Secured Transactions CANProfessor Moin A. Yahya – Fall 2013

INTRODUCTION........................................................................................................................................................... 5SCOPE OF THE ACT............................................................................................................................................... 9

IN SUBSTANCE SECURITY INTERESTS................................................................................................................................................9

TRUSTS...............................................................................................................................................................................................9

Re Skybridge Holidays Inc..............................................................................................................................................................9

SETOFF...............................................................................................................................................................................................9

FLAWED ASSETS.............................................................................................................................................................................10

Caisse populaire Desjardins de l’Est de Drummond v Canada.....................................................................................................10

GUARANTEES..................................................................................................................................................................................10

WHAT IS “PERSONAL PROPERTY”? THE LICENCE ISSUE..............................................................................................................10

Saulnier v Royal Bank of Canada.................................................................................................................................................10

DEEMED SECURITY INTERESTS.........................................................................................................................................................11

TRANSFERS OF ACCOUNTS AND CHATTEL PAPER...................................................................................................................11

LEASES.............................................................................................................................................................................................11

CONSIGNMENTS..............................................................................................................................................................................11

EXCLUSIONS FROM THE SCOPE OF THE ACT..................................................................................................................................11

LIENS GIVEN BY STATUTE OR RULE OF LAW.............................................................................................................................11

Commercial Credit Corp Ltd v Harry Shields Ltd...........................................................................................................................12

INSURANCE......................................................................................................................................................................................12

Re Stelco Inc.................................................................................................................................................................................12

GE Canada Equipment Financing GP v ING Insurance Company of Canada..............................................................................12

INTERESTS IN REAL PROPERTY...................................................................................................................................................13

Re Urman......................................................................................................................................................................................13

CLARIFICATIONS..................................................................................................................................................................................13

VALIDITY AND ENFORCEABILITY OF THE SECURED INTEREST.................................................................................13VALIDITY OF THE SECURITY AGREEMENT........................................................................................................................................13

Ellingsen (Trustee of) v Hallmark Ford Sales Ltd..........................................................................................................................13

994814 Ontario Inc v RSL Canada Inc and En-Plas Inc................................................................................................................14

356447 British Columbia Ltd v Canadian Imperial Bank of Commerce.........................................................................................14

Eagle Eye Investments Inc v CPC Networks.................................................................................................................................14

“STATUTE OF FRAUDS” REQUIREMENTS.........................................................................................................................................15

MacEwen Agricentre Inc v Bériault et al........................................................................................................................................16

Atlas Industries v Federal Business Development Bank: SKTN Farm and Truck Equipment Ltd (Debtor)....................................16

ATTACHMENT....................................................................................................................................................... 17SECURITY AGREEMENT.......................................................................................................................................................................17

VALUE....................................................................................................................................................................................................17

RIGHTS IN THE COLLATERAL.............................................................................................................................................................17

i Trade Finance Inc v Bank of Montreal.........................................................................................................................................17

AFTER-ACQUIRED PROPERTY.......................................................................................................................................................18

THE FLOATING CHARGE................................................................................................................................................................18

Credit Suisse Canada v Yonge Street Holdings............................................................................................................................19

Credit Suisse Canada v 1133 Yonge Street Holdings Ltd.............................................................................................................19

Royal Bank of Canada v Sparrow Electric Corp............................................................................................................................19

INVESTMENT PROPERTY.....................................................................................................................................................................20

PERFECTION........................................................................................................................................................ 20

PERFECTION BY POSSESSION...........................................................................................................................................................21

Re Raymond Darzinskas..............................................................................................................................................................21

Sperry Inc v Canadian Imperial Bank of Commerce......................................................................................................................22

PERFECTION BY CONTROL.................................................................................................................................................................22

CONTINUITY OF PERFECTION.............................................................................................................................................................22

CONSEQUENCES OF NON-PERFECTION...........................................................................................................................................23

Re Giffen.......................................................................................................................................................................................23

Re 1231640 Ontario Inc................................................................................................................................................................24

TRANSFER OF COLLATERAL.........................................................................................................................................................24

REGISTRATION..................................................................................................................................................... 25THE FUNCTION OF REGISTRATION....................................................................................................................................................25

BASIC CONCEPTS.................................................................................................................................................................................25

STRUCTURAL UNITY OF SUBSTANTIVE PERSONAL PROPERTY SECURITY LAW..................................................................25

NOTICE REGISTRATION..................................................................................................................................................................25

ELECTRONIC REGISTRATION SYSTEMS......................................................................................................................................25

DEBTOR NAME-BASED REGISTRATION AND SERIAL NUMBER REGISTRATION....................................................................25

Fairbanx Corp v Royal Bank of Canada........................................................................................................................................25

ERRORS AND OMISSIONS IN REGISTRATION DATA........................................................................................................................26

Re Lambert...................................................................................................................................................................................26

Coates v General Motors Acceptance Corp..................................................................................................................................26

Adelaide Capital Corp v Integrated Transportation Finance Inc....................................................................................................27

AMENDMENTS TO REGISTRATION.....................................................................................................................................................27

Heidelberg Canada Graphic Equipment Ltd v Arthur Andersen Inc..............................................................................................27

Lisec America, Inc v Barber Suffolk Ltd.........................................................................................................................................27

BASIC PRIORITY RULES....................................................................................................................................... 28JUSTIFICATION FOR THE FIRST-IN-TIME RULE.................................................................................................................................29

THE IRRELEVANCE OF KNOWLEDGE.................................................................................................................................................29

The Robert Simpson Company Ltd v Shadlock and Duggan........................................................................................................29

PRIOR LENDER’S COMPETITIVE ADVANTAGE..................................................................................................................................30

James Talcott Inc v Franklin National Bank of Minneapolis...........................................................................................................30

SECURITY FOR FUTURE ADVANCES..................................................................................................................................................30

PRIORITY OF REPERFECTED SECURITY INTERESTS......................................................................................................................31

SUBORDINATION AGREEMENTS........................................................................................................................................................31

CIRCULAR PRIORITIES.........................................................................................................................................................................31

RBC v General Motors Acceptance Corporation of Canada..........................................................................................................32

Re CIF Furniture Limited...............................................................................................................................................................32

PURCHASE-MONEY SECURITY INTERESTS.............................................................................................................33THEORY OF PMSI PRIORITY................................................................................................................................................................34

SCOPE OF PMSI PRIORITY...................................................................................................................................................................34

GIVING VALUE TO ACQUIRE RIGHTS IN COLLATERAL..............................................................................................................34

North Platte State Bank v Production Credit Ass’n........................................................................................................................34

Agricultural Credit Corp of Saskatchewan v Pettyjohn..................................................................................................................35

REFINANCING PMSIS......................................................................................................................................................................35

Unisource Canada Inc v Laurentian Bank of Canada....................................................................................................................35

MacPhee Chevrolet Buick GMC Cadillac Ltd v SWS Fuels Ltd.....................................................................................................35

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MIXED PMSIS AND NON-PMSIS......................................................................................................................................................36

Clark Equipment of Canada Ltd v Bank of Montreal......................................................................................................................36

ALLOCATION OF PAYMENTS.........................................................................................................................................................36

Re Chrysler Credit Can Ltd and Royal Bank of Canada................................................................................................................36

THE SECTION 34 PRIORITY RULES.....................................................................................................................................................36

THE PMSI PRIORITY IN PROCEEDS....................................................................................................................................................37

Massey-Ferguson Industries Ltd v Melfort Credit Union Ltd..........................................................................................................37

COMPETING PMSIS..........................................................................................................................................................................37

SUBORDINATION AGREEMENTS........................................................................................................................................................37

FIXTURES, ACCESSIONS, AND COMMINGLED GOODS.............................................................................................37FIXTURES...............................................................................................................................................................................................37

MEANING OF FIXTURE....................................................................................................................................................................38

Cormier v Federal Business Development Bank...........................................................................................................................38

FIXTURES AND LANDLORD’S RIGHT OF DISTRESS....................................................................................................................39

859587 Ontario Ltd v Starmark Property Management Ltd...........................................................................................................39

ACCESSIONS.........................................................................................................................................................................................39

Industrial Acceptance Corp v Firestone Tire and Rubber Co........................................................................................................39

GMAC Leaseco Ltd v Tomax Credit Corp.....................................................................................................................................39

COMMINGLED GOODS..........................................................................................................................................................................40

In the Matter of San Juan Packers, Inc.........................................................................................................................................40

LIENS ARISING BY STATUTE OR RULE OF LAW......................................................................................................40LIENS IN FAVOUR OF PRIVATE CREDITORS.....................................................................................................................................40

General Electric Capital Equipment Finance Inc v Transland Tire Sales & Service Ltd................................................................40

GOVERNMENTAL LIENS.......................................................................................................................................................................41

Leavere v Port Colborne (City)......................................................................................................................................................41

DaimlerChrysler Financial Services (Debis) Canada Inc v Mega Pets Ltd....................................................................................41

PROTECTION OF TRANSFEREES IN ORDINARY COURSE..........................................................................................41SALE OF GOODS IN ORDINARY COURSE..........................................................................................................................................41

ORDINARY COURSE OF BUSINESS...............................................................................................................................................42

Camco Inc v Olson Realty (1979) Ltd............................................................................................................................................42

Tanbro Fabrics Corp v Deering Milliken Inc..................................................................................................................................43

SALE AND AGREEMENT TO SELL.................................................................................................................................................43

Royal Bank of Canada v 216200 Alberta Ltd................................................................................................................................43

Spittlehouse v Northshore Marine Inc (Receiver of)......................................................................................................................44

PRIORITIES WITH RESPECT TO REPOSSESSED OR RETURNED GOODS................................................................................44

TRANSFER OF CHATTEL PAPER........................................................................................................................................................44

TRANSFER OF INSTRUMENTS AND DOCUMENTS OF TITLE...........................................................................................................45

TRANSFER OF SECURITIES.................................................................................................................................................................45

PROCEEDS.......................................................................................................................................................... 45NATURE AND SOURCE OF THE CLAIM TO PROCEEDS....................................................................................................................45

Flintoft v Royal Bank of Canada....................................................................................................................................................46

PERFECTION OF SECURITY INTEREST IN PROCEEDS.....................................................................................................................46

TRACING................................................................................................................................................................................................46

TRACING INTO AN OVERDRAWN ACCOUNT................................................................................................................................46

Flexi-Coil v Kindersley District Credit Union Ltd............................................................................................................................46

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BACKWARDS TRACING..................................................................................................................................................................47

Agricultural Credit Corp of Saskatchewan v Pettyjohn..................................................................................................................47

TRACING INTO A MIXED FUND.......................................................................................................................................................47

ENFORCEMENT OF THE SECURITY INTEREST..........................................................................................................48PROCEDURAL AND SUBSTANTIVE LIMITS ON ENFORCEMENT RIGHTS.......................................................................................48

Waldron v Royal Bank...................................................................................................................................................................48

SEIZURE OF COLLATERAL..................................................................................................................................................................48

R v Doucette.................................................................................................................................................................................49

VOLUNTARY FORECLOSURE..............................................................................................................................................................49

Angelkovski v Trans-Canada Foods Ltd........................................................................................................................................50

DISPOSAL OF THE COLLATERAL.......................................................................................................................................................50

Copp v Medi-Dent Services Ltd.....................................................................................................................................................50

DEFICIENCY CLAIMS............................................................................................................................................................................51

Bank of Montreal v Charest...........................................................................................................................................................51

ENFORCEMENT OF SECURITY INTERESTS BY RECEIVERS AND RECEIVER-MANAGERS..........................................................52

Ostrander v Niagara Helicopters Ltd.............................................................................................................................................52

Standard Trust Co v Turner Crossing Inc......................................................................................................................................52

DEEMED SECURITY INTERESTS.........................................................................................................................................................52

TRUE LEASES AND SECURITY LEASES DISTINGUISHED...........................................................................................................53

THE MEASURE OF DAMAGES FOR BREACH OF A TRUE LEASE...............................................................................................53

Keneric Tractor Sales Ltd v Langille..............................................................................................................................................53

CONFLICT OF LAWS............................................................................................................................................. 54SECURITY INTERESTS IN GOODS: INITIAL VALIDITY AND PERFECTION......................................................................................54

RELOCATION OF GOODS.....................................................................................................................................................................54

Re Adair; Re General Motors Acceptance Corporation.................................................................................................................54

Re Claude A Bedard.....................................................................................................................................................................55

THE DESTINATION OF GOODS RULE AND THE MOBILE GOODS RULE.........................................................................................55

Gimli Auto Ltd v BDO Dunwoody Ltd............................................................................................................................................55

SECURITY INTERESTS IN INTANGIBLES, ETC...................................................................................................................................55

SECURITY INTERESTS IN INVESTMENT PROPERTY.........................................................................................................................55

ENFORCEMENT.....................................................................................................................................................................................56

Cardel Leasing Ltd v Maxmenko...................................................................................................................................................56

FEDERAL SECURITY INTERESTS............................................................................................................................ 56THE BANK ACT SECURITY INTERESTS..............................................................................................................................................56

THE NATURE OF THE BANK ACT SECURITY INTEREST.............................................................................................................56

Royal Bank of Canada v Sparrow Electric Corp............................................................................................................................56

THE BANK ACT – PPSA INTERACTION..........................................................................................................................................57

Bank of Nova Scotia v International Harvester Credit Corp...........................................................................................................57

INTELLECTUAL PROPERTY SECURITY INTERESTS.........................................................................................................................57

SHIP MORTGAGES................................................................................................................................................................................57

INTERNATIONAL DEVELOPMENTS.....................................................................................................................................................58

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INTRODUCTIONEvolution of Canadian Personal Property Security Law

- Interacts with a lot of aspects of commercial law- Very broad area of law- Land is “real” property whereas PPSL focuses on “personal property” – we will not be talking about real property in this

course- Note, however, that real remedies can include actions on personal property- In rem: Action involves and follows property (i.e., foreclosure)

o Real remedies (remedies available for secured creditors)o Not about the person, it’s about the property

- In personam: Action is against a person, and follows the person (i.e., suing someone for damages)o Personal remedies (remedies available for unsecured creditors, although still available to secure creditors as

well)o You can’t just seize people’s property – you have to sue the person

- In terms of ownership, you can think of it from a finance perspective, where ownership is broken into equity and debto Equity

A property interest i.e., a down-payment on a house The person with equity is last in line for recovery

o Debt Secured Debt

It is a form of property – i.e., a bank who has the first mortgage on a house Secured creditors are first in line for recovery

Unsecured Debt Have no property claim in the goods Behind the bank in line for recovery

- Credit(or) and Debt(or)o C lends money to Do D has to pay C money back in one lump sum or in instalmentso There are limitations (i.e., Consumer Protection Act and Criminal Code sections govern the rate of interest, etc.)

- There is short-term, medium-term and long-term creditCreditors’ Remedies

- Debt can be secured or unsecuredo Credit card debt is an example of unsecured debt

- Unsecured Credit o Can sue for damages – personal remedieso Subject to the law of contractso Recovery is slow and unpredictableo Personal remedies:

Can sue for missed installment, or, if you can establish repudiation of contract, can sue for entire debt Interest rates tend to be higher for unsecured credit because of the uncertainty of recovery in case of

default May contain:

Essential time stipulation making the time for repayment an essential term Acceleration clause stipulating that any default makes the whole amount due

- Secured Credit o Recovery is faster and more predictableo Secured creditors have access to both personal remedies (available to unsecured creditors) AND real remedies

(only available to secured creditors)o Real remedies:

Can seize the property – the property is called collateral Possessory form (i.e., keep property until paid) Non-possessory form (i.e., on default, get the good back, repossession)

No court process needed – no concern for other creditors What if not enough?

Can proceed against D for deficiency (personal remedy) in some provinces – need to check what the rules are where you are practicing

What if sale proceeds of collateral are more than the amount of D’s debt? Surplus is to be accounted for an given to D, or to the next creditors in line

Interest rates tend to be lower for secured credit because of the fact that they are first in line for recovery in case of default

Pre-PPSA Forms of Secured Transactions- Chattel Mortgage

o Similar to a real estate mortgage, except it is on personal propertyo SP agrees to lend D a sum to be secured by a piece of propertyo D then transfers title of property to SP; D pays SP the sum owed in timely fashion; and the title of the property

goes back to the D SP is the legal owner during the mortgage, but usually D keeps the collateral

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D keeps an equitable interest in the collateral (equity redemption) – D gets title backo Can D get a second mortgage on the personal property already mortgaged?

Yes, but now second mortgage is behind first mortgage but ahead of D’s equity of redemption If D defaults, SP gets first claim, then second mortgage, and if anything left then D

o The debtor is conveying title, but keeping possession (opposite to a pledge)o Remedy is to sell the thing or keep it (foreclose)o Problem is taking possessiono Not used often anymore

- Pledge o Similar to what happens when pawning merchandising (not quite, but closest example)o Common law possessory device for goods or non-goodso D transfers to SP possession plus right to sell the collateral if D defaults on its loan obligations (opposite to a

chattel mortgage)o Seller has no right to keep the thing pledgedo Pledge is a contract, so power of sale comes from agreemento Still some commercial pledging of:

Negotiable instruments (i.e., cheques) Securities (i.e., stocks or bonds) Documents of Title (i.e., bills of lading or warehouse receipts)

Warehouse receiptso Goods in warehouse and owner has certificate saying whoever holds certificate

can get the goodso The certificate is pledged as collateral, so if D defaults, SP can take certificate and

take whatever is in the warehouse- Charge

o Created by contract, statute or common lawo Also known as a lieno Once a lien is registered against personal property, it becomes first in line for recovery in case of defaulto Mortgage on houses today is analogous to charge

o D by agreement gives SP the right to seize and sell the collateral if D defaults and to use the sale proceeds to pay down the outstanding debt

o It is a possessory security (i.e., a mechanic’s lien by statute)o Similar to a chattel mortgage, except title stays with the D

- Conditional Sale Agreement o SP sells personal property on installments but title stays with SP until D pays all installmentso Title does not pass to the buyer until all payments are madeo Security is the retention of titleo CSA is like chattel mortgage or charge – if D defaults, SP still owns truck and can sell it to get remaining amount

- Hire-Purchase and Lease Agreements o Four types:

Rent to own – D makes monthly payments to SP for lease of personal property and then at end of period, D buys personal property from SP

Rent with option to purchase No purchase clause, but renter can always purchase at ‘residual value’ – i.e., blue book of vehicle after

3 years of leasing Pure rent agreement

- Accounts Receivable Financing o Example:

Miley Cyrus manufactures and sells foam hands to Robin Thicke’s department store She sells 100 hands the first of every month to Thicke’s store at $5/hand, BUT she gets paid 3 months

after the delivery Hence, Thicke’s store owes Miley $500/month for the next 3 months Miley at any point in time has $1,500 in accounts receivables to be received over the next 3 months

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Suppose Miley wants to borrow $500/month from Lady Gaga’s bank, but she has no collateral (or does she?)

She can pledge the $500/month that she gets from Thicke’s department store as collateral Two ways of doing this: Lady Gaga says to Miley here is $450 a month, and I will go collect the $500

from Thicke directly Or, Lady Gaga says here is $450 and you pay me every month, but if you default, I get to seize the

$500 owed to you by Thicke What is difference?

In first, G takes risk of Thicke not paying (unless she puts in a Recourse Agreement that says she can get balance from Miley)

In second, Miley takes risk- Security Interests in Circulating Assets

o Property that turns-over (has stock and flow) are circulating assetso Problems for creditors are: uncertainty as to what the inventory is in the future (security would violate nemo dat)

and legal interest is in security which can be sold at anytimeo In the US, Benedict case held that a secured party is assigned a security interest or not; there is no middle

ground This case caused a crisis in accounts receivable and inventory financing Strange new devices, such as field warehousing and physical separation were invented to get around

the holding It was a major force in the push for UCC Article 9

o Example from above: Suppose Miley Cyrus sells the hands to other shops too She keeps more than 100 hands in her warehouse Because demand is up and down, she usually manufactures 500 hands, sells most of them, but keeps

100 hands as ‘inventory’ in her warehouse At any point in time, Miley has two ‘circulating assets”:

Stock-in trade (“inventory”) and Its accounts receivable (“accounts”)

Miley can also pledge the inventory when borrowing money from Lady Gagao Problems:

The After-Acquired Property Problem : How does law handle the fact that inventory and accounts may come after loan deal is signed?

The Right of Disposal Problem : Miley needs to sell her inventory to get cash to pay debt – how does law handle this?

o Solution – floating charge In England circulating assets were dealt with by the floating charge (unlike the fixed charge) The floating charge was not attached to anything specific until an event occurs which caused it to

crystallize

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- All of these forms had plusses and minuses – some of these were a result of bad judicial decisions, and others because of bad statutory schemes

- In Canada, PPSAs were passed to remedy the problems and create one uniform way of dealing with secured debt – each province has own act, and not uniform across provinces

- In United States, Article 9 of the Uniform Commercial Code (UCC) is the equivalent law – each state has its own Article 9, but there is more uniformity in US than here

The Canadian PPSAs- According to the BC Personal Property Security Act, you must register security interests

Personal property registry42  (1) There must be a registry known as the personal property registry for the purposes of registrations under this Act and for registrations that are permitted or required under any other enactment to be made in the registry(2) The registrar may have a seal of office in the form prescribed(3) The minister may designate a person as registrar(4) The registrar may designate one or more persons as deputy registrars

- Why register?o If you do not register, you become an unsecured creditoro To warn third parties

- Scope of the Acto Every transaction that “in substance” creates a security interesto As long as you are lending money and getting money back, and you are taking interest in a piece of property, that

is a secured interest and the Act covers ito This is outlined in s 2 of the Act:

Scope of Act: security interests2 (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

Classification of Collateral (as outlined in s 1 of the Act)- “Collateral” means personal property that is subject to a security interest- Collateral can be either:

o Goods (consumer goods, equipment, inventory) “Consumer Goods” means goods that are used or acquired for use primarily for personal, family or

household purposes “Inventory” means goods that are:

Held by a person for sale or lease, or that have been leased by that person as lessor To be furnished by a person or have been furnished by that person under a contract of

service Raw materials or work in progress, or Materials used or consumed in a business

“Equipment” means goods that are held by a debtor other than as inventory or consumer goodso Intangibles (accounts or intangibles)

“Account” means a monetary obligation not evidenced by chattel paper or an instrument, whether or not the obligation has been earned by performance, but does not include investment property

“Intangibles” means personal property, other than goods, chattel paper, a document of title, an instrument, money and investment property, and includes a licence

o Paper representing intangible rights (chattel paper, documents, instruments) “Chattel Paper” means one or more writings that evidence both a monetary obligation and a security

interest in, or a lease of, specific goods or specific goods and accessions Classic IOU with security interest in specific good attached

“Instruments” means: Classic IOU A bill of exchange, note or cheque within the meaning of the Bills of Exchange Act (Canada), Any other writing that evidences a right to payment of money and is of a type that in the

ordinary course of business is transferred by delivery with any necessary endorsement or assignment, or

A letter of credit or an advice of credit if the letter of credit or advice of credit states on it that it must be surrendered on claiming payment under it,

“Instruments” does not include

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Chattel paper, a document of title or investment property, or A bond, debenture or similar document evidencing an obligation secured, in whole or in part,

by a mortgage of an interest in land unless the interest being mortgaged is, itself, a mortgage of land

o Property received by D upon disposition of collateral (proceeds)The Secured Lending Puzzle

- It is more difficult for a debtor to acquire unsecured credit after he already has secured credit- Implementing secured debt costs more money- Since secured and unsecured debt is a zero-sum system, with added costs it should be less popular.- Issues:

o Nowadays, especially in Ontario, taking a security interest is much more streamlined Should secured creditors still be given higher priority? Has establishing a secured interest been made

too easy?o There is always a deemed super-priority secured interest from the Crown (taxes, liens, etc.)

