law 587 personal property security law buckwold · o the merchant is the agent of the supplier. o...

LAW 587

PERSONAL PROPERTY

SECURITY LAW

BUCKWOLD

Table of Contents

Chapter 1: Introduction ........................................................................... 4

1. Secured Financing Before the PPSA.......................................................................................................4

2. Inter Partes Rights...................................................................................................................................4

3. Problems of Priority ................................................................................................................................4

4. Categories of Cases ..................................................................................................................................4

Chapter 2: Substance Test ....................................................................... 5

1. Security Interest.......................................................................................................................................5

2. Application of the Substance Test ...........................................................................................................5

Canadian Western Bank v. Baker (Sask QB and Affirmed by CA)..........................................................5

Axis Cash International...............................................................................................................................6

Sims Battle Brewster & Associates Inc. (RE) (1999)(Alta. Q.B.)...............................................................6

Chapter 3: Deemed SI and Exclusions from the PPSA ........................... 6

1. Deemed SI ................................................................................................................................................6

Royal Bank v. Autotran Manufacturing Ltd. (Sask.Q.B.) .........................................................................7

Sprung Instant Structures Ltd. v. Caswan Environmental Services Inc. [1997] ......................................7

2. Transactions Specifically Excluded from the Act...................................................................................8

Chapter 4: Attachment ............................................................................ 8

1. Attachment – The Concept......................................................................................................................8

Patry v. General Motors Acceptance Corp. of Canada (2000) ................................................................ 10

Chapter 5: Perfection & Registration .................................................... 10

1. Perfection ............................................................................................................................................... 10

Case Power & Equipment v. 366551 Alberta Inc. (Receiver of) .............................................................. 13

GMAC Leaseco LTD. v. Moncton Motor Home & Sales Inc. (2003)(N.B.C.A)...................................... 13

Harder (Trustee of) v. Alberta Treasury Branches [2005] ..................................................................... 14

Royal Bank of Canada v. Steinhubl’s Masonry Ltd. [2003] Sask QB ..................................................... 14

Sperry Inc. v. Canadian Imperial Bank of Commerce (1985) ................................................................. 15

Chapter 6: The Priority Status of an Unperfected SI............................. 15

1.The Meaning of “Priority” And “Subordination”................................................................................. 15

2. Subordination of Unperfected SI to Trustee in Bankruptcy................................................................ 16

Re Giffen (1998) SCC ................................................................................................................................ 16

3. Subordination of Unperfected SI to Judgement Creditors .................................................................. 16

4. Subrogation............................................................................................................................................ 16

N'amerix Logistix INC., RE (2001)........................................................................................................... 16

Chapter 7: Priority Among SI & Priority Between SI & Writs ............. 17

1. The Priority Structure of the Act .......................................................................................................... 17

Carson Restaurants International v. A-1 United Restaurant Supplies Ltd. [1989] ................................ 17

C.I.B.C. v. A.K. Construction (1988) et al. (1995) (Alta. Q.B.) ................................................................ 18

Furmanek v. Community Futures (1998) ................................................................................................. 18

2. Tacking Future Advances..................................................................................................................... 18

Thorp Finance Corp. of Wisconsin v. Ken Hodgins & Songs (1977) Mich. C.A..................................... 18

3. Priority Between a SI and a Writ of Enforcement ............................................................................... 19

Chapter 8: PMSI, Subordination, Subrogation & Marshalling.............. 19

1. Purchase-Money Security Interests (s. 1 (1)(ll)): .................................................................................. 19

Agricultural Credit Corporation of Saskatchewan v. Pettyjohn[1991]................................................... 20

Battlefords Credit Union Ltd. v. Ilnicki [1991] Sask CA ......................................................................... 21

2. Subordination ....................................................................................................................................... 21

3. Subrogation and Marshalling............................................................................................................... 21

Steinbach Credit Union Ltd. v. Manitoba Agricultural Credit Corp [1991] .......................................... 21

Chapter 9: Proceeds .............................................................................. 21

1. Proceeds: The Concept and its Function .............................................................................................. 21

Canadian Imperial Bank of Commerce v. Marathon Realty Co. Ltd. [1987] ......................................... 22

2. Perfection of a SI in Proceeds............................................................................................................... 22

3. The Scope of the Concept: Identifiable or Traceable .......................................................................... 22

Universal C.I.T. Credit Corp. v. Farmers Bank of Portageville .............................................................. 22

Agricultural Credit Corporation of Saskatchewan v. Pettyjohn............................................................. 23

4. Proceeds and the Position of Deposit-Taking Institutions................................................................... 23

Flexi-coil Ltd. v. Kindersley District Credit Union .................................................................................. 23

Chapter 10: Priority of SI against Buyers and Lessees.......................... 24

1. The Protection of Buyers and Lessees: Priority v. Perfected and Unperfected SI ............................. 24

Royal Bank v. Wheaton Pontiac ............................................................................................................... 25

Lanson v. Saskatchewan Valley Credit Union Ltd................................................................................... 25

Canadian Commercial Bank v. Tisdale Farm Equipment Ltd................................................................ 26

2. The Ordinary Course Buyer or Lessee ................................................................................................. 26

Camco Inc. v. Olson Realty (1979) Ltd..................................................................................................... 26

Alberta Pacific Leasing Inc. v. Petro Equipment Sales Ltd..................................................................... 26

General Motors Acceptance Corp. of Canada v. Owens.......................................................................... 26

Willi v. Don Shearer Ltd ........................................................................................................................... 27

The Royal Bank v 216200 Alberta Ltd. .................................................................................................... 27

Spittlehouse v. Northshore Marine Inc..................................................................................................... 27

Chapter 11: Accounts, Liens and Fixtures ............................................ 28

1. Accounting Financing and Factoring.................................................................................................... 28

2. Liens and Other Statutory Interests .................................................................................................... 30

Craddock Trucking Ltd. v. LeClair.......................................................................................................... 30

Chapter 12: Chattel Paper & Interjurisdictional Issues (Conflict of Laws).............................................................................................................. 31

1. Chattel Paper Financing....................................................................................................................... 31

2. Interjurisdictional Issues (Conflict of Laws) ....................................................................................... 31

Gimli Auto Ltd. v. BDO Dunwoody Ltd................................................................................................... 32

Chapter 13: Post-Default Rights and Remedies .................................... 33

1. Enforcement of a SA under Part V (PPSA s. 55-64)............................................................................ 33

Loewen v. Superior Acceptance Corp....................................................................................................... 36

Rapid Transit Mix Ltd. v. Commcorp Financial Services Inc. ................................................................ 36

Chapter 14: Bank Act Security.............................................................. 37

1. The Conceptual Basis of Bank Act Security and the Scope of s. 427................................................... 37

2.Future Property as Security ................................................................................................................... 37

3. Future Advances and Antecedent Debt ................................................................................................ 37

4. Proceeds ................................................................................................................................................. 37

5. Registration............................................................................................................................................ 38

C.I.B.C. v. 281787 Alberta LTD. (Crockett’s Western Wear) ................................................................. 38

6. Priorities: Provincial SI v. Bank Act SI ................................................................................................ 38

Royal Bank v. United Grain Growers....................................................................................................... 38

Bank Of Nova Scotia v. International Harvester Credit Corp. (Ont CA)............................................... 39

Chapter 1: Introduction 1. Secured Financing Before the PPSA 1) Chattel Mortgage: Goods are used as collateral and the debtor retains possession, but the title is transferred to the creditor. Debtor holds an equity of redemption that allows return of title upon payment. Upon default, creditor has a right to seize based on ownership. Required registration. 2) Conditional Sale: Vendor retains title to collateral/goods, but debtor takes possession. Seizure upon default based on ownership. Required registration. 3) Assignment of Accounts: Debtor is vendor and others (account debtors) owe them money. The advance comes from the creditor who demands an assignment of those accounts so that if the debtor defaults they can go to debtor’s customers and get them to pay the lender directly. For business financing and requires registration. 4) Floating Charge Debenture: Wide range of assets being offered as collateral (such as all inventory or all assets). Under this, the agreement gives an inchoate interest in the form of an equitable interest that was not tied to specific items until it crystallized when default occurred. At that time, the creditor got a property interest in all property defined under the agreement.

2. Inter Partes Rights Secured Credit Transactions fall into one of two categories generally: 1. Vendor Credit:

• Where a person selling goods or services on credit takes an SI in the property of the buyer to secure repayment of remaining purchase price. On default, entitled to seize and sell the collateral.

• This interest is usually in the property being sold (called a Purchase Money Security Interest). This interest is often transferred/assigned to a financial institution at some point making them the secured creditor.

2. Lender Credit:

• Lender/creditor lends money to borrower/debtor and takes an SI in their property to secure repayment of the sum loaned. The secured party can only realise against the property to which the SI has attached and only to the extent of the interest.

3. Problems of Priority

• Priority disputes arise because debtors can give SI in the same collateral to more than one creditor or can deal collateral to others that is subject to an SI.

• Generally, perfection is required to win (the date of registration usually determines priority status).

• The primary basis for competing claims:

• a) Liens: A person who provides repair, storage or transportation services on credit terms to goods, may be entitled to assert a claim to satisfy the debt.

• b) Judgement Creditors and the Trustee in Bankruptcy:

• c) Transferees: Those who acquire property from a debtor by purchase or gift can take subject to an SI in existence at the time of the transfer.

4. Categories of Cases 1) Inter Partes Rights: The rights between the secured party at the debtor. 2) Priorities: The rights between the secured party and a third party.

• Examples: o a) Secured Party v. Secured Party: Both have security interest on property. o b) Secured Party v. Commercial Lienholder: o c) Secured Party v. Debtors’s Trustee in Bankruptcy:

o d) Secured Party v. Buyer from Debtor

Chapter 2: Substance Test 1. Security Interest

• s. 3 (1): The PPSA applies only to transactions that create/provide for SI or that are deemed to create them.

• s. 1 (1) (tt): Security interests are: o (i) An interest in goods, chattel paper, a security, a document of title, an instrument, money or an

intangible that secures payment or performance of an obligation… o (ii) the interest of

� (A) a transferee arising from the transfer of an account or a transfer of chattel paper, � (B) a person who delivers goods to another person under a commercial consignment, and � (C) a lessor under a lease for a term of more than one year, � whether or not the interest secures payment or performance of the obligation;

• Read s. 1 (1) (tt) in the context of s. 3 that makes the PPSA applicable to every transaction that in substance creates a security interest.

2. Application of the Substance Test

A. Legal Consequences of Characterization • s.3 (2): The PPSA applies to true leases that have a term of more than one year (s.1 (1)(z) and commercial

consignments (s.1 (1)(h)). It does not apply to true leases or consignments (s. 55 (1)). o In those cases, a secured party must rely on a property interest in collateral.

B. True Lease or Security Agreement (Security Lease) Test: Determine what the intention (not necessarily expressed) of the parties to the transaction was as determined by the circumstances surrounding its creation and the effect its terms could reasonably be expected to produce.

• The relevant factors relate to the parties’ economic rights and obligations since s. 3(1)(a) prevents characterization based on the location of the title.

Canadian Western Bank v. Baker (Sask QB and Affirmed by CA) • Issue: Was it a conditional sales agreement or a lease?

• Test: Compare the amounts required to purchase the wares at the expiry of the minimum lease period with the market value of the wares at that date. If the amount to pay to buy it is small, then it is probably a conditional sale.

o Indicia that it is a conditional sale: � Acceleration clause � Significant down payment � Payment of taxes and insurance � Option to Purchase � No contemplation of the ultimate return at the end � No provision providing for the transfer of title to the lessee upon performance of the

obligations � Specific provisions about where title remains, or the characterization of the arrangement are

not determinative but can be helpful.

C. True Consignment or Security Agreement • Focus on the substance of the transaction.

• Consignment: o A relationship of principal and agent exists between transferor and transferee of the goods, whereby

the owner delivers them to another who, mostly, has the role of selling them as the agent for the owner.

o Consignors remain owners until sale of the consigned goods because the goods are in the hands of the agent with the objective of selling them to a third party (or even the consignee in some cases).

Test: Determine whether the facts indicate a principal-agent relationship or a secured sales transaction by looking at what the parties actually do and not just the contract.

• Features of a true consignment as per Access Cash International, Inc. v. Elliot Lake and North Shore

Corporation for Business Development (2000):

o The merchant is the agent of the supplier. o Title in the goods remains in the supplier. o Title passes directly from the supplier to the ultimate retail purchaser and does not pass through the

merchant. o The merchant has no obligation to pay for the goods until they are sold to a third party. o The supplier has the right to demand the return of the goods at any time. o The merchant has the right to return unsold goods to the supplier. o The merchant is required to segregate the supplier's goods from his own. o The merchant is required to maintain separate books and records in respect of the supplier's goods. o The merchant is required to hold sale proceeds in trust for the supplier. o The supplier has the right to stipulate a fixed price or a price floor for the goods. o The merchant has the right to inspect the goods and the premises in which they are stored. o The goods are shown as an asset in the books and records of the supplier and are not shown as an asset

in the books and records of the merchant. o The shipping documents refer to the goods as consigned. o The supplier maintains insurance on the goods after they are delivered to the merchant. o It is apparent from the merchant's dealings with others that the goods belong to the supplier rather than

the merchant.

