by the error (which they wouldn’t as further searching revealed the SI)


Registration is electronic predominantly but can also be submitted via hard copyo This creates the issue however of a time lag, something not occurring in purely electronic

registration jurisdictions

Lambert Reasonable Person Test He is a reasonably prudent prospective purchaser or lender who uses the system to learn about

prior registered claims He knows how to use the search tools and is reasonably competent in doing so Where the property is a motor vehicle, they will obtain the personal info as well as the vin Where the property is a motor vehicle, they will conduct both searches

Coates v GMAC – Serial Goods Test1) The test of whether a registration is misleading is objective2) Total accuracy in registration is not necessary3) A seriously misleading description will defeat the registration4) It will be seriously misleading if it

a. Would prevent a reasonable search from disclosing the registration; orb. Would cause a reasonable person to conclude that the search was not revealing the same

chattel (in the case of a serial number search) or the same debtor for a name search. The obligation is on the searcher to review the registrations to make the determination

5) The design of the system is irrelevant – the only question to be answered is whether a registry search will reveal the incorrect registration

Financing Statement

The financing statement is the document which serves to lay out the security interest purported to attach to the piece of collateral

Only the financing statement is registered, not the security agreement itselfo Obviously no one wants to give away the information relating to the contract as it might

play a role in undercutting the SP’s negotiating position The financing statement itself can serve to be very expansive or very specific as to what security

interests one might have (Adelaide Continental Corp v Integrated Transportation Finance Inc)o Failure to indicate what the financing statement is actually securing may lead to curative

provisions being insufficient for keeping your interest perfected

Registration of financing statements43 (1) A person who wishes to have a financing statement registered must submit it for registration at an office of the registry.(2) Registration of a financing statement is effective from the time assigned to it in the office of the registry and, if 2 or more financing statements are assigned the same time, the order of registration is determined by reference to the registration numbers assigned to the financing statements in the registry office.(3) The registrar must not register a financing statement or issue a search result under this Part until any prescribed fees have been paid or arrangements satisfactory to the registrar for their payment have been made.(4) A financing statement may be registered before a security agreement is made and before a security interest attaches.(5) A registration may relate to one or more than one security agreement.(6) 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.(7) Subject to subsection (9), if

(a) one or more debtors are required to be disclosed in a financing statement, or(b) collateral is consumer goods that are defined in the regulations as serial numbered goods,and there is a seriously misleading defect, irregularity, omission or error in

(c) the disclosure of the name of any of the debtors other than a debtor who does not own or have rights in the collateral, or(d) the serial number of the collateral,the registration is invalid.

(8) If it is alleged that a defect, irregularity, omission or error is seriously misleading, it is not necessary to prove that anyone was actually misled by it.(9) Failure to provide a description in a financing statement in relation to any item or kind of collateral does not affect the validity of the registration with respect to other collateral contained in the financing statement.(10) Failure to indicate the prior registration law on a financing statement (transition), providing for the continuation of a registration under prior law as provided in section 78, is not seriously misleading for the purposes of subsection (6).(11) A person who fails to indicate, in the prescribed manner, the appropriate prior registration law, as defined in section 78 (1), on a financing statement (transition) that provided for the continuation of the registration under prior law, as defined in section 77 (1), fails to discharge an obligation within the meaning of section 69 to any person who has suffered damages as a result of reliance on the financing statement (transition).(12) Despite anything in this Part, the registrar may reject a financing statement if, in the opinion of the registrar, it does not comply with this Act or the regulations or with any other Act or regulations under which registration of a financing statement is authorized.(13) The registrar must give written reasons for the rejection of a financing statement under subsection (12).(14) For the purposes of subsection (15), "verification statement" has the meaning prescribed.(15) The secured party or person named as a secured party in a financing statement that is not a financing statement (transition) must give to each person named as debtor in the statement, no later than 20 days after it is registered,

(a) a copy of the statement reproduced on paper, or(b) a copy of a verification statement issued by the registry that relates to the financing statement,but a copy need not be given to a person who has agreed in writing to waive the right to a copy.

Minimum requirements

Only minimal information need be registered: the names and addresses of the parties, a description of the collateral, and the duration of the registration

o No requirement to file the underlying security documentationo SP does not need to obtain the named debtors consent to register or otherwise provide

proof that a security interests exists or is contemplated. Can’t claim privacy rights – can use shell company to avoid this

Notes on amending registration: When something is unperfected whether by error or omission, the PPSA will deem it to be in continual perfection except as against persons who acquire rights in all or part of the collateral during the unperfected period (Heidelberg Canada Graphic Equipment Ltd v Arthur Anderson Inc)

o New financing statements aren’t necessary every time, financing charge statements are fine

o A financing charge statement is not intended to affet the registration period of one of the claimed categories of collateral within the financing statement unless the party intended it to be effective

Note: A party cannot release or discharge a security interest that was not granted by the same debtor (Lisec America Inc v Barber Suffolk Ltd)

Note: in adopting an approach that differentiated between title of assets v security interests, the legislative drafters recognized the difference between a system for recording title to assets and one for recording security interests

Modern day transactions are such that property is often divisible into a number of different rights components such that multiple security interests may attach in a single piece of property

o In this case, who holds title is irrelevant and in fact misleading Avoiding issues with title is also important as it is old fashioned and nebulous in comparison to

simply identifying which rights are owed where and which have been bought and sold

Other than title to houses or title gained by the BPFV, title is not what people are often interested in acquiring, hence, there is no need to even have a system that lets you know who has title. You may simply want to deal with someone who has a license to do something that you would like to acquire, you may have no need to even consult the title holder

Significant Provisions

S.18 – Access to Security Agreement If you want it, you may have the right to get it – useful for due dilligence

S.43(4) – Advanced Registration is Permitted Negotiation takes time. Registering in advance helps people know that you are serious about

completing the transaction This helps to avoid someone swooping in and trying to snatch the SI out from under you Also serves to prevent the party from going to a third party, creates a presumed interest

S.48 – Registry searches

ABCD Problem A registers an SI in B’s car B sells to C, who then purports to grant an SI to D D will search the registry under C’s name, not appreciating that an unknown party still had an SI

(as the SI owner “A” will not be identified in the searchThe PPSA eliminates this through the use of asset based registration viz serial numbers for consumer goods or equipment

A search of the serial number would identify A

Debtors Protection Provisions in the PPSA

S.43(15) – Right to Notice Registration Must give a copy within 20 days of the notice of registration unless the debtor waives the right

S.50(2) – Consumer Goods (Requirement) An SP must discharge registration within 1 month for consumer goods

S.69 – Non-Compliance Non-compliance exposes the SP to liability for deemed damages based on the regulations and any

actual damages suffered by a debtor

Priority Rules

A priority rule establishes which of two interests in the same collateral takes precedence over the other

This is of crucial importance where two secured parties have security in the same collateral. The party with priority will have the first go at satisfying their claim

The second secured party will have to wait to see if any is left over, it may be the case that the first SP is completely unsatisfied, which would relegate the first SP’s remainder interest as an unsecured debt, causing SP2’s debt to be completely unsecured. They would then receive only pro-rata amounts

o Parties may try to contract that any excess funds from the disposition of property may belong to SP1, SP2 might claim unjust enrichment as a result

Note: The rule in Jacobs v Laumaillet states that, for consumer goods, the date of seizure of collateral is the relevant time for assessing priority

The date for assessing priority for inventory, equipment, book debts, accounts, etc will be at the time of the perfection of the security interest

Application to the Court

70 On application of an interested person, a court may(a) make an order determining questions of priority or entitlement to collateral, or(b) direct an action to be brought or an issue to be tried.

BC PPSA S.35 – Residual Priority Rules

35 (1) If this Act does not provide another method for determining priority between security interests,(a) priority between perfected security interests in the same collateral is determined by the order of the occurrence of the following:

(i) the registration of a financing statement without regard to the date of attachment of the security interest;(ii) possession of the collateral in accordance with section 24 without regard to the date of attachment of the security interest;(iii) perfection under section 5, 7, 26, 29 or 78;whichever is the earliest,

(b) a perfected security interest has priority over an unperfected security interest, and(c) priority among unperfected security interests is determined by the order of attachment of the security interests.

(2) For the purposes of subsection (1), a continuously perfected security interest must be treated at all times as perfected by the method by which it was originally perfected.(3) Subject to section 28 for the purposes of subsection (1), the time of registration, possession or perfection of a security interest in original collateral is also the time of registration, possession or perfection of its proceeds.(4) A security interest in goods that are equipment and that are of a kind defined in the regulations as serial numbered goods is not registered or perfected by registration for the purposes of subsection (1), (7) or (8) unless a financing statement relating to the security interest and containing a description of the goods by serial number is registered.(5) Subject to subsection (6), the priority that a security interest has under subsection (1) applies to all advances, including future advances.(6) A perfected security interest has priority over the interest of persons referred to in section 20 (a) only to the extent of

(a) advances made before the interests of the persons arise, or before the sheriff seizes the collateral or obtains a right to it under the Creditor Assistance Act,(b) advances made before the secured party acquires knowledge of

(i) the interests of the persons,(ii) seizure of the collateral by the sheriff, or(iii) an order giving the sheriff a right to the collateral,

(c) advances made in accordance with(i) a statutory requirement, or(ii) a legally binding obligation owing to a person other than the debtor entered into by the secured party before the secured party acquired the knowledge referred to in paragraph (b),

(d) reasonable costs and expenses incurred by the secured party for the protection, preservation or repair of the collateral, and(e) the amount of taxes paid by the secured party under section 27 (1) of the Manufactured Home Act.

(7) If registration of a security interest lapses as a result of failure to renew the registration or if a registration has been discharged without authorization or in error, and the secured party re-registers the security interest not later than 30 days after the lapse or discharge, the lapse or discharge does not affect the priority status of the security interest in relation to a competing perfected security interest that immediately before the lapse or discharge had a subordinate priority position, except to the extent that the competing security interest secures advances made or contracted for after the lapse or discharge and before the re-registration.