This keeps money available for some good policy concerns (employee wages, environmental cleanup), but it makes lending riskier and less certain

Cost of credit increasesSCOPE OF THE ACT

- Only applies to personal property (as per s 2(2))- PPSL is meant to allow for debtors to borrow from creditors, and ease the transactions by providing something secure as

security for creditors- This allows them to seize the security of debtor defaults- Third parties cannot claim ignorance of the security if proper steps are involved

Bankruptcy- D borrows moneys from one or more people- D doesn’t have enough money to pay everyone off- D files for bankruptcy under the Bankruptcy and Insolvency Act- A trustee in bankruptcy is an agent who takes over on D’s behalf and has to seek out as much as possibly can in order to

pay off all creditors- When they do, the debtor can make an assignment in bankruptcy: the debtor voluntarily assigns all of his or her property to

a trustee in bankruptcy so it can be sold or used to pay a debt- Priority goes to secured creditors, and to specific assets if those are secured- Trustee needs to know what can be sold for general creditors and what can’t be touched

How do we know if asset is covered by PPSA?- Security interest must be created

o Usually by agreement, but can be created by operation of lawIn Substance Security Interests

- When determining if a security transaction exists look at substance over form- Disregard what the agreement calls the transaction or who has title and look to the substance- The determination must be made in the context of statutes other than the PPSA, i.e., real estate, banking, etc.

Trusts- "Trust Indenture" means a deed, indenture or document, however designated, by the terms of which a person issues or

guarantees or provides for the issue or guarantee of debt obligations secured by a security interest, and in which another person is appointed as trustee for the holders of the debt obligations issued, guaranteed or provided for under the deed, indenture or document

- Example:o SP loans D $100o D transfers his prized baseball card collection to trustee on trust for D, but if D defaults on the loan, on trust for

SP, ORo D transfers the cards to SP to be held on trust for D on terms that the property will vest in SP absolutely if D

defaultso If D borrows money from A1, A2, and SP, where the moneys borrowed from SP are secured by some asset held

as collateral – then A1 and A2 can’t touch the asseto Suppose D holds an asset in trust for SP until D pays off SP – is that asset off limits to A1 and A2?

Yes, but how do we know if D is actually holding those assets in trust? Must be a trust agreement or document

Re Skybridge Holidays IncRule

- Need to look at purpose of the transactions, the role and relationship of the parties, the practicality and commercial reality, and the intention of the parties with respect to the transactions to determine if there is a creditor-debtor relationship

Facts- Travel agent held deposit $ in trust for vacationers- Goes bankrupt- Customers wanted $ back, and creditors also wanted $ back

Issue and Holding- Was this a debtor/creditor relationship? No and therefore money goes back to customers

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Analysis- PPSA says a trust is a security interest if the purpose is to secure payment or performance of an obligation- Travelers here are not lenders but consumers; funds are part of purchase, not a secured transaction

o If there was no Trust, then the $ owed would simply be a debt, but trust creates an interest in the $ for vacationers

o Trustee in Bankruptcy: argues that trust is a security trust making vacationers SP & per PPSA they should’ve registered – however court disagrees and because they were merely consumers, the money is theirs

Setoff- Setoff is “the right of a debtor who is owed money by his creditor on another account or dealing to [ensure] payment of what

is owed to him by setting this off in reduction of his own liability”- Example:

o Dealer is a lumber merchanto It offers volume rebates to its customers that are calculated and paid at the end of each financial yearo Customer has bought substantial quantities of lumber from Dealer during the current financial year and will qualify

for the volume rebate in Aprilo Dealer sells Customer one further quantity of lumber for $100 on 90-day termso On June 30, Dealer does the rebate calculations and determines that Customer is entitled to $95o Suppose customer had not paid $100 (or $5) and dealer goes bankrupto Customer only owes trustee in bankruptcy $5 and not the full $100 amounto Otherwise, would have to pay $100 and then try to get $95 from what remains in the dealer’s assets (may only

get a small percentage)o As per law, if the setoff is related to same transaction, you can apply the setoff

So if customer was owed cash by the owner of the dealership (therefore not related to the same transaction), customer must pay full $100

o Concept helps banks settle customer’s debts when customer has many accounts (some positive and some negative)

Flawed Assets- Called a flawed asset because even though the debtor’s name is attached to the asset, the debtor can’t touch it, and the

bank that holds it also can’t touch it- A owes bank $1,000- A deposits $500 into another bank account, on the understanding that it cannot withdraw that amount until original debt paid

off- This creates security interest for bank that no other creditors can touch because debtor would not have received cash

anyway- There is a movement in Canada to change perfection of secured interests in bank accounts to just care and control, similar

to the US Article 9 of the UCCCaisse populaire Desjardins de l’Est de Drummond v CanadaRule

- If you set up an agreement dealing with flawed assets , it is, in substance, a secured interest as the two debts do not relate to the same transaction

Facts- Debtor took out a line of credit and in return made a term deposit to bank in an account that only bank could access- They agreed that the debtor would only get cash back once loan paid off- Debtor went bankrupt and defaulted on the agreement- Debtor owed the Federal Crown money for taxes and EI- The federal Crown asked bank to hand over cash to pay taxes and EI – debtor disagreed

Issue and Holding- Is the cash in the bank account a secured debt? Yes

Analysis- Although federal case, the language defining security interest is the same in all provincial PPSAs- This means it applies also to provincial scenarios- The Income Tax Act and Employment Insurance Act give the Crown priority over all secured debt- Bank says this is a setoff and it wasn’t technically the debtor’s cash to begin with (therefore nothing to register)- The agreement by the bank is trying to treat this asset as both a setoff AND as two separate transactions – court says it

cannot be both- Majority finds that these are two separate transactions and therefore cannot be considered a setoff- It is a secured debt- Dissent considered it a setoff

Guarantees- A guarantee is a promise by A to B that if C fails to pay a debt owing to B, A will pay instead (i.e., co-signing a loan)- Personal remedy only- But, if A gives B an interest in A’s personal property to secure C’s payment obligation to B or, alternatively, to secure A’s

own obligation to B under the contract of guarantee, then real remedyWhat Is “Personal Property”? The Licence Issue

- Licenses are important forms of intangible personal property which can create security interestsSaulnier v Royal Bank of CanadaRule

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- A license will count as intangible property under the PPSA if it includes a right to an interest in property analogous to a profit a prendre

o So a license plus some kind of right to a property interestFacts

- Debtor Saulnier holds four fishing licences (lobster, herring, swordfish and mackerel)- Debtor signed a General Security Agreement (“GSA”) with the Royal Bank- In January 2003, he signed a guarantee (limited to $215,000) to the Royal Bank for the debts of the appellant Bingo Queen,

a company of which he was the sole owner- At that time, Bingo Queen also entered into a GSA- The standard form GSA gave the Bank a security interest in: “all … present and after acquired personal property including

… Intangibles … and in all proceeds and renewals thereof”- In 2004, Mr. Saulnier owed the Bank $120,449, and Bingo Queen owed $177,282- On July 8, Saulnier made an assignment in bankruptcy- The trial judge found that according to the evidence, Saulnier’s four fishing licences had a market value in excess of

$600,000- This amount, if available to creditors, would be sufficient to discharge all debts and provide a surplus- On November 18, 2004, four months after the bankruptcy, Saulnier purported to lease his lobster licence to Horizon

Fisheries Limited, whose principal owner was his common law spouseIssue and Holding

- Are the fishing licenses property that can be pledged as collateral within a PPSA? YesAnalysis

- This case was in a province that didn’t explicitly state that licenses were considered intangibles- S says a license is merely a privilege to do that which is otherwise illegal, thus not covered under the GSA, nor able to be

seized in bankruptcy- Accounts receivable are intangibles, and licenses are similar as they give you cash because you can make money off the

fish being caught with the license – therefore they should be considered intangibles- The terms of the license do matter (i.e., if transferable, renewable, governed by rules, etc.)

Deemed Security Interests

Transfers of Accounts and Chattel Paper- Transfers are still covered by PPSA so that other creditors should know that the cash is going to 3rd party- Otherwise, debtor might sell account but not tell other creditors- See ss 2(1)(b) and 3 of the PPSA:

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.2(1)(b) … and a transfer of chattel paper if they secure payment or performance of an obligation

Leases- Leases are short term rentals- Any lease for more than a year must be registered in order to be get secure priorty.- Distinguish “true leases” from disguised financing deals or sales- True leases grant no additional rights at the end of the lease term- The determination is very important and the consequences important, but it can be difficult- There is no agreed test (i.e., 22 part test by Cummings, accounting test)- “Closed-end leases” do not require the lessee to purchase at the end of the term; “open-end leases” the lessor will sell the

equipment at the end of the term and lessee is responsible for any deficiency from the expected value (and entitled to any surplus)

- Open-ended leases are in effect financing agreements, because there is no risk to the lessoro The focus is the money, not the equipment

- Example:o SP is a garden equipment rental companyo It rents a lawnmower to D for the weekendo D sells the lawnmower to T who has no knowledge of SP’s interesto SP learns about the sale and claims the lawnmower from T

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o The PPSA does not apply because the lease is a non-security lease and it is for a term of less than one yearo This means that (1) there is no requirement for SP to register a financing statement and (2) the common law

property rules apply (nemo dat) so SP’s claim will succeedConsignments

- “Consignor” gives physical possession to the “consignee”, but title remains with the “consignor”- The “consignee” will try to sell the property (for a fee)- When sold title passes directly from the “consignor” to the “consumer”- The typical retailer gets title to the goods he is selling- There are “true consignments” and financing agreements- Look to the words and substance rather than relying on what it is called

Exclusions from the Scope of the Act

Liens Given by Statute or Rule of Law- Governed by s 4(a) of the PPSA- Recall we say that taxes and EI payments also trump secured debt- Liens such as landlord’s right to seize an apartment and all the goods in it to pay rent will also trump other secured debt,

even if secured debt is registered and landlord is notCommercial Credit Corp Ltd v Harry Shields LtdRule

- Between a landlord’s right to distress and an secured creditors rights to the same property through a chattel mortgage, the landlord’s right is superior

- The right to distress was established at common law and is now statutory- It is not a lien until the landlord actually takes possession of the property- Use the common law priority rules: first in line- Who has the title matters – if it was a conditional sale rather than a chattel mortgage, the landlord’s rights would

not attachFacts

- Defendant Landlord was granted the right to possess property when tenant could not pay rent- However, the plaintiff was owed money in a chattel mortgage

Issue & Holding- Did the landlord’s claim require registration? No

Analysis- At Common Law, landlord in distress has priority over a chattel mortgage but not a conditional sales contract- A landlord’s rent in arrears is a lien and therefore is not subject to the PPSA (from s 4(1)(a))- As a result, the landlord’s claim does not require registration

Insurance- Governed by s 4(c) of the PPSA

Re Stelco IncRule

- Registration under the PPSA to perfect security interests in unearned insurance premiums is not requiredFacts

- CAFO Inc (“CAFO”) finances insurance premiums for businesses under a standard form Premium Instalment Contract (a “PIC”)

- CAFO pays the insurance company upfront and collects the premiums in installments from the insured- Stelco gave an insurance company a down payment on the premiums due to the insurer- Under the PIC, Stelco agreed to pay the rest of the premiums to CAFO over time and CAFO pays the insurer that remaining

sum up front in exchange for an assignment of the right to receive payment of any amounts due from the insurer, such as unearned premiums

- Stelco made all payments under this PIC- Stelco defaulted on this PIC

Issue & Holding- Did CAFO have to register their security interests in the insurance premiums as per the PPSA? No

Analysis- The Act says insurance premiums are exempt from the requirement to register security interests in unearned insurance

premiumsGE Canada Equipment Financing GP v ING Insurance Company of CanadaRule

- Even though insurance premiums are exempt from the PPSA, if the insurance is paid out the resulting funds are considered proceeds and are covered by the PPSA

Facts- Brampton purchased trucks by financing them from GE and secured them properly – trucks were collateral (classified as

inventory as Brampton leased them to drivers)- Brampton insured the trucks with GE as beneficiary and then leased them to drivers- Drivers got insurance from ING with Brampton as beneficiary- Trucks were stolen- Brampton said they owned trucks outright, which was not true and ING did not look to see if this was true- Brampton got cash and agreed to transfer trucks (if found) to ING- Brampton continued to pay GE for trucks

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- Trucks found – ING took them- Brampton went bankrupt- GE looked for its trucks – ING had them

Issue & Holding- Are the trucks covered under the PPSA? Yes

Analysis- ING tried to argue that they were protected by s 30 of the PPSA:

Protection of buyer or lessee of goods30 (2) A buyer or lessee of goods sold or leased in the ordinary course of business of the seller or lessor takes free of any perfected or unperfected security interest in the goods given by the seller or lessor or arising under section 28 or 29, whether or not the buyer or lessee knows of it, unless the buyer or lessee also knows that the sale or lease constitutes a breach of the security agreement under which the security interest was created.

- This does not work because this situation does not fall under the “ordinary course of business” and ING should have done a title search to see who actually owned the trucks

- As between GE and ING, the consequences of Brampton’s misrepresentations must be borne by ING- It is ING, therefore, who must look to Brampton for satisfaction - GE’s purchase money security interest (“PMSI”s) in the Trucks and their proceeds have priority over ING’s salvage rights in

the same vehicleso PMSI means:

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,

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,

The interest of a lessor of goods under a lease for a term of more than one year, and The interest of a person who delivers goods to another person under a commercial consignment,

o BUT PMSI 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

- GE is entitled to possession of the 2003 truck and to the proceeds from the sale of the 2005 truckInterests in Real Property

Re UrmanRule

- The assignment to Kriendel is a mortgage of a mortgage, but it is an interest in land and should not be treated as intangible personal property

- So the PPSA does not apply- The parties for which Kriendel acted where the ones with a PPSA interest

Facts- Mortgage broker attains revolving line of credit from the bank with a general assignment of book debts as security- Later two mortgages are assigned to Kreindel to borrow money- Later assigns another mortgage to Eckhardt- Urman becomes bankrupt- Question of priority – nothing was registered- At trial, the judge held that:

o In their agreement, the bank waived its rights on second mortgages, so it has no security interest in themo Kreindel is a secured creditor under the PPSA, but it is still subordinated to the trustee in bankruptcy

Issue & Holding- Who has priority, the claimant under the Land Titles Act or the bank under the PPSA? The Claimant – the PPSA does not

applyAnalysis

- A security interest in a mortgage is to be treated as an interest in land and not an intangible (personal property)- Common law held that debt follows a security, therefore claimant’s interest was not subject to PPSA- An absolute assignment of mortgage does not create a security interest- A security interest in mortgage is an interest in land and not subject to PPSA

ClarificationsTenants and Landlords

- Commercial landlords have the right of distress at common law (right to seize stuff inside to pay late rent)- Residential landlords derive their rights from statute (these days)- Need to check individual provinces’ rules- For the purpose of this course, all you need to know is that there is a possibility that a landlord will be able to jump ahead of

the queue (by operation of law) regardless of whether any secured interest is perfected, etc.Corporations

- Corporations can never own “consumer goods” within the meaning of the PPSA (it’ll either be equipment or inventory)How to Search for Secured Interests

- Registration is by debtor’s name – description is what is needed, so no minimum valueVALIDITY AND ENFORCEABILITY OF THE SECURED INTEREST

- There must be a concluded security agreement

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- The agreement must comply with the Statute of Frauds requirements specified in BC PPSA s 10, otherwise the security interest will be unenforceable against third parties

o Statute of Frauds doesn’t exist in BC, but it is built into the PPSA at s 10 under the “writing requirements” section- There must be attachment- The security interest must be perfected

Validity of the Security Agreement

Ellingsen (Trustee of) v Hallmark Ford Sales LtdRule

- There is no security interest where there is no security agreementFacts

- Truck dealer is eager to make sale- He lets the plaintiff take possession of the truck and registers in buyer’s name without payment or financing- Dealer says he will try to secure financing for the buyer later, never does- Buyer becomes bankrupt, trustee in bankruptcy claims the truck- Dealer never registered security interest- Argues the PPSA never applied

Issue & Holding- Was there a concluded sale? No

Analysis- Majority

o Since no security agreement was ever signed, the PPSA does not applyo The buyer therefore kept the truck in a constructive trust for the dealer

- Minorityo There was an intentional sale agreement with an extension of credito Therefore the PPSA does apply and since the dealer did not register the security interest he is subordinated to

the trustee in bankruptcy- The majority bypasses the whole sales question by applying the constructive trust, but it does not resolve issues of unjust

enrichment compared to other creditors who are not getting full payment and the argument bootstraps itself994814 Ontario Inc v RSL Canada Inc and En-Plas IncRule

- If a conditional sale agreement is subject to a condition precedent that is not fulfilled, the sale does not conclude- Although PPSA is meant to comprehensively regulate secured interests, common law still operates (conditions

precedent, capacity, consideration, public policy, etc.)Facts

- Contest over 3 pieces of equipment that were located on the premises of RSL- En-Plas is a company holding a general security agreement (GSA) over all of the assets and undertakings of RSL, including

after-acquired equipment- GSA was perfected under the PPSA- 994814 Ontario Inc is the appellant and is the parent and secured creditor of RSL

Issue & Holding- Was a security interest created? No

Analysis- RSL had not yet acquired an interest in the machines- The documentation exchanged btw the parties did not give RSL rights in the equipment to which the appellant’s GSA could

attach- RSL acquired nothing until the machines were “Electrical Safety Approved” and En-Plas had made them operational- Since this never occurred, RSL never became a debtor and never acquired any rights in the three machines, a prerequisite

for the creation of a security interest356447 British Columbia Ltd v Canadian Imperial Bank of CommerceRule

- When determining whether a security interest is created, you must look at the terms and wording of the agreement, not the purpose of the transaction – doesn’t have to be express – can be implied – but the agreement itself needs to be In writing

Facts- Money was lent to the plaintiff to pay off debts and continue business and any money derived from the business would go

to the lender- The bank later tries to remove the lender from the registry claiming it is not a security interest

Issue & Holding- Was a security interest created? Yes

Analysis- According to the court a security interest can be created by saying very little about the collateral- The important thing is to look at the terms of the agreement, not the purpose of the transaction- Here there was enough to create a security interest

Eagle Eye Investments Inc v CPC NetworksRule

- You must look at the intent of the parties to see whether any prior unsecured debts of an assignee was intended to be covered under the “all obligations” clause

Facts

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- BDC loan to CPC – General Security Agreement and Letter of Offer

Issue & Holding- When Eagle Eye (EEI) took BDC’s secured loan, did that allow it to add the unsecured loan to the secured loan under the

“all other obligations” clause? NoAnalysis

- Court looked to intent of parties and construe the two contracts (GSA and letter)- Court upheld chambers judge’s finding that the assignment only covered the original secured loan- No intent to allow unsecured to be subsumed into secured loan- Letter of offer controls over GSA- Policy reasons for not allowing this- Unsecured loan still enforceable but not as secured loan

“Statute of Frauds” RequirementsSection 10: Writing Requirements

- S 10: writing requirements in certain contextso If you don’t abide by s 10 requirementsthird parties won’t recognize your SIo Depends on the type of collateral (nature of property in which you have an interest)o Collateral can change nature later on (might not need writing requirement initially, but may after)

For all situations, parties will try to satisfy 10(1)(d) most onerouso Has nothing to do with making SI enforceable between partieso BUT is used to make SI enforceable against other parties

- S 10(1): subject to subsection (2) and 12.1, a SI is only enforceable against a third party of:o (a): enforceable only if collateral is not in form of investment property and is in possession of the SP

Rarely relied on – cannot possess intangible propertyo (d): requirements of SA

D has to sign agreement (WRITTEN FORM) 4 descriptions of collateral:

o 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

o 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

o A statement that a SI is taken in all of the debtors present and after acquired personal property or

All PAAP: means security interest in EVERYTHINGo A statement that a SI is taken in all of the debtors present and after acquired

personal property except Specified items or kinds of personal property One or more of the following: goods, investment property, instruments,

documents of title, chattel paper, intangibles, money, crops or licenses o (3) subject to subsection (6), a description is inadequate for the purposes of subsection (1) (b) if it describes the

collateral as consumer goods or equipment without further reference to the kind of collateral Can be described as: consumer goods or equipment…but must be further particularized

o (4) a description of collateral as inventory is adequate for the purposes of subsection (1)(b) only while it is held by the D as inventory

o (5) a SI in proceeds is enforceable against a third party whether or not the SA contains a description of the proceeds

o (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

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- Recommended: describe everything as All PAAP (covers everything)o Debtors may not give you an All PAAP because this gives the appearance that all your property is encumberedo If you fail to exclude property, this is a bonus (you will get a SI where you didn’t think you would)

- S 10(1): basic requirement- S 10(2): not deemed to have taken possession if in apparent possession of the debtor

o Deemed: cannot get possession symbolically or constructively (must actually have for provisions to apply)- S 10(4): collateral described as inventory adequate only while held by the debtor as inventory

o Example: Take SI in all inventory and truck in lot OK Take truck and convert into delivery van Lost SI (still in possession BUT no longer inventory

o May cease to be inventory or be in possession of someone else Now fail to meet the writing requirement

- S 10(5): All PAAP trucks…o If truck is sold, SI goes to new person (interest is not extinguished)o If truck is sold for $10,000, the statute automatically transfers interest to proceeds and gets an interest in the

truck as well. o Do not need to describe proceeds (only original collateral)o Security interest continues in collateral and extends to proceeds (these can also be seen as after acquired

property)- Has been held absence of a signature means no attachment occurs and agreements are not retroactively effective

Why Need Writing?- To prove that there actually is an agreement- “Except where the collateral is consumer goods, the secured party may register a financing statement before the security

agreement is concluded”- “Consequently, registration is no more than a warning to third parties that there might be a security interest in the collateral”- “To satisfy the writing requirement, the document has to contain a description of the collateral that is sufficient to enable it to

be identified”o How much detail is needed?