Axis Cash International

• Indicates true consignment: o Merchant is agent of supplier o Title passes directly from supplier to ultimate purchaser o Merchant having no obligations to pay for the goods until they are sold to a third party o Supplier having right to demand return at any time o Merchant having tright to return unsold goods to supplier o Merchant required to segregate the supplier’s goods from their own.

• Basically, anything that indicates the merchant is acting as an agent only.

D. Security Agreement and/or Trust • If the proposed trust is being used as the vehicle to secure the obligation that is the basis of the relationship then

it is a security agreement. If it is the source of the obligation, it is a trust.

• Constructive trusts can’t be SI since they exist only pursuant to court rulings.

Sims Battle Brewster & Associates Inc. (RE) (1999)(Alta. Q.B.) Facts: Insurance company entered into a brokerage/agency agreement with Royal Insurance Company. Sims defaulted and Royal took possession of the files pertaining to its business and then sold them and applied it against the debt. Issue: Was there a charging provision in the agreements that brought them within the terms of a SA as defined in PPSA? Analysis:

• It was an SA because the trust was being used as a vehicle to secure the obligation. E. License and Quotas

• It is unclear where Alberta law stands on the issue of whether the subject of a SA is property when it is in connection with an agreement that purports to give a creditor SI in a license or agricultural quota held by the debtor.

Chapter 3: Deemed SI and Exclusions from the PPSA 1. Deemed SI A. Introduction

• S. 3 (2): The PPSA applies to four types of transactions that are not actually SAs: o 1. Assignment (Sale) of an Account (s. 1 (1)(b)): Transferor retains apparent control despite not

having ownership of or an interest in it.

o 2. Assignment (Sale) of Chattel Paper (s. 1 (1)(f)): o 3. A Lease for a Term of More than One Year (s. 1 (1)(z)): Person in possession is not the owner so

can mislead. o 4. A Commercial Consignment (s. 1(1)(h): Person in possession is not the owner so can mislead.

• However, this does not extend to the PPSA provisions regarding inter partes enforcement (s. 55).

• s. 12 (2): For the purpose of attachment, a lessee and consignor have rights in the goods when they obtain possession of them pursuant to the lease or consignment.

o While the assignment of an account or chattel paper aren’t dealt with, it is implicit that they will be attached.

B. Commercial Consignment

• "Commercial Consignment" (s. 1 (1)(h): Consignments under which both the consignor and the consignee are in the business of dealing in goods of the description consigned.

o DOES NOT INCLUDE consignments to auctioneers and consignees who are generally known to their creditors to be selling or leasing goods for others.

Royal Bank v. Autotran Manufacturing Ltd. (Sask.Q.B.) Facts: Royal bank had loaned funds to Roundup for an SA covering all present and future property. Harmon supplied Roundup with farm equipment pursuant to several consignment agreements. The agreements provided that ownership remained with Harmon until sold and that Roundup held sales proceeds in trust for Harmon. Harmon also registered the interest but didn’t serve notice pursuant to s. 34 (2) as required for a PMSI (which is what Harmon would have) to beat out a previously registered interest. Roundup went into bankruptcy and Royal Bank says that the failure to serve notice made Harmon lose priority. Harmon claimed it was commercial consignment, which would make the property not subject to the SA since it was never really Roundups. Issue: Does Harmon fall within the exception in s. 2 (g) of the PPSA? Analysis:

• s. 2 (g) defines consignments. The question was whether or not it was an “agreement under which goods are delivered to a person for sale or lease if the person is generally known in the area in which he carries on business to be selling or leasing goods of others.” NOTE: This is generally known to creditors in Alberta.

• General knowledge: Knowledge on the part of the persons who might be expected to deal with the consignee as creditors, buyers or lessees (not just the consignors).

o This can be established by reputation evidence such as affidavit testimony. C. Lease for a Term of More than One Year

• Lease for a Term of More than One Year (s. 1 (1)(z)): Where the lessee may or does remain in possession of the leased property for more than one year. Actual possession for more than a year is not necessary, as it is about what is possible under the terms of the lease.

o It includes: � Lease for an indefinite term that is determinable at the option of one of the parties. � Lease for a term of less than one year that is automatically renewable for one or more terms

the total of which exceeds a year. � Lease with an initial term of a year or less, where the lessee remains in possession, or

substantially uninterrupted possession, of the leased property after the expiry of the term with the lessor’s consent (as soon as, but not before, possession exceeds one year)

o DOES NOT INCLUDE i) leases where the lessor is not regularly engaged in the business of leasing goods or a lease of household furnishings; ii) appliances as part of a lease of land where the goods are incidental to the use and enjoyment of the land; iii) certain proscribed goods.

• Regular Engagement in the Business of Leasing: o The frequency that the lessor engaged in leasing prior to entering the lease is not a determining factor

as volume does not matter as long as it is part of their regular business.

Sprung Instant Structures Ltd. v. Caswan Environmental Services Inc. [1997] Facts:

Sprung and Royal Bank were creditors of Caswan. RB advanced Caswan funds under a SA. Caswan declared bankruptcy. Sprung had leased the structure to Caswan in late 1994 in two lease agreements and the first was a lease for more than 1 year. Analysis:

• Sprung’s lease was a deemed SI as per s. 3 (2) (b) and a lease of a term of more than one year as per s. 1 (y).

• Sprung’s seizure did not reconstitute it as the owner of the structure from the beginning of its relationship with Caswan. It may be owner of the structure against the trustee in bankruptcy but it was a competing creditor against the Royal bank.

• Court of Appeal: Says that the General Security Agreement does not charge the structure because its wording does not cover it. NOTE: I DO NOT UNDERSTAND WHAT WENT ON THERE

• s. 21: Provides that a lessor for a lease of more than a year or a commercial consignor whose interest isn’t effective against a trustee in bankruptcy as per s. 20 (a), the lessor or consignor is deemed to have damages from the date right before the bankruptcy (so they can get cash as an unsecured creditor pro rata but not the goods) in an amount equal to:

� a) the value of the leased or consigned goods at the date of the seizure, bankruptcy or winding-up order,

and � b) the amount of the less, other than that referred to in clause (a) resulting from the termination of the lease

or consignment.

2. Transactions Specifically Excluded from the Act • S. 4: Lists specifically excluded transactions.

o s. 4 (3) (e-f): The PPSA defers where there is a cross-over interest in land and personal property (such as a mortgage or lease).

o s. 4 (b): Says that a Bank Act security agreement does not create a PPSA security agreement. o s. 4 (c): Security interests and assignments of interests arising under insurance policies are expressly

excluded. � These are regulated by the Insurance Act:

• S. 584: (1) When assignee of a contract gives notice in writing of the assignment to the insurer at its head office/principle office in Canada, the assignee has priority against assignees who didn’t give similar notice and beneficiaries other than the designated one from before the notice.

o (2) When a policy is assigned as security, the beneficiaries right is only affected as much as necessary to give effect to the interest of the assignee.

o (3) When assigned unconditionally, the assignee has all the rights and interests given to the insured.

o (4) Insurance policies can say that it can’t be assigned. Chapter 4: Attachment

1. Attachment – The Concept A. The Requirements of Attachment

• A security interest comes into existence when it attaches to (charges) personal property.

• Two levels of attachment depending against who the SI is to be enforced: o 1) Debtor-Creditor: The SI attaches when s. 12 (1)(a) value is given and (b) the debtor has rights in the

collateral. o 2) Third Party Rights: The requirements above must be met, and s. 12 (1) (c) the security agreement

must be enforceable within the meaning of s. 10 (i.e. secured party in possession of collateral or a written security agreement describing it has been signed).

Requirements of s. 12 (1): 1) Value must be Given (s. 12 (1) (a)): Value must be given by or on behalf of whomever claims the SI. There is no requirement that the person granting the interest must receive the value.

• Value (s. 1 (1) (ww)): Any consideration sufficient to support a simple contract, including an antecedent debt or liability (e.g. does not have to be a new value, so earlier unsecured loans can be transformed by entering into an SA). A binding commitment to give credit at a later time (that is not completely at the discretion of the secured party), even if subject to conditions, is enough.

2) Debtor must have Rights in the Collateral (s. 12 (1)(b)): Any legal or equitable proprietary interest qualifies as rights in the collateral.

• s. 12 (2): A debtor has rights in goods leased or consigned to them when they obtain possession of them in accordance with the lease or consignment

• A SI in a lessee’s possessory rights under a lease for less than one year is not an SI in the goods but a charge on the possessory interest of the lessee.

3) Must be Enforceable within the Meaning of s. 10 ((12 (1)(c)): To be enforceable against a third party a SI must: s. 10 (1) (a): Be in the possession of the collateral OR s. 10 (1) (b): Have a signed agreement that contains a description of the collateral that meets the requirements of (i-iii). This can be done by a generic description indicating the kind of property subject to the SA. Remember, these are different description requirements than necessary for registration. Extra Provisions: s. 12 (3): For the purpose of subsection 12 (1), debtor has no rights in (a) crops until they become growing crops (b) the young of animals until they are conceived (c) minerals until extracted (d) trees other than crops till they are severed. s. 13(1): Where the SA provides for an SI in after-acquired property, the SI will attach in accordance with s. 12 without the need for specific appropriation. s. 13 (2): The SI does not attach in AAP if it is a) a crop that becomes a growing crop more than a year after the agreement is entered into (i.e. attaches to the first crop, but not the second) b) Consumer goods, other than an accession, unless it’s a PMSI or replacement collateral described in the SA (eg: sell old car and get a new one).

B. "Rights in the Collateral" - the Deemed Security Agreements • Deemed Security Agreements involve two types of situations:

o 1) Lessor or consignor (secured party) gives nothing more than possession to a lessee or consignee (debtor);

o 2) Creditor (debtor) sells and transfers ownership in an account or chattel paper to a buyer (secured party).

• In both, the debtor has either only possession or no interest at all, but s. 12 (2) deems them to have a right in the goods when possession is taken.

C. The Power to Give a Security Interest

• Generally, debtors must have rights in the collateral to give an SI, but there are statutory exemptions that allow a person with a posessory right in property to convey or charge the full ownership right that is held by someone else:

i. Factors Acts – Disposition by a Mercantile Agent:

Patry v. General Motors Acceptance Corp. of Canada (2000) Facts: s. 2 (1) of the Factors Act: Where a ‘mercantile agent’ has possession of goods/title to them with consent of the owner, any sale/disposition of it in the ordinary course of business is valid as long as the person taking it acts in good faith and did not know the agent lacked the authority.

• s. 2 (1) requires the following: o 1) The Individual with Possession was a Mercantile Agent:

� Mercantile Agent (s. 1 (1) Factors Act): One who has “in the customary course of business as an agent, authority either to sell goods or to consign goods for the purpose of sale, or to buy goods, or to raise money on the security of goods.”

o 2) They were in possession with the title-holder’s consent. o 3) They disposed of it in the ordinary course of business as a mercantile agent. o 4) The buyer had no notice that the agent did not have authority to give the chattel mortgage. o 5) The buyer took it good faith.

� Means, in this act, acting honestly, even if negligently.

• In this case, the transaction could not be characterized as a commercial consignment under the deemed SI provisions. However, had it been, then s. 6 of the Factors Act said that s. 2 to 5 didn’t apply to consignments caught by the PPSA.

ii. The Sale of Goods Act - Seller in Possession

• S. 26 of Sale of Goods Act: An individual who is not the owner of goods can create an SI that can be asserted against the owner (e.g.: when an individual who sold goods to a buyer remains in possession of them or the documents of title despite title passing to the buyer).

o This must be done in the ordinary course of the seller’s business and in good faith without notice of the good’s having been sold (s. 26 (1)). A buyer can protect themselves by registered in the interest (s. 26 (2)).

o S. 26 also provides that if a second buyer grants an SI in the goods, except as otherwise provided, the SP is protected from a claim to the goods asserted by the original buyer (s. 26 (3) & (4)).

D. Note on the definition of "debtor"

• S. 1 (1) (m): Person who owes payment or other performance of a secured obligation, whether or not they have rights in the collateral. Includes (i) A person who receives goods from another person under a commercial consignment. (ii) A lessee under a lease for a term of more than one year (iii) a transferor of an account or chattel paper. (iv) Transferee of or successor to a debtor’s interest in collateral as per a number of sections.

• Look at each section that has the word to determine whether, in that context, it means: o A) A person who has rights in the collateral but who is not the primary debtor. o B) A person who owes payment of the obligation, but who has no rights in the collateral. This could be

a primary debtor or a guarantor. o C) A person who owes payment of the obligation and who has rights in the collateral. This

could be a primary debtor or a guarantor.