(8) If a debtor transfers an interest in collateral which, at the time of the transfer, is subject to a perfected security interest, that security interest has priority over any other security interest granted by the transferee before the transfer, except to the extent that the security interest granted by the transferee secures advances made, or contracted for,

(a) after the expiry of 15 days from the day the secured party who holds the security interest in the transferred collateral has knowledge of the information required to register a financing statement disclosing the transferee as the new debtor, and(b) before the secured party referred to in paragraph (a) amends the registration to disclose the name of the transferee as the new debtor or takes possession of the collateral.

(9) Subsection (8) does not apply if the transferee acquires the debtor's interest free from the security interest granted by the debtor.

1) Between two perfected security interests, priority goes to the secured party who is first to register a financing statement or to perfect its security interest by S.24 possession

2) A perfected security interest has priority over an unperfected security interest3) Between two unperfected security interests, priority goes to the first security interest to attach to

the collaterala. One must thustly look towards when attachment has occurredb. Sperry Inc v CIBC – turned heavily on agency provisions until Sperry registered

If there is no applicable rule or special governing rule, the answer will be found in the BC PPSAo Should there still be an issue, S.68 preserves the common law such that it can be used as

a last resort. Normally this will only apply to non-PPSA interests covered by other legislation such as the Bank Act

Special Priority Rules: CropsSecurity interests in crops37 (1) In this section, "secured party" includes a receiver.(2) This section applies to land for which a certificate of title has been issued under the Land Title Act and to prescribed land or classes of land.(3) Except as provided in this section, a security interest in crops has priority with respect to the crops over an interest in the crops claimed by a person with an interest in the land.(4) A security interest referred to in subsection (3) is subordinate to the interest of

(a) a person who acquires for value an interest in the land while the crops are growing crops, including an assignee for value of the interest of a person with an interest in the land while the crops are growing crops, and(b) a person with a registered mortgage on the land who

(i) makes an advance under the mortgage after the crops become growing crops, but only with respect to the advance, or(ii) obtains an order for sale or foreclosure after the crops become growing crops,without fraud and before the notice of the security interest in the growing crops is filed in accordance with section 49.

(5) A security interest referred to in subsection (3) is subordinate to the interest of a creditor of the debtor who causes to be registered, in accordance with the Court Order Enforcement Act, a judgment in the appropriate land title office affecting the land on which the crops are growing before the notice of the security interest is filed in accordance with section 49.(6) The interest of a creditor referred to in subsection (5) does not take priority over a purchase money security interest in the crops, or a security interest in the crops referred to in section 34 (8), a notice of which is filed in accordance with section 49 not later than 15 days after the time the security interest in the crops attaches.(7) Section 36 (8) to (15) applies to seizure and removal of growing crops from land.

Special Topic: Simultaneous Attachment Where the dispute is between two unperfected security interests, priorities are determined

according to the order of attachment What happens however when the security interest attaches to the collateral at the same time?

o Most likely occurs in AAP. The moment the debtor acquires a new asset, both security interests will simultaneously attach to the new asset, therefore time of attachment can’t be used to determine the relevant priority

In this instance, a court would turn to property law principles and give the secured party who first entered into the agreement the first right – prior in time is prior in right as per equitable principles

Information Asymmetry



Information asymmetry deals with the study of decisions in transactions where one party has more or better information than the other. This creates an imbalance of power in transactions, which can sometimes cause market failure

o Can happen where seller knows less than the buyer, could be a harmful situations due to taking advantage due to lack of knowledge

Information asymmetry exists on both sides of the equation, as the debtor does not know what factors are being taken into account when the creditor is considering extending a loan, so they are behooved to give more information to suss this out further

o No matter how much information or due diligence creditors do, they cannot ever truly know the motivations of the company, its employees, their passion etc

Furthermore, doing excessive due diligence raises agency costs and may further impart cost on the debtor to make up for this. Some element of trust is required

Irrelevance of Knowledge

Actual knowledge of the security interests of other parties is irrelevant. Priority is only based on the relevant provisions of the PPSA (Robert Simpson Company Ltd v Shadlock and Duggan)

The PPSA was specifically crafted to avoid the uncertainty that would arise if notice was able to defeat priority. Were notice a factor, creditors would never know where their security interest ranked in priority. This goes against the ease and simplicity of ranking the act strives for

Other areas of law incorporate notice differently, so it is conceptually acceptable that the PPSA does as well

o Notice applies in real estate transactions, however, the presence of the assurance funds makes it such that notice is practically irrelevant as the wronged party will still be made whole

o Notice applies in securities viz insider trading because such behaviour is unfair to the populace as this is an action they cannot protect themselves against with due diligence, unlike with PPSA concerns.

Divergent Approaches

The priority structure of a secured financing system can embody one of two approaches: It can provide “flexible” priority rules that give courts wide discretion to do “justice” between

secured parties with competing claims to the collateral; or Provide clear certain priority rules that facilitate a high level of legal risk assessment but that,

because of their inflexiblity and focus on easily established factors, produce “injustice” in some particular situations

o This does have the additional benefit of lowered transactional costs and supervisory costs as well (James Talcott Inc v Franklin National Bank of Minneapolis – allowing the use of the original financing statement to secure future collateral without additional transactions)

While equity and flexibility is valuable, it actually serves to hamper the goal of the act to be clear and efficient. Even though injustice may arise, parties can account for it simply in their risk analysis. Furthermore, these lending parties are best stationed to suffer from unfair situations due to the proportionally small effect of such occurrence

This still may lead to windfalls in any event or circumstances where party get substantially less than they might be entitled to in equity (Re 1231640 Ontario Inc)

Utilization of Bad Faith and/or Misleading Information

While subjective knowledge should be irrelevant, if there is bad faith in the transaction or fraudulent misrepresentations made, courts will address it in equity, not in the ambit of the PPSA.

A dishonest SP may be estopped in certain instances or simply disentitled to benefits they otherwise might be entitled to (Eagle Eye Investments Inc v CPC Networks)

Security for Future Advances

"future advance" means an advance [of money, credit or other value secured by a security agreement] whether or not the advance is made in accordance with an obligation and includes reasonable costs incurred and expenditures made for the protection, maintenance, preservation or repair of collateral;

Future advances14 (1) A security agreement may provide for future advances.(2) Unless the parties otherwise agree, an obligation owing to a debtor to make future advances is not binding on a secured party if the collateral has been seized, attached, charged or made subject to an equitable execution under the circumstances described in section 20 (a) (i) or (ii) and the secured party has knowledge of this fact before making the advances.

35(5) - (5) Subject to subsection (6), the priority that a security interest has under subsection (1) applies to all advances, including future advances.

This combination enables the SP to advance money to the debtor on the basis of a pre-existing Security Interest and to access the priority of that pre-existing Security Interest for all amounts advanced (James Talcott)

Subordination Agreements40 (1) A secured party may, in a security agreement or otherwise, subordinate his or her security interest to any other interest and the subordination is effective according to its terms between the parties and may be enforced by a third party if the third party is the person or one of a class of persons for whose benefit the subordination was intended.(2) An agreement or undertaking to subordinate or postpone

(a) the right of a person to the performance of some or all of an obligation to the right of another person to the performance of some or all of another obligation by the same debtor, or(b) some or all of the rights of a secured party under a security agreement to some or all of the rights of another secured party under another security agreement with the same debtor,does not, because of the subordination or postponement alone, create a security interest.

(3) Subsection (2) is deemed to have come into force on October 1, 1990 and is retroactive to the extent necessary to give it effect on and after that date.

A subordination agreement occurs when a senior secured party contractually agrees to subordinate its security interest to the security interest of a junior secured party.

The contract does not change the true priorities as it pertains to the PPSA registration, but it does change the practical effect of a party’s priority (Royal Bank of Canada v General Motors Acceptance Corporation of Canada Ltd)

o This may lead to issues with circularity of security where each party owes another party obligations

The benefit to this is that it allows the debtor to have access to additional lines of credit that the senior creditor may not be willing to provide

Subordination ClauseThis clause appears in the original contract and is between the original SP and the debtor. Other secured parties are not privy to it but are expected to benefit from the clause

Subordination clauses are common in “all asset” type agreements and in medium/long term secured debentures

45(6) don’t need register even subordination agreement, although you may if you likeo No need to notify as it is a contractual relationship between the parties, PPSA still

showing superior interestso You won’t know what their interest covers that intimately anyway other than whatever

subject matter is covered in either SP’s financing statementso Registration of subordination clause may even be counter-productive as it may show an

unwillingness of SP1 to supply more credit

Note on Beneficiaries40 (1) A secured party may, in a security agreement or otherwise, subordinate his or her security interest to any other interest and the subordination is effective according to its terms between the parties and may be enforced by a third party if the third party is the person or one of a class of persons for whose benefit the subordination was intended.

Unlike in normal contract law, a party with no privity can seek to enforce the obligations of two parties when the interest lies in them so long as they are the intended beneficiary

Contract an also limit amount, time period/duration of and type of collateral included in the subordination agreement

Note: United States has a doctrine of Equitable Subordination that allows courts to apply equitable principles to remedy creditor misbehavior, including by subordinating certain creditor claims. Much more drastic than Canada

Note: The US also has the doctrine of marshalling wherein if the senior creditor can satisfy itself from two funds and the junior from only one, the senior is expected to only use the one the junior has no access to.

This seems out of keeping with traditional thought as it effectively lowers the amount SP1 can rightly recover. If both parties are equal, they will share ratably.

Purchase Money Security Interests (PMSI)

Definition

"purchase money security interest" means(a) a security interest taken in collateral, other than investment property, to the extent that it secures payment of all or part of its purchase price,(b) a security interest taken in collateral, other than investment property, by a person who gives value for the purpose of enabling the debtor to acquire rights in the collateral, to the extent that the value is applied to acquire the rights,(c) the interest of a lessor of goods under a lease for a term of more than one year, and(d) the interest of a person who delivers goods to another person under a commercial consignment,but does not include a transaction of sale by and lease back to the seller and, for the purposes of this definition, "purchase price" and "value" include credit charges or interest payable for the purchase or loan credit;

A PMSI is defined to be a security interest that secures payment of all or part of the purchase price of a collateral.