Enough to satisfy the PPSA and to give notice to third parties as to what is being claimed Some acts have more requirements than others

- Because s 10(1)(d)(i) asks for a description of the collateral, it is a requirement that we know the classification of the collateral

MacEwen Agricentre Inc v Bériault et alRule

- In order for a security agreement to meet the writing requirement it must:o State the names of the parties to the security agreemento Confirm that a security interest is being given from the debtor to the creditor

Facts- Debtor (MacLennan) owed money to both MacEwan and Bériault- Plaintiff got oral agreement that debtor would give security for debt in crops when debt reached $130,000, and debtor

provided document that described crops and listed plaintiff as a secured creditor- Defendant was a grain dealer who had a contract with debtor where debtor failed to meet a price quota- Defendant sold debtor’s 2001 crop for slightly more than debtor’s debt, and debtor signed over cheques to defendant

knowing that the two parties would have to compete for the moneyIssue & Holding

- Was the oral agreement coupled with the document listing crops sufficient for the writing requirement? NoAnalysis

- Judge held that a security agreement was created at the time that MacLennan met with MacEwan and they discussed crop security

- Found that the SA was primarily oral, but also partially written- There was the Location of Secured Crops document – which set out the description of the crops that were forming the

collateral, and was signed- There was the Agricultural Commodity Corporation Application for Loan Booklet, which made reference to crop security- However, the only place in the document that the applicant’s name appeared was under the listing of existing creditors

(should have struck out the other name and replaced it with MacEwan)- Finally, there was a promissory note

o However, the promissory note did not refer to any security interest- For a SI to be enforceable against a third party, it has to be attached- For attachment to occur when the SP does not have possession of the collateral, at least part of the SA must be in writing,

the part that is in writing, must contain provisions relating to security and that portion of the documentation must be signed- Section 11(2)(a) - SA requires a description of the collateral sufficient to enable it to be identified, however it will not

necessarily contain all of the terms of he SA btw the parties- In this case, the documents other than containing a description of the collateral, did not name the parties to the SA and did

not confirm that a SI was being given from the debtor to the creditorAtlas Industries v Federal Business Development Bank: SKTN Farm and Truck Equipment Ltd (Debtor)Rule

- Invoices that are not signed by the buyer cannot be a security agreementFacts

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- Buyer ordered parts from plaintiff- Defendant signed work orders for the order, but the work order did not say anything about plaintiff retaining title or security

interest- Plaintiff sent invoices expressly claiming a security agreement (i.e., included a title retention clause)- However, buyer did not sign it

o The invoices had the following stamped on the back: “Title to property described on this invoice retained by vendor until payment in full. Vendor has right of

repossession on default. Power to forcibly retake. This is a security agreement”- Bank became receiver of bankrupt defendant – bank had security in “all chattels now owned or hereafter acquired by the

Company (debtor)…”Issue & Holding

- Can unsigned invoices be a security agreement? NoAnalysis

- BC PPSA s 10 requires a signed security agreement (from the buyer)- The principles of law and equity apply to the PPSA and the buyer was not aware that he was contracting a security

agreement with the plaintiff- Also under law of contract, buyer could argue that this was a modification after the contract was signed- The manufacturer was too late – should have searched the registry to see earlier bank interest- No document signed by debtor – invoice not signed by debtor- This is exactly what SOF is protecting against

ATTACHMENT- The very creation of a SI- Identifying what the security interest is- Two step process to attain secured position:

o Attachment – s 12 SI of the creditor “attaching” to the property involved Come about pursuant to agreement between creditor and debtor SP has no rights to particular property unless the SP has an interest that has attached – property that

is subject to an attached SI is called “collateral”o Perfection

In order for attachment to occur:- There must be (a) a security agreement, which (b) satisfies the “Statute of Frauds” or writing requirements- The secured party must give value- The debtor must have rights in the collateral or the power to transfer rights in the collateral to a secured party

Security Agreement- Security Agreements are consensual, written documents that satisfy both creation/provision and evidential requirements of

a security interestValue

- Like consideration in contract law- Rights in collateral: nemo dat- Consideration: SP must give value in exchange for the interest

o Can be antecedent debt or liability, meaning that the fact that the SP has lent money to the D in the past will be value to allow for attachment of a SI under a later deal

o Consideration normally involved: promise to lend money or extend credit even if it turns out later, the promise is not honoured (consideration can also be forbearance)

o New value is relevant in some contexts – s 31(6)(a) chattel paper and s 34(5)Rights in the Collateral

i Trade Finance Inc v Bank of MontrealRule

- Fraud makes an agreement voidable, not void- Full ownership is not required for attachment and therefore a lesser interest is sufficient

Facts- i Trade Finance had advanced money to a company, Webworx Inc, operated by a fraudster- The fraudster used the advances to the company to buy shares in a BMO Nesbitt Burns account which, in turn, were

pledged to BMO to obtain additional credit- Both of the parties to this appeal were unaware of the fraud- The appellant brought a civil proceeding against the fraudster after the fraud was discovered- This resulted in an order that imposed a constructive trust or equitable lien on all the property purchased by the fraudster

through funds advanced to Webworx- i Trade was also granted a tracing order that allowed them to trace assets of the fraudster- The order excluded assets in the hands of bona fide purchasers for value without notice- i Trade sought funds in the hands of BMO- At trial i Trade successfully claimed the funds at issue, but the trial judge's decision was overturned at the Court of Appeal

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Issue & Holding- Could BMO be described as a bona fide purchaser for value, which requires a consideration of the nature of each party's

interest in the funds? Yes- Did Webworx have rights in the collateral? Yes

Analysis- Wife did not give consideration for purchase of shares- Bank DID give value for security interest in shares (extension of credit on credit cards)- BMO had no knowledge of fraud against i Trade- Trial Judge:

o Trial judge ordered that all fraudulent funds be traced and constructive trust be imposed for benefit of i Trade, except against bona fide purchasers without notice

o i Trade: advanced the funds to Webworx under a mistake of fact and accordingly has a prima facie right to recover them

o Also BMO’s claim to the disputed funds based on the pledge is a security interest governed by the PPSA and that BMO could acquire an enforceable security interest only if the pledgors themselves had rights in the collateral to pledge to BMO

o “nemo dat quod non habet” (no one can give what he or she does not have)o Plus wife had no interest because she had given no consideration upon the purchase of the shares, and Mr.

Ablacksingh could not have acquired an interest in the funds used to purchase the shares because he knew that they were procured by fraud

o BMO: the fact that i Trade was fraudulently induced to advance money to Webworx, and not directly to Mr. Ablacksingh or Ms.Ramsackal, is immaterial to the question of whether BMO is a bona fide purchaser for value without notice

o Also, when i Trade lent the money to Webworx, i Trade intended to pass title in the money to Webworx, regardless of the fact that it was induced to do so by fraudulent misrepresentations

o The pledge agreement establishes that it is a bona fide purchaser for value without notice- Supreme Court:

o Law of mistaken payments only works between payor and payee – BMO is not the payeeo Did BMO have security interest?

It took interest in shares to ensure performance of credit card debto Was it attached?

“The first two requirements for attachment of a PPSA interest are easily met. First, as was set out above, the debtors Mr. Ablacksingh and [wife] signed a security agreement that identified the collateral as the shares credited to the investment account. Second, it is clear that BMO gave value to the debtors by extending further credit on the MasterCard account of Mr. Ablacksingh and [wife]”

o Real issue: did they have the right to pledge the shares? Fraud makes an agreement voidable, not void “When an innocent party consensually advances funds to another under an agreement, it voluntarily

parts with those funds, and this divestiture conveys the right to use them. This right is subject to the innocent party avoiding the agreement by revoking their consent to it. Until that time, the agreement is effective by its terms.”

i Trade allowed Webworx to use the cash – so consented to transfer Shares pledged at that time, so valid transfer and pledge

o Is BMO a bona fide purchaser? Yes – they gave more credit and got security PPSA inapplicable because i Trade had no security interest

After-Acquired Property- Security interests in after acquired property

o S 13(1): Subject to section 12 and subsection (2), a security agreement that provides for a security interest in after acquired property attaches to that property in accordance with the terms of the agreement without any need for a specific appropriation by the debtor

o BUT, there is an exception for consumer goods and crops – see s 13(2)

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- Crops exemption – American concerns (not issue in Canada)- Consumer exemption – concerns about all customer’s items being tied up by bank or store- Both these exemptions come from Article 9 in US

The Floating Charge- Common law had a vague definition of floating charge

o It floated over goods and crystallized at the time of some event (usually default)- The PPSA allows floating charges and does not mention crystallization- The PPSA does away with the need for floating charges- Post-PPSA, if the parties want a security interest in the debtor’s circulating assets, all they have to do is specify in the

security agreement that the debtor gives the secured party a security interest 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 (as the case may be) and to make it clear, expressly or by implication, that, in the absence of default, the debtor remains free to deal with the collateral in the ordinary course of its business

Credit Suisse Canada v Yonge Street HoldingsRule

- With floating-charges, only the PPSA applies, not the previous case law- There is no more question of crystallization- According to the PPSA the only requirement are attachment and perfection, same as any other security interest

Facts- Plaintiff gave defendant landlord with debtors a loan with the rent-in-arrears as collateral- Agreement says the plaintiff can’t exercise rights until default, and defendant gets benefit of rent until notice given (floating

charge)- Income was invested and landlord went bankrupt, and plaintiff claims that rent

Issue & Holding- When did the security interest attach to the rent? At the time of the contract (Credit Suisse has a right to rent obtained)

Analysis- “The PPSA only requires attachment and perfection (to enforce against a third party). It does not contemplate or require

any further act of crystallization. The PPSA applies to … floating charges in the same fashion and manner as it does to other security interests”

- If they want to delay attachment, they will require some specific clause in the agreement that delays the attachment- The plaintiff has no right to rents collected before the notice of default: even though interest attached, because the security

agreement allowed defendant the benefits of the rents until notice of defaultCredit Suisse Canada v 1133 Yonge Street Holdings LtdRule

- Only the PPSA applies and crystallization is not relevant any longer

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- The PPSA preserves freedom of contract- To determine which rights the owners reserved, look at the wording of the security agreement

Facts- Plaintiff gave defendant landlord with debtors a loan with the rent-in-arrears as collateral- Agreement says the plaintiff can’t exercise rights until default, and defendant gets benefit of rent until notice given (floating

charge)- Income was invested and landlord went bankrupt, and plaintiff claims that rent

Issue & Holding- Was the debtor entitled to retain the rents before notice of default? Yes

Analysis- Court says s 25 (s 28 in BC) (proceeds from collateral are subject to the same security interest as collateral itself) was not

engaged by this contract- Not allowing parties “to tailor their agreements” would be against the concept of freedom of contract- Here parties had simply contracted out of s 25 (s 28 in BC)- Thus, the assignment does not enable the lender to retrospectively reach the net rental proceeds paid to Holdings during

the loan period but prior to default- If security attached at the time of contract, it should have applied to all rents- The contract should have been read to mean tenants could pay defendant- The parties should be able to define what counts on default

Royal Bank of Canada v Sparrow Electric CorpRule

- If a GSA authorizes the debtor to use proceeds from the disposition of collateral in its business, the proceeds may be used to pay employee wages and to settle any deem trusts arising under the federal Income Tax Act

- However this authorization only extends to payments actually made by the debtor prior to the debtor’s default and commencement of enforcement proceedings by the SP

- Once the proceedings are initiated the debtor loses its authority to disburse any proceeds- The unmet claims will thereafter be treated as enjoying no priority over the SP’s claim whether or not the claims

are supported by non-consensual liens under the fiscal legislation- *Note: since this case, Parliament has changed the legislation to make it that the gov’t now is first in line no matter

what – tax man always winsFacts

- RBC secured a loan made to Sparrow with a general security agreement (GSA) covering Sparrow’s present and after-acquired property and with Bank Act Security (BAS) created by an assignment of inventory under s 427 of the Bank Act

- When Sparrow experienced financial difficulties a standstill agreement was executed – allowed S to continue its business but permitted the bank, on default, to appoint a receiver and enforce its security

- It was discovered that Sparrow had not been remitting its payroll deductions as required by s 153 of the Income Tax Act- Fed gov’t claim was based on the s 227 ITA deemed trust provision, which created a deemed statutory trust in the monies

deducted from wages but not remitted to Her MajestyIssue & Holding

- Did the terms of the GSA confer an express or implied license on Sparrow to use the proceeds from the sale of its inventory to meet Sparrow’s operating expenses, including payment of wages? No

Analysis- All members of the SCC agreed that:

o Section 227(5) of the ITA was not retroactive in its effect, and thus could not override the bank’s security interesto That the SI created under the Alberta PPSA and s 427 of the Bank Act were specific security interests and not

floating charges- Majority

o The SI in the inventory disappears only if the debtor actually sells the inventory and applies the proceeds to a debt to a third party

o Since the disposition of the collateral (goods) was not sold by the debtor himself, but by the default of the receiver, then it was not in the ordinary course of business for the debtor

o The issue is whether the sale by the receiver was part of the license? Majority held that it wasn’t Thus the bank won – there was no authority to give money to the gov’t, thus it’s not a property right

“Allowing the mere potential operation of a license to sell to defeat a SI in inventory would deprive the interest of all efficacy”

- Dissento The payment of payroll deductions would be a usage to which the bank contemplated Sparrow would use the

proceeds of inventory sold in the “ordinary course of business”o GSA contained an express license permitting Sparrow to sell inventory in the course of its business and use the

proceeds available to pay wages, and remit wage deductionso Thus applying the license theory, the appellant’s deemed trust must take priority over the bank’s security interest

Investment PropertyAttachment in Direct Holding System

- Apart from a statutorily created security interest of very limited application, a security interest attaches to collateral only when three conditions are met:

o Value is giveno The debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party

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o Either: The debtor must have signed a security agreement containing a description of the collateral sufficient

to enable it to be identified; or In the case of a certificated security in registered form, the security has been delivered to the secured

party in accordance with s 68 of the STA; or In the case of investment property, which includes a security, the secured party has obtained

“control” under the debtor’s security agreementAttachment in Indirect Holding System

- Apart from a statutory recognition of the common law broker’s lien, a security interest attaches to collateral in the indirect holding system only when three conditions are met:

o Value is giveno The debtor has rights in the collateral or the power to transfer rights in the collateral to a secured partyo Either:

The debtor must have signed a security agreement describing the collateral as a security entitlement or a securities account, or describing the underlying financial asset held in the securities account; or

In the case of investment property (which includes, among other things, a security entitlement or a securities account), the secured party has obtained “control” under the debtor’s security agreement

PERFECTION- Perfection (attachment and possession, registration, or temporary perfection) offers the secured party maximum protection- Refers to the publication of a SI

o Possession is one method of publication (i.e., the pledge)- Twyne’s Case

o The debtor, conveyed a flock of sheep to creditor as security for a loan, but remained in possessiono A judgment creditor (unsecured) levied execution against the sheep to enforce payment and a dispute arose

between him and the debtor over who was entitled to the sheepo The court held that the transaction between debtor and secured creditor was a fraudulent conveyance and so it

was void against the judgment creditoro According to the law of fraudulent conveyances, if a debtor transfers property with the intention of defeating

creditors, the transfer is void.o Twyne’s case stands for the proposition that if the debtor transfers ownership, but not possession, that creates a

presumption of intention to defeat creditors- Why is lack of transfer of possession a problem?

o Other creditors think the debtor still has assets- Two opposing policy considerations:

o The need to facilitate non-possessory secured lending; and o The need to protect third parties from being misled

- Registration provides a way of reconciling these two polices by giving interested third parties the means of discovering a non-possessory security interest in advance of a transaction involving the collateral

o The registration system is all about notice – different from the real estate registry in that it doesn’t necessarily mean that it is correct (whereas the Torrens system in real estate is always correct)

- PPSA registry gives a set of priority rules where it does not matter whether you have had notice or not- Section 19: Perfection

o Perfected SI requires attachment and all steps required for perfection are completed o Gives notice to the world that you have interest in the collateralo Regardless of the order of occurrence (meaning you can perfect first by registering before you get the loan)

- Perfection:o Perfection by possessiono Perfection by registration (seems to be the most powerful way to perfect a SI)o Perfection by controlo Temporary perfection

- Section 25: Perfection by registrationo Registration also perfects a security interest (in any type of collateral)o Of course, this is subject to section 19

- Section 26: Temporary Perfectiono Exists when a SI is protected even though no financing statement has been registered and the SP is not in

possession of the collateralo The Act recognizes a number of other situations where the SP is given a grace period within which to perfect an

as yet unperfected SI or to re-perfect a SI that has become unperfected by reasons of a change of circumstanceso Section 26 deals with short-term SI

- 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

Perfection by Possession- Section 24: Perfection by possession of collateral

o This works for chattel paper, goods, instruments, negotiable documents of title (i.e., warehouse receipts, etc.), and money (letters of credit, advices of credit) unless possession is a result of seizure or repossession

Hypothetical (Ontario vs. BC)- SP, a truck dealer, has sold a truck to D on conditional sale terms

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- D returns the truck to SP for a check-up under the manufacturer’s warranty- While the truck is in SP’s possession, D borrows money from friend who registers SI in truck- D becomes bankrupt- In Ontario, the security interest is only perfected by possession if the truck is held as collateral (in this case SP is only

holding the truck for maintenance so it would not be perfected) – friend would have priority- In BC, possession alone is enough so it would be perfected and C would have priority

Re Raymond DarzinskasRule

- Section 24 requires actual physical possession and control to be taken by the creditor to perfect the interestFacts

- Creditor took security interest in a large machine but due to the size of the machine, they do not take possession- When debtor defaulted, creditor had bailiff go to the plant and claim large piece of equipment but can’t actually take it

because it is too big – says this is constructive notice of possession- Debtor implicitly accepted the repossession and acknowledges that the equipment is the creditor’s- Trustee claims that equipment is not the creditor’s

Issue & Holding- Does the creditor’s constructive notice of possession perfect the security interest? No

Analysis- Possession is considered actual notice of a security interest, but for it to be actual notice, it must be actual possession- Here, Morgenstern never had possession (and no registration)- No physical possession here- Need actual possession or registration- Constructive notice of possession is not enough- Left equipment in full working order – if non-functional it would be okay but not in total working order (i.e., cut power cord, or

a seal over it)- The security interest has not been perfected- If Morgenstern had taken it before insolvency, he would have had priority over it

Sperry Inc v Canadian Imperial Bank of CommerceRule

- Appointing a receiver to act as agent for debtor and to run a business on a day to day basis is not possession- Possession must be unequivocal- Possession must be “reasonable, clear and actual possession”, thus it can’t be the debtor’s agent

Facts

- Debtor (Allinson) signed conditional sales agreement to purchase Sperry’s equipment- Allinson also signed a general security agreement with bank on all inventory, which said that if a receiver was appointed on

default, that receiver would be acting as agent in running the business instead of liquidating assets- Both creditors’ perfection lapsed, and the bank appoints a receiver- Bank does not renew its registration and so it never perfected its SI- Sperry renewed its registrations- Bank argues that they have a perfected SI through possession, because receiver now runs the company

Issue & Holding- Did bank’s appointment of a receiver constitute possession? No

Analysis- The bank’s security agreement made receiver agent of debtor- If receiver is debtor’s agent, and not the Bank’s, then the Bank did not have possession- Bank never perfected its security interest and were seeking best of both worlds – receiver is agent of debtor company, then

it must not only take the benefits but then accept the detriments which flow – meaning can’t be creditor and seize everything

- Residual Priority Rules in the BCPPSA (s 35(1))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

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(c) priority among unperfected security interests is determined by the order of attachment of the security interests.

Differences from BC and Ontario- Here in BC, the possession would not be perfection as s 24(1) of the BC Act says that possession does not perfect

a SI if it is a result of seizure or repossession- In Ontario, s 22(1) of the OPPSA states that possession or repossession of the collateral by the secured party, or

on the secured party’s behalf by a person other than a debtor or the bebtor’s agent, perfects a security interest… but only while it is actually held as collateral

- However, in both BC and Ontario, possession regardless of the reason cannot be perfected by the debtor’s agent so it fails regardless

Perfection by Control- Control is determined by who actually gets to use the share

Continuity of Perfection- Section 23: Continuity of Perfection

o (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

o (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.

The fact that there is a transferee doesn’t change the priority of the original transferor because there is still notice

Hypothetical: Seller supplies Debtor with a truck under a conditional sale agreement and registers a

financing statement on May 1 On June 1 Seller assigns the chattel paper to SP1 On August 31, Debtor gives SP2 a security interest in the truck and SP2 registers a financing

statement Debtor defaults against SP1 and SP2 and they both claim the truck Who has priority?

o SP1 wins because it holds same rights as original sellero Remember: notice is what this is all about

Consequences of Non-Perfection- Failure to perfect means that the SI will be “subordinate to” or “ineffective against” the categories of claimant listed in s 20 of

the Act- Section 20: Subordination of unperfected security interests

o 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.