Chapter 5: Perfection & Registration 1. Perfection A. The Concept of Perfection

• Perfection: A priority status acquired by an SI. It means that the holder of an SI has done what is necessary to qualify for application of the priority rules.

• s. 19: An SI is perfected when o (a) It has attached (per s. 12) o (b) All steps for perfection are completed (regardless of their order of occurance).

• Interests that can defeat an unperfected SI: o a) Debtor’s trustee in bankruptcy (s. 20 (a)); o b) Other secured creditors (s. 35 (1)); o c) Buyers of the collateral (s. 20 (b)). o d) Judgement creditor with a registered writ of enforcement (Civil Enforcement Act)

• At CL, priority is based on Nemo Dat that ranks priority in the order the interests arise. Under the PPSA, priority is determined by perfection (date of possession/registration as per s. 24 and 25 respectively)

B. Perfection "Steps"

• Perfection requires (in no particular order) both of the following to occur for perfection: o a) Perfecting Act

� Possession (s. 24) or Registration (s. 25) o b) Attachment of the SI

� This requires all three steps of s. 12

• A) Rights in collateral

• B) Value Given

• C) Written SA that describes the collateral as per s. 10

• s. 43 (4): Financing statements may be registered before a SA is made and a SI attached.

• SEE SLIDES FOR EXAMPLES

• Automatic Perfection will be granted in prescribed circumstances. Examples: o A) Temporary and Conditional (s. 5 (2)) o B) Temporary and Unconditional (s. 28 (3)).

C. Perfection by Registration

• Perfection by Registration (s. 25): Subject to s. 19, registration of a financing statement perfects and SI in collateral.

o It can be better to take possession of negotiable collateral (money, negotiable instrument, security or chattel paper).

• s. 31: Gives a holder priority if i they acquired it w/o knowledge that it was subject to an SI OR ii) they were a holder for value regardless of whether or not they had knowledge.

o S. 47: Registration is not constructive notice of the SI to third parties. o S. 43 (5): Registration can related to more than one SA.

Information Availability

• S. 18: Requires a secured party to respond to a demand from a specified person (3rd party) for the details of/copy of the SA.

o The demand can be made by the debtor, a creditor, a sheriff representing judgement creditors, a person with an interest in the personal property of the debtor, or an authorized representative of one of the above. Access to the information will be limited to categories of persons whose rights have been or could be affected by the priority regime of the Act.

o This is there because the registry makes only minimal information available (ex: no terms of SA or, except where serial numbers required, much info about the collateral).

o Potential creditors aren’t entitled to direct demands for information from a secured party, but they can get the debtor, who has rights to demand it, to get the information for them.

D. The Operational Concepts of a PPSA Registry System I. Two Main Search Criteria:

• 1. Debtor’s Name: This is the primary basis for searching the registry because if the searches were based on the collateral, there would be problems with after-acquired property.

o S. 19 – 21 PPSAR: Information that must be included regarding the debtor’s name. Must be legal name of debtor.

o S. 36 (2) PPSAR: Can describe by item or kind, or can make it a specific or general term like goods or APAAP (or that minus or plus a few things). Inventory as a term is only valid while the stuff is held as inventory (as with s. 10 PPSA).

• S. 36 (3): However, it is never enough just to say consumer goods or inventory.

• 2. Description of the Collateral/Serial Numbers: Serial numbers are required in some cases because the debtor’s name might not be sufficient. Examples: a) specific item of tangible property sold in secondary markets b) a third party who doesn’t know debtor’s name.

o 1. Where the collateral is serial numbered goods held as "consumer goods" (s. 1 (1) (i)), the Act

requires registration using both the debtor name and the serial number of the goods. One of the two is not enough (s. 43 (7)).

o 2. Where the collateral is serial numbered goods held as “equipment" (s. 1 (1) (p)), the secured party has a choice.

o Serial numbers must or should be included in some cases. � PPSA:

• 43 (7): Registration is invalid where one or more debtors must be disclosed in a financing statement, or the collateral is a serial number good, and there is a seriously misleading error.

o s. 43 (9): This will not affect the validity of the registration of the other collateral.

• 35 (4): A SI in equipment that is serial numbered goods is not registered for the purposes of s. 35 (1), (7) or (9) unless the financing statement includes the serial number.

• 30 (6): Where goods sold/leased, the buyer/lessee takes them free from any SI perfected by s. 25 if a) they didn’t know about the SI AND b) the goods were not described by serial number in the registration.

• 30 (7): s. 30 (6) only applies to equipment that is serial number goods. � PPSA Regulations:

• 1 (1) (y): Defines serial number goods. Look to the following for definitions of them.

• 1 (1) (b): Defines Aircraft.

• 1 (1) (e): Defines boats.

• 1 (1) (k): Defines designated manufactured home.

• 1 (1) (o): Defines mobile home.

• 1 (1) (p): Defines motor vehicle.

• 1 (1) (cc): Defines trailer.

• 34: Financial statements submitted for registration require: o a) Consumer Goods: Description by serial number in accordance with s. 35 o b) Equipment or inventory: May provide description as per s. 36 or by serial

number by s. 35. If its not serial number goods, it must have a description as per s. 36.

• 35: Lists the specifics of the serial number requirements.

• 36: Applies to financing statements for collateral other than serial number goods or serial number goods not described in accordance with s. 35 if its inventory or equipment. Provides rules similar to those in s. 10.

• 37: Sets out the descriptive requirements for proceeds. o Registration using the debtor’s name alone gives the SP:

� Priority over unsecured creditors and the trustee in bankruptcy � BUT NOT other buyers or other SP (s. 30 (6-7) and s. 35(4).)

ii. Validity of Registration

• S. 43 (8): No need to show anyone was affected by an error. Validity is an objective test that depends on whether a registration would be disclosed had a search been done using the appropriate criteria and not whether registration was disclosed by an actual search.

• s. 43 (6): The test of validity is whether or not the registration is “seriously misleading.”

o This means it is valid if perfect registration criteria, or imperfect criteria close enough to the perfect that the objective hypothetical searching party using the perfect criteria would not be mislead by the results.

o To not be ‘seriously misleading’ a registration would have to be disclosed to a searching party in a manner that a searching party could reasonably be expected to know or be suspicious that the debtor or collateral described in the registration was the same as described by the perfect criteria. � This depends on the degree of similarity between the search results between perfect and

imperfect criteria. Ex: If a lot are returned, then it may be a problem. � Inexact Matches: Variants of a name are revealed when searches are done.

• Goods are classified by how they were being used when SI attached.

Case Power & Equipment v. 366551 Alberta Inc. (Receiver of) Facts: Two secured creditors with claims against the same chattels in the same debtor and one makes an error. Priority between the two based on s. 35 that depends on perfection and registration date. . Issue: Is this seriously misleading? Analysis:

• All of this depended on getting a proper registration in first.

• s. 44 (3): Errors can be cured by registering a financing change statement. It is effective from the date it is registered.

• s. 44(4): Basically, you can change the registration and if that is done before anything else happens the error is irrelevant.

• S. 43 (6): Registration is not affected unless the error is ‘seriously misleading’ o Where the collateral is consumer goods that are serial number goods as per the regulations, then a

seriously misleading error will invalidate the registration.

• Cote’s Judgement (WRONG): o An error is seriously misleading when either:

� (i) It would likely prevent a reasonable search under a reasonable filing or registration system from disclosing the existence of the registration, or

� (ii) It would make a person who did somehow become aware of the registration think that it was likely not the same chattel.

• Hetherington’s Judgement o Heatherington’s test would omit the italicized words from the following version of cote’s test:

� (i) It would likely prevent a reasonable search under a reasonable filing or registration system from disclosing the existence of the registration, or

� (ii) It would make a person who did somehow become aware of the registration think that it was likely not the same chattel. (Emphasis added)

� THIS IS AN OBJECTIVE TEST.

• The Dozer: A search with the correct number revealed the interest despite the incorrect number and it showed up under a name search. The difference was slight and the letters sounded similar so a reasonable person would have thought they were the same. Ergo, not seriously misleading.

• The Excavator: A reasonable person would have known the name was a combo of the company name it’s the name it carried on its business under, but it wasn’t revealed by a search of the debtor’s name nor its trade name so it was seriously misleading.

• NOTE: o s. 43 (8): An error can be seriously misleading without anyone being actually mislead. o s. 12 (2) (a) of the Regulations: No more than one name on a line.

GMAC Leaseco LTD. v. Moncton Motor Home & Sales Inc. (2003)(N.B.C.A) Facts: Misspelled name and correct serial number registered. The name was not revealed under the search but the serial number would have been. Issue:

Is this seriously misleading? Analysis:

• There is no requirement for a dual search (both serial number and debtor name)

• A seriously misleading error with either the serial number (where it is mandatory [i.e. consumer goods]) or the debtor’s name invalidates the registration.

• The Test For Seriously Misleading: o If a search using the correct information doesn’t disclose the interest as either an exact or close match,

then the error will be deemed “seriously misleading” o If a search reveals one or more closes matches, further reflection is required.

� The Test: Whether reasonable searchers would ignore the close matches or pursue at least those which are so similar that it would imprudent for the reasonable person to ignore them.

• 1.Where a serial number is mandatory: A right name cannot save a wrong number, and a wrong number cannot save a right name (s. 43 (7) (a) (b))

• 2. Where a serial number is optional/not required: An error in the debtor’s name is sufficient to name it invalid, but an error in the serial number should be treated as an election to omit it.

Harder (Trustee of) v. Alberta Treasury Branches [2005] Facts: Here the serial number search didn’t reveal the interest, but the trustee had been told about it before the assignment. This is being appealed Issue: Analysis:

• A error in serial number registration won’t defeat the claim of a secured creditor against subsequent secured creditors or a trustee in bankruptcy who obtains actual knowledge of the existence of the security as a result of a name search or otherwise.

• A correct debtor name for the purposes of registration does not need to be the name on the birth certificate, but could be the one under which they are commonly known.

o S. 20 Regulations: Lays out precise requirements for names.

Royal Bank of Canada v. Steinhubl’s Masonry Ltd. [2003] Sask QB Facts: Issue: Is it a motor vehicle and therefore a serial numbered good? Analysis:

• Motor Vehicle defined at s. 2 (1)(o).

• Serial Number Goods defined at s. 2 (1) (u). It includes motor vehicle.

• s. 12 (1): Says that a registration of interest in serial number goods can be effected if described in accordance with s. 13 or 14 if they are equipment or inventory. Here it was equipment and s. 13 (1) gives some requirements.

• The forklift is a motor vehicle within the meaning of s. 2(1)(o) of the Regulations and therefore the applicant is not entitled to the maximum priority available for serial numbered goods because it did not comply with s. 13(1) thereof. The respondent perfected its ownership or security interest in the forklift by taking possession thereof and consequently is entitled to priority over the applicant's limited security interest in the forklift.

• Not including a serial number when required means you only get protection against unsecured creditors and trustees in bankruptcy.

E. Perfection by Possession

• s. 24: Actual physical possession of the collateral by the SP or their agent can perfect and SI. This applies to all categories of collateral other than intangibles.

o Intangibles (s. 1 (1)(x)) are excluded since physical possession is not possible. o Ex: A financial institution that enters into a term deposit contract with a depositor. It’s obligations to

the depositor is the property of the depositor. If that term is not an instrument (s. 1 (1)(w)) then the institution can’t perfect a security interest under the term of the deposit by taking possession if they thereafter loan them money. It is actually an account (s. 1 (1)(b) and therefore an intangible.

o Possession mostly comes up with securities and instruments.

• s. 24(2): A SP does not have possession if the collateral is in actual or apparent possession or control of the debtor or debtor’s agent.

• s. 27(1): If collateral is held by a bailee, a SP can get possession by getting the bailee to issue a document of title issued in their name or agree to hold the goods for them (the bailee is treated as agent of the party)

i) Perfection by Possession and SI in Securities

• Securities (s. 1(1) (rr)): Special rules around perfection.

• Certified Shares: SP can perfect by taking physical possession. o This can include a transfer of certificate into SP’s name, and if that is the case then they qualify for the

special priority under s. 31 (3).

• Uncertified Securities/Immobilized Securities: Not evidence by a security certificate so they couldn’t be physically taken.

o The act suggests that an interest could be perfected via possession, but doesn’t say how.

• In Alberta, security includes only corporate shares and debt obligations that are represented by a “writing” so it does not extend to uncertified securities. Therefore in Alberta, uncertified shares are “intangible” (s. 1(1)(x) rather than a security). This means they can only be perfected by registration.

• s. 31 (3): A person who has taken an instrument or security by possession without knowledge of the other SI has a higher priority than someone who has registered it because they are treated as a purchaser and this section applies to purchasers.

ii) Does Seizure Constitute Perfection by Possession?

Sperry Inc. v. Canadian Imperial Bank of Commerce (1985) • To determine who the receiver agent was agent for when they took it, look to the contract and determine

whether they were acting for the purposes of realization (as agent for the SP) or pursuant to their authority to carry on the business (agent for the debtor under the standard clause in the security agent agreement).