Essentially, it grants a security interest when the debtor is permitted to acquire rights in the collateral by virtue of the value granted by the creditor

PMSI’s also include leases over one year and commercial consignment situations

Note: Sale and Leasebacks are specifically excluded (as these do confer a security interest effectively but cannot confer a PMSI as the debtor owned the property prior to the loan)

Sale and leasebacks help to unlock capital with which to work and also provide additional tax benefits to both parties

Super Priority Status

Purchase money security interests34 (1) Subject to section 28, a purchase money security interest in

a) collateral or its proceeds, other than intangibles or inventory, that is perfected not later than 15 days after the day the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier, or(b) an intangible or its proceeds that is perfected not later than 15 days after the day the security interest in the intangible attaches,has priority over any other security interest in the same collateral given by the same debtor.

(2) Subject to subsection (5) and section 28, a purchase money security interest in inventory or its proceeds has priority over any other security interest in the same collateral given by the same debtor if

(a) the purchase money security interest in the inventory is perfected at the time the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier,(b) the secured party gives a notice to any other secured party who has, before the time of registration of the purchase money security interest, registered a financing statement containing a description that includes the same item or kind of collateral,(c) the secured party gives notice to any other party who has, before the time of registration of the purchase money security interest, registered a security agreement providing for a prior security interest on the same item or kind of collateral,(d) the notice referred to in paragraph (b) states that the person giving the notice expects to acquire a purchase money security interest in inventory of the debtor and describes the inventory by item or kind, and(e) the notice is given before the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier.

(3) A notice referred to in subsection (2) may be given in accordance with section 72 or by registered mail addressed to the address of the person to be notified as it appears in the financing statement referred to in subsection (2) (b) or the security agreement referred to in subsection (2) (c).(4) Subject to section 28 a purchase money security interest in goods and its proceeds taken by a seller, lessor or consignor of the collateral, that is perfected

(a) in the case of inventory, at the date the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier, and(b) in the case of collateral other than inventory not later than 15 days after the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier,has priority over any other purchase money security interest in the same collateral given by the same debtor.

(5) A non-proceeds security interest in accounts given for new value has priority over a purchase money security interest in the accounts as proceeds of inventory if a financing statement relating to the security interest in the accounts is registered before

(a) the purchase money security interest is perfected, or(b) a financing statement relating to it is registered.

(6) A non-proceeds purchase money security interest has priority over a purchase money security interest in the same collateral as proceeds if the non-proceeds purchase money security interest,

(a) in the case of inventory, is perfected at the date the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier, and(b) in the case of collateral other than inventory, is perfected not later than 15 days after the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier.

(7) For the purposes of this section, if goods are shipped by common carrier to a debtor or to a person designated by a debtor, the debtor is deemed not to have obtained possession of the goods until the debtor, or another person at the request of the debtor, has obtained actual possession of the goods or a document of title to the goods, whichever is earlier.(8) A perfected security interest in crops or their proceeds given for value to enable a debtor to produce or harvest the crops and given

(a) while the crops are growing crops, or(b) during a period of 6 months immediately prior to the time when the crops become growing crops,has priority over any other security interest in the same collateral given by the same debtor.

(9) A perfected security interest in fowl, cattle, horses, sheep, swine or fish or the proceeds of any of them given for value to enable the debtor to acquire food or drugs to be fed to or placed in the animals or fish has priority over any other security interest in the same collateral given by the same debtor other than a perfected purchase money security interest.

PMSI Conditions

1) The purpose of the loan must enable the debtor to acquire a new asset2) The value must have been applied by the debtor to acquire those rights

a. The funds must actually be used directly. This may cause a problem where funds are comingled

b. General use loans are NOT accorded PMSI status, even if the loan is shown to have other positive effects

Note: Lender and Vendor PMSI’s accomplish the same goal.

After Acquired Property

The AAP clause is a cost saving device that allows a creditor to gain a security interest in both current and future assets belonging to the debtor

o This, however, creates a situational monopoly wherein, without subordination, a debtor will not have access to alternative revenue and credit streams

The PMSI is a device which helps to alleviate the monopolyo Creditors tend to realize the value in this and normally allow it as part of the terms of

their contract. To not do so otherwise would be to require the original creditor to continually fund purchases, some of which may require new financing statements if sufficiently different from the original security agreement

Procedural RequirementsIn order to obtain a PMSI priority, the SP must:

1) Establish that its security interest falls within the definition of a PMSI2) Establish that it satisfied certain procedural requirements

PMSI in Non-Inventory The SI must be perfected not later than 15 days after the debtor obtains possession of the

collateral Must be perfected before the expiration of the time period 34(1) – Where the collateral is intangible the time period runs from the date of attachment

PMSI in Inventory34(2) – Stricter Procedural Requirements

The SP must perfect the security interest before the debtor obtains possession of the collateral The SP must notify in writing prior secured parties who have registered a financing statement that

covers the inventoryThese both must be completed prior to delivery

Given that inventory can often become mixed and intermingled, it is important to have this provision give notice such that the past creditors can take stock of what security interest they own over what current inventory.

Refinancing PMSI’sWhere SP3 buys out SP2 (who had a PMSI) and takes out a financing statement, in the event of default, a conflict occurs between SP1 who had an AAP and SP3 who would like to take the PMSI status of SP2.

The theory is such that SP3 should not get a PMSI as the money he gave to SP2 was not related to the purchase of the item itself

Alternatively, it could be argued that SP3 is giving new value by securing the title to the asset by buying out SP2’s original conditional sale term

Some disagreement exists as to what is the right interpretation.

Consideration: In the event that a PMSI secures all AAP, it is obvious that the AAP would not be subject to a PMSI. However, would the AAP status destroy the original PMSI?

Canada has adopted a Dual-Status Approach wherein the security interest can be divided into its PMSI and non-PMSI status. Nothing in the PPSA prevents this and the definition even seems to allow it, thereby allowing the possibility of a secured obligation that is only partly a PMSI

PPSA Property Classification

Intangible: Means personal property, other than goods, chattel paper, a document of title, an instrument, money and investment property, and includes a licence;Consumer Goods: Means goods that are used or acquired for use primarily for personal, family or household purposes;Equipment: means goods that are held by a debtor other than as inventory or consumer goods;

Note: this serves as a form of residual categoryInventory: means goods that are:

(a) held by a person for sale or lease, or that have been leased by that person as lessor,(b) to be furnished by a person or have been furnished by that person under a contract of service,(c) raw materials or work in progress, or(d) materials used or consumed in a business;

Note: the term used means depleted exhausted

Debtor’s Use of GoodsWhat a debtor may be using the goods for is determined subjectively and on the facts

A truck can be consumer goods if driven personally, equipment if used on a project, inventory if held for car sales, etc.

o Consumer goods are given extra protection by the act as the government has no interest in providing heavy security interests over toasters

1(4) - Unless otherwise provided in this Act, the determination whether goods are consumer goods, inventory or equipment must be made as of the time the security interest in the goods attaches.

Land Related GoodsFixtures: Are considered goods to which a PPSA security can attach. This may occur before or after the good is affixed

S.36 regulates how fixtures rights attach and how priorities layCrops: means crops, whether matured or otherwise, and whether naturally grown or planted, attached to land by roots or forming parts of trees or plants attached to land, and includes only trees that

(a) are being grown as nursery stock,(b) are being grown for uses other than the production of lumber and wood products, or(c) are intended to be replanted in another location for the purpose of reforestation;

Growing crops constitute personal property subjectable to a PPSA security interest as soon as the crops become growing crops

S.37 dictates SI’s in crops The PPSA treats crops as property even when still attached

o Although S.12(3)(a) points out that a debtor has no rights in crops until they become growing crops

o But 35(8) can grant a security while the crops are growing or 6 months before they become growing crops)

Minerals: Can only be subject to a security once extracted from the land

Proceeds

Security interests in proceeds28 (1) Subject to this Act, if collateral is dealt with or otherwise gives rise to proceeds, the security interest

(a) continues in the collateral unless the secured party expressly or impliedly authorizes the dealing, and(b) extends to the proceeds,but if 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 collateral at the date of the dealing.

(1.1) The limitation of the amount secured by a security interest as provided in subsection (1) does not apply if the collateral is investment property.(2) A security interest in proceeds is a continuously perfected security interest if the interest in the original collateral is perfected by registration of a financing statement that

(a) contains a description of the proceeds that would be sufficient to perfect a security interest in original collateral of the same kind,(b) covers the original collateral, if the proceeds are of a kind that are within the description of the original collateral, or(c) covers the original collateral, if the proceeds consist of money, cheques or deposit accounts in deposit taking institutions.

(3) If the security interest in the original collateral was perfected other than in a manner referred to in subsection (2), the security interest in the proceeds is a continuously perfected security interest, but becomes unperfected on the expiration of 15 days after the security interest in the original collateral attaches to the proceeds, unless the security interest in the proceeds is otherwise perfected by any of the methods and under the circumstances prescribed for original collateral of the same kind.

Proceeds: Means: (a) identifiable or traceable personal property, fixtures and crops

(i) derived directly or indirectly from any dealing with collateral or the proceeds of collateral, and(ii) in which the debtor acquires an interest,

(b) a right to an insurance payment or any other payment as indemnity or compensation for loss of, or damage to, the collateral or proceeds of the collateral,(c) a payment made in total or partial discharge or redemption of an intangible, an instrument, investment property or chattel paper, and(d) rights arising out of, or property collected on, or distributed on account of, collateral that is investment property;

Any Dealing: Did the dealing come from an exchange, trade-in, purchase, etc May be a combination of trade-in and cheque, would be sufficient Exchange or barter may not be sufficient Granting a security interest in a truck that generates revenue through transportation of goods is

not a dealing as the income is simply income, not proceeds from the sale or disposition of the truck

Application to Later-Generation Proceeds: So long as the proceeds are used from one item to the next, they can be traced or identified as per the continuity principle in S.28 of the PPSA.