- In other words, the people who have the highest priority:o (1) a person holding a perfected security interest in the same collateral; (2) lienholders and persons having

priority under any other Act; (3) execution creditors and such like; (4) a trustee in bankruptcy and other creditors’ representative; and (5) a transferee of the collateral (if last two are unperfected)

Re GiffenRule

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- In order to protect its security interest from claims in bankruptcy, a lessor must therefore perfect its interest through registration of its interest (s 25), or repossession of the collateral (s 24) – the PPSA operates to defeat the unperfected SI of the lessor, in favour of the interest by a “trustee”

Facts- The lessor (TLC) leased a car to BC Tel, which in turn leased the car to one of its employees (Giffen, “the bankrupt”)- The term of the lease was for more than one year- The lease gave the bankrupt the option of purchasing the vehicle from the lessor- Later, Giffen files for bankruptcy- Neither the lessor nor BC Tel had registered financing statements (thus SI is not perfected)- The appellant was appointed as the trustee in bankruptcy- The lessor seized the vehicle and sold it- The trustee is claiming the proceeds- Lessor tried to argue it was unconstitutional

Issue & Holding- Was TLC’s SI perfected? No

Analysis- The interest, created by the lease agreement falls within the PPSA because it is for longer than a year and therefore must

be registered- In order to protect its SI the lessor must perfect its interest through registration or possession of the collateral- A security interest is valid and enforceable when it attaches to personal property- Section 12(2) states explicitly that “a debtor has rights in goods leased to the debtor… when he obtains possession of them

in accordance with the lease”- Thus, upon delivery of the car to the bankrupt, the lessor had a valid security interest in the car that could be asserted

against the lessee and against a third party claiming a right in the car- However, the lessor’s security interest remained vulnerable to the claims of third parties who obtain an interest in the car

through the lessee including trustees in bankruptcy- In order to protect its security interest from such claims, the lessor must therefore perfect its interest through either:

o (1) registration of its interest (s 25), or o (2) repossession of the collateral (s 24)

- The failure to register meant that the lessor’s security interest in the car was not perfected, as defined in the PPSA, at the time of the assignment in bankruptcy

Re 1231640 Ontario IncRule

- A secured creditor should always keep secured interests registeredFacts

- Appellant bank sought the appointment of an interim receiver of the debtor company- It held a perfected security interest over the assets of that company - However, during the receivership the appellant allowed its registration under the PPSA to lapse - The appellant did not re-perfect its security interest before the interim receiver assigned the debtor into bankruptcy,

following which, a significant tax refund came into the debtor’s estate- The bank asserts priority over the tax refund and some other undistributed funds, on the basis that the date when the

receiver was appointed is the date for determining priority, and on that date, the appellant’s security interest was perfected- In contrast, the trustee in bankruptcy says that the relevant date for determining priority is the date of the assignment into

bankruptcy- Because on that date the appellant’s security interest was unperfected as against the trustee, the bank ranks as an

unsecured creditor, pari passu with other unsecured creditorsIssue & Holding

- Is the appellant’s SI effective against the trustee in bankruptcy? NoAnalysis

- Because the appellant’s SI became unperfected as a result of letting its registration lapse, and b/c it did not re-perfect its SI before the assignment of the debtor into bankruptcy, it was unperfected on the date of the appointment of the trustee and its SI is therefore ineffective against the trustee

- Unlike a trustee in bankruptcy, a receiver does not obtain the debtor’s proprietary interest in the collateral and obtains no priority rights, and thus is not in a priority contest with any creditor on behalf of unsecured creditors

o Receiver obtains its powers from an order of the courto The debtor is not stripped of all its interest in the collateral upon the appointment of an interim receiver

(appointing an IR does not perfect the registration)- The effect of these subsections is to determine the priority rights of creditors at a particular time, but not to freeze priorities

for all time- Neither these subsections nor the order appointing the interim receiver had the effect of exempting the appellant from the

requirement of registration- Thus it’s SI was unperfected by its failure to file a financing change statement within the time period- IR is merely an administrator who pays out the proceeds to the creditors, both secured and unsecured, in the order of their

priorityTransfer of CollateralHypotheticals:

- SP has an unperfected security interest in D’s pickup truck- D sells and delivers the pickup truck to T without SP’s authority- T does not know about SP’s security interest

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- Who has priority?o T has priority because it perfected the SI when it took possession of the truck

- SP1 has an unperfected security interest in D’s pickup truck- Later, D gives SP2 a security interest in the same pickup truck- The security agreement is in the form of a mortgage, and SP2 registers a financing statement- D defaults against SP1 and SP2 and they both claim the truck, which is still in D’s possession- Who has priority?

o SP2 wins because he perfects his SI by registering its financing statement- SP holds an unperfected security interest in D’s accounts- D makes an outright assignment of the same accounts to T, who registers a financing statement- SP and T both claim the accounts- Who has priority?

o T does because he perfected by registering a financing statement (as per s 35(1) – cannot use s 20 because accounts are not included)

- SP holds an unperfected security interest in D’s chattel paper- D makes an outright assignment of the chattel paper to T, who either takes possession of the chattel paper or registers a

financing statement- SP and T both claim the chattel paper- Who has priority?

o In BC, because s 35 says “If this Act does not provide another method for determining priority between security interests”, s 20 applies and if T knew about SP’s interest, SP would win

o In Ontario, it appears that you could get two different answers based on the Act- Assume that SP holds an unperfected security interest in D’s pickup truck- D sells the pickup truck to T- SP and T both claim the truck- Who has priority?

o T will have priority if he did not know of SP’s interest- SP holds an unperfected security interest in D’s pickup truck- D agrees to sell the truck to T on June 1, with payment due on June 8- In the meantime, on June 3, SP registers a financing statement- T tenders payment on June 8- Does T take the truck free of SP’s security interest?

o Depends on whether value was given on June 1- Did T give value?

o Old pre-PPSA cases suggest that value isn’t given until the payment is made, HOWEVER the PPSA says “value” means any consideration, which likely would mean that value was given on June 1 and therefore T would get the truck free of SP’s security interest

REGISTRATION- Registration systems arose to centralize the information needed to perfect security interests

The Function of Registration- Registration systems developed to protect the interests of creditors

o To ensure nemo dat principle that a party cannot convey more title then they have- If a creditor has a security interest (in rem rights) in property, then the debtor has title subject to security interest, (not full

title)- Since debtor can’t convey an interest he doesn’t have, the registration makes sure buyers and other creditors can check if

debtor has full titleBasic Concepts

Structural Unity of Substantive Personal Property Security Law- The traditional security devices were eliminated and all regulation of secured financing were consolidated into a single

regime- All registrations are subject to substantially the same requirements- A single search will disclose all consensual charges against the name of the debtor or against a specified item of property

Notice Registration- Notice registration: file financing statement

o Contains basic information with no detailso Obtain details from secured party

Must have a copy of the agreement signed by the debtor so that the creditor cannot inflate the amount of debt owed and must send a copy to the debtor so they know it is correct

Do not obtain details from debtor to prevent the debtor from deflating the value of the debt- Allows the SP to nominate its own registration period in the financing statement, except where the collateral is consumer

goods, in which case there is a maximum 5 year registration period- Provides a greater measure of confidentiality of business information than is permitted by document filing- A single financing statement can relate to one or more than one security agreement- A financing statement can be registered before a SA is executed between the parties

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Electronic Registration Systems- Saves transaction costs – quick and easier for parties to register and search- Promotes direct user access to the register, saves admin costs- Avoid time lags btw the lodging of a financial statement and registration of the SI- Time lags reduce the reliability of the register

Debtor Name-Based Registration and Serial Number Registration- For motor vehicles, trailers, and aircraft (tractors, mobile equipment, mobile homes, boats in BC) register by serial number- All else, by debtor’s name- Hypothetical:

o SP1 (A) takes a security interest in collateral belonging to Debtor (B) and registers a financing statement against B’s name

o B later sells the collateral to Transferee (C) who, in turn, negotiates with SP2 (D) for a loan secured on the same collateral

o In these circumstances, a search by D in the debtor’s name index is unlikely to retrieve A’s security interestDebtor Name-Based Registration

- Must match birth certificate or citizenship card- Must have a name and address- If an individual, you must add birthdate- Must not be misleading errors- See the PPSA and the PPSA Regulations

Fairbanx Corp v Royal Bank of CanadaRule

- Secured creditors must take care to ensure that the debtor’s name is recorded in the financing statement exactly as it appears in the debtor’s legal constating documents (articles, limited partnership declaration, etc.), in order for the security interest to be perfected in the applicable assets of the debtor

Facts- A company by the name of Friction Tecnology Consultants Inc (“Friction”) entered into a factoring agreement with Fairbanx

Corporation (“Fairbanx”)- Friction assigned all of its accounts receivable to Fairbanx and Fairbanx filed a financing statement perfecting its interest in

a general security agreement, but in the filing of the statement spelled the debtor name with the word “Technology”, as it should properly be spelled, i.e., with an ‘h’

- The evidence before the court was that all invoices, stationery, cheques and day-to-day documentation of Friction included the spelling of technology which included in the ‘h’, notwithstanding that the proper corporate name the spelling “Tecnology”, being without the ‘h’

- There is no explanation in the recited facts of the case for this oddity- Thereafter Royal Bank of Canada loaned money to Friction, securing it with a general security agreement perfected under

the PPSA by registration- It took all property including accounts receivable and book debts- Royal Bank of Canada registered against the proper spelling of the name for its debtor, “Friction Tecnology Consultants Inc”- Friction thereafter went bankrupt- Prior to making its PPSA filing, Royal Bank searched the correctly spelled name of Friction Tecnology Consultants Inc, and

the security interests of Fairbanx were not revealed in the results of that enquiry response- This case then became a contest between Fairbanx and Royal Bank for priority in the bankrupt Friction’s assets

Issue & Holding- Did the incorrect spelling of Friction’s name fail to perfect Fairbanx’ security interest? Yes

Analysis- The Court of Appeal dismissed the appeal on the basis that:

o The appellant’s security interest was unperfected and the bank’s perfected security took priority over the appellant’s unperfected interest in the accounts

o Bank actually knew of Fairbanx’s security interest, because it searched first with wrongly spelt name: Technology, not Tecnology

- Name is important – can’t be mistakesErrors and Omissions in Registration Data

Re LambertRule

- If the error in the financing statement results in a reasonable person being misled materially, then the registration is invalidated

- If, despite the error, a reasonable person will still retrieve the financing statement from the system, then the error in the financing statement is not likely to mislead materially

Facts- Mr. Lambert bought a car which was registered and when it was registered under name “Gilles J. Lambert” but his legal

name is Joseph Phillipe Gilles Lambert- The VIN number and date of birth were correct on the registration- Only searched the registry using the name

Issue & Holding- Is the security interest’s perfection voided if the registration is under the wrong name? No

Analysis

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- Court holds that he should have done a more extensive search- Actual knowledge is irrelevant- Test is a reasonable person- If the error in the financing statement results in a reasonable person being misled materially, then the registration is

invalidated- If, despite the error, a reasonable person will still retrieve the financing statement from the system, then the error in the

financing statement is not likely to mislead materially- Reasonable Person:

o He or she is a reasonably prudent prospective purchaser or lender who looks to the registration system of the PPSA to provide notice of any prior registered claims against the property he or she is proposing to buy or take as collateral for a loan

o He or she is conversant with the search facilities provided by the registration system and is a reasonably competent user of those facilities

o Where the property to be bought or taken is a motor vehicle, the reasonable person will obtain the name and birthdate of the seller/borrower as well as the VIN of the motor vehicle

o Where the property is a motor vehicle, the reasonable person will conduct both a specific debtor name search, and a VIN search

- So the reasonable person is a searcher who will use all available searches to protect their interest- Note, however, that if the VIN was recorded wrong (and debtor’s name was correct) this would likely not be correctible

Coates v General Motors Acceptance CorpRule

- If a search using a correct version of the criteria (i.e., the last 6 digits of a VIN) does not reveal the registration, the registration has failed

Facts- Debtor had security agreement on a truck with GMAC- GMAC registered with two mistakes in the serial number- Debtor then gave promissory note to Coates on dump truck which he registered- When debtor defaulted, Coates went to registry, had clerk use serial number for search but there was no match

Issue & Holding- Did this constitute a misleading mistake under PPSA? No

Analysis- The mistake was not misleading, GMAC’s registration was valid- If the reasonable searcher cannot use the correct information to find the registration with the error, then the error is

seriously misleading- In this case, the correct serial number would have revealed the incorrect registration with the correct names and a

description of the truck because the last six digits of the serial number were the same- Thus, a reasonable searcher would have seen the incorrect registration and made inquiry

Adelaide Capital Corp v Integrated Transportation Finance IncRule

- It is very important to characterize your collateral properly- The register has an obligation to provide at least a sufficient indication of the collateral in which it is claiming a

security interest to alert a subsequent searcher, who is about to provide credit to the same debtor, that the collateral in which the new creditor is claiming an interest may be subject to a prior claim

Facts- Adelaide lent money to ITFI who rented out trailers- Adelaide registered two financing statements but registered trailers as equipment when checking the boxes- Trailers were actually inventory- There was no general description of the chattels subject to the security interest

Issue & Holding- If the trailers that the debtor was renting out counted as inventory and not equipment, did that error in the registry void the

security interest? No, but the equipment listed as collateral didAnalysis

- A specification in the general description category will restrict the scope of the security interest to that collateral- The choice boxes are the general category of the collateral, any description is a specification of the general category

o Filling in the general collateral description portion of the FS is optional under the PPSAo Having chosen to fill in that portion, however, the secured creditor risks limiting the collateral that is protected by

perfection through registration to something less than what may, in fact, be encompassed by the Security instrument, if words are used which fail to make it clear that something other than what was described is also caught by the registration

- A reasonable purchaser could not be expected to be put on inquiry about any interest in debtor’s inventory based on these statements

Amendments to Registration

Heidelberg Canada Graphic Equipment Ltd v Arthur Andersen IncRule

- Where a FCS is used to remove a security interest in part of the collateral, the security interest in that collateral is deemed unperfected until replacement of the interest in that collateral occurs using a FCS

Facts- Plaintiff assigned a security interest to a creditor

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- Plaintiff had the security interest in everything, including accounts- Creditor filed financial change statement after assignment- A second creditor loaned the original debtor money and registered security interest, then convinced a bank to give up

interest in accounts- Thinking it already had no interest the accounts, it filed Financial Change Statement (FCS), which removed accounts- When it found out it did originally have an interest in the accounts, it filed FCS2 to re-include them- The second creditor’s un-perfection and re-perfection happened after the creditor’s collateral was already perfected

Issue & Holding- Does the first creditor unregistering its interest in the accounts allow anyone to register a security interest in it? No

Analysis- Creditor maintains priority in everything- A financing statement is the root of perfection (“tree”), and a financing change statement is how it is amended (“branches”)- The branches live as long as the tree does- No further financing statement is required unless the registration period has ended- If interest in some collateral is removed and replaced, the creditor only loses priority to a party that gets rights in the

collateral during the windowLisec America, Inc v Barber Suffolk LtdRule

- The protections established in the Ontario PPSA for secured creditors who are unaware of asset transfers made by their debtors prevail despite any loss incurred by a subsequent lender acquiring a security interest in the transferred asset

Facts- There was a priority dispute over a waterjet (Jet A) between secured creditors of two related debtor companies- The first debtor (Barber Suffolk) had obtained financing for the acquisition of Jet A from Lisec America Inc (Lisec)- The second related debtor (Barber Glass) had obtained financing for the acquisition of other equipment (Machine B and

Machine C) from Lisec- Lisec properly perfected its purchase money security interests with registrations against both Barber Suffolk and Barber

Glass- Neither registration included a general collateral description on the financing statement- Unfortunately Lisec was not aware that Barber Suffolk had sold its interest in Jet A to Barber Glass on the day of the

original financing- Shortly thereafter, Barber Glass arranged for additional financing from Roynat Capital Inc (RCI)- Prior to advancing, RCI requested that Lisec either confirm the scope of its security interest or, if the Lisec debt had been

paid in full, register a discharge- As Lisec was still unaware of the transfer of Jet A from Barber Suffolk to Barber Glass, and wished to facilitate the RCI

financing, Lisec discharged its registration against Barber Glass on the understanding that it would receive payment for Machine B and Machine C out of the proceeds of the new RCI financing

- On the basis of the discharge, RCI advanced funds to Barber Glass and registered its security interest against all assets of Barber Glass, including Jet A

- Barber Glass subsequently went into receivership, and Jet A was included on the list of assets of Barber Glass to be sold- Upon receiving notice of this situation, Lisec filed a Financing Change Statement reflecting the transfer by debtor within 30

days of its learning of the transfer- Lisec brought an application to settle the priority dispute and to prevent Jet A from being sold in the receivership- Lisec argued that its original registration against Barber Suffolk continued to perfect its security interest in Jet A- On the other hand, RCI claimed that Lisec's registration against Barber Glass was broad enough to cover Jet A such that

the discharge filed by Lisec caused Lisec's security interest in Jet A to become unperfectedIssue & Holding

- Did the transfer of Jet A from Barber Suffolk to Barber Glass un-perfect Lisec’s SI in Jet A? NoAnalysis

- The Court of Appeal confirmed that pursuant to Section 48(2) of the Ontario PPSA, the unknown transfer from Barber Suffolk to Barber Glass did not un-perfect Lisec's PMSI in Jet A because Lisec had properly registered a financing change statement against Barber Glass within 30 days of learning of the transfer

- The court examined the Ontario PPSA fundamentals of the granting of a security interest, attachment and perfection, and determined that Barber Glass had never granted a security interest to Lisec in Jet A that could have attached and been perfected by Lisec's registration against Barber Glass

- The fact that Barber Glass ultimately became the owner of Jet A did not alter this result- Rather, Lisec's security interest in Jet A was only perfected by its registration against Barber Suffolk- The Court found that the discharge of Lisec's registration against Barber Glass could not therefore adversely impact the

operation of Section 48(2) in preserving the priority of Lisec's security interest in Jet A- The Court also held that Lisec's registration against Barber Suffolk was a stand-alone registration that was not subsumed in

its Barber Glass registration- The discharge of the Barber Glass registration did not take with it the discharge of the Barber Suffolk registration, and that

discharge was found to be a red herring in the analysis- The Court observed that RCI was really in no worse position than it would have been if there had never been an intervening

Lisec/Barber Glass registration revealed by its search

Summary- Is there a security interest (s 2)?

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- Has it attached (s 12)?o Value given?o Does the debtor have rights in the collateral?o Is it attached between the two parties?o Is it attached with respect to the rest of the world (s 10)?o Has it perfected (s 19)?

Section 24 – perfection by possession Section 35(1) – general priority rules Section 20 – specific priority rules with respect to unperfected interests Section 23 – continuity of perfection

Section 25 – perfection by registration

BASIC PRIORITY RULES- Registration

o In BC, the following have serial numbers: Vehicle, motor home, combine, trailer, tractor, boat, aircraft

- Residual Priority Rules in the PPSAo 35 (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.

- BC Personal Property Security Regulations:o Collateral description

9 (1)  Subject to section 12 and to subsection (2) of this section, collateral must be described as follows:

(a) consumer goods that are serial numbered goods must be described by serial number in accordance with section 10;(b) equipment that is serial numbered goods must be described

(i)  by serial number in accordance with section 10, or(ii)  in accordance with section 11;

(c) collateral must be described in accordance with s 11 if the collateral is(i)  consumer goods that are not serial numbered goods,(ii)  equipment that is not serial numbered goods, or(iii)  inventory, whether serial numbered goods or otherwise.

o Describing other collateral11 (1)  Subject to section 12, in order to describe collateral that is not to be described by serial number, there must be entered whichever of the following entries is applicable:

(a) a description of the collateral by item or kind;(b) a statement indicating that a security interest is taken in all of the debtor's present and after-acquired personal property;(c) a statement indicating that a security interest is taken in all of the debtor's present and after-acquired personal property except specified items or kinds of personal property;(d) subject to subsection (2), a description of the collateral as inventory.

(2)  A description of collateral as inventory under subsection (1) (d) is valid for the purposes of this section but only while the collateral is held by the debtor as inventory.(3)  A description is inadequate for the purposes of subsection (1) if it describes collateral as "consumer goods" or "equipment" without further reference to the kind of collateral

Justification for the First-In-Time Rule- 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;…

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.

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The Irrelevance of Knowledge

The Robert Simpson Company Ltd v Shadlock and DugganRule

- The court will not read in a knowledge requirement, therefore lack of knowledge is not a prerequisite for determining priority between competing security interests

- PPSA says that whoever perfects or registers first has priority, regardless of notice- Perfected defeats unperfected, even if the other knows its unperfected- Actual notice irrelevant – what matters is registration

Facts- Between February 18th, 1976 and June 24th, 1976, pursuant to eleven Conditional Sale Contracts, the Plaintiff sold to the

debtor certain chattels for installation at a motel property- On or about June 4th, 1976 an employee of the Plaintiff put the Defendants on notice of the Plaintiff ’s security interest- On June 14th, 1976 the debtor mortgaged the motel to the Defendants and also on the same date by Chattel Mortgage

mortgaged the Chattels and equipment in the motel, including the Plaintiff’s Chattels, to the Defendants- The Defendants’ Chattel Mortgage was registered under the PPSA on June 17th, 1976, but the Plaintiff did not register its

Conditional Sales Contracts under that Act until February 7th, 1978Issue & Holding

- Does the fact that Simpson had given actual knowledge prior to registration mean that his SI takes priority? NoAnalysis

- First to register has priority – the creditors knowledge is irrelevant- Grafting an equitable exception on a modern statute would be dangerous- Simpson’s should have registered earlier

Prior Lender’s Competitive Advantage

James Talcott Inc v Franklin National Bank of MinneapolisRule

- Once a financing statement is registered describing property by type, the entire world is warned that there may be a perfected security interest in any goods of that description that the debtor owns or obtains

Facts- Talcott is the assignee of a conditional sales contract for which the vendor had not registered- Talcott registers a financing statement that vaguely described the collateral- Debtor signs security agreement with the Bank who takes interest in two other trucks- Debtor signs another security agreement with Talcott that gives interest in “all goods owned and hereafter acquired” (Talcott

gave an extension of existing debt)- Now the security agreement qualifies all trucks- Bank registers financing statement after the second security agreement with Talcott

Issue & Holding- Does the financing statement’s lack of bank’s knowledge that the other creditor did not register in Ontario affect their

interest after registration? NoAnalysis

- Talcott’s Financing Statement meant he registered for anything that can be defined as “construction equipment, motor vehicle”, which covered the two trucks

- A Security Agreement defines the security interest- A financing statement only perfects pre-defined interest, but does not create an interest- If security agreement doesn’t grant an interest, it doesn’t matter what’s on the financing statement- If Talcott had a financing statement for specific trucks (as opposed to the vague description), the second security

agreement would have required a financing change statement- PPSA allows registering a financing statement before the security agreement when the agreement is not for consumer

goods- PPSA says one financing statement can perfect more than one security agreement

Notes on the Case from Class - Five Issues:

o Whether an equipment lease which gives the lessee the right to acquire title to the equipment for $1 upon compliance with the lease terms is a “security agreement” within the meaning of [BC PPSA]?