• Only when there is objective evidence that the receiver-manager intended to dispose of the collateral to enforce the SI does their possession qualify as perfection by possession.

o Indicia of this includes giving notice to the debtor of an intention to sell the collateral. F. Automatic Perfection

• Under certain circumstances, perfection is granted without registration or perfection, but its temporary.

• Automatic and Temporary Perfections: o 1. s. 5 (2): Temporary and conditional. It will be recognized only if an additional perfection step is

taken before the expiry of the stipulated time period. This section is related to moving between jurisdictions.

o 2. s. 26 (1): Temporary and unconditional. This means it will be recognized for a specified time period whether or not additional steps are taken before or after the expiry of that period. This section is related to taking possession under s. 24.

o 3. s. 28(3): Temporary, unconditional perfection is granted to a security interest in proceeds. The SI and perfected status in the original collateral continues in the proceeds for 15 days after the SI attaches to the proceeds. It must be perfected by a method applicable to the original collateral of the same kind before the expiry of 15 days. � Example: Debtor gets proceeds and pursuant to s. 28 (1) (a), the SP’s SI attaches to them. The

financing statement doesn’t have the information required for continuous perfection of proceeds as per s. 28 (2). Permanent perfection will require further action (like taking possession or filing a statement covering the proceeds) and if that is done the SP’s SI is perfected. It will be perfected for 15 days thanks to s. 28 (3) even if nothing else happens.

Chapter 6: The Priority Status of an Unperfected SI 1.The Meaning of “Priority” And “Subordination”

• Subordination/Priority: Ranking interests by entitlement of the interest-holders to enforce their respective claims against the subject property.

• S. 60 (12): When a SP seizes and sells the property of debtor, the buyer acquires the debtor’s interest free of the SP’s interest, or any subordinate interest.

o A SP with a higher priority interest can release it so that it is sold but then the proceeds of the sale are doled out according to priority so they still get paid out first.

• S. 61 (1): Surplus proceeds, remaining once the cost of the claim is satisfied, must be paid to the holders of subordinate interests in priority.

• s. 63 (2): A court can issue an order precluding a subordinate SP from seizing/selling the collateral when it could jeopardize a higher SP’s SI in it.

o When a debtor defaults to more than one SP, both can seize and sell and if they get in a dispute over who can do that they make a summary application to court and it usually goes to the one with a higher priority.

• Some terminology suggests that the SP cannot enforce/looses the SI as against competing parties, but not necessarily for inter partes purposes.

o Ex: S. 20 (a): “Not effective against” and s. 30 (2): “free of”

2. Subordination of Unperfected SI to Trustee in Bankruptcy • s. 20 (a): SI are ‘not effective’ against a trustee in bankruptcy if the SI is unperfected at the date of bankruptcy.

• Bankruptcy and Insolvency Act o s. 67 (1): There are statutory restrictions protecting certain kinds of property from being divided up. o s. 71 (2): After bankruptcy is filed, then property can’t be disposed of and it goes to secured creditors

or the trustee. o s. 72 (1): This act doesn’t supersede or abrogate substantive provisions of other acts that are not in

conflict with it. o s. 136 of BIA: Sets out a priority scheme for the division of bankrupt’s property whereby the interests

of the various creditors are all "[s]ubject to the rights of secured creditors".

Re Giffen (1998) SCC Facts: Issues: Can s. 20 of the PPSA render a lessor’s unperfected SI in personal property ineffective against the rights acquired in the property by the trustee in bankruptcy? Analysis:

• On these facts, s. 20 defeats the unperfected SI of the respondent. o This was a deemed SA, so the PPSA applied despite locus of title. Attachment had occurred since the

debtor had rights in the leased goods via possession but not perfection. Thanks to s. 20 (a) (i) the trustee can sell it with clear title and the SP is an unsecured creditor.

o Property under the BIA is defined broadly and includes the rights to use/possess a car.

• s. 81 of BIA allows SP to file claim against the trustee and if they don’t they are deemed to have abandoned all right to the property. Here, it would have been defeated anyways.

Direct Rental: Where the property is exempt under the BIA from the trustee taking it, it is not exempt by an SP so an unsecured SP can take it over a trustee who is statutorily excluded.

3. Subordination of Unperfected SI to Judgement Creditors • CEA s. 35 (1): An unperfected SI is subordinate to a registered writ of enforcement

4. Subrogation • Pay SP what they are owed by debtor to step into their shoes.

• Subrogation is not explicitly recognized by the PPSA, but given effect by case law.

N'amerix Logistix INC., RE (2001) Facts: Trustee tried to get the court to declare EBF’s interest in accounts receivable subordinate to the trustee because EBF failed to register its interest. The bankrupt had owed BNS money and went to EBF to get cash to pay off BNS and entered into a factoring agreement to factor some accounts receivable in which BNS has a perfected SI. This agreement expressly contemplated EBF registering its interest. EBF however registered it incorrectly. Despite a warning from the

trustee EBF took steps to collect on the accounts and put in a financing change statement but this was after bankruptcy had been declared. EBF claimed it was subrogated to the perfected BNS interest as a result of paying BNS the indebtedness of the bankrupt. Analysis:

• S. 20 (a) and (b):

• S. 72: Says that except so far as they are inconsistent with the act, the normal rules continue to apply, including equity. This implicitly recognizes subrogation.

o Subrogation also appeared in the agreement and it was with the knowledge and approval of all parties that EBF paid out the obligation to BNS to take its priority position. This met all the criteria for subrogation by EBF to the position of BNS to the extent of the funds advanced by EBF to pay out BNS.

• S. 20 does not affect subrogation as s. 20 does not require the SI be recorded in the name of the person seeking to claim under it. Only that it has to be perfected.

• BUT subrogation is an equitable right and requires that the asserter has clean hands. o EBF does not have clean hands because they made efforts to obtain payment after the appointment of

the trustee and notice to the trustee. o EBF claims that clean hands applies to the conduct giving rise to the right, and they did nothing bad

there. o HOWEVER no submissions on it and had there been it would have been correct to set off the amount

still owed to EBF by how much extra they took as the conduct was not enough to disentitle them to the amount they sought to recover via subrogation.

Chapter 7: Priority Among SI & Priority Between SI & Writs 1. The Priority Structure of the Act

• s. 30 (2)-(8): These priority rules protect buyers/lessees, usually in the ordinary course of business.

• s. 31: These priority rules protect transferees of negotiable collateral as they normally don’t need protection because of established commercial practice.

• s. 34: PMSI General Priority Rule

• s. 35 (1): Priority amongst perfected interests is the order of registration/possession for the purpose of perfection.

• s. 35 (1)(c): Priority between unperfected SI is determined by the date of attachment o There is no rule to deal with two competing unperfected SI that attach at the same time.

• s. 35 (4): If its serial numbered equipment, then it is not registered or perfected for s. 35 (1), (7) or (9) unless the financing statement has a serial number.

• S. 66 (1): All rights and duties from the SA or the Act must be exercised in good faith and a commercially reasonable manner.

• S. 66 (2): A person isn’t acting in bad faith merely because they have knowledge of the interest of the other.

Carson Restaurants International v. A-1 United Restaurant Supplies Ltd. [1989] Facts: Yorkton granted Carson an SI in its APAAP to secure repayment of the development expenses Carson incurred on their behalf. Then they granted a PMSI to A-1 on certain stuff. The guy who ran Carson was part of that deal and A-1 tried to register but made a mistake and Carson registered theirs properly before it was fixed. Issue: What does s. 66 requiring good faith mean? Analysis:

• Allowing Carson to take advantage of A-1 in the circumstances would be to let the guy running Carson use the act as an instrument to defeat a claim of which he was aware and deceitfully delayed by his representations to A-1 while pursuing his own SI.

• The system should be subjugated to prevent an unjust result.

• Bad faith is more than just knowledge, but its not clear exactly what it is.

• s. 66 (2): A person is not acting in bad faith merely because they are acting with knowledge of the interest of some other person.

• s. 1 (2): Defines notice or knowledge.

C.I.B.C. v. A.K. Construction (1988) et al. (1995) (Alta. Q.B.) • The court found that bad faith involves a form of positive conduct that would support a waiver or estoppel.

Furmanek v. Community Futures (1998) • Applied estoppel to give priority to a secured party that failed to register its interest, but the estopped party’s

conduct was more than just acting with notice of the existence of the prior unperfected interest.

Other Examples of Bad Faith: 1) A representation that someone won’t rely on their strict legal rights 2) There is reliance upon the above (and possibly this must be to their detriment) i) Perfected or Unperfected SI v. Buyer of Goods in Ordinary Course of Seller’s Business

• Nemo Dat will play a role in some circumstances.

• s. 30 (2): If the sale from the debtor to the buyer is in the ordinary course of business of the debtor, then the buyer takes free of any security interest even if its perfected.

• The other situation would be s. 20 where an unperfected SI will be subordinated to the interest of a buyer who gives value and acquires property w/o prior interest. Basically nemo dat.

• Nemo Dat still plays a part. For example, if an SI’s priority is cut off (ex: s. 30 (2) in the case of a buyer) then the buyer can sell it and the new buyer will have priority since there is no interest on it. However, if it not, then the interest remains since the buyer can only give an SI what it has. Therefore s. 35 (1) will apply.

2. Tacking Future Advances • Line of Credit: Usually involves an agreement to grant a specified sum of money under terms providing that the

amount can be drawn down as needed and paid in part or total at any time.

• The act rejects the CL’s approach to dealing with the creditor’s SI in the debtor’s property with respect to draws occurring after other interests in the collateral have arisen.

• s. 35 (5): Subject to subsection (6), the priority that an SI has under sub (1) applies to all advances/future advances. This means that they don’t have to keep checking for new SI every time they advance, since the first registration applies to all as is allowed by s. 43 (4). This means priority dates from time of registration.

o s. 35 (6): A SI that would otherwise have priority over a registered writ of enforcement will be subordinated with respect to future advances made after the secured party acquires knowledge of the writ.

o s. 1 (1) (c): Defines advance (payment of money, provision of credit or giving of value) etc… o s. 1 (1) (u): Future advances are advances whether or not made pursuant to an obligation and includes

reasonable costs incurred and expenditures made for the protection, maintenance and preservation or repair of the collateral.

o s. 14: SA may provide for future advances. Unless the parties otherwise agree, an obligation owing to a debtor to make future advances is not binding on an SP if, pursuant to s. 35 (6), the SI does not have priority over a writ of enforcement to those advances.

• Either have to get the old registration discharged or try and use estoppel (if they say they won’t advance anymore) to get around future advances registration.

• Always check to ensure there is an agreement that covers this. Without an SA that does that, there is no SI.

Thorp Finance Corp. of Wisconsin v. Ken Hodgins & Songs (1977) Mich. C.A. Facts: State Bank was the first secured creditor by perfection of SI in the payloader. Thorpe was the second. Issues: Does a SP’s perfected status continue to later advances without new filings where an SA was executed and a financing statement filed followed by a later advance made pursuant to a subsequent agreement covering the same collateral and purporting to incorporate by reference the original security agreement?

Analysis:

• s. 43 (4) operates here to make the perfected status continue.

3. Priority Between a SI and a Writ of Enforcement • Governed by Civil Enforcement Act. The writ of enforcement must be registered for the judgement creditor to

seize property (s. 33 CEA)

• Priority of a writ of enforcement are determined by CEA ss. 35, 36 (3).

• The Rule: An SI that is perfected/registered before the writ, will have priority (s. 35 (2) CEA). o Subject to s. 35 (6) regarding future advances made after the writ is registered and the SP acquires

knowledge of it within s. 32 of CEA. o As per s. 35 (1): An SI that is perfected/registered after a writ is subordinate to it.

� This is subject to the usual exception in favour of PMSI that takes priority over previously registered writ if CEA s. 35 (3)’s requirements are satisfied.

• Serial number registration is also required for serial number goods held by debtor as consumer goods or equipment (CEA s. 36 (3)).

Chapter 8: PMSI, Subordination, Subrogation & Marshalling 1. Purchase-Money Security Interests (s. 1 (1)(ll)):

• An SP can have an SI in future property and gain priority via registration.

• S. 22 & s. 34: Grant special priority status to PMSIs, so that creditors with SI in APAAP don’t have too much control.

o Sale and lease-back transactions are not included. o Lease for a term of more than one year and commercial consignments are treated as PMSI.

• 3 Step Process: o (1) Does it qualify as a PMSI? o (2) If it is a PMSI has it been perfect in the requirements of S.34 of the PPSA o (3) Apply the rule.

• Just because it is a PMSI doesn’t give it priority.