This allows the SI to extend to the proceeds no matter where they are, and no matter whether it was anticipated in the original agreement

Note: While the original collateral must be described, S.10(5) points out that proceeds need not be described

o Of course, you will say you are entitled to proceeds in your agreement regardless (Flintoft v Royal Bank of Canada)

Note on TracingA secured party may asset a personal or proprietary claim based upon the secured party’s security interest in the collateral. In order to do this, the SP must demonstrate that the property was subject to an SI

This allows a party to either follow the collateral or to follow the proceeds of the collateralNote though that there must be a direct link between the proceeds derived from the original asset as it pertains to the acquisition of new assets (356447 British Columbia Ltd v Canadian Imperial Bank of Commerce)

Agricultural Credit Corp of Saskatchewan v Pettyjohn Tracing at common law and equity is a proprietary remedy. It involves following an item of

property either as it is transformed into other items of property, or as it passes into other hands, so that the rights of a person in the original property may extend to the new property. In establishing that one piece of property may be traced into another, it is necessary to establish a close and substantial connection between the two pieces of property so that it is appropriate to allow the rights in the original property to flow through to the new property.

Secured Transactions Master FIRAC

Substance Security Interests

Trusts

Re Skybridge Holidays Inc

Facts: Skybridge Holidays Inc filed for bankruptcy while still holding cash that travelers had given them in anticipation of rendered services from the company. The trustee in bankruptcy asked the court for direction as to whether the PPSA applied to the funds held. The concern was whether the funds as held were held in trust separate from the statutory trust set out by the Travel Agents Act. If the funds were held in trust, the creditors wouldn’t be able to get them (such that the customers would get them but company creditors would not)

Issue: Was a security interest created? Or were the funds held in trust?

Ratio: In order to determine if there is an intent to take a security interest, one must look at the purpose of the transaction, the role and relationship of the parties, the practicality and commercial reality and the intention of the parties with respect to the transaction

Analysis: On its face, a security interest is partially created when money is exchanged for a right in the property. It was argued that the funds here secured the performance of an obligation by the company. If the relationship is construed as a debtor/creditor relationship, then the inevitable result is the finding of a security interest. However, the court points out that it is the substance of the transaction that is truly critical and one cannot simply apply the words of the PPSA to the circumstance and find it determinative. It was obvious here that the customers were merely consumers and found themselves with unanticipated rights by virtue of the bankruptcy. They never entered into the deal anticipating gaining a security right and would normally assume the money will be returned, or held in trust on their behalf.

Holding: Trust

Flawed Assets

Caisse Populaire Desjardins de l’Est de Drummond v Canada

Facts: The bank granted Camvrac a 277k line of credit. Camvrac deposited 200k in accordance with the term savings agreement. The parties entered into a “security given through savings” agreement which forced Camvrac to maintain the 200k deposit. It also held that if he defaulted they would use the money to satisfy themselves. He went bankrupt and they closed his account to realize the security. Camvrac neglected to pay income tax and EI premiums, so the government claimed a deemed trust in favour of the crown over the deposit. The bank wasn’t thrilled about losing money, but they lose at all levels such that the crown was owed scrilla.

The onus of the case was that the bank attempted to hold the funds as a form of set-off, not as a security interest. By construing it as a set-off, they would immediately deduct the debt above and beyond the normal provisions of the BIA creditor rankings. By having the agreement construed as a security agreement, the government would have the deemed trust and get their funds before the bank

Issue: Did the agreement create a security interest?Can they use the right of set-off to secure their funds?

Ratio: A security agreement need not take any particular form. So long as the creditors interest in the debtors property secures payment of an obligation, there is a security interest within the meaning of the act. “Security interest” should be read expansively and with regards to the intentions of the parties.

Analysis: It was clear on the facts that the bank intended to use the funds as a security interest. The contractual provisions allowed the bank to effect compensation to reduce or eliminate its indebtedness against his line of credit. His failure to meet his obligation to pay interest prompted the default leading to the seizure of the account. The income tax act and BIA have specifically broad definitions for what constitutes a security interest and the provincial PPSA’s or other statutes cannot affect that as it would throw the system into turmoil as what might be a security interest in one province may not be one in another.

The right of set-off in this case was considered but part of the necessary missing element was the debtor/creditor mutual relationship between parties. In technical terms, a bank account is a debtor and the person who makes the deposit is the creditor. However, Camvrac was prevented from drawing upon the bank account due to his obligation to not withdraw funds. Furthermore, they had “compensation conventionelle” which was designed to achieve a kind of legal or equitable set off arrangement, but this was a purely contractual agreement, not one that truly was a set-off with mutual debts. It was simply designed to get around having to pursue set off in court. Ultimately though, the true form was that the “set-off” was merely designed to facilitate the seizure of the security interest. If Camvrac could take the funds at any time, then the set-off would be valid, but it would then provide no support to the banks security

Holding: Deemed trust, give the government $$$$

The License Issue and Determinations of Property

Saulnier v Royal Bank of Canada

Facts: Saulnier was a fisherman who entered into a GSA which gave the bank rights in all present and after acquired property including intangibles. He personally owed over 120k to the bank along with 177k from Bingo Queen, his solely owned company. Upon going bankrupt, the judge found his 4 fishing licenses were worth about 600k, more than enough to cover his 400k liabilities. He purported to sell his lobster license to Horizon Fisheries Ltd (sketchy considering the owner was his wife) but the trustee and receiver agreed to sell the licenses for 630k. Saulnier refused to sign the agreement. Saulnier claimed it was merely a privilege and was non-transferrable, he further claimed that it could not be considered property due to the ministers discretion which could render the license invalid.

Issue: Are the licenses property? If so, to what purpose does this serve?

Ratio: Whether something constitutes property must be determined in combination between the provisions set out in the act, the legislative desire behind the acts and the commercial realities surrounding the use of the property

Analysis: As a starting point, it is important to realize that the PPSA as well as other legislation that deals with property has given an expansive meaning to the word “property”. Unlike when we were concerned with title, we are now more concerned with the property as it pertains to the rights we can gain from it. Here, classifying the licenses as property serves many purposes.

1) First, classifying the license as property satisfies the commercial realities of a world where property and property rights can be given to the bank in order to unlock capital for further

business development. Here, using a license as collateral allows them to get new equipment with which to actually utilize the license.

2) Second, holding the license is property helps to expand the definition of what property actually can be. This is important as the common law definition of property has fallen far behind and is not responsive enough to the needs of the marketplace. If legislators are unwilling to expand, the courts will do it for them. Not surprisingly, the BC PPSA now includes licenses as property as a result of cases like this

a. Finding otherwise leads to an issue where statutes might recognize something as property where the common law does not, best avoided where possible.

b. The courts comment that a mere license cannot be considered property at common law, but this is perhaps irrelevant now.

3) Finding it property also satisfies the BIA concerns as banks will be able to become secured parties and liquidate the asset upon default to another fisherman. Certain non-transferrable licenses would not facilitate this, but there isn’t a concern with transferability here as the minister allows certain licenses and the profit a prendre that comes with it (something that gives ownership rights). There would be no increase to the amount of fisherman and thus no corresponding detriment to the fisheries.

In effect, the court expands the meaning of the word “property” so as to better harmonize with both the BIA and the PPSA. The license combined with the profit a prendre is a close enough analogy to common law forms that it isn’t an unreasonable stretch.

Holding: Can sell/transfer

Lam v British Columbia

Facts: Lam had his sperm sample in a cryopreservation freezer at UBC. A power outage caused his sperm to deteriorate in quality. He filed a class action lawsuit, but issues arose as to whether sperm could be considered goods under the Warehouse Receipt Act. UBC demurred, claiming that goods should be determined as something that is the proper object of trade and commerce

Issue: Can sperm be considered property or goods?

Ratio: Where property is not excluded from fulfilling the purposes of an act, it may be considered goods subject to the act

Analysis: Whether approached through a textual, contextual or purposive analysis, the court found that there was no reason to exclude sperm from being considered a good according to the WRA. Limiting the definition to “traditional” goods would not serve the purposes of the act nor a commercial reality where the lab was offering a service (storage) of something that (in JCM V ANA) was considered property so long as all parties considered it property along the way and approached their business relationship as such. This does not mean that sperm will be property in all cases. This reflects the fact that human materials are still not considered property for all intents and purposes. However, in a particular factual matrix such as this or JCM where sperm is held as proprety, there should not necessarily be reticence to have it satisfy the requirements of other acts where it is appropriate to do so

Holding: Property for the purposes of the act, weren’t allowed to rely on exclusionary clause against WRA

Exclusions from the Scope of the Act

Liens Given by Statute or Rule of Law

Commercial Credit Corp Ltd v Harry Shields Ltd

Facts: Landlord took the property and sold it to make up for a lack of rent payment, CCC had a chattel mortgage and duly registered security

Issue: What is the priority status between a chattel mortgage holder and a landlord who has distrained the property for arrears of rent?

Ratio: The PPSA exempts operations of law such as liens such that where there is a conflict between a provision of the PPSA and a provision of any general or special act, S.69 of the PPSA won’t serve to override the common law authority.

Analysis: S.68 of the PPSA points out that the common law has not been rendered moot. This is because the common law is the final fall back mechanism when a situation in perview of the act cannot be solved. Since the common law historically grants the landlord the ability to distrain, this was a big step up in his favor. This rule is limited by then S.31(2) of the Landlord and Tenant Act (RSO) which pointed out an exclusion did not apply to title derived by way of mortgage. Since CCC gained title by way of mortgage (such that the true beneficial owner was still the tenant), the landlord could seize the asset by way of the implied lien.