Yes – or even if pure lease still covered by PPSA

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o Whether debtor had sufficient ownership of the leased equipment so that it became secured property under the extension agreement with plaintiff?

Need to know so that it perfectedo Whether the description of the secured property, as it appeared in the extension agreement, was sufficient to

meet the requirements of [PPSA]? Yes – it doesn’t take much

o Whether the financing statement filed at the same time the first security agreement was assigned to plaintiff was sufficient to protect a security interest in the property covered by the extension agreement?

Yes – since it was broad enough, it gave defendant notice of what was coveredo Which security interest was entitled to priority?

Plaintiff filed first, so perfected, so wins over second one

Security for Future Advances- “Future advances” means an advance of money and can be optional or obligatory within a security agreement- Optional Advances – secures present and future advances/property (i.e., collateral)- Obligatory Advances – SP undertook to give a future advance, whether or not pursuant to a commitment (not absolute

commitment)o If the second advance is obligatory then value was given at the time of the SAo The obligation to give value is value

- Future advances for the preservation of the collateral – tend to treat them as obligatory b/c the SP is forced to do it- PPSA allows the parties to agree that a SI given today can cover further advances made by the creditor to the debtor at a

future date (this is because the SI will often secure an indebtedness that changes over time – as in a line of credit)- PPSA says that such an obligation to make future advances is not binding if the SP has knowledge of the collateral being

seized, attached, charged or make subject to equitable execution (s 42)o The parties can specifically contract out of this protection for SPs

This allows for later indebtedness to be tacked onto a senior priority o Whether advances are tacked on or not is subject to the agreement between the SP and the D

- The ability to tack on an advance made under another SA will most commonly be permitted when it is the residual priority rule that is used to resolve the competition, the date of filing the first financing statement (or the date of possession) determining the priority for all advances of the two competing secured parties (ss 35(1) and (5))

o There is no reason why a single financing statement cannot cover more than one security agreement so long as the D and SP are the same and the collateral in the SAs is accurately covered by the financing statement

- Future Advances in the PPSA:o 14 (1) A security agreement may provide for future advances.o 35 (5) Subject to subsection (6), the priority that a security interest has under subsection (1) applies to all

advances, including future advances.Priority of Reperfected Security Interests

- Reperfectiono 35 (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.

- Why would registration lapse?o D’s name changes and SP1 fails to correct within the allowed time periodso D transfers its interest in the collateral to T and SP1 fails to correct within the allowed time periodso If SP1’s registration is for, say, a five-year period and SP1 fails to correct within the allowed time periods

Subordination Agreements- A subordination agreement occurs when a senior secured party agrees to subordinate its security interest to the security

interest of a junior secured party- SP1 has perfected first – then SP2 perfects – then SP3 perfects

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o SP1 and SP3 sign an agreement that says that SP1 will only collect once SP3 has collectedo SP1 had subordinated its interests to SP3

- Subordination or postponement of right to security interests40 (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.- Two types of subordination:

o Turnover = on the insolvency of the debtor, the junior creditor agrees to turn over to the senior creditor all recoveries received by the junior creditor in respect of the junior debt

o Contractual = the junior creditor agrees with the debtor, that so long as the senior debt is outstanding, the junior debt is not payable unless and until the senior debt has been paid in full

- SP1 has given D a loan for up to $200,000 but has registered a financing statement covering “all present and after-acquired personal property” of D

- Even though security agreement says limit of $200,000 if D wants another loan from SP2, can SP2 rely on the limits to guarantee that it will get its money back (assume inventory averages around $300,000)?

o No – so SP2 may make SP1 sign a subordination agreemento D may ask SP1 for a subordination agreement – who gets to enforce? – third party issueso Note subordination agreement does NOT create security interest, so no need to register or perfect

- In a turnover agreement, SP1 promises that if it enforces its security interest, it will pay the proceeds to SP2 up to the value of the collateral

- For example, assume the value of the collateral is $100- Debtor owes SP1 $70 and it owes SP2 $40- Under a turnover agreement, SP1 promises to pay SP2 the first $40 out of the collateral sale proceeds

Circular Priorities- True circularity is apparent in situations when SP3 perfects their SI during the period when SP1’s SI has lapsed and they

have not reperfected yeto Circularity is created by lawo SP1>SP2; SP2>SP3; but SP3>SP1

- Apparent circularity is created when dealing with subordination agreements- A debtor (D) grants SP1 [A] a security interest covering all of D’s present and after-acquired personal property- The security agreement secures $200,000- D grants SP2 [B] a security interest in all present and after-acquired personal property to secure a loan in the sum of

$100,000 and SP2 [B] registers a financing statement- SP1’s [A’s] security interest is perfected by registration at the time of D’s contract with SP2 [B], but it subsequently becomes

unperfected- While SP1’s [A’s] security interest is unperfected, D grants SP3 [C] a security interest in all present and after-acquired

personal property to secure an advance of $150,000, and SP3 [C] registers a financing statement- SP1 [A] subsequently reperfects its security interest- Ultimately the collateral is sold and $225,000 is realized- The proceeds of realization are insufficient to satisfy all secured claimants- A>B>C>A- How much does C get?- Two approaches:

o Gilmore Rule: A gets $200,000 but C takes $150,000 leaving A with $50,000 B gets $25,000 Maybe this is Canada’s approach?

o Dixon Rule: C knew B had claim for $100,000, so C only expected maximum of $125,000 A first, C gets $125,000 and A gets $75,000 B gets $25,000

- Assume that SP3’s [C’s] claim is for $250,000 instead of $150,000 and all other facts remain the sameo First approach: SP3 [C] is entitled to the amount of his claim or the amount of the fund, whichever is less

On this basis, SP3 [C] would get $200,000, SP1 [A] would get nothing, and SP2 [B] would get $25,000o Second approach: SP3 [C] is entitled to the amount of his claim up to the difference between the value of the

collateral and the amount of SP2’s [B’]s claim SP3 [C] gets $125,000, SP1 [A] gets $75,000, and SP2 [B] gets $25,000

- Now assume that SP2’s [B’s] claim is for $250,000 and all other facts remain the sameo First approach: SP3 [C] gets $150,000, SP1 [A] would get $50,000, and SP2 [B] gets $25,000o Second approach: SP3 [C] gets nothing, SP1 [A] would get $200,000 and SP2 [B] gets $25,000

- SP1 [A] has priority over SP2 [B], SP2 [B] has priority over SP3 [C], and SP3 [C] has priority over SP1 [A]

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- Each has a claim for $100 and the collateral value is $100o Gilmore’s approach, SP3 [C] recovers $100 while SP1 [A] and SP2 [B] recover nothingo Dixon approach, SP1 [A] recovers $100, while SP2 [B] and SP3 [C] recover nothing

RBC v General Motors Acceptance Corporation of CanadaRule

- A subordination agreement , each SP gets what they would normally get according to the actual priority rules – then, if there is a subordination agreement, the parties who have the subordination agreement will act in accordance with the agreement using the interest they received

Facts- Three security interests: RBC, CIBC, GMAC- The CIBC security interests in the RBC Collateral were created by two security agreements, namely:

o Debentures dated January 7, [1985], February 19, 1990; April 17, 1997; August 7, 1997 and July 9, 1998o A General Security Agreement dated January 25, 2000 (the “GSA”)

- The GMAC security interest in the RBC Collateral was created by a Security Agreement of July 25, 2000- The RBC security interest was created in the form of equipment leases dated March 14, 2001, April 4, 2001 and May 3,

2001- The perfection dates for determining the priority:

o CIBC security interest – January 29, 1985, February 22, 1990, April 30, 1997, August 29, 1997, July 15, 1998 o GMAC security interest – December 13, 1999o CIBC security interest – January 25, 2000o RBC security interest – March 14, 2001; April 2, 2001; May 3, 2001

Issue & Holding- Who has priority? RBC to the extent that RBC takes what CIBC would have received from its perfected

Analysis- Notice:

o RBC last- Priority order:

o CIBC security interest created by Debentureso GMAC security interesto CIBC security interest created by the GSAo RBC security interest

- BUT RBC and CIBC signed subordination agreement, so new ordero RBC wins to the extent that RBC takes what CIBC would have received from its perfected debentures

Re CIF Furniture LimitedRule

- Depending on the facts of the case, court will apply either complete or partial subordination taking into account whether one will provide a more equitable result

- Complete subordination can be justified only if supported by “clear and explicit language”

Facts- The proceeds of the sale of the assets of CIF Furniture Limited (“CIF”) were insufficient to satisfy the security interests of

two competing secured creditor groups: Kari Holdings Inc (“Kari”) on the one hand and The Vengrowth Traditional Industries Funds Inc and The Vengrowth II Investment Fund Inc (collectively, “Vengrowth”) on the other hand

- Kari had the first-in-time registration of its security interest which was registered on November 30, 2004 in the amount of $1,000,000

- Vengrowth’s security interest was registered second on December 2, 2004 – its secured debt included (but was not limited to) a senior subordinated debenture of $4.35 million

- On December 31, 2004, Kari and Vengrowth entered into an inter-creditor agreement and agreed on the following priorities as between them despite the order of registration of their respective security:

o First: Vengrowth to the extent of its $4.35 million senior subordinated debentureo Second: Kari to the extent of its $1 million secured noteo Third: Vengrowth to the extent of its additional loans to CIF

- Such was the lay of the land until approximately 4 years later- In 2008, a third lender, Comerica Bank (“Comerica”), was introduced into the equation- Comerica provided CIF with a secured revolving credit facility- To obtain the financing from Comerica, several documents were signed including an inter-creditor agreement between

Comerica and Vengrowth under which Vengrowth agreed to subordinate its security to Comerica’s security- The priorities after the introduction of Comerica, therefore, created a circular priority problem described as follows:

o Vengrowth ranked ahead of Kari to the extent of its $4.35 million senior subordinated debentureo Kari ranked ahead of Comerica ( by virtue of the registration order) to the extent of its $1 million secured noteo Comerica ranked ahead of Vengrowth pursuant to the 2008 inter-creditor agreement

Issue & Holding- Was there partial subordination or complete subordination? Partial subordination

Analysis- Complete Subordination: K wins – why?

o First, Kario Second, Comericao Third, VenGrowth

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- Partial Subordination: V wins – why?o First, Comerica, to a maximum of $4.35 million, and then VenGrowth, to a maximum of $4.35 million less

Comerica’s claimo Second, Kario Third, Comerica for any claim in excess of $4.35 milliono Fourth, VenGrowth for all of its remaining claims

- Court goes with partial subordination – based on notice

PURCHASE-MONEY SECURITY INTERESTS- Purchase-money security interest(PMSI) is a new creditor’s security interest in a newly acquired asset that allows a debtor

to override his primary creditor’s security interest in after-acquired property - A PMSI is a security interest that enables a debtor to get rights in the collateral if the debtor relied on the availability of the

financing to obtain those rights- In order for a creditor to have a PMSI, you must register:

o Immediately on debtor’s possession (if inventory)o Within 15 days (non-inventory)

- 1(1) "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

- "Commercial consignment" means a consignment under which goods are delivered for sale, lease or other disposition to a consignee who, in the ordinary course of the consignee's business, deals in goods of that description, by a consignor who,

(a) in the ordinary course of the consignor's business, deals in goods of that description, and(b) reserves an interest in the goods after they have been delivered,but does not include an agreement under which goods are delivered(c) to an auctioneer for sale, or(d) to a consignee other than an auctioneer for sale, lease or other disposition if it is generally known to the creditors of the consignee that the consignee is in the business of selling or leasing goods of others

Theory of PMSI Priority- Purchase money security interests

34 (1) Subject to section 28, a purchase money security interest in(a) collateral or its proceeds, other than intangibles or inventory, that is perfected not later than 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

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(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

Scope of PMSI Priority

Giving Value to Acquire Rights in Collateral

North Platte State Bank v Production Credit Ass’nRule

- The 10 day grace period for the PMSI financer begins when the debtor has possession, not when he acquires rights

Facts- A debtor enters a sales contract for cattle- Based on their relationship the dealer gave the debtor possession of the cattle right away without payment- The debtor writes a cheque on the bank’s credit account which he asked for in order to buy the cattle, the bank did not yet

decide to forward the money, so the cheque bounces- Later the bank grants the loan and a good cheque is sent- The bank later claims a PMSI on the cattle

Issue & Holding- Does the bank have a PMSI on the cattle? No

Analysis- The important question is what rights did the debtor acquire and when- Use the Sale of Goods Act to answer: title passes when goods are delivered- The debtor acquired title to cattle before the credit was forwarded from the bank- The bank’s credit was used to pay the price of the goods, but the debtor did acquire any new rights in the goods- Therefore, it is not PMSI- The bank is just an unsecured creditor

Agricultural Credit Corp of Saskatchewan v PettyjohnRule

- A security interest is a PMSI if:o The lender has taken a security interest in the propertyo The lender has given value for the purpose of enabling the debtor to acquire rights in the propertyo The value has in fact been used to acquire those rights

Facts- Plaintiff (ACCS) agreed to finance purchase of cattle provided they got a security interest in that cattle and defendant debtor

would not sell them without permission- But ACCS made the loan monies available only after DF had purchased the cattle- Same basic transaction happened three years later for more cattle- DF borrowed from to pay for new cattle from BMO- Then used ACCS loan to repay bank- Defendant sold the cattle to buy new cattle, and then defaulted- Plaintiff tries to claim the new cattle- PPSA says they can only claim the cattle if they had a PMSI in them

Issue & Holding- Did the plaintiffs have a PMSI in the original cattle? Yes

Analysis- Defendant bought the cattle based on the plaintiff’s commitment to funding- Since defendant relied on the commitment in buying the cattle, the commitment itself became legally binding and counted

as value- This value was given “for the purpose of acquiring rights in the property”, and that value was for all intents and purposes “in

fact used to acquire those rights”- Defendant would not have bought the cows if they did not have a commitment from the plaintiff to fund the purchase- Doesn’t matter that value was given after the purchase, b/c its purpose was to enable the purchase of the cattle

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Refinancing PMSIs- On Date 1, SP1 takes a security interest in all Debtor’s present and after-acquired personal property and registers a

financing statement- On Date 2, SP2 supplies a printing press to Debtor on conditional sale terms and registers a financing statement- On Date 3, Debtor obtains a loan from SP3 and uses the money to pay out SP2- SP3 takes a security interest in the printing press and registers a financing statement- On Date 4, Debtor defaults against SP1 and SP3 and they both claim the printing press- SP3 has PMSI

Unisource Canada Inc v Laurentian Bank of CanadaRule

- Possession of equipment prior to a security agreement does not exclude it from becoming a PMSI- If the security agreement enables a party to acquire rights in the collateral, then it is a PMSI

Facts- An agreement between a debtor (Printer’s Grp) and a third party (RBC) to sell its goods to the third party and lease them

back (“sale and lease back”), which is not a security interest (Bill 152 allows it if it is for a full year)- This looks like a security lease with the option to purchase outright at the end- The plaintiff supplied some equipment to debtor, and had a general security interest in everything- Defendant financed a buy-out of debtor’s lease with a security interest in his equipment- Third party interest was discharged, legal title passed to debtor, and defendant registered its interest as a PMSI- Debtor goes bankrupt

o Note if, as part of the refinancing, Laurentian had taken an assignment of the RBC’s first security interest, there would be no dispute that Laurentian’s interest should have priority over that of Unisource

o Instead LB paid RBC the amount outstanding on the printing press and registered a general security agreementIssue & Holding

- Does Laurentian have PMSI priority over general SI of Unisource? YesAnalysis

- By enabling the debtor to acquire title, the transaction with the defendant enabled the debtor to “acquire [further] rights in the collateral [press]”, that it previously did not have

- The purpose of giving priority to a PMSI is to enable the person who has advanced funds for the acquisition of a particular asset to have the first priority over creditors who hold general security over all the assets

- In holding the equipment prior to the sale and lease back, the financing provided by the debtor fit into the definition of a PMSI

- Debtor might never have acquired title, b/c definition of PMSI excludes “a transaction of sale by and lease back to the seller”

MacPhee Chevrolet Buick GMC Cadillac Ltd v SWS Fuels LtdRule

- In order to have a PMSI, you must perfect within 15 days after the day the debtor obtains possession of the collateral

Facts- In 2004, Dixon Fuels leased a GMC truck from GMAC- Dixon Fuels buys from SWS up to a line of credit from SWS that was secured by a General Security Agreement, signed in

2005, from Dixon Fuels to SWS - In 2005, SWS registered the Financing Statement for GSA identifying the GMC truck by serial number as secured collateral- In 2007, GMAC conveyed the truck to MacPhee- Dixon Fuels as lessee then signed a new lease with MacPhee as lessor, and MacPhee registered the Financing Statement

for this 2007 lease- Dixon then defaulted to SWS, who sought to realize on the truck under its 2005 General Security Agreement in priority to

MacPhee’s titleIssue & Holding

- Did MacPhee have a PMSI? NoAnalysis

- Collateral is equipment- Need to perfect within 15 days after the day the debtor obtains possession of the collateral- The debtor obtained possession back in 2004 and GMAC did not register, so MacPhee (transferee) loses

Mixed PMSIs and Non-PMSIs

Clark Equipment of Canada Ltd v Bank of MontrealRule

- The PMSI aspect of an agreement can exist with other kinds of security agreements, and can be effective- So long as the security agreement complies with the requirements of a PMSI, and the requirements for priority, it

can be a PMSI even if it covers after-acquired collateral- In other words, those parts of a security interest that qualify as PMSI will get priority, while those that only give a

general security interest will be a regular security interestFacts

- Defendant had registered a floating charge security interest- Plaintiff gives notice to bank of intent to create a PMSI in existing and after-acquired inventory with a list of the type of

inventory included- Over the next two years, the debtor acquires three pieces of equipment- Defendant argues that the security agreement did not create a PMSI, but a floating charge

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Issue & Holding- Can a PMSI exist in after-acquired inventory? A PMSI can exist with other kinds of security agreements, but only on the

equipment it had at the time – the after acquired inventory is just a regular security interestAnalysis

- A PMSI can exist in conjunction within other security agreements, so it was a PMSI- Clark complied with the requirements, thus it held an PMSI priority – the after-acquired property is just a regular SI

Allocation of Payments

Re Chrysler Credit Can Ltd and Royal Bank of CanadaRule

- PMSI priority does not require specific financing for specific inventory- The PPSA recognizes the inventory financer’s right to “cross-over” the security

Facts- Both parties had security interests in debtor’s stock of new and used cars- When the debtor went into receivership, Chrysler, who had a PMSI in the new cars (b/c it financed the dealer’s purchase of

new cars), contested the used cars as well- The classes of used cars were as follows:

1. 4 trade-ins where statement had not been paid off2. 31 trade-ins where statement was paid3. 9 cars that could not be linked to trade-ins

Issue & Holding- Which cars did Chrysler’s PMSI extend to? Classes 1 and 2 only

Analysis- The PPSA recognizes the inventory financer’s right to “cross-over” the security: all of the dealer’s inventory financed by the

financier secures all of the advances, which enabled the dealer to acquire itThe Section 34 Priority Rules

- On Date 1, SP1 takes a security interest in all debtor’s present and after-acquired personal property and registers a financing statement

- On Date 2, SP2 negotiates the sale to Grantor of a printing press for use in Grantor’s publishing business- Grantor agrees to make a 20 percent down payment on the purchase price and to pay SP2 the balance by installments

under a conditional sale agreement- Grantor borrows the amount of the down payment from SP3 and gives SP3 a security interest in the press- SP3 registers a financing statement on Date 3- SP2 registers a financing statement on Date 4- Debtor defaults and SP1, SP2, and SP3 all claim the press- According to s 34(4), SP2 wins - seller

The PMSI Priority in Proceeds

Massey-Ferguson Industries Ltd v Melfort Credit Union LtdRule

- To keep perfection of proceeds, the secured party must prove the proceeds originated from the secured collateralFacts

- Plaintiff had a valid PMSI in inventory of a debtor- Defendant had a general security agreement including a floating charge- Debtor cancelled agreement with plaintiff, he owed plaintiff more than the value of the inventory- SPPSA states that a PMSI gets priority over everything but security interest in accounts where new value is given

Issue & Holding- Can the defendant argue that the right of the PMSI holder in the proceeds of the collateral falls under an account (an

intangible)? No

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Analysis- The exception to PMSI priority for intangibles does not apply because the plaintiff is not seeking priority on the proceeds

(and therefore the accounts), they are actually seeking the inventory- Whether the interest is secured or not depends on the time of agreement

Competing PMSIs- 34 (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.