• Four Categories of PMSI: o 1) Vendor Credit PMSI: To secure payment of its purchase price. o 2) SI taken by someone giving value for the purpose of allowing the debtor to acquire rights in the

collateral: It is only a PMSI to the extent that the money is used for the provided purpose. o 3) The interest of a lessor of goods under a lease for a term of more than one year: Even if it’s a true

lease, the lessor has to register to protect it from other creditors so we treat it as a PMSI as long as the registration satisfies the priority rule.

o 4) Commercial Consignment:

To Qualify as a PMSI under s. 34 • s. 34 (2) (a): This is the priority rule applicable to a priority competition between a PMSI in collateral other than

intangibles or inventory and another SI. o PMSI priorities are only available if they are perfected within 15 days of the debtor obtaining

possession of the collateral.

• S. (1) (ll): Provides the definition of a PMSI which is a pre-condition to the application of s. 34.

• S. 34 (3): The requirements that must be met by the holder of a PMSI in inventory.

• There can be more than one PMSI in the same collateral (eg: two lender PMSI or one lender PMSI and one vendor PMSI).

• S. 34 (5): If it’s a lender and a vendor the vendor gets priority

• S. 34 (9) & (10): Special priority is given to suppliers of crop or animal food, drugs or hormones. i) PMSI v. Trustee in Bankruptcy:

• s. 22 (1): If it’s a PMSI in collateral in either collateral other than intangibles that is perfected not later than 15 days after debtor takes possession (or an agent) or intangibles if perfected no later than 15 days after SI attaches, then it can defeat a trustee in bankruptcy.

ii) PMSI v. Security Interest:

• A PMSI in non-intangibles that are not inventory will defeat an SI as long as it is perfected within 15 days of debtor obtaining possession. If it is an intangible the priority requires perfection within 15 day window after attachment.

iii) PMSI v. Security Interest Inventory:

• PMSI must be perfected at or by the time the debtor obtains possession of the collateral. This means the financing statement must be registered prior to giving the loan and the inventory being acquired by debtor.

• The SP must give notice to any other SP who has a registered interest before the PMSI and register a financing statement containing a description that includes the same item or kind of collateral.

iv) PMSI v. Writ of Enforcement:

• CEA gives priority over the writ if it is perfected at least 15 days of the possession of the collateral or 15 days from attachment if it is an intangible.

v) PMSI v PMSI • s.34 (5): PMSI taken by a seller, lessor or consignor has priority over any other PMSI (lender PMSI) if it is

perfected at the date the debtor or agent takes possession (inventory) or 15 days after possession (if not inventory) o The perfection requirements must still be satisfied. o Only ever arises when you have part of a purchase price of goods being financed by a lender and part

by the seller.

vi) Prior, Registered Non- PMSI vs. PMSI • s.22 & 34: PMSI have priority over SI granted by debtor under an SA even if perfected when PMSI arose.

Agricultural Credit Corporation of Saskatchewan v. Pettyjohn[1991] Facts: Pettyjohn gets a loan from ACCS to buy cattle and give ACCS a mortgage that included the new cattle. He gets an additional loan for more cattle later and an SA is excuted providing for an interest in whatever is purchased with the loan. Before he got the money he bougth the cattle and obtained a receipt from the seller. ACCS took the receipt and issued a cheque to the seller that was jointly payable to themselves and Pettyjohn. Pettyjohn also borrowed cash from BOM and arranged to have ACCS issue a cheque to cover it. Both the mortgage and the SA provided the cattle wouldn’t be sold by Pettyjohn without the consent of ACCS. Pettyjohn later sold the cows without consent then defaulted. ACCS tried to realise on its security and the Pettyjohn declared bankruptcy and claimed their present cattle couldn’t be seized (which under a Sask statute was the case unless ACCS had a PMSI in the cattle). Analysis:

• Three requirements for PMSI: o 1. The lender must have an SI in the property. o 2. The lender has given value for the purpose of enabling the debtor to acquire rights in the property

(this includes a binding promise to give cash/extend credit even if the loan had not occurred yet) o 3. Value has in fact been used to acquire those rights.

• Evidence that can be used could show an intention to create a binding commitment, show serious intention of extending credit (mechanism for making it work) and can include letters, bills, receipts, interim financing that imply the person can buy based on the strength of the letters, warnings not to buy until they received the final letter of approval which was received.

• Here, they had an SI and value (in the form of the promise to advance shown by the letter) was given to obtain the rights in the cattle.

o The monies advanced were used to acquire rights when the purchase had already taken place and the rights already acquired was ignored because the court said no need to divide transactions up so minutely since they knew where the cash was coming from due to the nature of the transaction.

Battlefords Credit Union Ltd. v. Ilnicki [1991] Sask CA Facts: Basically Ilnicki had a bunch of stuff out on PMSI. Wants to consolidate their loans so they get a loan from the CU and use that to pay out all the old PMSI and give the CU an SI. Issue: Does the CU get a PMSI by virtue of loaning cash to pay off the old PMSIs? Analysis:

• s. 1 (1) (ll)(ii) requires it be used to acquire rights, and here the debtor already owned the stuff. o The CU could have paid the creditors off directly and subordinated that way.

• Bank of Montreal v. Tomlin: If there is a PMSI loan that is refinanced by the same lender for the same collateral, then it retains its priority status.

• In the case of other loans, Ilnicki was still getting new value since he paid off those loans for a moment so he acquired title free to PMSI collateral for a moment but the loan used to acquire those rights was from the CU so they got a PMSI.

o Basically, there is no reason for the CU not to get a PMSI since had things gone right they would have had it and nothing was gained by disassociating PMSI from the original lenders.

o On exam either apply it technically or distinguish it if it would come to a silly result.

2. Subordination • Subordination comes up related to the following:

o 1. The ability to take and perfect broadly-based security interests in a debtor's present and after-acquired property,

o 2. The effect of the first in time priority rules of section 35, o 3. The ability to register a financing statement before a security agreement has been executed pursuant to

section 43(4), o 4. The power to tack future advances as provided in section 35(5).

• S. 40: A subordinate agreement can be signed so that a party with a higher priority will be subordinated to one with a lower priority and the benefiting creditors can enforce these even if third parties to the agreement.

o These agreements can be limited in anyway. This can be signed between the debtor and the SP, or between SPs.

• Can treat a subordinate clause as a ‘negative pledge clause’ so that the granting of another SI is not a default, but the SI is not subordinated.

3. Subrogation and Marshalling • Subrogation can also be relied upon in certain circumstances by a SP who is otherwise subordinate to another

SP.

• Marshalling: An equitable doctrine that can be invoked in the context of competing claims to property asserted by a secured creditor.

Steinbach Credit Union Ltd. v. Manitoba Agricultural Credit Corp [1991] Facts: Applicant made three loans to debtor and took an SI in all the guys property. The respondent loaned money and took a PMSI in the guys cattle. Analysis:

• Marshalling: When there are two estates or funds and one creditor can enforce its claim against both and another against only one, the doctrine of marshalling operates to compel the creditor who has recourse to both estates or funds to exhaust the assets against which it alone has a claim before having recourse to the assets in which the other claimant has an interest.

• It is an equitable doctrine.

Chapter 9: Proceeds 1. Proceeds: The Concept and its Function

• S. 28: Provides that a SI in a debtor’s inventory (or any other kind of collateral) “extends to the proceeds” so that there is no need to provide for this contractually.

• S. 1 (1) (jj): Proceeds are identifiable or traceable personal property i) derived directly or indirectly from any dealing with the collateral or proceeds of collateral ii) in which the debtor acquires an interest (including insurance proceeds). The key factors are 1) identifiable or traceable 2) acquired from collateral 3) debtor acquiring an interest.

• It can include money, negotiable instruments, traded-in goods (high value durable goods like motor vehicles especially), accounts (if the debtor’s business is one in which goods are sold on short term credit) or chattel paper (where the debtor sells high-value durable goods on credit and takes an SI in them).

• s. 34: Treats the SI in proceeds as a PMSI.

• s. 35 (3): The priority of the SI in the original collateral carries over to the proceeds unless requirements of s. 28 aren’t met (i.e. new form of proceeds aren’t covered in the financing statement).

o HOWEVER separate perfection steps may be required to maintain the s. 35 (3) priority position (ss 28 (2)-(3)).

Canadian Imperial Bank of Commerce v. Marathon Realty Co. Ltd. [1987] Facts: Appeal from a declaration that the landlord’s claim for past due rent took priority over the SI of the appellant bank in the lessee’s personality property. The bank had perfected an SI in the inventory and proceeds that the landlord claimed. Analysis:

• S. 28 applies and extends the SI to the proceeds.

2. Perfection of a SI in Proceeds • s. 28 (1): Grants a SI in the proceeds, but does not perfect it.

• s. 28 (2): SI in proceeds will be continuously perfected if: o 1) If the registration at the outset described the original collateral and all the other types of collateral

that could be proceeds. If that is enough to perfect, then the SI in the proceeds will be perfected. o 2) Where the proceeds are of the kind in the description of the original collateral o 3) If the proceeds consist of money, cheques or deposit accounts

• s. 28 (3): If you don’t fit into s. 28 (2) - by having a financing statement sufficient to cover the proceeds if they were original collateral - then you have 15 days to perfect it.

3. The Scope of the Concept: Identifiable or Traceable • s. 1 (1)(jj): To be proceeds, property must be:

o 1) Identifiable or traceable as o 2) Property derived from a dealing with original collateral or proceeds.

� The definition of proceeds extends the concept somewhat beyond property received by the debtor through dealing with the original collateral.

• Identifiable: o When evidence discloses a direct connection between that property and the original collateral or an

earlier generation of proceeds (Transamerica Commercial Finance Corp. v. Royal Bank). o This is where you can always follow it such as Cash deposited in an account by itself and then used to

buy a car.

• Traceable: o Property can be traced even though there is no demonstrable factual connection between the two.. o The role of these rules was found in Flexi-Coil Ltd. v. Kindersley District Credit Union Ltd.

� The right to trace proceeds is a statutory right and the PPSA has not just adopted straight the CL or equity rules.

� S. 1 (6): There doesn’t have to be a fiduciary relationship to trace.

Universal C.I.T. Credit Corp. v. Farmers Bank of Portageville Facts: Car salesman had an agreement with Credit Corp that helped him finance his purchases of new inventory and gave them an SI in all inventory. He was required to repay the advances as sold, which was done in the form of cheques drawn on his account at the defendant bank. The account had other funds intermingled. He wanted to pay off his debts

to the Farmer’s Bank before the credit corp. go to him when they said he was in default. So funds come out and go to the Farmer’s bank, but whose funds were they? Analysis:

• Mere co-mingling does not render proceeds unidentifiable.

• The cash proceeds into the checking account and paid out in the operation of the business are taken free of any claim. However, these were a bit of a fraudulent conveyance since the defendant bank knew that he was doing this to try and avoid the SI.

• The tracing rules are applied. They are just factual presumptions. o 1. Withdrawal from a mixed fund is deemed to be first from non-proceeds money and then from

proceeds money. o 2. If deposits of non-proceeds go back into the account, they are not deemed to be repayment or

restitution of any earlier withdrawals of proceeds.

• Then its basically do math to find out how much of the proceeds are left using these presumptions. ________________________________________________________________________

Agricultural Credit Corporation of Saskatchewan v. Pettyjohn Facts: An account with a BOM was a conduit for a line of credit with cash being withdrawn and repaid continually. Some of the money repaid came from cattle that ACCS had a PMSI in. ACCS says it can isolate certain trascations as being related to the sale of the cattle in which they had a PMSI. The Pettyjohns say that some of the borrowed money was used to buy the later cattle and a smaller portion came from other unidentified soruces. Also cattle sales began before the cattle purchase and ended after them. Also the line of credit always had a negative balance. Issue: Do the present cattle holdings of the Pettyjohns constitute proceeds of the 1981 and 1984 cattle? Analysis:

• PPSA tracing is based on CL and equity, but changed to fit PPSA.

• Under normal tracing, the funds were dissipated so they can’t be traced as the funds were used to pay the debts of the original wrongdoer and the creditor is a bona fide purchaser for value.

• The Close and Substantial Connection Test: Take a broad approach that notices that the connection between the new and old chattels are close. The proceeds from the old cattle were clearly used to buy the new one. The account, here, was just a conduit. Form is not as important as the function and the nature of the property.

• In this case, where a set of chattels is replaced by another of like function in the affairs of the debtor, it will be to the court to find that they were a replacement regardless of the formalities, but the formalities may have some effect on finding it as a replacement.

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4. Proceeds and the Position of Deposit-Taking Institutions • This is about funds generated by original collateral.

• S. 31 (1): A holder of money has priority over any SI, even if perfected, as long as they acquired it without knowledge or if a holder of value (regardless of knowledge).

o A holder of money for value would be a creditor etc…

• s. 31 (2): Creditor who receives an instrument (bill, note or cheque) has priority regardless of whether they have knowledge. (usually for payment of debt owed to them)

• s. 31 (3): Where you have a purchaser of an instrument or security, the purchaser has priority over an SI as long as they a) gave value b) acquired it without knowledge c) took possession. REMEMBER this applies to the instrument and not the proceeds from it.