Holding: CCC out of luck

Re Stelco Inc

Fact: Stelco signed two insurance premium contracts, one for 8.8M (under which all payments were made) and another for 1.8M (under which only .36M was paid). Notice of the PIC was not registered as the practice was not to register insurance interests under the PPSA (such that it was perfect already and not necessary). CAFO Inc wanted to seize the funds as a security as they claimed they had perfected one by virtue of CAFO paying the entirety of the needed sum for the insurance policy with Stelco paying them the premiums instead. CAFO claimed that the act did not apply to “a transfer of an interest or claim in or under any policy of insurance or contract of annuity” such that there was no need to register

Issue: If someone assigns the right to receive unearned insurance premiums, is this a security interest that is transferred? If so, is it necessary to file the claim to the interest or is there no need for registration?

Ratio: Where no harm is done by a lack of registration, registration may not be necessary

Analysis: Ultimately, an interest was created at the funding of the policy, even though the contingent actions hadn’t occurred yet. The determination does not mean that CAFO necessarily had priority over other secured lenders, but in this case, any agreement gave notice to future parties that this set up was occurring, such that the public notice policy of the PPSA was not offended. CAFO was not granted a license to keep lenders in the dark” and might have been forced to register in another situation

Holding: CAFO had the right to the unearned premiums

GE Canada Equipment Financing GP v ING Insurance Company of Canada

Facts: “Brampton” was a leasing and rental business which had GE finance a number of vehicles for its business. They had two Conditional sales agreements for two highway tractor trucks. Under the CSA’s, GE remained the owner and held title until the trucks were paid in full while Brampton had to maintain comprehensive insurance policies. After getting the insurance policies, both trucks were stolen. They made claims but made representations that no other person had interests in the vehicles. Brampton also purported to transfer title to ING in consideration of the insurance proceeds. ING never conducted PPSA searches. The trucks were later found and ING sold one of them. Brampton continued to make payments to GE even after they were stolen but eventually defaulted. GE had registered PMSI’s.

Issue: What has precedence, a perfected security interest or a salvage right granted by virtue of statutory condition 6(7) of the Insurance Act?

Ratio: As 6(7) does not grant a security interest, it ranks in lower priority to the registered PMSI of GE. 6(7) does not serve to vest title in ING nor does it serve to divest another party of its property interest.Where a party claims that legislation extinguishes pre-existing security rights, they better have good evidence to back it up

Analysis: On a purposive reading of the legislation, it was never the legislators intent to allow 6(7) to extinguish pre-existing security rights. Subrogation is only the ability to step into the insureds shoes, and these shoes were subject to the iron-clad boots of GE’s PMSI. To hold otherwise would be to give ING a greater right in the collateral than Brampton had. While there were two innocent parties here, ING could have and should have checked the PPSA to see if there were any superior interests prior to selling the one truck. While the insurance rights don’t require registration, they must still be mindful of the business environment.

Holding: ING had to cough it up, go after Brampton for their misrepresentation

Interests in Real Property

Re Urman

Facts: Urman was subject to a receiving order. He was a mortgage broker who bought and sold mortgages. He had a revolving line of credit with CIBC where the bank had a general assignment of book debts as their security. Urman later signed an “assignment of mortgage as security” document with Kreindel Investments for 65k. The document assigned mortgage debts and land; it was not registered under the PPSA. The trustee in bankruptcy tried to claim their interest wasn’t perfected as it wasn’t registered

Issue: Does a mortgage create a security interest? Does an assignment of a mortgage create a security interest? Regardless, does it need to be registered?

Ratio: A mortgage does not create a security interest as defined by the act, nor does an absolute assignment of a mortgage. That being said, a mortgage cannot be divorced from its attachment to the land, and since land attachments need not be registered, the act does not apply to the assignment.

Analysis: Kreindel was entitled to priority over the trustee as the mortgage was not subject to being classified as a security interest and thus did not need to be registered. While it was clear land did not need to be registered, mortgage status was more unclear. As it turned out, the legislature enacted more amendments to the PPSA (Ont) such that it was clear that mortgages or an interest in them need not be registered.

Holding: in the clear

Validity of a Security Agreement

Ellingsen (Trustee of) v Hallmark Ford Sales Ltd

Facts: Hallmark agreed to sell Ellingsen a truck without paying for it as he needed it quickly for his work up north. They gave him ownership predicated on the bank working out a financing deal with Ellingsen covering the balance via trade-in. The Bank of Nova Scotia didn’t want to finance and HK bank said they would with an additional 5k deposit which never came (as he owed a lien on his old truck). Ellingsen filed for bankruptcy and the trustee claimed the truck free of any security interest from Hallmark

Issues: Was it a conditional sale? If so, how is a conditional sale approached in the PPSA?

Ratio: Where a conditional sale is occurring, there is no transfer of title or security such that the original party would lose it’s priority. Where a condition does not occur, the sale is void ab initio and the property reverts back to the owner. Where there is no concluded security agreement, there can be no security interest.

Analysis: Part of the problem was that there was a transfer into Ellingsens name which seems to indicate a purchase and a debtor/creditor relationship subject to an unperfected security interest. On the facts though, it was clear that this was conditional on receiving third party funding. Hallmark successfully argued a constructive trust viz unjust enrichment as there was no security interest and to allow the trustee to retain the asset would be to deprive them of an asset they never relinquished. Had they had a security interest, it would have been overwritten by the trustees right as security interests are not effective against bankruptcy trustees if unperfected at the date of bankruptcy.

Holding: Had no secured interest, property reverts

994814 Ontario Inc v RSL Canada Inc and En-Plas Inc

Facts: En-Plas supplied 3 injection moulding machines to RSL. Their contract was such that they retained title in the equipment until payment was made in full and that they would be the ones to start up the

machinery. In order to allow the machines into Canada, certain modifications had to be made to satisfy the Ontario Electric Safety Code, En-Plas didn’t tell RSL at the time. 2 of the machines were shipped to RSL but one did not meet the proper safety standards. RSL went bankrupt and En-Plas let the receiver know the machines were theirs. The receiver already got an order to sell the machines. At trial, the judge found the condition hadn’t been met, title hadn’t passed, no debt had been created and as such, no security interest attached. 994814 claimed that their title claim was irrelevant and that the substance created a security interest. En-Plas claims they never got possession (Even though it was at their premises) and as such, no security interest attached.

Issue: Can possession occur without an attachment of a security interest?

Ratio: Mere possession does not equal title or vest any rights in a party

Analysis: Here, possession was not completed as the property could not be considered “Delivered” until it underwent the necessary modifications to make it properly compliant with the electrical safety code. In addition to that, En-Plas was not in a position to make payment and RSL was able to reject the goods as the condition precedent for the contract succeeding (installation and operation) hadn’t occurred. Ultimately, there must be a determination of whether a purchase and sale agreement was reached as a security interest cannot attach until the transaction occurs so as to give the debtor rights in the equipment. The substance of the contract was that a security interest would attach at time of operability, which never occurred

Holding: En-Plas gets their stuff back

356447 British Columbia Ltd v Canadian Imperial Bank of Commerce

Facts: CIBC attained a judgment against the controlling shareholder of 347202 BC Ltd which had received funds from 356447. They wanted to seize shares owned by Sayani, claiming they had a security interest in the shares. The contractual term promised to pay all funds towards 356447, provide a personal covenant, give an indemnity and make sure to pay everything off until the loan is paid in full. CIBC knew the language wasn’t strong enough to create a security interest, but claimed one was intended. The trial judge found it was a security interest

Issue: Did the contract create a security interest?

Ratio: One must look beyond the specific words of the document and look towards the intent and substance of the agreement to determine if a security interest was present

Analysis: Given the need for repayment, the reading of the contract was such that it seemed to create a valid equitable assignment of any funds received from 347202 or the Georgian Joint Venture to CIBC. This was construed as an assignment of a chose in action to “pay funds derived” to CIBC. The fact that a security interest was created was enough to force the performance of obligations and once that faltered, CIBC went after the shares appropriately by virtue of its enforcement as judgment creditor.

Note: Even though they had a security interest, they clearly did not register nor have possession or any of that stuff. As such there would be no priority against other secured creditors unless equally unpreparedHolding: Get money money

Eagle Eye Investments Inc v CPC Networks

Facts: CPC received a loan from the BDBC for 150k for a GSA, granting SI’s in all present and AAP’s. Eagle Eye (which was owned by Adams, a director of CPC) claimed CPC owed them 465k from running and infrastructure expenses. This was an unsecured debt and Eagle Eye sued while CPC said it owed nothing. Ayers, another director, left CPC and formed Black Dove which had the original GSA assigned to it. After negotiations, Black Dove assigned the debt to Eagle Eye. Eagle Eye claimed payments of 750k, including the original 465k which they claimed was no secured by virtue of a clause in the security agreement that said it would liable for all liabilities of the business. Eagle eye of course claimed that the assignment served to secure all past debts.

Issue: Can an “all obligations” clause contained in an assigned security agreement secure the previously unsecured debts owed by the debtor to the assignee from a time before the assignment took place?

Ratio: Unless the parties intended it to do so, probably not. The overarching contractual principles of commercial reasonableness, good faith and consent infuse all secured transactions.

Analysis: On a normal reading, the judge found that “other liabilities of the borrower” in the GSA related only to liabilities owing to the bank, not liabilities owing to any party that might be assigned the GSA. To hold this would mean that anyone coming in could have any amount of past debts covered. The original parties to the GSA clearly did not consent to have any other debt of any assigned party secured by them as this would be a commercial mishap of the greatest degree (especially as the BDBC was the only party willing to lend in the beginning and would not risk their investment as such). There would need to be a clear intent to do this as this is such a rare an uncommon event.

It is also worth pointing out that Eagle Eye was found to be acting in bad faith and not in a commercially reasonable manner. Construing either the GSA or Letter of Offer to come to this conclusion is manifestly incorrect. The judges point out that they could allow securing of past debts, but this would have to be clear. Given the bad behaviour of Eagle eye in addition to their inability to be transparent and show the financial filings that would prove their debts, there also seems to be a justice issue that the courts don’t want to reward them as well.

Holding: No security on original unsecured debts, whatever they may be.