- Four options, in general:o The first to register gets priority (the US approach)o The inventory financer gets priority under the PMSI provision, regardless of the order of registration, and without

the need for prior notice to the accounts financer (pre-2006-Ontario approach)o The inventory financer gets priority under the PMSI provision, regardless of the order of registration, but subject

to giving the accounts financer prior notice (Atlantic provinces and post-2006-Ontario approach)o Accounts financier gets priority (Western provinces approach)

Subordination Agreements- PMSI could fall under the definition of s 1 (i.e., SI) which could beat due to priority rules

o Must comply with s 34o If it is merely permission to give PMSI, then it’s not subordinationo If it says specifically subordination, then it is subordination o Having negative pledge is alright, anything more is subjecting it to priority

FIXTURES, ACCESSIONS, AND COMMINGLED GOODS- Priority rules often conflict when collateral goes through a transforming event, such as personal property being affixed to

land (i.e., a wall lamp) or when funds have been deposited into the same interest-bearing account as other moneyo Accession = a component (the “accessory”) has been added to a larger item (the “principal goods”) so as to

become part of the wholeo Commingling = goods from different sources that lose their separate identities when they are mixed together or

when they are used as components or ingredients in the manufacture or production of an entirely new product or mass

Fixtures- The term “fixture” is often used indiscriminately to describe

o Goods that have become attached to land but have retained their separate identity, and o Goods that have become an integral part of the land or a building on the land: for example, bricks in a wall

- Three categories of goods:1. Those that are on the land to be used for the better enjoyment of the land but have never become physically

attached to it2. Those that have become attached to the land but are not an integral part of it (true fixtures)3. Those goods that have become an integral part of the land (i.e., bricks in a wall)

- “Land” – any attachment to a structure or building that is itself treated as having become part of the land- Security interests in fixtures

36  (3) Except as provided in this section and in section 30, a security interest in goods that attaches before or at the time the goods become fixtures has priority with respect to the goods over a claim to the goods made by a person with an interest in the land.(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 after the goods become fixtures including an assignee for value of the interest of a person with an interest in the land at the time the goods become fixtures, and(b) any person with a registered mortgage on the land who

(i) makes an advance under the mortgage after the goods become fixtures, but only with respect to the advance, or(ii) obtains an order for sale or foreclosure after the goods become fixtures

without fraud and before the notice of the security interest is filed in accordance with section 49.(5) A security interest in goods that attaches after the goods become fixtures is subordinate to the interest of a person

who(a) has an interest in the land at the time the goods become fixtures and who

(i)  has not consented to the security interest,(ii)  has not disclaimed an interest in the goods or fixtures,(iii)  has not entered into an agreement under which a person is entitled to remove the goods, or(iv)  is not otherwise precluded from preventing the debtor from removing the goods, or

(b) acquires an interest in the land after the goods become fixtures if the interest is acquired without fraud and before the notice of the security interest in the goods is filed in accordance with section 49.

- Fixtures – Section 1(1):o “Fixture” does not include building materials

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o "Building materials" means materials that are incorporated into a building and includes goods attached to a building so that their removal

(a) would necessarily involve the dislocation or destruction of some other part of the building and cause substantial damage to the building apart from the loss of value of the building resulting from the removal, or(b) would result in the weakening of the structure of the building or the exposure of the building to weather damage or deterioration,

but does not include(c) heating, air conditioning or conveyancing devices, or(d) machinery installed in a building or on land for use in carrying on an activity inside the building or on the land

Meaning of Fixture

Cormier v Federal Business Development BankRule

- Pre-affixation, a chattel mortgage in collateral defeats subsequent interests in the real property- A good purchased with a conditional sales contract, pre-affixation, defeats all other interests because the debtor

does not have any title until payment is completedFacts

- Landlord rented premises to auto-shop- In 1981 landlord sold premises to auto-shop financed by mortgage- Equipment financed by Bank- Five machines:

o An Ingersoll Rand Temprite Air Make Up unit (1977)o A Bearcat frame straightener (1978)o A Binks spray booth (1979)o A Bee Line Optoflex alignment machine (1979)o A Black Hawk Power-Cage Serial No. BHYPC 35 (1980)

- First four registered financing statement in 1979- Fifth in 1980- But landlord always owned building

Issue & Holding- What is the nature of the attachment of the machinery and who has priority? Defendant

Analysis- With respect to the chattel mortgage on the other pieces of equipment:

o Pre-affixation, a chattel mortgage in collateral defeats subsequent interests in the real property- With respect to the conditional sales contract for the fifth piece of equipment:

o A good purchased with a conditional sales contract, pre-affixation, defeats all other interests because the debtor does not have any title until payment is completed

o However, in this case, the good was bought, affixed, and then the agreement was executed (i.e., the interest was attached)

The collateral must be attached prior to affixationo If the defendant had complied with the ten-day grace period to secure the PMSI they would have retained the

interest via circular priorityo Oral agreement = pre-affixation (this is an old decision, today you would need a written document)

Complication btw landlord and SP – this is a lien by rule of law (a lien defeats unperfected SI) – this is about chattels

What happens when the SI is perfected and there is a landlord lien? The PPSA doesn’t address this The Landlord and Tenant Act says – landlord lien is not a SI, it’s done by rule of law In general, the lien only applies to things (i.e., chattels) which belong to the tenant Thus, if you lend a machine/book to a tenant, you are the third party, and you can take it

back Unless the title to the goods is at of a chattel mortgagee – this is inconsistent with the PPSA If title is derived by chattel mortgage, mortgagee is defeated by the lien b/c the implication

has been, if title is by conditional sale, the title of third party (SP) is not defeated by landlord lien

Fixtures and Landlord’s Right of Distress

859587 Ontario Ltd v Starmark Property Management LtdRule

- Trade fixtures are different from immovable fixtures in that they can be restored to the status of chattels at the option of the tenant

- The manner in which property is attached to the land will be a significant consideration when deciding whether property is subject to distraint

Facts- Plaintiff sold a paint spray booth to the debtor, who attached it with bolts to the property leased out by the defendant to the

debtor

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- The conditional sales contract allowed the plaintiff to recover possession- The defendant sold the booth to a third party and the plaintiff discovered this and subsequently registered its conditional

sales agreement under the PPSAIssue & Holding

- Can the landlord sell the fixture to a bona fide purchaser for value? NoAnalysis

- The booth is easily removed and therefore it can’t be chattel and the priority remains with the vendor, not the landlordAccessions

- Accessions – Section 1(1):o "Accessions" means goods that are installed in or affixed to other goods

- Security interests in accessions38 (2) … a security interest in goods that attaches before or at the time the goods become an accession has priority with respect to the goods over a claim to the goods as an accession made by a person with an interest in the whole.

Industrial Acceptance Corp v Firestone Tire and Rubber CoRule

- As long as the secured party can identify and reasonably remove their accession, they should get itFacts

- Appeal, held that respondent was entitled to maintain its security on tires on a truck purchased under a conditional sales agreement which was assigned by the vendor to the appellant

- Guy purchased truck under conditional sales agreement and the vendor assigned its interest in that agreement to the appellant

- The guy replaced the tires on the truck with tires purchased by him from the respondent under conditional sale agreements- Respondent claimed the tires under its CSC

Issue & Holding- Does the doctrine of accession apply so as to cause the tires to have become part of the truck and thus available as part of

the security of the appellant? NoAnalysis

- The tires are removable without physical injury to the body of the truck or to any of its constituent parts- The doctrine of accession ought not to be applied where removable and identifiable accessory chattels are claimed by the

holder of an original title, retained as security for their value, against the prior security title holder of the principle chattelGMAC Leaseco Ltd v Tomax Credit CorpRule

- Those who deal in accession and seek a non-possessory SI therein, must accept the priorities of the PPSA or search title and SI to ensure they obtain the priority they seek in the asset to which the accession is attached

Facts- GMAC owned a vehicle, which it leased under a true lease to its lessee, which it registered- The lessee arranged for the supply and installation in the vehicle by an electronics company of a radio and speakers and an

electronic door locking and security system- The transaction was financed under a CSA btw the lessee and Tomax- Tomax registered under the Repair and Storage Lien Act- The lessee defaulted under the lease and removed the radio and speakers- GMAC seized the vehicle

Issue & Holding- Does the Tomax lien under the RSLA attach to the vehicle and the proceeds of its sale for the full amount owing under the

CSA? YesAnalysis

- The electronic door locking system and security system are an improvement to the vehicle, these costs are secured by the RSLA lien in priority to GMAC’s claim

- “Repair” is defined as “an expenditure of money on, or the application of labour, skill or material to, an article for the purpose of altering, improving or restoring its properties or maintaining its condition…”

- A radio is not an integral part of a vehicle – thus, a radio installed in a vehicle is not a repair under RSLA – it does not alter, improve or restore the vehicle

- Failure to make this distinction deprives the PPSA application to accession of any practical effect Commingled Goods

In the Matter of San Juan Packers, IncRule

- Where collateral loses its identity by commingling or processing, the SI continues in the mass or productFacts

- San Juan bought cans on credit from a can manufacturer, and granted them a floating lien in all of its inventory- The food processor bought vegetables from many farmers- The farmers had obtained financing from Peoples State Bank and had granted the bank a SI in their crops and the

“proceeds” thereof- The food processor filed a petition in bankruptcy after it had received the farmer’s vegetables and processed and sold a

portion of them, but before it had finished paying the farmers- The bank brought this claim against all of the food processor’s secured creditors

Issue & Holding- Does the bank lose its SI once the goods become comingled? No

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Analysis- Bank had a perfected SI in the farmers’ vegetables and they became part of a mass of vegetables in the hands of the food

processor, so commingled that their identity became lost in the masso Under s 9-315(1) of UCC – where collateral loses its identity by commingling or processing, the SI continues in

the mass or productLIENS ARISING BY STATUTE OR RULE OF LAW

- Two types of Liens: o For private creditorso For government

- Liens over private creditors: o Repairer’so Warehouseo Inn-Keepero Solicitoro Landlord

- Liens for government:o Tax obligations

- Generally, they take priority over unperfected security interestsPriority of Liens

- 32  A lien on goods that arises as a result of the provision, in the ordinary course of business, of materials or services in respect of the goods, has priority over a perfected or unperfected security interest unless the lien arises under an enactment that gives priority to the security interest

- To determine priority, go to the parent statute first and then go to the PPSALiens in Favour of Private Creditors

General Electric Capital Equipment Finance Inc v Transland Tire Sales & Service LtdRule

- Must determine: (1) When was the non-possessory lien registered; (2) When did the non-possessory lien arise; and (3) When did the lender acquire a right against the article

- RLSA with the PPSA provide the non-possessory lien priority over a perfected security interestFacts

- Vendor has security interest in trailers- Repairer repairs trailers and returns possession, but is never paid- Business goes bankrupt

Issue & Holding- Does the repairer have priority under the RSLA over the secured party? Yes

Analysis- The security interest here was not perfected, so repairer has priority with non-possessory lien- But, assuming it was perfected, lender has priority over the non-possessory lien if the rights were acquired before the lien

was registered- Must determine: (1) when was the non-possessory lien registered; ( 2) when did the non-possessory lien arise; and (3)

when did the lender acquire a right against the article- A non-possessory lien arises when the repairer gives up possession- Non-possessory liens allow the repairer to give up possession and retain a lien assert it against third-parties- The RSLA states that a non-possessory lien has priority over everyone (except those with a possessory lien)- Therefore, the RLSA with the PPSA provide the non-possessory lien priority over a perfected security interest

Governmental Liens

Leavere v Port Colborne (City)Rule

- If the PPSA does not apply, the common law priority rule applies (chronological)- All interests of every kind rank according to their date- This is the “first-in-time” rule

Facts- Municipality distrains chattel of a taxpayer for taxes owing under Municipal Act s 400(2)- The same chattel was part of a perfected security interest

Issue & Holding- Does the PPSA apply? No

Analysis- First question is if the distress is lien on chattel under a statute – it is- The municipality’s lien arose when it took possession of the chattel by distress- Second, the exception deals with competition between a lien and an unperfected security interest only

o Therefore, provisions of the PPSA do not apply hereo If they did, the lien would have priority over perfected security interestso The legislature could not have intended otherwise

- Note: This is broad reading of s 400(2) and not a wholly satisfactory answer to the competition problem- There is ongoing debate about how to handle this (no priority for the Crown, special priority rules, etc.)

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DaimlerChrysler Financial Services (Debis) Canada Inc v Mega Pets LtdRule

- Leases in which ownership remains with the lessor are not a “security interest” within the meaning of section 224(1.3) of the ITA and, as such, are not subject to the CRA’s deemed trust claims

Facts- Mega Pets and plaintiff enter a conditional sales agreement for a minivan- Security interest is perfected- Mega Pets becomes insolvent and owes taxes- CCRA seizes the minivan to cover money owing- Plaintiff claims conversion by Crown was unlawful, they had priority

Issue & Holding- Is Mega Pets liable for taxes? No

Analysis- The Income Tax Act does not define security interest in the same way as the PPSA- Each definition stands on its own- Use “but for” test- It can be said, “but for” the security interest, the van would be owned by plaintiff, not Mega Pets- So Mega Pets is liable for all amounts owing to Chrysler- Note: court was overly concerned with expropriation of the minivan, otherwise statutory language is relatively clear

PROTECTION OF TRANSFEREES IN ORDINARY COURSE- Under certain circumstances, a debtor can pass good title to the collateral to a third party, free of the security interest- In some cases, the secured party has a claim to the proceeds

Sale of Goods in Ordinary CourseTransferees

- Generally:1. Unperfected security interest: transferee gets clear title provided the transferee gave value, took delivery, and

had no knowledge of the security interest2. Perfected security interest and SP expressly or impliedly authorized the transfer, the transferee gets clear title.

The typical case is where the collateral is inventory3. Perfected security interest and SP did not expressly or impliedly authorize the transfer, the transferee takes

subject to SP’s security interest [but see section 30]- Subordination of unperfected security interests

20 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.

- Protection of buyer or lessee of goods30 (1) In this section:

"buyer of goods" includes a person who obtains vested rights in goods under a contract to which the person is a party as a consequence of the goods becoming a fixture or accession to property in which the person has an interest;"seller" includes a person who supplies goods that become a fixture or accession under a contract with a buyer of goods or under a contract with a person who is party to a contract with the buyer;"the ordinary course of business of the seller" includes the supply of goods in the ordinary course of business as part of a contract for services and materials.

(2) A buyer or lessee of goods sold or leased in the ordinary course of business of the seller or lessor takes free of any perfected or unperfected security interest in the goods given by the seller or lessor or arising under section

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28 or 29, whether or not the buyer or lessee knows of it, unless the buyer or lessee also knows that the sale or lease constitutes a breach of the security agreement under which the security interest was created.(3) A buyer or lessee of goods that are acquired as consumer goods takes free from a perfected or unperfected security interest in the goods if the buyer or lessee

(a) gave value for the interest acquired, and(b) bought or leased the goods without knowledge of the security interest.

(4) Subsection (3) does not apply to a security interest in(a) a fixture, or(b) goods the purchase price of which exceeds $1,000 or, in the case of a lease, the market value of which exceeds $1,000. (Garage Sale Exception)

(5) A buyer or lessee of goods takes free from a security interest that is temporarily perfected under section 26 (1), 28 (3) or 29 (4) or a security interest the perfection of which is continued under section 51 during any of the 15 day periods referred to in those sections, if the buyer or lessee

(a) gave value for the interest acquired, and(b) bought or leased the goods without knowledge of the security interest.

(6) If goods are sold or leased, the buyer or lessee takes free from any security interest in the goods perfected under section 25, if

(a) the buyer or lessee bought or leased the goods without knowledge of the security interest, and(b) the goods were not described by serial number in the registration relating to the security interest.

(7) Subsection (6) applies only to goods that are equipment and that are defined in the regulations as serial numbered goods.(8) A sale or lease referred to in subsection (2), (3), (5) or (6) may be for cash, by exchange for other property or on credit and includes delivering goods or a document of title to goods under a pre-existing contract for sale, but does not include a transfer as security for, or in total or partial satisfaction of, a money debt or past liability.

Ordinary Course of Business

Camco Inc v Olson Realty (1979) LtdRule

- Give a liberal interpretation to “sales in the ordinary course of business”- “Ordinary course of business” doesn’t have to be just about inventory

Facts- A real estate developer buys household appliances from Camco to put into condo units they are developing- The developer never pays Camco for the appliances- Developer goes bankrupt- The end users (owners of the condos) claim they took the appliances free of any security interest- Camco argues they did not sell to the end users and that the sales were not made in the ordinary course of the real estate

developers businessIssue & Holding

- Were the sales in the ordinary course of business so that the owners of the condos take the appliances free of security interest? Yes

Analysis- Sales in the ordinary course of business are not limited to just inventory- Do not look to the general field of business, but the seller’s particular business- It should be interpreted liberally to affect the intention of the PPSA- It is fact dependant- Here the fact that sale of appliances was only incidental to the sale of condos does not preclude it- They knew they were selling appliances with the units

Tanbro Fabrics Corp v Deering Milliken IncRule

- So long as it is customary for a seller to sell the type of inventory in question in the manner in question, it is in ordinary course of business

- You don’t necessarily have to have possession of goods for the sale to occur in the “ordinary course of business”o Note, however, that in BC, the PPSA is silent on this

Facts- Plaintiff (“converter” finishes textile into dyed and patterned fabrics) and a debtor (Mill Fabrics) bought unfinished textiles

from the defendant on a buy and hold basis- The defendant kept the customer’s inventory until it was to be used- The defendant sold out of a particular textile and told the plaintiff to buy it from the debtor- The plaintiff only had a quarter of the purchased fabric delivered when the debtor went insolvent

Issue & Holding- Was Tanbro’s purchase of the goods in the ordinary course of Mill Fabric’s business, and hence free of Deering’s perfected

SI? YesAnalysis

- The plaintiff had bought the fabric in the ordinary course of business- In this case, it has been established that converters buy these goods in propitious markets and often in excess of the

requirements- On occasion, converts enter the market to sell the excess through brokers or to other converters - Factual analysis is to determine if the seller sells relevant items in ordinary course of business- Indications that a sale doesn’t qualify:

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o Bulk Sale Acto Sale in distress at a loss priceo Sale in liquidationo Sale of a commodity never dealt with before by seller and wholly unlike the usual inventory

Private sales btw individual buyers (Royal Bank) OCB – includes sale to the public at large

- Note: it should always be a factual analysiso A criticism says that if the defendant creditor always had possession, there no saleo The real conditions of the industry should determine what counts as ordinary course of business

Sale and Agreement to Sell

Royal Bank of Canada v 216200 Alberta LtdRule

- Buyers take over full title upon full payment, delivered or not- Not followed in Ontario and most likely will not be followed in BC (see treatment of issue in Spittlehouse)

Facts- A furniture dealer grants security to the bank over its inventory, and then becomes bankrupt- The receiver tries to keep the inventory, but some of the furniture has already been sold to consumers and is awaiting pick

up- There are four classes of customers:

o Class 1: Paid full price, no possession or reserved goodso Class 2: Paid part price, no possession, but goods set aside for that transactiono Class 3: Paid part price, no possession, and no goods set aside for that transactiono Class 4: Waiting for refund, goods returned

Issue & Holding- At what point does the buyer take over full title? Upon full payment, delivered or not

Analysis- For a sale to have occurred, title must have passed- Sale of Goods Act: title and risk transfers when the goods are ascertained

o Where there is a sale of a specific item, which was in a deliverable state and identified in some fashion as being the goods purchased, the title passes on the making of the contract whether or not the whole price has been paid

o In this case the purchaser is entitled to priority- Where there was full or partial payment for goods not in dealer’s possession, the payment is a payment made to secure the

transaction and is a debt due from the defendant to the proposed purchaser in the event of default- Therefore the “deposits” were unperfected security agreements, in unascertained goods, and therefore the buyer has no

title in any specific good- The court would not call full or partial payments for goods not in dealer’s possession trusts- Any scheme which permits trust classes or devices outside the act will cause commercial uncertainty and produce

disruption in commercial transactions- Class 1: RBC wins: no specific goods yet- Class 2: customers win – specific goods earmarked for sale – title transferred- Class 3: RBC wins: same as 1- Class 4: RBC wins: customers are now unsecured creditors so they lose- Result would be different in BC – deposits converted into statutory liens for consumer buyer in BC Sale of Goods Act

Spittlehouse v Northshore Marine Inc (Receiver of)Rule

- Do not look to the SGA or title passing to determine if a sale occurred (in Ontario)- In BC, you have to look at SGA so the outcome would depend on what the SGA says

Facts- Plaintiff bought a boat from the defendant- Defendant went into receivership after the plaintiff had paid 90% of the price- The receiver in bankruptcy claims priority on the boat- The sales contract said that “title would not pass until full purchase price”

Issue & Holding- A conditional sales contract in the ordinary course of business transfers title at a different time than in the Sale of Goods

Act; which definition holds? The plaintiff has priority as a buyer in the ordinary course of business, upon paying the remainder of the balance

- *Note: does not follow RBC case!Analysis

- Royal Bank of Canada v 216200 Alberta Ltd: the goods are sold when the title passes to the buyer and SGA determines that issue

- However, a conditional sale is still a sale between a buyer of goods from a seller who sells in the ordinary course of business

- The Sale of Goods Act is “not relevant to the resolution” to determine when the title passes- Note:

o The court should have just said this was a sale subject to a security interest in the ordinary course of business, but it was instead worried about when title itself passed

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o There was no need to deny Royal Bank of Canada v 216200 Alberta Ltd because there was passage of beneficial title here

o A problem arises in the situation where the court denies that title has not transferred if the item is not ascertained, in that a conditional sale does not transfer title and the buyer is out of luck

- In conditional contract situations, the fact that a seller retains a security interest in the goods does not mean a sale has not occurred

- It is still relevant to the conditional sales contract that the item be ascertained- In Spittlehouse the boat was ascertained, and therefore beneficial title had passed and a sale had occurred- The requirement for passing of title can include beneficial title- This would make the cases reconcilable- The outstanding issue is what happens if the item is ascertained, but there is no passage of title- The advisory committee suggests property does not need to pass, but identification must occur- The best way to handle it is not to talk about title

o The PPSA doesn’t care about title- A sale subject to security interest is still a sale, and a sale has not occurred until the goods are ascertained- In BC: Section 30

o "buyer of goods" includes a person who obtains vested rights in goods under a contract to which the person is a party as a consequence of the goods becoming a fixture or accession to property in which the person has an interest

o "seller" includes a person who supplies goods that become a fixture or accession under a contract with a buyer of goods or under a contract with a person who is party to a contract with the buyer

o "the ordinary course of business of the seller" includes the supply of goods in the ordinary course of business as part of a contract for services and materials.

Priorities with Respect to Repossessed or Returned Goods- Security interests in returned or repossessed goods

29  (1) If a debtor sells or leases goods that are subject to a security interest under circumstances in which the buyer or lessee takes free of the security interest under section 28 or 30, the security interest reattaches to the goods if

(a) the goods are returned to, or are seized or repossessed by, the debtor or a transferee of chattel paper created by the sale or lease, and(b) the obligation secured remains unpaid or unperformed.