• 1(1)(kk): Defines purchase

• s. 31 (5): says knowledge for this is very narrow and must be knowledge that they acquired the interest in violation of the SA.

• S. 1 (1) (cc): Obligation Secured

• S. 1 (1) (ww): Value Flexi-coil Ltd. v. Kindersley District Credit Union Facts: Churchill sold farm equipment supplied by Flexi-coil who retained a PMSI in them. The proceeds from sale of those were deposited in Churchill’s account at the CU. Those proceeds were generally cheques, electronic funds and

transfers. That account was also where the CU’s line of credit. The proceeds were deposited in the CU who then advanced Churchil the cash to pay off other creditors. The CU claims they didn’t know about the arrangements in the SA and that they were ok as either bona fide purchasers for value or under s. 31 (3) of the PPSA, and that proceeds couldn’t have been created since the account was in negative balance. Flexi-Coil said that the CU took the cheques subject to their interest because they advanced their own funds to Churchill and not Flexis. Analysis:

• The CU qualified as a purchaser under s. 31 (3) of the PPSA so it beat out Flexi’s SI perfected under s. 25. This is because they a) gave value for his interest b) acquired the instrument without notice that it was subject to an SI AND c) took possession of the instrument.

o S. 2 (u): The cheques were instruments. o S. 2 (hh): A purchaser is a person who takes by purchase. o S. 2 (ff): A purchase includes taking by sale, lease, discount, negotiation, mortgage, lien, issue or

reissue, gift or any other voluntary transaction creating an interest in personal property. o S. 2 (qq) defines value, and the deposit reducing churchill’s debt to the bank was enough to qualify the

CU as purchaser.

• Proceeds weren’t even created under s. 2 (ee) (iii) because the debtor needs a proprietary interest in the proceeds to claim on them since statutory tracing only applies where the debtor has acquired rights in the proceeds and there was no such interest since the account was in negative balance (i.e. no right of payment so no right).

Set-off: If parties owe each other debts they can set them off against each other provided that neither is subject to a third party claim that both know about. Proceeds recap: 1. Where property subject to a security interest (collateral) is dealt with by D, the security interest in the collateral extends to the proceeds -s.28(1) 2. Is the property in question “proceeds”of the original collateral? Definition s.1(1)(jj)

• identifiable or traceable

• derived from a dealing with the original collateral or with proceeds of the collateral

• D acquired an interest OR insurance proceeds Principles determining “traceability”: Universal CIT Credit v. Farmers Bank of Portageville, ACCS v. Pettyjohn, Flexi-coil v. Kindersley Credit Union

3. If the property is proceeds, is the security interest in the proceeds perfected? -s. 28(2) continuously perfected and (3) temporarily perfected, or if not within either, perfected in another manner. 4. What is the priority of the proceeds security interest?

• If continuously perfected –dates from date of registration or possession for purposes of perfection with respect to the original collateral –s. 35(3)

• Retains p.m.s.i. priority if proceeds interest is continuously perfected

• If not continuously perfected -dates from the date of registration or possession for purposes of perfection with respect to the proceeds collateral

5. Special priority rules apply where proceeds are:

• money –s.31(1)

• an instrument used to pay a creditor of D –s.31(2)

• an instrument or security purchased for value from D –s.31(3)

Chapter 10: Priority of SI against Buyers and Lessees 1. The Protection of Buyers and Lessees: Priority v. Perfected and Unperfected SI

• S. 28 (1): Where collateral is dealt with, an SI will continue in it unless the SP expressly or impliedly authorizes the dealing OR there is a priority that otherwise cuts the SP off or subordinates it.

o Example: An SI taken in inventory, the SP gives the debtor permission to dispose of it/give additional Sis. Conditions can be attached to disposing of the collateral but won’t affect the position of the taker (unless they knew in certain circumstances).

• Examples of statutory cut-offs: o s. 20 (b): A transferee of collateral who a) gives value AND b) acquires their interest without

knowledge of the SI takes it free of unperfected SI.

i. SI v. Buyer/Lessee of Consumer Goods worth $1000 or less

• 30 (3): buyer taking consumer goods take free if gave value or bought or leased without knowledge

• 30 (4): s. 30 (3) doesn’t apply if the goods are worth over $1000. ii. Temporary Perfected SI v. Buyer or Lessee

• ss. 5 (2) and 30 (5): SI’s can be temporarily perfected w/o registration or possession (ss. 5, 26, and 28 (3) but these cannot be asserted against most buyers/lesses who acquired their interest w/o knowledge of the temporary perfection.

iii. SI (perfected or unperfected) v. Buyer or lessee in the ordinary course of business of sellor or lessor

• s. 30 (2): Buyer or lessee of goods sold in the ordinary course of business of the sellor or lessor takes free of any SI in the goods (even if arising under s. 28 or 29) whether or not the buyer has knowledge of it unless they also know that the sale constitutes a breach of the SA under which the SI was created.

Royal Bank v. Wheaton Pontiac Facts: Bank had an SA with Key West providing it with an SI in their inventory. Bank registered, but no serial number on cars since they are inventory. A fiero was not sold at liquidation auction and so Steiban offers to sell and store it, but enters into an SA with Key West to buy it. Deschner buys Fiero from Steiban after doing a serial number search of Sask and Alberta that didn’t disclose the SI. Deschner later traded it in at Wheaton who sold it to Morin warranting clear title. The bank seizes it. Analysis:

• The SI was perfected because it was inventory when the SI attached so as per s. 1 (5) that is the form we consider the good in for the purposes of perfection. Ergo no need to record a serial number.

• s. 20 doesn’t apply to the first transaction since it was perfected and s. 30 (3) doesn’t apply since it was worth more than $1000 as per s. 30 (4).

• s. 30 (2) doesn’t apply since this was not in the ordinary course of business since Key West was bankrupt, wasn’t in business and didn’t even have a place of business. In this context "a sale in the ordinary course of business is a sale consistent with general commercial practice", but it is a question of fact depending upon the circumstances of the sale.

o s. 30 (2) only applies if its given by the seller. As we saw in Camco, since the goods are subject to a perfected SI given by someone other than the seller, so the buyer cannot rely on s. 30 (2 to assert priority over it in the rest of the transactions.

• Ergo s. 28 Nemo Dat rules apply.

Lanson v. Saskatchewan Valley Credit Union Ltd. Facts: Lanson loaned Nickel $ to buy a trailer and got an SI in it, which he registered. He knew that Nickel would either rent or sell the home and required Nickel repay the loan when the house was sold. Nickel sold it but didn’t tell Lanson about the sale, and the purchaser did not search the registry (since they didn’t need financing) and later sold it to Rempel who go financing from the CU who registered an SI claiming the trailer and its proceeds. Lanson discovered the sale and attempted to seize. Analysis:

• s. 28 (1): Debtor’s right to deal with collateral is subject to SI unless cut off by statute or implicitly/explicitly authorized.

• The SA between Nickel and Lanson anticipated Nickel dealing with the home and the repayment clause was not a clause requiring his permission.

o The court found that Lanson gave Nickel express authority to deal with it despite the words of the SA and because he knew that is what would happen with it.

• There is a difference between conditional authorization and an authorized sale subject to conditions that the proceeds go to the SP.

o Put in a provision demanding that the buyer be told that the interest will not be given up till they are paid.

Canadian Commercial Bank v. Tisdale Farm Equipment Ltd. • Here, any dealing done on the express condition that the SI would only be released on payment of the entire

proceeds in circumstances where all parties, including the vendor the purchaser and the holder of the SI, had knowledge of the SI.

• This case is restricted to cases where secured party agrees with the buyer to release the SI on the express condition that the obligation is satisfied in full and makes it clear to the debtor that he does not intend to rely simply on the proceeds.

2. The Ordinary Course Buyer or Lessee • S. 30 (2): A buyer/less of goods sold/leased in the ordinary course of business of the seller/lessor takes free of

any SI in the goods given by the sellor/lessor or arising under ss. 28 or 29, whether or not the buyer/lessee has knowledge of it, unless they also have knowledge that the sale/lease constitutes a breach of the SA under which the SI was created.

Camco Inc. v. Olson Realty (1979) Ltd. Facts Camco sold appliances to developer Muxlow who put them in condos and sold them to third parties. Camco was unaware that Muxlow had or was going to transfer them to third parties. Camco had registered a conditional sales agreement. It is unusual for condoes to have appliances come with the purchase price and the condo owners did not know their appliances were encumbered. Analysis:

• S. 30 (2): Condo owners will take free of the registered interest of Camco if the sale was done in the ordinary course of business of ‘seller’ unless they knew it was a breach of the SA (which they didn’t).

o To determine ordinary course of business, consider the business of the specific seller and whether the transaction was in the normal course of business. Buyer of goods should be giving a liberal interpretation as well.

o Here the seller was selling condos in a systematic way (a fact known to the appellant) and the court here and just because the selling of appliances was incidental to the primary business of selling the condos does not preclude the operation of s. 30 (2).

Alberta Pacific Leasing Inc. v. Petro Equipment Sales Ltd. Facts: Alberta Pacific had a perfected SA on the crane that Universal rented to Petro w/o Petro knowing about the SI (so didn’t know it breached the SA). Argues that Universal was in the business of renting cranes and only sold them if they were obsolete or had trouble renting them. The lease to Petro included an option to purchase. This sale might have been the only one that year. Analysis:

• The ordinary course of business is the type normally made by vendors in the business of selling goods of that kind where business dealings are carried out under normal terms and consistent with general commercial practice. Does not include private sales between individuals, but can include sale between sellers who ordinarily don’t sell to each other but instead the general public.

• S. 30 (2): Focuses on the business of the seller. Here Universal would sell them sometimes, although preferred to rent, and this was in the ordinary course of business (keep in mind the intention of the provision is to protect buyers) as it was a usual, if only incidental, part of their business. A sale can be in the ordinary course of business even if incidental only.

• Not restricted to inventory.

General Motors Acceptance Corp. of Canada v. Owens Facts: Diacom bought truck from a dealer under a conditional sale contract and the chattel paper was sold to GMAC. The buyers then sold the vehicle back to the dealer who sold it to Owens. The sale was bona fide. Analysis:

• S. 30 (2):“buyer takes free of an SI given by the seller”. The SI is given by the purchaser who was Diacom. o The problems here are:

� a) The SI was given by Diamcom (the purchaser) not the dealer (the vendor), and there is no evidence that the dealer sold the truck as agent of Diacom. The dealer was the seller, hence the seller didn’t give the SI.

� B) Diacom was violating the SA by selling it back to the dealer who had to know about the SA so that prevents that sale from cutting the SI free.

Willi v. Don Shearer Ltd • Knowing about the SI doesn’t prevent a purchase from cutting an SI off under s. 30 (2) unless they actually

know it was a breach of the SA.

• Serial number registration provides a partial solution by the gaps in s. 30 (2) and (3).

• Remember a SI in serial numbered goods held as equipment can be perfected by registration that doesn’t include the serial number (PPS Reg 34 (1) (b)) but if it is not included then the SI is deemed unperfected in a competition between the SP and a buyer or lessee of the goods who acaquires them without knowledge of the SI (PPSA 30 (6) and (7).

The Royal Bank v 216200 Alberta Ltd. Facts: Basically four classes of purchasers who wanted to know if a perfected SI covering APAAP of a retail vendor took over them: Class One: Paid the full purchase price for personal property, but property not in possession of retailer. Class Two: Paid part of the purchase price for personal property in the possession of the retailer. Class Three: Paid part of the purchase price for personal property not in the possession of the defendant. Class Four: Owed cash refunds by retailer Analysis:

• S. 30 (2): Requires that the goods are sold. This requires that there was a sale. Sale is not defined in the PPSA.

• s. 3 (4) of Sale of Goods Act: A sale is where title passes. It passes when the goods are transferred, and up till then is just an agreement to sell.

o When is there a transfer of title? Look to Sale of Goods Act. o 1) s.18: If unascertained, then its not a sale till ascertained. It is not just A bottle of water, but THIS

bottle of water. Unascertained is a good just bought by description. o 2) s 19: If ascertained goods, then the property is transferred at the time the parties intend and then you

look to the contract. If its not there the sale of goods act gives some rules if the contract is silent. S. 20 sets out the rules for ascertaining the intention of the parties. � s. 20 (1) � s. 20 (2): Where there is an unconditional sale of contract for the sale of specific goods in a

deliverable state, the property in the goods passes to the buyer when the contract is made and it is immaterial whether the time of payment or time of delivery, or both, be postponed. Because of this it will depend if title has passed. If its ascertained, then title passes when the contract is made unless the contract says different (but won’t take until they paid the balance of the price).

• Class 4: Unsecured debt that has no interest in the property of the store and are screwed.

• Classes 1 and 3: Contract not for ascertained goods so the title wouldn’t have passed at the time of sale. The money they paid to the purchase price ws not paid in trust.

• Class 2: They have priority.