Statute of Frauds Requirements

MacEwan Agricentre Inc v Beriault et al

Facts: MacLennan was a farmer who owed MacEwan 130k. MacEwan wanted a mortgage on the property which could not be granted due to a recent divorce. MacLennan signed a Loan application (in order to give security in his crops now and in the future) and gave it to MacEwan and never got anything back (although MacEwan filed a financing statement thereafter). MacLennan owed money to Beriault for an earlier contract. He agreed to sell him some soybeans and to credit his accounts on the next harvest. He was unable to fully supply the product and owed Beriault 32.7k. Beriault claims the document was just proof of where his stuff was and wasn’t designed to give rise to a security interest. Alternatively, he

claimed if a security interest was created, it wasn’t enforceable against him as a third party due to its oral nature.

Issue: Who had what security interest if any, and how does that affect the relations of the parties?

Ratio: While a security agreement can be made orally, there must be attachment, perfection and/or registration in order for the security interest to be enforceable against a third party. There must also be a context sensitive inquiry into the nature of the security agreement based on the factual matrix of the case

Analysis: There was a clear intention both through oral and written conduct, to give MacEwan a security interest in the crops. MacLennan signed the document pointing out where the crops were, his legal title over them, etc and signed it. It is ok that a security agreement that contains a description sufficient to identify the property does not contain all of the terms of the security agreement between the party (even though it wasn’t signed) (as this isn’t the chief mischief the PPSA is aimed against).

Ultimately though, while Beriault had an in personam right to the proceeds of the sale of the soybeans whereas MacEwan had a property right, the right did not attach by virtue of not having a signed agreement. It was therefore not enforceable against third parties like Beriault. Once Beriault has the cash he doesn’t have to give it back

Holding: MacEwan out of luck

Atlus Industries v Federal Business Development Bank: S.K.T.N Farm and Truck Equipment Ltd

Facts: Atlus manufactured equipment and delivered it to SKTN. Atlus then learned that the bank had decided to realize on the security it had on the assets of the debtor by a registered debenture by appointing a receiver to take over the business. Atlus stamped new words onto the receipt it sent the bank 3 months after the fact claiming Atlus had title until payment was made in full with power of repossession. They also claimed the receipt was a security agreement. Atlus claimed the work orders plus receipts which were signed by the person who accepted delivery was a representation of a security agreement.

Issue: Can a party attempt to asset a security agreement after the fact?

Ratio: If a party wishes to asset a security interest after the fact, it must have contain the description of the collateral as well as being signed validly by the party such that both parties consent to the interest being established, otherwise it will not be valid. (Everything should be done before hand)

Analysis: Here it was clear that Atlus was trying to conjure up a security interest after the fact as it had an unperfected security and would be an unsecured creditor that would only receive a portion of funds upon the dissolution of the company. The court had very little sympathy, especially considering a PPSA search would have shown the banks interest. This could have spurred them to get cash or establish the security interest in advance. Here, the signature of the delivery man could not possibly be consenting to a security agreement, let alone one that was justified three months later after the fact.Holding: No Security Interest

Attachment

Rights in the Collateral

iTrade Finance Inc v Bank of Montreal

Facts: iTrade advanced a butt load of money to “Webworx” which claimed to have government contracts for computer services that it, of course, did not have. Ablacksingh wanted to increase the credit limit on the joint account with his bae so he took the advances from the company and bought shares which he used as collateral, pledging them to the bank as collateral. iTrade claimed a constructive trust and/or equitable lien as well as a right to seek a personal remedy against any party (obviously BMO). They did not pursue unjust enrichment but they kinda did by virtue of the constructive trust.

Issue: Who should get the funds from the shares?

Ratio: Where a party acquires rights that are voidable, they may still have enough rights in the collateral to transfer it such that it will be made the subject matter of a secured transaction

Analysis: There was no doubt that the money used to purchase the shares was acquired fraudulently. The concern however is that, while the money was forwarded under a fraudulent misrepresentation, this did not serve to completely deny Ablacksingh all of his rights in the property. Until the iTrade notified or attempted to notify Ablacksingh that his right was revoked, he still had sufficient power to convey the property to a third party BFPV. BMO’s value was that they raised the credit limit on his account, and they took possession of the shares as well.

iTrade tried to recover the funds under a mistake of fact, but BMO was not a payee, so it was inapplicable

o They also claimed the wife gave no consideration, all joint so it doesn’t matter iTrade claiming equitable rights effectively takes them out of any concern about the PPSA. Even

though they were given an equitable proprietary interest, this still does not prevail over the PPSA as BMO had the ultimate equitable defence: being the BFPV

A Tracking order was given to locate the funds, normally done due to concerns of fraud (equity concerns)

Holding: BPFV, BMO gets paid son

Credit Suisse Canada v 1133 Yonge Street Holdings Ltd

Facts: Credit Suisse lent $7M to 1133 YSH for the construction of a commercial building. The security included an assignment of rents that was registered under the PPSA. The assignment was acknowledged to be an effective present assignment of existing and future leases, however, CSC elected not to exercise any rights or powers until a default occurred. 1133 YSH paid 60k monthly, a portion of which paid the loan and the excess was held in a “case collateral account” secured by a separate agreement The loan came due and CSC demanded payment, they applied to court asking about the funds held in trust to see if they could use those for compensation.

Issue: Does the lendor have rights in the net rentals they allowed the borrower to keep?

Ratio: While there are clearly ways in which securities can attach that fall within the scope of the PPSA, parties are still free to deal with the collateral in various fashions as per freedom of contract principles.

The purpose of the PPSA is not to make security agreements stale or inflexible, if parties want, they can even reanimate devices to function as old pre-ppsa devices did.

Analysis: S.9(1) makes a security agreement effective in accordance to its terms. Here, CSC allowed 1133 to use the funds as they saw fit, only keeping a residual right to call everything in down the road. Even though the funds that 1133 were traceable to the funds CSC allowed them to keep, it would be unfair to let 1133 rely on the funds and then call into question their purchases when they were allowed to retain possession of the collateral itself. It makes no commercial sense to allow this to happen and even if it did, CSC would be estopped from seizing the assets.Holding: Credit Suisse out of luck for the most part

Royal Bank of Canada v Sparrow Electric Corp

Facts: RBC secured a loan to Sparrow with a GSA covering present and AAP along with a Bank Act security relating to inventory viz s.427. When Sparrow defaulted, they entered a standstill agreement which allowed Sparrow to continue running the business. Sparrow hadn’t been remitting its payroll deductions. The receiver eventually sold Sparrow’s assets. The amount owing to the government was held in trust as it was unclear whether the funds would be owing to the government or not

Issue: Does the deemed trust resulting from 227(5) of the ITA override a previously executed GSA and BAS regarding the proceeds of the sale of inventory upon liquidation?

Ratio: The deemed trust provisions under 227(5) do not serve to allow the government to attach a beneficial interest in property to property that belongs to the other party at the time of liquidation. The deemed trust only applies to property of the bankrupt.

Analysis: Unfortunately for the bank here, the non-payment of the funds owed to them did not occur until the point of bankruptcy, the exact same point that the property of the bankrupt that was subject to the GSA and BAS belonged to RBC. The court also held that RBC had a fixed charge under the terms of the agreement that served to crystallize their rights both currently and in advance. The crown held a kind of floating charge that could only attach before the sale of the property and solely to the equity of redemption in the property (which would cease to exist upon bankruptcy)

Consideration; License Theory: Mclachlin +3 – The interests are subject to a license that allows the use and sale of items in the normal course of business but is not so broad to encompass the satisfaction of income tax obligations. To hold otherwise would be to subject the security interest to a lesser power than what it already had. Should the sale occur, the right would be defeasible and the crown could take funds from the debtor who had applied them elsewhere. But where the sale vests the goods in the creditor (such as upon liquidation) there is no tax obligation accompanying it.

The debtors covenant to pay all taxes was not part of the license Holding the deemed trust presupposes an actual sale to be made would be dangerous as it would

create an obligation in advance that might not be satisfied Court reticent to judicially legislate, afraid of license theory

Holding: RBC winPerfection

Twyne’s Case

Facts: The farmer pierce conveyed a flock of sheep to Twyne as security for a loan but remained in possession of the flock of sheep(400 UK Fun Bucks). A judgment creditor levied execution against the sheep for 200 UK Fun Bucks and the dispute arose over who was entitled to the sheep.

Issue: Who is entitled to the sheep in a security agreement with a debtor in possession?

Ratio: According to the common law, there is a presumption of a fraudulent conveyance when a debtor remains in possession of the security.

Analysis: At common law, retaining the collateral presupposed an intention to defeat creditors. This is obviously because someone in the early 1800’s would have no idea about whether you had a security interest or not. The unfortunate corollary of this case is that nowadays, were this to be the case, it would severely restrict access to credit as people could essentially never have possession of equipment they might need (Especially in a PMSI). People are much more credit savvy and educated nowadays, and rather than let crazy crap happen (Especially to fixtures, immovable and intangibles) we allow these kinds of security interests because of the registration system (which helps to give the notice they never had).

Holding: Pierce in big trouble

Perfection by Possession

Re Raymond Darzinskas

Facts: Morgenstern held an unperfected security interest by way of chattel mortgage in a heavy piece of manufacturing equipment. The item was connected to heavy electrical wiring but was not a fixture. A bailiff came and constructively seized the asset but did not affect its operation or remove it from the premises (due to its size). The trustee in bankruptcy made an action claiming that the security interest remained unperfected via its lack of seizure and that the interest M had should subordinate to the trustee in bankruptcy

Issue: When attempting to perfect by possession (S.24) is constructive possession allowed?

Ratio: Constructive possession is not allowed to perfect a security interest. There must be actual physical possession of an asset in order to perfect.