(2) If a security interest reattaches under subsection (1), the perfection of the security interest and the time of registration or perfection is determined as if the goods had not been sold or leased if the security interest was perfected by registration at the time of the sale or lease and the registration is effective at the time of the return, seizure or repossession.

Transfer of Chattel Paper- Transferring chattel paper created problems since it meant that purchasers of such paper would have to perfect their

security interest in the reversionary interest in the chattel by filing a financing statement in the place where the chattel was located

- To solve this problem, the PPSA definition of “chattel paper” was amended to include specifically a lease of goods31 (6) A purchaser of chattel paper who takes possession of the chattel paper in the ordinary course of business and for new value has priority over any security interest in it that

(a) was perfected under section 25, if the purchaser does not know at the time of taking possession that the chattel paper is subject to a security interest, or(b) has attached to proceeds of inventory under section 28, whatever the extent of the purchaser's knowledge.

Transfer of Instruments and Documents of Title- 31 (1)-(5):

31 (1) A holder of money has priority over a security interest in money perfected under section 25… if the holder(a) acquired the money without knowledge that it was subject to a security interest, or(b) is a holder for value whether or not the holder acquired the money with knowledge that it was subject to a security interest.

(2) A creditor who receives an instrument drawn or made by a debtor and delivered in payment of a debt owing to the creditor by that debtor has priority over a security interest in the instrument whether or not the creditor has knowledge of the security interest at the time of delivery.(3) A purchaser of an instrument has priority over a security interest in the instrument perfected under section 25 or temporarily perfected under section 26 or 28 (3) if

(a) the purchaser gave value for the instrument,(b) the purchaser acquired the instrument without knowledge that it was subject to a security interest, and(c) the purchaser took possession of the instrument.

(5) For the purposes of subsections (3) and (4),(a) a purchaser of an instrument, or(b) a holder of a negotiable document of title, who acquired his or her interest under a transaction entered into in the ordinary course of the transferor's business has knowledge only if he or she acquired the interest with knowledge that the transaction violates the terms of the security agreement creating or providing for the security interest.

Transfer of Securities30 (9) A purchaser of a security, other than a secured party, who

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(a) gives value,(b) does not know that the transaction constitutes a breach of a security agreement granting a security interest in the security to a secured party who does not have control of the security, and(c) obtains control of the security

acquires the security free from the security interest.(10) A purchaser referred to in subsection (9) is not required to determine whether a security interest has been granted in the security or whether the transaction constitutes a breach of a security agreement.(11) An action based on a security agreement creating a security interest in a financial asset, however framed, may not be brought against a person who acquires a security entitlement under section 95 of the Securities Transfer Act for value and did not know that there has been a breach of the security agreement.(12) A person who acquires a security entitlement under section 95 of the Securities Transfer Act is not required to determine whether a security interest has been granted in a financial asset or whether there has been a breach of the security agreement.(13) If an action based on a security agreement creating a security interest in a financial asset could not be brought against an entitlement holder under subsection (11), it may not be brought against a person who purchases a security entitlement, or an interest in it, from the entitlement holder.

PROCEEDS- A lot of the law involving proceeds comes from the common law- The Act defines proceeds but that’s about it- Definition in the Act:

"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;

Nature and Source of the Claim to Proceeds- Statutory definition (part (a) of definition)

o 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 D acquires an interesto Only property in which D acquires an interest falls within the definition

Debtor need not possess or even have received proceeds in order to have an interest in them If the current account balance is in the negative, the D does not have an interest in it and it cannot be

proceeds- Statutory definition (part (b) of definition)

o Definition also includes: “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; and…a payment made in total or partial discharge or redemption of an intangible, and instrument or chattel paper”

In these instances, D need not acquire an interest in property for it to be proceeds This latter element is important because it means that payment from an account is proceeds even if the

debtor does not acquire an interest in the paymentFlintoft v Royal Bank of CanadaRule

- There is an assumption, even in the absence of a clause, that “the principle is plainly to be spelled out that if you sell my goods with my consent, it is on terms that you bring me the money in place of the goods”

Facts- A debtor sells collateral that the defendant bank had a security in- The security agreement included proceeds, but the trustee argued that the debtor owns book debts from the sale of goods

Issue & Holding- Are accounts receivable from sales included in proceeds of the collateral? Yes

Analysis- Common law right to pursue proceeds and is not contingent on any type of agreement between parties

Perfection of Security Interest in Proceeds- Interest continues in proceeds after dealing with original collateral

28 (1) Subject to this Act, if collateral is dealt with or otherwise gives rise to proceeds, the security interest(a) continues in the collateral unless the secured party expressly or impliedly authorizes the dealing, and(b) extends to the proceeds,

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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.(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.

Tracing- Tracing is about the collateral itself and is an equitable remedy (not a legal remedy)

o If you were chasing the person, that would be a legal remedy- See definition:

o “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.”

- Property must be “identifiable” and “traceable”o Identifiable if they continue to exist in their original formo Traceable if they are converted into a substituted form which can be located and determined to be the

substitution for the original collateral or proceeds- How to trace proceeds differs in law and equity- In law, only property that remains identifiable is traceable- In equity, property does not need to remain identifiable, but other rules exist- What is identifiable or traceable is not defined in the PPSA so use the law and equity rules

Tracing into an Overdrawn Account

Flexi-Coil v Kindersley District Credit Union LtdRule

- Choses in action or second-generation proceeds cannot be relied on not cover security interests in collateral- In cases with respect to overdrafts, the bank always wins (as per s 31(3))

Facts- C has a line of credit account, but it also uses to make deposits- The balance is always below zero- They use the same account to pay Flexi for inventory- When C becomes bankrupt, they owe money to Flexi- Flexi has a perfected PMSI, but there is no inventory left- They try to go after the proceeds in the account- They claim there are cheques which can be traced as proceeds from the inventory- There are three assets to follow from the inventory:

o The chequeso The chose in actiono The money from the cheques

- A security interest in collateral will extend to proceeds- The cheques are proceeds which can be traced to the collateral (first generation proceeds)- The bank claims they are purchasers for value so they have free title to the cheques- But, the money from the cheques is also proceeds (second generation proceeds)

Issue & Holding- Can Flexi trace proceeds into funds used to pay off a line of credit? No

Analysis- The only real proceeds are the cheques themselves- The bank does not really have a chose in action- It is a credit/debtor relationship- There is no cash to trace from the cheques- Any other holdings would make the bank a guarantor for the plaintiff. - Flexi should have opened a separate account for proceeds, which it audited and could release on its own power- Second Generation Proceeds : “proceeds can be derived from, either a dealing with the original collateral, or other

proceeds… When an account is in overdraft, no property right arises”o Therefore, even if credit to account was considered proceeds and collateral, the debtor had no rights in it anyway

and it cannot be claimed by a creditor

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o “When in negative balance, there were no proceeds of the cheque to which the debtor was entitled, or to which Flexi-Coil’s security interest could attach”

- Court relied on s 31(3):31(3) A purchaser of an instrument has priority over a security interest in the instrument perfected … 28 (3) if

(a) the purchaser gave value for the instrument,(b) the purchaser acquired the instrument without knowledge that it was subject to a security interest, and(c) the purchaser took possession of the instrument.

Backwards Tracing

Agricultural Credit Corp of Saskatchewan v PettyjohnRule

- For the purposes of PPSA tracing, the substance of the transaction, and not the form, will govern whether there is a close and substantial connection between collateral and proceeds

Facts- For tracing purposes, the facts are that the defendant sold all existing cattle that had been collateral under a PMSI in favour

of the plaintiff and paid down the overdraft that was used to buy other cattleIssue & Holding

- Can the plaintiff trace the PMSI from the cattle it funded to the new cattle as proceeds? Yes, but only to the portion of the purchase that the collateral had funded

Analysis- Tracing should not be done by subrogation- There is no need to trace every dollar – just trace by function- How much of the borrowed money went into buying each herd- Note: this is a flexible approach, but uncertain

Tracing into a Mixed Fund- Equitable rules:

o Basic common law principle of tracing is first in first outo In equity, there is a presumption that the account holder withdraws their own money first

- Clayton’s Case (1816), 35 ER 781: o First in first out: if money is spent out of a fund where proceeds are kept, equity will assume that the money is

used is in the order of the depositso If proceeds X, Y, and Z are deposited, money withdrawn will come from the proceeds in that ordero Not really used in Canada a lot – courts increasingly do not really like this approach

- Re Hallet’s Estate (1880), 13 Ch. D 696 (CA): o *Most likely to be used in cases where defendant has mixed his own money with the claimant’s moneyo The Rule in Clayton’s Case will not apply where a defendant has mixed his own money with the claimant’s

moneyo In this case there is a “presumption of rightful withdrawal”, which states that any withdrawal will be assumed to

come from the defendant’s money, and not the proceeds of the collateral (in these cases it’s about trust funds)- Lowest Intermediate Balance Rule:

o If relevant funds are commingled with the defendant’s funds in an account, a beneficiary (or creditor) cannot claim the right to more than the lowest intermediate balance after appropriation

o Very similar to the Clayton’s Caseo LIBR has been somewhat rejected in Pettyjohn case

It would take too much time because you would have to do the LIBR calculation every time a withdrawal was made

- Pro Rata Approacho *Most likely to be used in cases where none of the defendant’s own money is mixed in with the claimant’s

moneyo LSUC Case:

Both victims share entire amount pro-ratao Re Graphicshoppe Ltd

Case suggests no more LIBC rule but overruled on appealo Port Alice Specialty Cellulose Inc (Trustee of) v Conoco Phillips Co:

The defendant should be allowed to repossess the goods on a pro-rata basisENFORCEMENT OF THE SECURITY INTEREST

- Governed by Part 5 of PPSA: Rights and Remedies on Defaulto (1) the events triggering the debtor’s default;o (2) the secured party’s entitlement to take possession of tangible collateral if not already in its possession;o (3) retention or disposition of the collateral by the secured party, or its redemption by the debtor; and o (4) the post-disposition relationship between the parties (namely, the debtor’s right to any surplus and the

creditor’s right to claim for any deficiency)- This part does not apply to transactions referred to in s 3 and pawnbrokers (as they have their own Pawnbrokers Act) (see

s 55(2))Procedural and Substantive Limits on Enforcement Rights

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Waldron v Royal BankRule

- Despite security agreement allowing “payment on demand”, reasonable notice must be givenFacts

- The plaintiff had a loan to operate a ceramics business- The debtor displayed risky behaviour as a debtor and the bank became worried- On default the bank ordered a bailiff to seize all assets and change the locks on the premises- According to the security agreement there was no need for notice- The plaintiff was not given any notice, until the bailiff showed up demanding the money, assets and changing the locks

Issue & Holding- Was reasonable notice required regardless of what was indicated in the security agreement? Yes

Analysis- Despite security agreement allowing “payment on demand”, reasonable notice must be given- In earlier English cases, on demand, allowed just enough time to mechanically get the money- The CA expanded the definition in Mister Broadloom to include time needed to find another creditor or find alternative

financing- The SCC approved of Mister Broadloom in Dunlop v Lister- Since the Kavcar and Whonnock have made reasonable notice the law, regardless of the drafting of the security agreement- Must have an acceleration clause:

o S 16:  If a security agreement provides that a secured party may accelerate payment or performance by the debtor when the secured party is or believes himself insecure or decides that the collateral is in jeopardy, the provision must be construed to mean that the secured party has the right to accelerate payment or performance only if the secured party, in good faith, believes and has commercially reasonable grounds to believe that the prospect of payment or performance is or is about to be impaired or that the collateral is or is about to be placed in jeopardy.

- 56 (1) In this section, "secured party" includes a receiver.(2) If the debtor is in default under a security agreement,

(a) except as provided in subsection (3), the secured party has against the debtor only(i)  the rights and remedies provided in the security agreement,(ii)  the rights, remedies and obligations provided in this Part and in sections 36 to 38, and(iii)  when the secured party is in possession or control of the collateral, the rights, remedies and obligations provided in section 17 or 17.1, and

(b) the debtor has against the secured party the rights and remedies provided in the security agreement, the rights and remedies provided by any other statute or rule of law consistent with this Act, and the rights and remedies provided in this Part and in section 17 or 17.1.(3) Except as provided in subsection (4) and sections 17, 17.1, 59, 60 or 62, no provision of sections 17, 17.1 or 58 to 69, to the extent that it gives rights to the debtor or imposes obligations on the secured party, can be waived or varied by agreement or otherwise.

- Public policy and unconscionability are the groundsSeizure of Collateral

- Right of seizure or repossession58 (1) In this section, "secured party" includes a receiver.(2) Subject to subsection (3) and to sections 36 to 38, on default under a security agreement,

(a) the secured party has unless otherwise agreed the right to take possession of the collateral or otherwise enforce the security agreement by any method permitted by law,…

(3) Subject to subsection (4), if a debtor, who is in default under a security agreement that provides for a security interest in consumer goods, has paid at least 2/3 of the total amount of the obligation secured, the secured party must not seize the consumer goods.(4) On application by the secured party, a court may order that subsection (3) does not apply and the order may be subject to conditions.(5) In an application under subsection (4) the court may take into consideration all relevant circumstances, including the value of the collateral, the amount of the obligation that has been discharged, the reasons for default and the present and future financial circumstances of the parties.

R v DoucetteRule

- Secured party has right to possession for the collateral, however you cannot do illegal things to get the possession

Facts- The accused is a bailiff- Along with two other bailiffs, he goes the house of the debtor to take possession of a TV- They enter the house uninvited despite the protests of the debtor- On the way out assault the debtor

Issue & Holding- Was the seizure legal? No

Analysis- Cannot do that- “I have grave doubts whether s. 67 of the Personal Property Security Act clothes the court with jurisdiction to order the

police to act in this manner. … Police officers are not normally charged with the enforcement of civil remedies. Under the

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circumstances, in order to avoid any misapprehension of the respective rights of the parties, the bailiff should be left to attempt seizure on his own. In the event that resistance is met his duty is to retreat and have the issue placed before the courts.”

- The accused, as agent of the secured party, has the right to possession for the collateral- However, you cannot do illegal things to get the possession- Note: usually the security agreement will have a provision that grants a licence to enter the debtor’s premises for the

purpose of taking possession of collateral on defaultVoluntary Foreclosure

- Governed by Sections 61 and 62 of the Acto Statute doesn’t use word “foreclosure” (other than in s 61) – keeping collateral in satisfaction of obligation

securedo If you chose this, the obligation secured by the collateral is deemed to be satisfied (i.e., there could be no suit for

any deficiency)o Seized and propose to various parties who may be affected that you just keep it to satisfy obligationo Not unusual for other parties to argue you have done thiso S 61:

How to proceed: propose this to affected parties To whom to give notice: same as under s 59 (debtor, party in possession, subordinates) Notice: 15 days to object to notice

If not deemed by passage of time to have elected this remedy Any party who gets notice can object

o If object: must move to disposition route and start process over again (new notice, 20 days, etc)

o S 61(3): if no notice of objection, SP is deemed to have irrevocably elected…entitled to hold property free from interests of D and subordinates

Not free from prior (subject to that)o S 61(8): if foreclosed, you can sell it but not free from prior interestso Do it first – extinguish obligation (nothing else owing to you)o S 62: any of the parties entitled to remedy the collateral by paying out the obligation secured

If they pay it out – obligation has been repaid and collateral returned to D This is very unlikely to happen but may be on an exam Before the SP who has seized collateral has disposed of it or foreclosed on it, the D or holder of a

subordinate interest in the collateral may redeem the collateral This is done by tendering fulfillment of the obligation secured by the collateral together with the

expenses incurred seizing the collateral and readying it for dispositiono Pay attention to acceleration clause

Would have to pay out as well but collateral restored- Rights and obligations of secured parties in possession of collateral

17 (1) In this section, "secured party" includes a receiver.(2) A secured party must use reasonable care in the custody and preservation of collateral in the possession of the secured party and, unless the parties otherwise agree, in the case of an instrument or chattel paper, reasonable care includes taking necessary steps to preserve rights against other persons.(3) Unless otherwise agreed, if collateral is in the secured party's possession,

(a) reasonable expenses, including the costs of insurance and payment of taxes or other charges incurred in obtaining, maintaining possession of and preserving the collateral, are chargeable to the debtor and secured by the collateral,(b) the risk of loss or damage to the collateral, unless caused by the negligence of the secured party, is on the debtor to the extent of any deficiency in insurance coverage,(c) the secured party may hold as additional security any increase or profits, except money, such as the young of animals or dividends paid in additional shares received from the collateral, and must apply any money so received, unless remitted to the debtor, immediately on its receipt to reduce the obligation secured by the collateral, and(d) the secured party must keep the collateral identifiable, but fungible collateral may be commingled.

(4) Subject to subsection (2), a secured party may use the collateral(a) in the manner and to the extent provided in the security agreement,(b) for the purposes of preserving the collateral, or(c) in accordance with an order of a court in the manner directed.

- There is a separate section for consumer goods – section 67Angelkovski v Trans-Canada Foods LtdRule

- No “deemed foreclosure”- Must give requisite notice of objection

Facts- SP seized restaurant with chattels in it (held as security) from D and then started operating it, in order to make money more

than original debt- But chattels in restaurant were destroyed

Issue & Holding- Does debtor still have to pay SP deficiency? Yes

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Analysis- D did not give SP proper notice of objection, so D owes deficiency- Court stated:

o “A secured party in possession of the collateral may, after default, propose to retain the collateral in satisfaction of the obligation secured, upon giving notification to that effect to the debtor. If the debtor objects within 15 days, the secured party must proceed in such a manner as to protect any realized surplus for the debtor, on the disposition of the collateral. If there is no objection within the 15 days, the collateral is no longer subject to any claim of the debtor.”

Disposal of the Collateral- Section 59 deals with disposition of collateral:

o S 59(2): in existing condition or fix up; charge for reasonable costs of repairo Dispose of it s 59(3), by private or public saleo It is usual to sell at public sale because it is easy to challenge a private sale (by other SPs; debtor don’t sell for

FMV, other parties can probably deprive you of your ability to sue for deficiencies)o S 59(13): SP can purchase collateral at FMV at public saleo S 59(14): when a SP disposes to a purchaser in good faith, purchaser gets free from SI and all subordinate

interests whether or not this section complied witho When you sell only disposing it free from your SI and subordinate interests

When it sells, buyer takes it subject to prior interests (who could potentially seize it) In practice, all of SPs will do this together OR you will want to clear high interests first (no one will buy

and could be commercially unreasonable to sell this way) Why you need to know prior interests who you will need to buy out!! Other law relates to this

S 16 of the Sale of Goods Act (must reveal charges and encumbrances)- S 59 before proceeding- S 59(6): fairly elaborate notice requirement before proceeding with sale

o Separate notice from CL notice (2 notices given)o At least 20 days’ notice before disposition

When, where, what, etc.o To whom?

S 59(6): debtor (includes who has possession [they also get notice]) and parties with subordinate interests

Prior interests are NOT entitled to notice- Supplementary law:

68  (1) The principles of the common law, equity and the law merchant, except insofar as they are inconsistent with the provisions of this Act, supplement this Act and continue to apply.(2) All rights, duties or obligations arising under a security agreement, this Act or any other law applicable to security agreements or security interests must be exercised or discharged in good faith and in a commercially reasonable manner.(3) A person does not act in bad faith merely because the person acts with knowledge of the interest of some other person.