Spittlehouse v. Northshore Marine Inc. Facts: Plaintiffs entered into a contract for a boat with Northshore and have paid most of it off and were just awaiting delivery. The contract of sale that title would be transferred when the payments were made in full. The bank has a perfected SI in all of Northshore’s assets including the boat. The bank claims the plaintiffs have no title as it is a contractual interest they have. Decision:

• Section 28 (2) is applied. It was done in the ordinary course of business and there was no knowledge of the SA.

• The court says that it was a conditional sale and is valid to the extent that the purchasers cannot demand the transfer of title until all of the purchase price is paid.

• Distinguished from Royal Bank v. 216200 Alberta Ltd. by saying that the SGA is not relevant to the resolution. Here points to the contract and says that while the SGA may effect when property passes it does not affect that this was a sale.

• BUT THERE ARE PROBLEMS WITH THIS REASONING because we’re saying he’s entitled to the boat despite not having title. This is a receivership and its priority between secured parties and buyers. What happened if Transamerica had petitioned them into bankruptcy? Then the boat would vest in trustee and the buyer has no property interest in it and can file an unsecured claim so now they are screwed. Then its between a trustee and SP. The result would be an inducement.You could protect the prepaying buyer with a statutory right.

• NOTE: remember a cheque is separate from the collateral underlying it. If a bank doesn’t honor a cheque, you have recourse against the person who wrote it, not the bank.

Chapter 11: Accounts, Liens and Fixtures 1. Accounting Financing and Factoring

A. Sources and Concepts

• s. 1 (1)(a)): An account is a debt that has to be repaid but excludes provisions dealing specifically with ‘accounts’ that are embodied in chattel paper, instruments or securities. Therefore, an account under the PPSA is only a monetary obligation.

• S. 1 (1) (x): An account is also an intangible.

• The type of accounts that are especially relevant: o Deposit accounts: Accounts held with banks or other financial institutions. o Accounts receivable: The obligation to pay for goods or services that are provided on unsecured credit

terms.

• Account Creditor: Person to whom the account is owed and the owner of it as intangible personal property.

• Account Debtor: Person who owes the money. o HOWEVER when it is used as collateral account creditor is the ‘debtor’ under the SA giving rise to

the SI in the account.

• PPSA priority rules apply to both an SI (s. 3 (1)) and a sale/assignment (s. 3 (2)) of an account (which is treated as a deemed SA) so have to register their interest even if a sale.

• Common Arrangements involving Accounts as Security: (a) Wholesale financer acquires a security interest in accounts as proceeds of inventory collateral (s. 28 (1)). (b) A lender grants a line of credit to a manufacturer, wholesaler, or retailer secured by a "general assignment of accounts." (c) A lender makes a loan to a borrower (e.g. a construction company) on the security of an assignment of amounts payable under specified contracts. (d) A factor purchases accounts under a factoring agreement.

• Accounts, existing or future, are chose-in-action and is mostly deal with under equity. S. 41 of PPSA mostly mirrors the equity rules.

• S. 10: One difference is that an assignment must be in writing if the assignee or secured party wishes to enforce his or her interest as against third parties.

B. Factoring

• Factoring: Refers to persons acting as agents/consignees of goods for sale on behalf of others. o Because accounts are generally chattel paper (s. 1 (1)(f)) the PPSA’s priority provisions for chattel

paper apply s. 31 (7) and s 28. o Factoring business offer a variety of services and there are a number of types of factoring, but they are

all the same for the purposes of the PPSA. � Full Service Factoring � Maturity Factoring � Recourse Factoring � Bulk Factoring

• Basically, in equity, it goes to whomever notifies the account debtor first.

C. Creation and Perfection of a Security Interest in Accounts

• It is unclear whether the debtor has sufficient interest in ‘future accounts’ to meet the s. 12 requirements (i) when the assignment is made but no contracts under which the future accounts are to be earned have been entered into; (ii) when such contracts are entered into; or (iii) when the right to payment has been earned by the debtor's performance.

• This isn’t a big problem since date of registration determines priority but it can be a problem (e.g. s 7).

• Under rules of equity, priority is given to the assignee who acquired his or her interst without notice of a prior assignment who is first to notify the account debtor.

i. Priority of Unperfected SI v. Trustee in Bankruptcy or transferee of collateral

• s. 20: Applies as normal so that it is not effective against the trustee as it an account is an intangible and this section covers intangibles (s. 20 (b)).

ii. Priority between SI

• s. 35: the residual priority rule will apply and if both perfected then it will be first to register. iii. Priority SI v Writ

• S. 35 of CEA writ wins unless the SI was registered first. iv. PMSI in accounts as proceeds

• The PMSI rules apply in the usual way.

• s. 34 (2): The PMSI in the collateral or proceeds that is perfected not later than 15 days then they get it. Again will need description of collateral etc…

• s. 35 (3) of CEA: A PMSI has priority over a writ that bound to the personal proerpty before the PMSI was registered/perfected if the SI was registered or perfected not later than 15 days from the day that the debtor or another person at the request of the debtor,obtained possession of the collateral, or (b) the security interest attached, in the case of personal property other than goods, chattel paper, a security certificate, a document of title, an instrument or money.

v. SI in Accounts as Original Collateral v. PMSI in accounts as Proceeds of inventory

• s. 34 (6): A non-proceeds SI in accounts given for new value has priority over a PMSI in accounts as proceeds of inventory if a financing statement relating to the SI in accounts is registered before the PMSI is perfected or a financing statement related to it is registered.

• This reverses the normal priority given to PMSIs. o This is done because a) economic b) equitable reasons. After all, a prior account finacer can lose out to

a subsequent inventory financer (who is argueably in a better position to avoid loss). D. Secured Party/Assignee's Right to Payment of the Account

• s. 41: Mini-code of provisions dealing with the rights and obligations of the account debtor (assignor) and the SP (assignee).

• s. 41 (1): Defines account debtor as a person obligated under an intangible or chattel paper.

• S. 41 (2): The rights of the SP (assignee) is subject to the terms of the contract between account debto and assignor and any defence arising fro that or any other defence/claim of the account debtor against the assignor that accrues before they have knowledge of the assignment unless the account debtor has made an enforceable agreement not to assert defences or claims arising out of the contract.

• S. 41 (5): The account debtor can make payments to the assignor a) before they receive notice that states i) the account is assigned to the assignee who should be paid AND ii) identifies the contract under which the amount payable is to become payable OR b) after the account debtor requests the assignee to furnish proof of the assignment AND ii) the assignee fails to furnish it within 15 days.

• S. 41 (6): Payment by an account debtor to an assignee pursuant to a notice refereed to in subsection 5 (a) discharges the obligation of the account debtor to the extent of the payment.

• S. 41 (7): Prevents the account debtor from enforcing, as against the SP (assignee) a contractual term under which the debtor (assignor) has agreed not to transfer the account arising under the contract between the account debtor and the debtor. It basically would give the account debtor a chance to go after damages against the assignor for breach of contract, but can’t be used vs. third parties.

2. Liens and Other Statutory Interests A. Commercial Liens

• s. 4 (a): The PPSA applies generally to non-consensual liens or charges.

• s. 32: Priority is given to artisan/repairer who, in the OCOB furnishes materials or services with respect to goods subject to an SI.

• The Garagekeepers' Liens Act: Confers a lien on persons who have rendered services with respect to motor vehicles or farm vehicles in the circumstances stipulated.

o S. 2 (1): A garage keeper who houses, stores or repairs a motor vehicle is entitled to a lien with respect to any unpaid account for such services

o s. 2 (3): Lien lasts for as long as lien-holder retains possession of the motor vehicle unless he obtains signed acknowledgement of the indebtedness from an authorized person with respect to the services provided (as long as it is done afterwards). NOTE: a lien can arise by someone other than the owner and the garage keeper has no need to enquire as to authority.

o 1(d) garage keeper defined. Person who keeps a place of business. o 1 (e): Motor vehicle defined o 1 (a) farm vehicle defined o s. 2 (3): A lien lasts for as long as lien-holder retains possession of the vehicle. I o s. 3 (1): If possession is given up, lien lasts for 21 days unless a financing statement is registered. Such

a statement requires serial number. o s. 6 (1): Lien lasts for 6 months after registration. As long as the vehicle has been properly seized by a

civil enforcement agency within that period, the lien continues until it is sold in the proper manner. There is a qualification that allows the order to be extended if it couldn’t reasonably be enforced.

o S. 32: Governs priority between holder of a SI and lien. Liens win if given in the ordinary course of business unless the act that gives it says that it doesn’t.

o S. 4: Every lien on a motor vehicle/farm vehicle shall be postponed to an interest that is created or arise in good faith and without express notice of the first mentioned lien and that was created or arose before the registration of a financing statement referred to in s. 3 (1).

• Basically this says that the PPSA does not apply to an SI provided by repair liens.

Craddock Trucking Ltd. v. LeClair Facts: Owner took 4 trucks and entered into a lease operator agreement with the applicant that said that the operator is in charge of expenses for maintaining their own stuff and Craddock could inspect and repair the stuff they deem necessary to comply with the rules. This was independent contracting. Analysis:

• s. 32: Gives priority to the lien subject to any competing priority rules. Those competing rules here would be s. 4 of the Garage Keepers Act.

• For s. 4 to apply, s. 32’s requirements must be met (a) lien on goods b) supply services/materials in respect of goods c) in the ordinary course of business)

• S. 4 says that it would only give priority to an SI if it arose after the lien claimant surrendered possession but before it registered at the PPSA.

o HOWEVER a lien will win out if the SI was created before the lien arose.

• Garagekeeper’s lien act applied. It required either possession or a written signed acknowledgement. o No written acknowledgement since it was written before the repair work was done and therefore can’t

count. Court also suggests must be obtained before the lien is registered. o For possession, you must look at it in relation to the repair services and Craddock’s possession for

driving was a different purpose. The relevant possession was possession for drivers and this makes it seem narrowly construed by finds a lien anyways.

B. Statutory Trusts and Security Interests

• PPSA says nothing about liens/charges created by statute and held by debtor-employers.

• Generally, for a statutory lien to have priority over a prior SI granted by debtor-employer, the legislation must clearly state that the lien attaches to identified property and not just the interest of the debtor in property.

• This will occasionally be interefered with:

o Employment Standards Code:

• s. 109: Creates a deemed trust and SI to protect unpaid wages

• s. 109 (2): Employer deemed to hold all wages in trust for employees regardless of where they are kept.

• s. 109 (3): Payable in priority to any other claim up to $7500 per employee.

• s. 109 (4):This will not take priority over a PMMSI that is a) taken prior to the pay accruing due AND b) registered within the time periods referred to in s. 22 of the PPSA.

o Bankruptcy and Insolvency Act

• s. 136: See that the trustee takes it all and says that subject to the rights of secured parties (who can take it so that it doesn’t go into the pool or get paid out first as per s. 20 or a PMSI) and some super priorities in the act, then the employees get it.

• This conflicts with the provincial rules, so the result is SP’s will petition debtor’s into bankruptcy. The court specifically said this was ok in Bank of Montreal v. Scott Road Enterprises

Ltd. C. Tax Priorities

• Crown usually gets taxes with statutory trusts and SI. The priority of these is determined by the legislation that creates them:

o Income Tax Act s. 227: Basically you have a trust if you deduct money and you need to pay more and it is the highest priority interest.

Chapter 12: Chattel Paper & Interjurisdictional Issues (Conflict of Laws) 1. Chattel Paper Financing

• Chattel Paper s. 1 (1) (f): Writings that evidence both a monetary obligation and an SI or lease of specific goods but does not include an SA providing for an SI.

• s. 3 (1) (b): The transfer of chattel paper falls under the PPSA. This is the true one. Also applies as per s. 3 (2) (a) to a transfer of account or chattel paper that does not create an interest. This is the deemed one.

• S. 31 (6): Purchaser of chattel paper who gives new value and takes possession has priority over the holder of a registered SI in the same paper if the purchaser is not aware of the existence of the registered SI at the time they take possession. . It will also defeat it if it has attached to proceeds of inventory under s. 28 regardless of their knowledge. (i.e. Perfection by possession gives a stronger priority) THIS IS THE SPECIAL PRIORITY RULE.

o s. 1 (1) (kk): Purchase includes taking by sale etc…or any other consensual transaction creating an interest in property.

o If chattel paper is stamped with a notice of claim of the registered SP, the purchaser cannot gain priority as stamping ends further negotiations of it.

• Distinguish between claims to the chattel paper and claims related to the goods subject to them. The chattel paper loses its value as collateral if the SI in goods is not perfected as its value is based on its ability to enforce on that. If the underlying obligation can’t be enforced then its just an unsecured obligation.

o Ex: Karsales Ltd. which has the chattel paper representing the interest in the car sells it to Avco Acceptance Co. That makes Karsales the debtor and Avco the SP for the chattel paper for the PPSA purposes despite it being an outright sale of the paper (s. 3 (2) (a)).

• S. 29: Contains an elaborate set of rules to deal with situations where goods involved in a chattel paper transaction are returned to the original seller or seized by the chattel paper purchaser.

o Examining these is beyond the scope of this course but the are important in practice.