Analysis: Unfrotunately for M, the financing statement was improperly registered which was what led to the problems in the first place. When the bailiff came, no money was proferred, but because the parties were negotiating, the debots kept using the property. This would seem to someone on the outside like the item was in their possession. That being said, the courts found that there was a seizure as after a while there was no more use, but the seizure was not considered possession for the purposes of the PPSA

Holding: Morgenstern out of luck

Sperry Inc v Canadian Imperial Bank of Commerce

Facts: Sperry sold farm equipment and registered their interest under the PPSA. CIBC entered into a GSA with the particular dealer (Allinson), perfecting its interest a year later. The dealer changed its names and notified the parties. Sperry filed financing charge after the 15 day window, CIBC didn’t register anything at all. The result was that both security interest lapsed. The dealer went bankrupt a year or so later and Sperry filed a new financing statement just after a receiver manager took over the assets. CIBC’s GSA said that the agent (Thorne Riddell) would be under their control, the agent took over the business and CIBC claimed that this amounted to possession which would perfect their interest prior to the re-submission of Sperry’s financing statement.

Issue: Does an agent acting under authority serve to possess the assets such that the interest is perfected?

Ratio: Where an agent of a creditor does not take possession of the assets for the purpose of possession of the collateral, perfection by possession will not occur. Possession must be unequivocal

Old language used to say “Possession occurs only while it is held as collateral”

Analysis: While the case is myriad, the bottom line was that Thorne Riddell had two hats, one was acting as the agent of the bank in regards to seizing the assets for sale and liquidation, the other was acting as an agent for Allinson in the maintenance of the business. CIBC claimed that they decided to take the action to realize on their security and liquidate 6 days prior to the financing statement being filed, but the mere decision to realize falls short of actually realizing on the security. In addition, the bank never informed Sperry of its desire to sell which was mandated as a form of notice.

In the alternative, the judge points out that Sperry would have had a superior interest even at the time when the receivers did not allow them to remove the property from the property. If they were acting as the banks agents on that day, there would be an action in conversion against the bank for their behaviour.

Holding: Sperry perfected first.

Consequences of Non-Perfection

Trustee in Bankruptcy

Re Giffin

Facts: Telecom Leasing Canada leased a car to the BC telephone company who then leased it down to Giffin. They were both parties to the lease and the lease was for more than one year. TLC received funds from Giffin directly and was entitled to finds if BCT stopped paying. Giffin went bankrupt and neither BCT or TLC registered financing statements. The car was seized and sold for 10k. The bankruptcy trustee claimed to rely on the PPSA to supply the funds to the estate, but TLC was choked because Giffin did not own the car, so the claim was effectively vesting more rights in her than she actually had. TJ held estate gets it, CA held TLC get it

Issue: can the PPSA render a lessor’s unperfected security interest ineffective against the rights acquired by the trustee in bankruptcy via the BIA such that the trustee in bankruptcy acquires more rights than the bankrupt themselves?

Ratio: The PPSA has set aside traditional concepts of title and ownership such that the locus of title is not the only relevant factor. Where the bankrupt has a property interest in the car, the trustee will assume this and by virtue of the PPSA is actually entitled to more rights than those enjoyed by the bankrupt.

Analysis: By examining the case law (International Harvester; Doughty), the court determines that S.20(b)(i) modifies the principle that the trustee in bankruptcy gains the same rights as the bankrupt. Normally the trustee merely steps into the bankrupts shoes and has all the property and property rights vest in them, but in this specific instance, they get additional rights, something well within the provincial legislations power to allot.

The legislature specifically chose to value the unsecured creditors position as represented by the trustee over an unperfected security interest of a secured creditor because it is no doubt the responsibility of every secured creditor to do what is in their best interests and register. Failure to do this is irresponsible and the provincial governments overriding of the normal principle actually serves to make the BIA more practicable as provinces cannot rearrange the order of priority of creditors, but they can completely strip away a parties rights such that they are slotted into a group they might otherwise not be in.

Note: The old rules would have let TLC win. It is clear that the legislature sought to overturn this common law standard

Holding: trustee entitled to proceeds

Re 1231640 Ontario Inc

Facts: 1231640 (“State”) received an income tax refund of 4.5M and had another 1M to distribute upon insolvency. RBC acted as an administrative agent to a syndicate of lenders of State. The loan was secured by a GSA, and claim it covers the tax refund. St Paul also held a GSA which they claim includes the tax refund. PWC acted as receiver and trustee in bankruptcy. The bank perfected first. The creditor sold State’s name and renamed it to 1231640. After the name change, neither party filed anything or took possession of anything, thereby unperfecting their interests. RBC claimed they got perfected when they appointed PWC trustee, St. Paul claimed the right date was upon bankruptcy

Issue: who was entitled to the tax refund?Did the appointment of PWC implicitly exempt RBC from having to register?Did RBC’s failure to register result in losing its priority?

Ratio: The appointment of a receiver does not serve to exempt a party from registering their security interest. A court appointed receiver is not a person who represents the creditors of the debtors as no property vests in them. It is only the trustee who represents the interests of the creditors.

Analysis: While the court appreciates the fact that a person who represents the creditors of the debtor is not limited to persons with the same proprietary rights as the bankrupt, the trustee is the only one who holds the debtor’s proprietary interest on behalf of the unsecured creditors. Since the appointment of PWC didn’t serve to perfect the interest, the interest was never perfected until bankruptcy, at which point in time the bank was subservient to the trustee in bankruptcy.

Even the model order indicates that while a stay “stops the music” this does not reflect a stop in whether people can register their security interests or not

Holding: Since both St. Paul and RBC were both unperfected, they ranked pari passu as unsecured creditors and were entitled to funds ratably. Since RBC was owed 29M and St Paul was owed 88M, St Paul was entitled to ~66% (assuming no other major creditors), of the ~5.5M, big windfall for being second creditor

Registration

Fairbanx Corp v Royal Bank of Canada

Facts: Fairbanx entered into a “Purchase of Accounts Receivable Agreement” with Friction Tecnology Consultants Inc. This company did business has “technology” but the proper spelling was with no H. All of its materials, letterhead, etc, used the H. Fairbanx registered its interest with the incorrect spelling. Friction later sought another loan from RBC which did a search under the correct name and found 3 other creditors but not Fairbanx. The bank had prior knowledge of Frictions relationship with Fairbanx and required them to cease factoring its accounts receivables with fairbanx.

Issue: Is the factoring agreement an absolute assignment of accounts not subject to the PPSAIs fairbanx’ incorrectly spelled security still valid?

Ratio: Even where all steps are properly taken towards gaining an absolute assignment of accounts, there still may be a lack of priority if registration is improperly executed.Where a onjective reasonable person would be misled by using the searching mechanism, then a security interest will not be properly registered. Subjective knowledge is irrelevant.

Analysis: It is important to note that a registered financing statement is prima facie effective as it is only ineffective if it would cause a reasonable person to be materially misled by the error. Unfortunately for Fairbanx, if the name of the debtor is incorrect on the registered financing statement, then the registration will not perfect the creditor’s security interest in the assets of the correctly named debtor. This is because even if someone found the incorrect name, they would not be sure whether the security interest attached to the correct name. This does not serve to completely remove the security interest, it is simply unperfected and ranks behind all perfected security interests

Ontario used a specific name search. Therefore, if you can’t find them, you would be misled Fairbanx did not obtain a corporate profile report, nor did it conduct a Business Names Act search

or even examine the minute books to determine their correct name

Holding: Fairbanx out of luck.

Errors and Omissions in Registration Data

Re Lambert

Facts: Lambert purchased a truck from GMAC under a conditional sales contract. They filed a financing statement referring to the debtor as Gilles J Lambert which was also the name he used on the contract. That was not his full legal name though. Everything else was correct including the VIN. Lambert went bankrupt and the trustee seized the truck. They had 3 checking methods at the time, exact, non-exact and VIN. She did specific and non-specific checks and couldn’t find his name. No VIN search was done.

Trustees claimed it unperfected, GMAC claimed S.46(4) cured the errors since the trustee should have done a VIN search

Issue: When will an error of a fincancing statement render the security interest it represents unperfected as against third parties?What searches should be done?

Ratio: No subjective or effects based analysis is infused into whether someone is materially misled, it is only the objective reasonable person standard. The reasonable person using the system however is one who is familiar with the search functions of the system and who uses it to execute a specific inquiry (as they will be a potential purchaser or lender)The integrity of the registry system must serve both those who register and those who search registrations

Reasonable Person Test He is a reasonably prudent prospective purchaser or lender who uses the system to learn about

prior registered claims He knows how to use the search tools and is reasonably competent in doing so Where the property is a motor vehicle, they will obtain the personal info as well as the vin Where the property is a motor vehicle, they will conduct both searches

Analysis: According to the judge, any reasonable party looking to work with a motor vehicle would search the VIN. Given the issues that can arise with names and unforeseen security interests, the reasonable person would take advantage of VIN searches. Even if they have access to proper names, they would still conduct both a name search and a VIN search (As it is a cheap way to get extra info). Here, the VIN was properly attached to the registration document (if it was wrong, that could certainly mislead). Basically, if an error makes it impossible to search, then you know you’re hooped

If a motor vehicle is consumer goods, correct disclosure of the name will not prevent a VIN error from being a materially misleading one (doesn’t solve the ABCD problem)

Other courts only require one search, academic commentators have criticized this as serial number searching is thought to be supplementary, not primary. This was endorsed in NBCA

o This is obviously bull and not taking into account the economic realities. The BCPPSA mandates VIN registration for consumer goods, doesn’t for equipment. Therefore,

an error in a non-consumer vin may not invalidate the security.

Holding: Security interest perfected

Coates v General Motors Acceptance Corp

Facts: GMAC (again) registered a financing statement in respect of a dump truck with an incorrect serial number to Hoelke’s. Coates loaned Hoelke cash and took security by way of a promissory note which was registered with the Hoelke’s as debtors. Payments under the note were in default, so Coates did a serial number search and couldn’t find the truck. He then had it transferred into his name and tried to repossess it. GMAC said their registration was good even though you couldn’t find it as BC used only exact matches at the time even though the GMAC came up as an inexact match.

Issue: Is the registration of an incorrect serial number seriously misleading such that the security interest is not perfected?