Copp v Medi-Dent Services LtdRule

- The disposal of collateral must be made in a commercially reasonable manner- The test is beyond just good faith- Reasonable care must be taken to ensure the proper value is obtained- It is a question of fact

Facts- The plaintiff and his partner ran a dentist office- They had a stormy partnership- They were joint debtors to the defendant on dentistry equipment- They default on the loan- As a result the secured party sells the equipment, but to the partner- It is sold for the cost of the outstanding balance, but that is less than half collateral’s value- The plaintiff is not given reasonable notice of the sale

Issue & Holding- Is this commercially reasonable or in good faith? No

Analysis- Here there was a private sale with an adverse interest to the joint debtor and there was no independent appraisal- It was not commercially reasonable- No attempt at advertisement or publicity- Private sale to a party clearly adverse in interest to the joint debtor - No attempt at obtaining any opinion of value of the security, let alone an independent appraisal - Only measure of the sale price was the amount of the debt outstanding to the lessor and only independent evaluation

places a value on the security more than twice the amount of the sale price- The court granted an order containing, inter alia, a declaration that the transfer of the collateral to Dr. Piccininni is not a

disposition under the PPSA and that Dr. Piccininni “continues to have duties to the secured party to the collateral”

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Deficiency Claims- See s 59 above- S 60: who gets paid

o Giving accounting of paymento Get monies to the extent you are owed and then extra to subordinateso Still extra – goes to D

- SP may owe you damages if not conducted in commercially reasonable mannero S 69: if procedures haven’t been followed, entitled to damages (sue for actual damage or amount prescribed by

statute) and further, s 69(7) says if procedures in statute not complied with court can order SP1 in breach is not entitled to anything (cuts SP1 off)

Powerful disincentive- Consumer Goods

o Have retained some old law in the PPSAo Seize or sue (prior default remedial approach)

Opted for one, couldn’t get the other Rationale: without alternative approach, there would be no reason/benefit to get the most from the sale In BC, this survives in the consumer goods provision

o S 67: preserves remedial approach D in default under SI with consumer goods then (a) (b) (c) or (d) [faced with possession – provision

applies] Doesn’t say when characterization is done Shouldn’t probably exclude consumer goods

Seize, foreclose, or bring action to recover judgmento S 67(2): D unperformed obligations under SI are extinguishedo S.67(10): sue!!! SI extinguished

Bank of Montreal v CharestRule

- Although a secured creditor should comply generally with the notice provisions of the - PPSA, a failure to give notice will not prevent the creditor from enforcing the guarantee if the following three

requirements are satisfied: o The creditor has a right under its contract to sue the debtor for the deficiency (this right is deemed to be

part of the security agreement under s 64(3) of the PPSA unless the contract states otherwise)o The terms of the guarantee make the guarantor liable for the balance owed by the debtor to the creditoro The guarantee does not give the guarantor a contractual right to receive notice

Facts- The defendant is the person behind the one-man corporation Dynamic- He gives personal guarantees for loans to Dynamic (a chattel mortgage and a general security agreement)- Dynamic becomes bankrupt- Bank tries to comply with Part V- They should give notice to the debtor and the guarantor, but they only give notice to “Dynamic c/o Mr. Charest”- Defendant claims lack of notice

Issue & Holding- Can the bank enforce the guarantee? Yes

Analysis- According to Segreto, one must comply with statute to assert statutory rights- The statutory right is gone for the bank; they must rely on the contract- The previous case law from Featherstone, which said they could not rely on contract either, was wrong- The contract needs to expressly give the right to sue for deficiency- Here, for the chattel mortgage it says for all obligations, which would include deficiencies- For the general security agreement there is no deficiency clause, but it can be justly construed- According to Ziegel, it is important not to lose sight of the primary obligation, which is the debt- Cases where a specific provision was needed were not general security agreements- Here there is nothing specific tied to the loan

Enforcement of Security Interests by Receivers and Receiver-Managers- Receivers: appointed by court to take assets and manage them if needed in order to dispose of them or restore health of

bankrupt assets (i.e., company)- See ss 64-66

Ostrander v Niagara Helicopters LtdRule

- Must act in good faith- If appointed by court, then different

Facts- Ostrander was founder and principal shareholder of Niagara Helicopters- Niagara borrowed money from Roynat Ltd and gave as security a debenture under a trust deed arrangement encumbering

its assets- Upon default, Roynat appointed Bawden as receiver-manager of Niagara- Roynat sold most of the assets of Niagara after receiving two tenders- Ostrander brought action to regain possession of Niagara and to set aside the sale of its assets

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- He alleged improper conduct on the part of Bawden- As part of his case, Ostrander argued that Bawden was acting in a fiduciary capacity with respect to Niagara and that his

conduct amounted to breach of trustIssue & Holding

- Are receiver-managers appointed by creditor fiduciaries? NoAnalysis

- There is a distinction between private and court appointed receivers- The private receiver stands in the shoes of the appointer- They are not a fiduciary, but must comply with all laws and contractual agreements, but nothing more- The court appointed receiver is an officer of the court- They are responsible to all creditors; regardless of how asked the court for their appointment- Often in an agreement the receiver is an agent for the debtor- This is done to keep the debtor liable for the actions of the receiver and keep insurance valid- In that case, the creditor will still be liable for violations of s 17 (care of collateral in possession)

Standard Trust Co v Turner Crossing IncRule

- Must have the right to appoint a receiver in the security agreement- Otherwise, you need a court order

o Cannot do it by defaultFacts

- Turner Crossing acquired property in Regina for the purposes of building a shopping mall- Standard Trust Co was to finance Turner and agreements were executed as security for the funds

o Consisted of a first real property mortgage for some $5,656,000, a second participation mortgage, a PMSI and an assignment of leases and rental

- Phase I completed but problems arose in phase II and Turner alleged that Standard refused to provide additional funding- Shortly after, Standard was ordered by the court to be wound up and Ernst & Young was appointed as liquidator- Liquidator informed Turner that they were in default of the mortgage and- When this was not dealt with, Ernst & Young appointed a receiver and manager for Turner- Ernst & Young applied for foreclosure on the property- Turner counterclaimed stating that appointment of a receiver and manager was unlawful

Issue & Holding- Was Ernst & Young’s appointment of a receiver unlawful? Yes

Analysis- The security agreement must allow appointment of a private receiver, before a party is allowed to appoint one- The right to appoint is not implied or deemed if not in the agreement- Otherwise, the appointing party will be liable for damages

Deemed Security Interests- Although the PPSA covers leases for more than one year (and other agreements), enforcing them are not governed by the

PPSA, since leases are governed by the law of contract and leases- Application and interpretation

55 (2) This Part does not apply to(a) a transaction referred to in section 3, or(b) a transaction between a pledgor and a pawnbroker.

- Scope of Act: security interests that do not secure payment or performance3  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.True Leases and Security Leases Distinguished

- DaimlerChrysler Services Canada Inc v Cameron:o Was this a lease or a secured loan?o Look at terms of lease:

[10] In the instant case, the lease was on a printed form.  The term of the lease was 48 months, ending 5 October 2006.  Pursuant to the lease, Mr. Cameron was obliged to pay $1,092.30 monthly.  He was also required to pay $0.12 per kilometre if the truck was driven over 2,000 kilometres monthly.

[11] Mr. Cameron was required to maintain the truck in good condition and operating order, and to make all requisite repairs.  Further, the lease imposed restrictions on Mr. Cameron’s use of the vehicle: he was obliged both not to use the truck unlawfully or inappropriately and to keep the truck free of others’ claims.

[12] The lease did not include a down-payment or trade-in allowance. [13] Mr. Cameron had an option to purchase the truck at the expiration of the lease term for

$29,851.20.  The option purchase price (to which the parties refer as the truck’s “Residual Value”) was 54 percent of the manufacturer’s suggested retail price of $55,280 before the dealer installed accessories.  The figure of 54 percent was derived from a table prepared by Daimler to forecast various vehicles’ values at the end of their respective lease terms.

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[14] Mr. Cameron had the right to terminate the lease any time before the end of the lease term.  However, if he invoked this right, he was required to either exercise the option to purchase, or pay an early termination liability and return the vehicle to Daimler.

[15] If Mr. Cameron exercised the option to purchase prior to the expiration of the lease, he had to pay the Residual Value plus the unpaid monthly payments for the balance of the lease term, plus any other charges payable under the lease, less unearned lease charges on an actuarial calculation method.

[16] If Mr. Cameron terminated the lease without exercising the option to purchase, he had to pay the early termination liability, which the lease defined as all past due monthly amounts, plus all monthly payments not yet due, plus any amounts due under the lease, plus the Residual Value, minus the net amount that Daimler received in a reasonable sale, minus any insurance monies received by Daimler, minus any unearned lease charges.

[17] Mr. Cameron was also required to pay the early termination liability if Daimler terminated the lease.  Regardless of who terminated the lease, Mr. Cameron’s ensuing payment obligation would ensure that Daimler obtained at least the Residual Value.

[18] Upon default, Daimler could take immediate possession of the truck, obtain the early termination liability and sue for damages to be calculated in accordance with the terms of the lease described above.

o Court held this was a lease, so PPSA inapplicable, so can’t rely on PPSA Part 5 remedies.o Need to rely on leaseo The factors that support a finding that the lease is a security lease include:

Whether there was an option to purchase for a nominal sum; Whether there was a provision in the lease granting the lessee an equity or property interest in the

equipment; Whether the nature of the lessor’s business was to act as a financing agency; Whether the lessee paid a sales tax incident to acquisition of the equipment; Whether the lessee paid all other taxes incident to ownership of the equipment; Whether the lessee was responsible for comprehensive insurance on the equipment; Whether the lessee was required to pay any and all licence fees for operation of the equipment and to

maintain the equipment at his expense; Whether the agreement placed the entire risk of loss upon the lessee; Whether the agreement included a clause permitting the lessor to accelerate the payment of rent upon

default of the lessee and granted remedies similar to those of a mortgagee; Whether the equipment subject to the agreement was selected by the lessee and purchased by the

lessor for this specific lease; Whether the lessee was required to pay a substantial security deposit in order to obtain the equipment; Whether there was a default provision in the lease inordinately favourable to the lessor; Whether there was a provision in the lease for liquidated damages; Whether there was a provision disclaiming warranties of fitness and/or merchantability on the part of

the lessor; and Whether the aggregate rentals approximate the value or purchase price of the equipment.”

The Measure of Damages for Breach of a True Lease

Keneric Tractor Sales Ltd v LangilleRule

- General contract principles determine damagesFacts

- Keneric leased ten pieces of farm equipment to the Langilles during the summers of 1981 and 1982- The 1981 leases called for 10 semi-annual payments over a five-year period- The sum of these payments was equal to 120% of the original purchase price- A separate agreement gave the Langilles an option to purchase the equipment for 25% of the original purchase price- The option was exercisable at the end of the five year period and if not exercised, the equipment would revert back to

Keneric- The 1982 leases were structured the same way but the semi-annual payments were higher and the option to purchase was

set at 30% of the original purchase price- Keneric bought the farm equipment from the manufacturer and in order to finance the purchases, the leases were assigned

to the manufacturer - Keneric guaranteed the Langilles’ performance under the leasing agreements and agreed to act as agent for the recovery

of amounts due- In March 1983 the Langilles advised Keneric that they would have trouble making the lease payments- Negotiations failed to resolve the problem and the Langilles defaulted – Keneric seized the equipment- After due notice, Keneric sold the seized equipment and commenced an action claiming damages for breach of the leases

Issue & Holding- How should damages be calculated in cases of leasing personal property - by general contract principles

Analysis- Liquidated damages are recognized on default of a lease of real property in Highway Properties- Liquidated damages should also be applicable in the case of leasing personal property- There is liability as in any other contractual obligation, subject to all the rules of contract, such as mitigation- Note: in Canada the lease is enforced like any other contract, whereas in England, the liquidated damage is applied on

anticipatory breach, regardless of language

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CONFLICT OF LAWS- Parties are different jurisdictions- Parties and collateral are in different jurisdictions- Collateral or parties may change locations during the life of the transaction- All PPSA’s have the same general rules on jurisdiction based on the old UCC Article 9 rules (the new Article 9 has

revamped this area).- Apparent bifurcation problem, if two jurisdictions have conflict of laws rules that do not come to the conclusion (rare)

Security Interests in Goods: Initial Validity and Perfection- Sections 5-8.1- Section 5:

(1) Subject to sections 6 to 8, the validity, perfection and effect of perfection or non-perfection of(a) a security interest in goods, or(b) a possessory security interest in an instrument, a negotiable document of title, money or chattel paper,

is governed by the law of the jurisdiction in which the collateral is located when the security interest attaches.

Relocation of Goods- The rules with respect to relocation of goods is more broad compared to other jurisdictions, such as Ontario

5(3) A security interest in goods perfected under the law of the jurisdiction in which the goods are located at the time the security interest attaches, but before the goods are brought into British Columbia, remains perfected in British Columbia if it is perfected in British Columbia

(a) not later than 60 days after the goods are brought into British Columbia,(b) not later than 15 days after the day the secured party has knowledge that the goods have been brought into British Columbia, or(c) before the date that perfection ceases under the law of the jurisdiction in which the goods were located when the security interest attached,

whichever is the earliest, but the security interest is subordinate to the interest of a buyer or lessee of the goods who acquires his or her interest without knowledge of the security interest and before it is perfected in British Columbia under section 24 or 25.(4) A security interest that is not perfected as provided in subsection (3) may be otherwise perfected in British Columbia under this Act.(5) If a security interest referred to in subsection (1) is not perfected under the law of the jurisdiction in which the collateral was located when the security interest attached and before the collateral was brought into British Columbia, it may be perfected under this Act.

Re Adair; Re General Motors Acceptance CorporationRule

- Collateral subject to a perfected security interest in another jurisdiction becomes an unperfected security interest as of the date at which the collateral is brought into province of relocation, if the person who owns such security interest fails to perfect within the times limited by the relevant section of the PPSA

- If SP does do it within the time limit, it remains perfected for the relevant gap (from the time moved in until reperfection)

Facts- Debtor purchases car in Florida, moves it to Ontario a year later, and goes bankrupt a month after that- GMAC learns of the bankruptcy from an Ontario court notice- They perfect after that

Issue & Holding- What happens if the creditor fails to perfect within the time listed in the PPSA? Doesn’t perfect

Analysis- GMAC filed the registration after the allowed time, so they are unsecured- They were not perfected during the time in Ontario either

Re Claude A BedardRule

- Once notice has been received, you must perfect within the time limit set out in the PPSA of the province you relocated the goods to

Facts- The bank finances a conditional sales contract for a car in Quebec- The next day the debtor moves the car to Ontario without the bank’s knowledge- The debtor becomes bankrupt in Ontario- In Quebec no action is needed to perfect

Issue & Holding- Which law governs the security interest? Ontario

Analysis- It deemed to be perfected when brought into Ontario, because it was perfected in Ontario- However, the perfection will only continue up to 15 days, since there was notice given- The dealer knew the debtor lived in Ontario and that would be considered notice- Since it was not registered in Ontario within the 15 days, it is no longer perfected

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The Destination of Goods Rule and the Mobile Goods Rule- Law applicable: parties intend goods to be removed from jurisdiction

6 (1) Subject to section 7,(a) if the parties to a security agreement that creates a security interest in goods in one jurisdiction understand at the time the security interest attaches that the goods will be kept in another jurisdiction, and(b) if the goods are removed to the other jurisdiction, for purposes other than transportation through the other jurisdiction, not later than 30 days after the security interest attaches,

the validity, perfection and effect of perfection or non-perfection of the security interest is governed by the law of the other jurisdiction.(2) If the goods are removed out of British Columbia, but are later brought into British Columbia, the security interest in the goods is deemed to be a security interest to which section 5 (3) applies if it was perfected under the law of the jurisdiction to which the goods were removed.

- Law applicable: mobile goods, intangibles, etc.7 (1) For the purposes of this section and section 7.1, a debtor is located

(a) at the place of business, if any, of the debtor,(b) at the chief executive office of the debtor, if the debtor has more than one place of business, and(c) at the place of the principal residence of the debtor, if the debtor has no place of business.

Gimli Auto Ltd v BDO Dunwoody LtdRule

- If collateral is goods of a type that are normally used in more than one jurisdiction, and they are either equipment or inventory used by debtor for lease to others, then security interest is governed by location of debtor according to s 7

Facts- Debtor leased three trucks from plaintiff in Manitoba- Manitoba did not require registration of true leases, so the leases not registered anywhere- Debtor took back to their head office in Alberta where it rented the trucks out- Debtor also leased car in BC for use of its employees in its Surrey office

Issue & Holding- Is security interest perfected in jurisdiction of debtor? Yes

Analysis- Alberta PPSA is governing law – thus, s 7(2)(a)(ii) applies to the 3 trucks and b/c there was no registration in AB, the

lessor’s interest was not perfected- If there was no misrepresentation, AB law would apply and the lessor’s interest was not perfected before bankruptcy, thus

trustee prevails in both casesSecurity Interests in Intangibles, Etc.

7 (2) The validity, perfection and effect of perfection or non-perfection of(a) a security interest in

(i) an intangible, or(ii) goods, other than a foreign registered ship, that are of a type that are normally used in more than one jurisdiction, if the goods are equipment or are inventory leased or held for lease by the debtor to others, and

(b) a non-possessory security interest in an instrument, a negotiable document of title, money or chattel paper,is governed by the law, including the conflict of laws rules, of the jurisdiction in which the debtor is located when the security interest attaches.

Security Interests in Investment Property- Law applicable: investment property

7.1 (1) The validity of a security interest in investment property is governed by the law, at the time the security interest attaches,

(a) of the jurisdiction in which the certificate is located if the collateral is a certificated security,(b) of the issuer's jurisdiction if the collateral is an uncertificated security,(c) of the securities intermediary's jurisdiction if the collateral is a security entitlement or a securities account, or

Enforcement- Law applicable: substance and procedure

8 (1) Despite sections 5 to 7.1,(a) procedural issues involved in the enforcement of the rights of a secured party against collateral are governed by the law of the jurisdiction in which the enforcement rights are exercised, and(b) substantive issues involved in the enforcement of the rights of a secured party against collateral are governed by the proper law of the contract between the secured party and the debtor.

(2) For the purposes of sections 5 to 7.1, a security interest is perfected under the law of a jurisdiction when the secured party has complied with the law of the jurisdiction with respect to the creation and continuance of a security interest, and the security interest has a status in relation to the interests of other secured parties, buyers, judgment creditors or a trustee in bankruptcy of the debtor, similar to that of an equivalent security interest created and perfected under this Act.

Cardel Leasing Ltd v MaxmenkoRule

- If law is substantive, then apply law where agreement signed

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- If procedural then apply law where company is basedFacts

- DF entered into an agreement with PL to lease a Volvo, signed in BC- Agreement contained a buyout provision- PL company had its head office in ON, the agreement became effective at the time of its acceptance by an officer of the PL

at TO- Payments fell behind; car was reposed by the PL’s agents in BC and sold there

Issue & Holding- Is the “choice of law” provision of the contract enforceable? No

Analysis- The law of BC forecloses the option of suing upon electing repossession of the vehicle- You must either sue or repossess- The agreement’s provision was unenforceable in Ontario, b/c it was not valid according to the law of the jurisdiction where it

was to be performed- Even though in Ontario the provision was lawful, the performance was in BC

FEDERAL SECURITY INTERESTS

The Bank Act Security Interests- See ss 427-428 of the Bank Act

The Nature of the Bank Act Security Interest- A separate regime from the PPSA established before the PPSA existed

o No longer really necessary, but there is no motivation to get rid of it- The bank files a notice of intention registered with the Bank of Canada- The bank registers first, and takes security later (3 year window, renewable)- Bank of Canada has agency offices across Canada- Registry must be with the agent in the appropriate provinces (where notice of intention, business located)

o Provinces do not share data- Only specific debtors and specific collateral- Based on past policies of who should be lent money- Most common subsections:

o Inventory like security dealing with agricultural, aquaculture, forestry and related packaging (specific to avoid banks dominating the industry)

o Manufacturers and manufactured goods- Bank has the same power as if they had a bill of lading or warehouse receipt (essentially they have title)- The security is generally title based- Similarities to the PPSA : notice filing; centralized registry (at least partially); fixed security in AAP; covers future advances;

some fixture provisions; commingled goods; express priority rules- Differences from the PPSA : limited scope; anti-fraud provisions; obscure, unclear if it includes established title law;

incomplete priority system; incomplete enforcementRoyal Bank of Canada v Sparrow Electric CorpRule

- The rights and powers of the bank are established by the Bank Act- They are the same as if the bank had a bill of lading or warehouse receipt- The effect is to vest legal title in the good with the bank- The vesting attaches when the borrower acquires the property and is kept until the bank releases it

Issue- What is the nature of a Bank Act security interest?

Analysis- The security interest created by the Bank Act is “a fixed and specific charge with a license to sell the inventory”- A s 427 security interest gives the bank full legal interest in all the present and after acquired property held from time to time

whether or not the loan is in default- The debtor retains the equitable right of redemption; if he pays the loan, the bank must return legal title- This is essentially a chattel mortgage in favour of the Bank of Canada- The interest in after-acquired property is not a floating charge that attaches at default, it is a specific charge in everything

the debtor has at any given timeThe Bank Act – PPSA Interaction

Bank of Nova Scotia v International Harvester Credit CorpRule

- A Bank Act security may be a security interest under the PPSA- A bank can opt in or opt out of the PPSA simply registering or discharging a registration under the PPSA- Where a prior unperfected PPSA security interest is in competition with a subsequent Bank Act security, the

priority rules of the Bank Act (not those of the PPSA) apply- It may be possible to have two separate enforceable security interests (one under the PPSA and one under the

Bank Act) in the same collateral securing the same debt from the same debtorFacts

- Defendant had conditional sales contract in 1981 that remained unperfected due to wrong name on the financing statement

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- Later, the plaintiff obtains a security interest under the Bank Act s 178 (now s 427) and registers it with the Bank of Canada, which registers a valid financing statement under PPSA based on the s 178 security interest

Issue & Holding- Does the security interest created by the bank act qualify as one under the PPSA, and does it give the bank priority? The

bank has a valid security interest without priority over the defendantAnalysis

- The BA security agreement creates an interest in personal property for fulfilment of an obligation- It is a security interest as defined in the PPSA- The nature of the security interest is title or ownership, if the debtor can grant it- The BA security can only attach to the rights the debtor has- Since the BA agreement came after the conditional sales contract, the debtor never had title (never completed payments)- The BA security interest never attached- Assuming unlike here the BA applied, the BA security would be title based- The PPSA cannot be used to put the bank in a better position it would have been- If it was just PPSA, the bank would win

Intellectual Property Security Interests- IP Acts do govern assignment of IP rights, but not really the security related aspects (unlike the Bank Act or Shipping Act)- There may be absolute assignments or partial assignments (get right bank)- According to Dearle v Hall, the first assignee to notify the account debtor has priority- According to the Patent Act (s 51), the first to register assignment of a patent has priority- The prudent party will register under both the IP Act and the PPSA- The two acts can produce different outcomes

o The relative weight of the Acts will determine the priority - Approach 1:

o Just look to the IP registry – ignore the PPSA registry - Approach 2:

o PPSA registry deals with security, so no need for the IP registry – IP registry can only register actual assignments, but with security assignments, there the transfer only occurs on default

- Best approach: o Make sure the security agreement describes the interest as an assignment (to allow IP registry)o Register under both the PPSA and the IP registry

- Assignment of all and future copyrights are not possible- Each copyright must be registered individually in the CA registry- Registering and monitoring each under the IP and PPSA registries is a huge hassle- It seems likely the PPSA and IP Acts act concurrently- PPSA applies to matters not completely otherwise covered- Absolute assignment is completely covered and the PPSA would violate the constitutional separation of powers- Security assignments are not covered

Ship Mortgages- Canada Shipping Act applies to boats subject to certain type and minimum size- Some ships are possible to register, but it is not mandatory- Only registered ships can apply for mortgages- Registration is centralized and common across Canada- Priority is according to time of filing- According to case law a ships mortgage does not create security under the PPSA (unlike the Bank Act)- It is possible that a ships mortgage can be completely under the PPSA, but it has not been tested constitutionally (feds

seems to have occupied the field)- Unregistered ships can be dealt with under the PPSA- Assets on the ship can be very valuable (i.e., electronics)- To secure them:

o Mortgage the entire ship (even though you’re only interested in the assets)o Contract between the ship owner and the mortgagor (and possible subsequent mortgagors)

International Developments- Many other jurisdictions are thinking of introducing PPSAs- There is an English Law Commission report supporting the idea – international treaties on security already exist, such as for

aircraft financing (Canada not a member)- The civil law is generally adverse to the idea- They do not like:

o Non-possessory securityo Government run registries

- Assets are worth less when there is no established and certain PPSA system that creditors know how to use to enforce their rights – especially non-traditional assets like accounts receivables

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