Ratio: Serial Goods Test6) The test of whether a registration is misleading is objective7) Total accuracy in registration is not necessary8) A seriously misleading description will defeat the registration9) It will be seriously misleading if it

a. Would prevent a reasonable search from disclosing the registration; orb. Would cause a reasonable person to conclude that the search was not revealing the same

chattel (in the case of a serial number search) or the same debtor for a name search. The obligation is on the searcher to review the registrations to make the determination

10) The design of the system is irrelevant – the only question to be answered is whether a registry search will reveal the incorrect registration

Analysis: On the facts, a reasonable person would have been alerted to the interest as the recalling of the incorrect GMAC serial number was incredibly similar, and had a similar character in the mistaken character slot and would have led to someone looking at the registrations and seeing they covered the same type of chattel. The search system here found similar results based on the last 6 characters, here, the error was on the 3rd character of like, a million.

Consideration: The judge, and other commentators, have expressed concern over giving any form of legal right or credence to the programming used in the creation of the system. This is wise as any legal test that relies on the form of the programming in the system would change frequently and would not be unified across provinces, let alone within the province itself.

Holding: Security interest is legit

Adelaide Capital Corp v Integrated Transportation Finance Inc

Facts: ITFI and ITS became insolvent and the dispute arose between their secured creditors regarding the ownership of 87 truck trailers. Grey vest had two leases for 50 and 25 units, the 50 being classified as Equipment, Book Debts and Other with the 25 being Equipment and other. NAT had a debenture against Inventory, Equipment, Accounts and Other. The trailers were considered as inventory, and the other category is known to exclude consumer goods, inventory and accounts unless they are marked.

Issues: Can the misclassification be cured under the PPSA?

Ratio: The level of information in the financing statement is key and will serve to not only give notice as to what security interest may be present, but may also fully detail the exact type or kinds of collateral the security interest resides over. Failure to give any notice as to where a security interest lay will make the curative provisions inapplicable.

Analysis: Considering the financing statements were completely bare bones and did not include a general description to expound upon what the collateral was, even if someone found the proper things under the PPSA, there is no way to tell whether they are claiming any security interest in the inventory of ITFI and ITS. Since NAT followed the first two 1987 leases, it became the first perfected security. There were a

few of the Dec 1987 leases that did secure a few leases so that was fine by virtue of the description. NAT’s 1990 debenture listed 50 trailers with 50 serial numbers, and this had the effect of limiting their collateral to said trailers. The general section helps to both protect and limit the security interest.

Holding: NAT got 50 trailers, Greyvest got a few as well

Amendments to Registration

Heidelberg Canada Graphic Equipment Ltd v Arthur Andersen Inc

Facts: Heidelberg sold equipment to Kennedy Park and held a registered security interest in inventory, equipment, accounts and other”. The SI was assigned to Chase Manhattan Bank of Canada and they registered a financing charge statement. When Kennedy Park got into trouble, the Thomas’ loaned them money and registered an SI. They also convinced the bank to get rid of their registration. The bank thought they had no security interest and took it off (to allow subordination), but then later realized they did and registered a new financing charge that added the accounts security back on. When KP went bankrupt, the trustee attacked the banks SI in the accounts.

Issue: Is the second application which revests security in the party valid?Did the first financing statement discharge or merely unperfect the security interest in the accountsDoes it matter that they filed a financing charge statement instead of a new financing statement?

Ratio: A financing charge statement is not intended to affect the registration period of one of the

claimed categories of collateral within the financing statement unless the party intended it to be effective.

New financing statements are not needed to reperfect, charge statements will be fine When something is unperfected whether by error or omission, the PPSA will deem it to be in

continual perfection except as against persons who acquire rights in all or part of the collateral during the unperfected period.

Analysis: The judge here was not willing to find any technical reasons to deprive Chase of their interest, especially as the unperfected time was only 2 days and nothing happened in the interim when their interest wasn’t perfected. Perhaps if the bankruptcy happened in that time they would be hooped, but the bank quickly realized its error, forgoing that concern. The legislature specifically set up the deeming rule to make sure that no technicality would serve to divest a secured party from their collateral rights unless someone intervened during the down time.

Note on Amalgamation: An amalgamation does not create a “new company”, as such, there is no transfer of liabilities or assets and there is therefore no transfer by the debtor of its interest upon amalagamation. This serves to not need new name statement changes or new financing statements as there is no “new” debtor.

Holding: Rights are all right.

Lisec America Inc v Barber Suffolk Ltd.

Facts: Lisec sold a waterjet glass cutting machine to Barber Suffolk Ltd and delivered it to Barber Glass Industries Inc as requested. She perfected her security against Barber Suffolk via PMSI. BS sold their interest in the waterjet to BG on the day of the original sale. Lisec also sold two other machines to BG, a cutting line and a vertical IG line. When BG need cash, Roynat came along and offered cash if Lisec would discharge. She discharged for 9.5M and Roynat registered a financing statement against BG to perfect the interest in the waterjet. BG was placed into receivership and Lisec and Roynat both claimed the waterjet. Lisec claimed she remained perfected beyond the transfer, while Roynat claimed her discharge included the waterjet.

Issue: Did the unknown transfer affect Lisecs registration against BS?If so, did the discharge against BG serve to discharge the BS security?

Ratio: OPPSA – 48(2)(b) if the secured party learns about the unapproved transfer, it has 30 days to

register a financing charge or take possession.A party cannot release a security interest if it was not granted by the same debtor.

Analysis: Thankfully, Lisec filed a registration within 30 days of discovering that BS transferred the property to BG. More importantly, the transfer between BS and BG had nothing to do with modifying security interests or their priorities. BG never gave Lisec an interest in the waterjet, so she could not release a security interest she did not have. Had she perfected against BG, it wouldn’t be a problem, but she never took this action. The trial judge found the discharge to be sufficiently broad to refer to the subject materials outside of the BG security, but this was not upheld.

It is also worth noting that, while Roynat is kinda getting shafted, they were also trying to get access to something they never would have received in the first place.

Holding: Lisec da bes

Basic Priority Rules

Irrelevance of Knowledge

The Robert Simpson Company Ltd v Shadlock and Duggan

Facts: The debtor mortgaged the motel to Shadlock and on the same day via chattel mortgage registered the chattels and equipment in the motel, including RSC’s chattels to Shadlock as well. Shadlock registered first but RSC didn’t register its conditional sales contracts until 6 months later. RSC wanted to claim a notice doctrine such that their interest would perfect prior to Shadlocks.

Issue: Whether priorities over perfected securities are determined by who registers first or whether actual notice may defeat a claim to priority based on prior registration or perfection

Ratio: Notice or knowledge is irrelevant in determining priority between security interests. One must follow the PPSA rules to determine who has what priority

Analysis: Although the notice doctrine has been around forever in many areas of the law, the fact remained that notice was not a part of the act and in no way affected the priorities of the parties. The rules of priority are designed around attachment and perfection and the act specifically ignores the common law on this issue.

Holding: Defendant perfected appropriately

Prior Lender’s Competitive Advantage

James Talcott, Inc. v Franklin National Bank of Minneapolis

Facts: The debtor (Noyes) entered into a conditional sales contract covering the purchase of two dump trucks. The seller (Northern Contracting) assigned the rights to James Talcott Inc. A few months later, Noyes entered into an equipment lease with Franklin National Bank for one dump truck and a month later proceeded to enter into a similar lease agreement covering two additional dump trucks; Franklin didn’t register either lease. When Noyes had difficulties paying, Talcott signed a new agreement which was a forebearance in consideration for all goods as well as AAPs; no additional filing was made. After additional difficulty, the trucks were seized by Franklin.

Issue: Was the first financing statement sufficient to protect a security interest in the property covered by the extension agreement?

Ratio: A financing statement does not need to be amended when the security agreement is altered, so long as the same type of security interest is acquired.When the debtor does acquire more property of the type referred to in the financing statement already on file, perfection is instantaneous and automatic if attached properly

Analysis: Once a financing statement is on file describing a type of property, other people are duly noted that they have current security in that asset and may gain further security in such similar assets as are acquired. While the judge points out that AAP’s are preferable, noting in the UCC prevents the original contract from securing this in the way shown in the case at hand. The original statement here was broad enough to cover AAP’s. This resulted in Talcott getting a windfall as it unintentionally secured property that it didn’t anticipate, leaving the bank high and dry. The judge blamed this on the bank though for not doing their due diligence.

The main goals of the act are notice and commercial efficiency. If notice is given, it would be more commercially efficient to allow like-to-like agreements to be covered under the first financing statement to avoid agency costs

Holding: Talcott wins appeal

Circular Priorities and Subordination Agreements

Royal Bank of Canada v General Motors Acceptance Corporation of Canada Ltd

Facts: Both RBC, CIBC and GMAC had valid security interests in the property of HEL. CIBC gained SI’s in RBC collateral via two agreements and GMAC also gained security in RBC’s collateral. CIBC

registered one document before and after GMAC’s with RBC being last. RBC claimed priority to the funds via a subordination agreement signed between CIBC and RBC.

Issue: Does RBC move up in priority due to the subordination agreement or does CIBC lose its priority to RBC whereas GMAC retains its priority over RBC.

Ratio: Where subordination agreements exist, it does not serve to alter priority but only serves to alter in which fashion parties are paid.

Analysis: The court adopts the reasoning wherein RBC as the lowest creditor is paid the entirety of CIBC’s claim to the amount of RBC’s claim. CIBC would keep any left over, and the rest of the claim goes to GMAC. If there is any excess, the balance goes to RBC first (if originally not satisfied) with the remainder to CIBC. This serves to pay each party in accordance with their relative strengths in the security in a sort of pro-rata way to avoid the issue with circularities.

Ultimately, distributions have to be made as if there was no subordination agreement, with the subordination effectively serving to change the residual rules such that the ranking of the claims and distributions of proceeds is determined apart from the operation of the subordination agreement but still in such a way that the parties contractually satisfy themselves with proceeds where applicable

Holding: RBC gets priority payment

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