2. Interjurisdictional Issues (Conflict of Laws) • Each province counts as a foreign jurisdiction for conflict purposes.

• To avoid problems, the PPSA prescribes choice of law or recognition rules for foreign SI:

• There are two basic Rules: o 1. s. 7(2): The validity of an SI depends on a) a SI in i) intangibles ii) goods that are of a kind 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 (eg: long haul trucks) B) a non-possessory SI in chattel paper, security, negotiable document of title, an instrument or money (i.e. negotiable collateral) must be governed by the law where the debtor is located. � S. 7 (1): Tells us where the debtor is located. A) if they have a place of business is there b) if

its multiple places of business then it is at their head office c) if they have no place it applies at their principle residence.

� s. 7 (3): if a debtor relocates to another jurisdiction or transfers an interest in the collateral to a person located in another jurisdiction, a SI perfected in accordance with the applicable law as per 2 continues perfection in the province it is perfected in the other jurisdtion a) not later than 60 dayas after the debtor relocates b) not later than 15 days after the day the SP has knowledge that the debtor has relocated or has trasfered an interest in the collateral to a person located in the other jurisdiction c) prior to the date that perfection ceases under the law of the first jurisdiction, whever is first

o 2. s. 5 (1): Governs perfection and priority in a) SI of non-mobile goods and b) possessory SI in negotiable collateral. Jurisdiction is the jurisdiction where the collateral is situated at the time SI attaches. � S. 5 (2): If goods were originally elsewhere and had an interest attached there. Those goods are

then brought into Alberta and if it was perfected in Alberta within either those 60 (first moved into) or 15 days (acquires knowledge) timeline then the thing continues perfected. HOWEVER this status of continuous perfection will apply against competing third parties, but won’t win against a buyer who acquires without knowledge UNTIL actual perfection occurs.

� REMEMBER this temporary perfection only occurs if it has been registered within 60 days (and you keep the old registration date).

o S. 7 (1): Discuses the debtor’s location when the SI attaches and also applies to "in goods which are of a type that are normally used in more than one jurisdiction, if such goods are classified as equipment or as inventory leased or held for lease by the debtor to others". This would include a fleet of long-haul trucks, even though the trucks never leave the province.

• Just because Alberta law is prepared to recognize the validity and perfection of a foreign SI in collateral doesn’t mean that the foreign SI can be asserted against someone who acquires and interest in the collateral in Alberta. In some situations, the SP must reperfect in the province in order to have the foreign perfection recognized here (ss.5 (3) – (5) and s. 7 (4).

o There are grace periods for reperfection, but there is no guarantee of complete perfection prior to actual perfection.

o Reperfection in the province is not necessary in the circumstances prescribed in s. 7 (2) unless the jurisdiction where the debtor is located when the SI attached does not have a central registry and the SP has a non-posessory SI (s. 7 (4)).

Gimli Auto Ltd. v. BDO Dunwoody Ltd Facts: Bankrupt rented out trucks to tourists for short periods. It leased three trucks from Gimili who was a business in Manitoba (the lease was entered there and its statutes didn’t require registration). The trucks were taken to Alberta, where its head office/chief place of business was. The bankrupt also had a branch in Surry where it took a long term lease on a passenger vehicle owned by Eagle Ridge (which was registered) and kept it in BC but it was only used by staff.The trustee in bankruptcy has rejected the claims of the lessors because bankruptcy occurred before registration in Alberta. Analysis:

• S. 7 will prevail over s. 6, and both prevail over s. 5.

• The Gimli Trucks o S. 7 (2) (a) (ii) applies to "goods that are of a kind that are normally used in more than 1 jurisdiction, if

the goods are equipment or are inventory leased or held for lease by the debtor to others..." The trucks fit within these are they were inventory and trucks are used to cross jurisdiction. � The issue is how pickup tricks are ‘normally used’ NOT just these particular ones or the

intentions of the lease. o Since s. 7 applies, Alberta law governs because the debtor (lessee) had its offices in Alberta and

therefore s. 7 deemed the debtor to be here.

o No registration means the interest was not perfected.

• The Eagle Ridge Car o He concludes that all motor vehicles (or passenger motor vehicles) are goods of a type used in more

than one jurisdiction for the purposes of s. 7 (2) (a) (ii) o The other requirement of equipment or inventory leased or held for lease by the debtor to others

(which is interpreted as a further sub-lease and not the lease which is the SI) so he finds that this car was not leased or held for lease to others. BUT because of OR and ARE equipment need not be held for re-lease. � S. 1 (o): Equipment is any goods held by the debtor which are neither inventory nor consumer

goods. And the car doesn’t fit inventory (s. 1 (w)) or consumer good (s. 1 (h)) so it has to be equipment so it satisfies the first branch of s. 7 (2) (a) (ii)

o Therefore s. 7 (2) says that the governing law is the jurisdiction where the debtor was located. � Where the debtor is located is defined by s. 7 (1) to be his place of business (chief executive

office if more than one location) and that is Alberta and Alberta law applies if there was no misrepresentation. No registration here so the trustee prevails.

Chapter 13: Post-Default Rights and Remedies 1. Enforcement of a SA under Part V (PPSA s. 55-64)

• Part V does not apply to deemed SI so they can seize as per the true lease/consignment agreement.

A. What triggers it? • s. 56 (1): When a debtor is in default, then the SP has the rights and remedies specified in the PPSA. Seizure

without default could be conversion.

• S. 56 (2): PPSA obligations can’t be waived.

• S. 1 (1) (n): Default could be 1) failure to pay the debt or 2) the occurance of an event or set of circumstances under which the SI becomes enforceable (eg: typically bankrupt, or sale, or movement outside of jurisdiction of the court). The SA defines default.

• What is the amount payable on default? If the debtor defaults there is usually an acceleration clause so the debtor doesn’t just owe the money they fell behind on but all of it. Some will also have a right to payment on demand.

o S. 16: Limits the SP’s right to invoke the acceleration clause where the SA contains a deemed insecurity provision. Such a deemed provision (where the SP considers there to be a risk they won’t get paid back even thought the payments are still up to day) can only be exercised where the SP a) in good faith believes b) has commercially viable reasons to believe tht the collateral is or is about to be placed in jeopardy.

B. What is the SPs right then to take possession of the collateral? • S. 58 (1): Subject to the CEA and s. 36 – 38, the SP, unless otherwise agreed, has the right to take possession of

the collateral or otherwise enforce.

• This means it is subject to a) the possession must be done via CEA b) must be done in a manner permitted by law (basically use CEA and follow pre-seizure requirements of federal law).

• S. 58 (1) (c): Allows for seizure without removal as per the CEA it can’t be moved or there isn’t sufficient storage space.

C. Is notice required prior to seizure? • Nothing in the PPSA or CEA requires notice.

• S. 244 of BIA: Notice is required when the debtor is insolvent and the intention to enforce involves all or substantially all of the business assets of the debtor. Then there is a requirement of 10 days notice.

• There is also the CL Rule from Lister and Dunlop of reasonable notice. o Mister Broadloom Corp.: to determine what length of time is reasonable requires looking at the

following factors: (1) the amount of the loan; (2) the risk to the creditor of losing his money or the security; (3) the length of the relationship between the debtor and the creditor; (4) the character and reputation of the debtor; (5) the potential ability to raise the money required in a short period; (6) the circumstances surrounding the demand for payment; and (7) any other relevant factors".

D. Presuming notice given, HOW do you seize? • s. 58 (2): Can seize either by taking possession, giving notice or by posting a notice of seizure by fixing a

sticker on the goods. The CEA may appoint the debtor as the bailee forcing them to take appropriate care.

• What if it is intangible? o s. 57 (1): On default or under SA, they are required to notify the account debtor to make the payments

due to the SP (the same applies for chattel paper etc…). If its cash, they can seize and apply it to the debt.

• How does it get delivered to the possession of the SP? o s. 58 (5)-(7): Basically says can give it to the guy.

E. If the SP or the CEA have control over it, there is a duty of care for property after seizure: • s. 17 (1): There is a duty on the SP and the CEA to take care to preserve the collateral. This includes, unless the

parties agree otherwise, the steps to preserve the rights against other persons in the case of chattel paper, security or instrument.

F. Pre-disposition notice

• The PPSA contains specific pre-disposition notice.

• s. 60(4): must give notice no less than 20 days before disposing to a) the debtor and anyone else known to be the owner b) a creditor or person with an SI in the collateral whose interest is subordinate who has prior to the date of notice registered or taken it onto possession c) anyone else with an interest.

• What does the notice have to say? o s. 60 (5) 1) description of collateral 2) amount required to statisfy the obligations secured by the SI 3)

the sums actually in arrears (i.e. the amount that has ACTUALLY been defaulted on not accelerated) exclusive of the operation of any acceleration clause in the SA and a brief description of any default other than non payment

o This leads to the question of what amount to indicate on the notice: A) debt amount or B) collateral amount. Basically the idea is that collateral is worth a certain amount and the debt is worth another. Most use the debt, she uses the collateral.

• s. 60 (5) (e-h) o e) they have to be advised they have a right to redeem the collateral (any person entitled to notice) o f) the debtor may reinstate the SA on payment of the amount in arrears o g) if it isn’t redeemd or reinstated the collateral will be disposed of and the debtor may be liable for

deficiency o h) the date and time of the public auction and such should be in there.

• 60 (7): they can’t allege that there is a deficiency if they don’t have an obligation to pay the deficiency if under any act or rule of law the Sp does not have a right to collect a deficiency from a debtor.

• s. 15: Notice is not required in certain cases such as perishables, securities, cost to much to store, the cost is disproportionate to its value, et…etc… OR if everyone who receives notice consents (but can only be done after the fact).,

G. Preparation for disposition

• s. 60 (1) collateral may be disposed of in this part its in existing condition or mafter any repair etc… H. How do you sell it?

• s.60 (2): basically in any way that will get rid of it to get the best value.

• s. 60(3): the SP may delay disposition of the collateral in whole in part if its commercially reasonable. o S. 66 (1): applies to any rights and obligations especially those here so they SP has to act in good faith

and in a commercially reasonable manner. I. What title does the buyer get?

• s. 60 (12): When a SP disposes of the collateral to a purchaser who acquires the purchaser’s interest for value and in good faith and takes possession of it then they acquire title free of a) debtors interest b) interest subordinate to the debtor c) interest subordinate to that of the SP.

o THIS MEANS that a subordinate seizure cannot destroy the interest of a SP with a higher interest.

• S. 60 (13): s. 12 won’t affect the rights of a person deemed registered pre-PPSA who wasn’t given written notice.

J. Distribution of proceeds of disposition

• s. 60 (1) says that it will go a) first to the enforcement of them b) satisfaction of the obligations secured by the SI and any surplus to s. 61 (a better SI hasn’t lost its SI so it doesn’t have to be paid out).

• What about surplus? o s. 61 (1): a) first to a subordinate who has registered or taken possession b) anyone else with an interest

c) debtor. K. What if there is a deficiency

• s. 61 (4): basically the debtor is liable for deficiency. Gets the debt by suing them on the debt which is the in personum debt obligation (the SI is the in rem enforcement against the property interest in the collateral).

L. Could the SP keep it?

• s. 62 (1): They can do it if they give notice to everyone who was due notice to sell and a CEA if still in possession (keep in mind that applies up there too).

• s. 62 (2): anyone who is entitled to notification and whose interest would be adversely affected. o If there is notification of objection then a SP can’t then persue a claim for deficiency since they are

deemed to have elected to take the collateral in satisfaction. Basically then you will precluded from going after the debtor for a deficiency in the notice.

o This is why it is important to see if its debtor or collateral in the notice since if its debt, and you take it, then you can’t go after it. If it’s the value of the collateral, then you can go after the rest.

• s. 62 (6): Objections can be overruled by the court:

• The act also specifically allows the SP to buy the collateral themselves but if they violate their obligations they will be in trouble.

M. Redemption or reinstatement

• Redemption: At any time before sale or decided to irrevocably be deemed to keep then there is right to redeem. o s. 63 (1): can be redeemed by anyone entitled to receive notice of its disposition under s. 60. They can

be redeemed by tendering all obligations secured by the collateral. Again does that mean the total debt or just the value of the collateral. Again, the question is what they should pay? Again goes back to value or debt.

• Reinstate o Only the debtor has a right to reinstate it by a) paying the amount actually in arrears b) curing any

other default. o They can do this any time before they SP have contracted for the sale etc…BUT this is limited to twice

a year s. 63 (2). N. What is the consequence of failure to perform any of these statutory obligations?

• s. 67 (1): What if they fail to act in a commercially reasonable manner without reasonable excuse? Then the person to whom the duty is owed can recover damages (any reasonably forseable loss or damage).

o Example: sells for too little and doesn’t recover the full value of the collateral. o Must prove the damage, and this is very hard with consumer goods.

• 67 (2): Deemeed damages provision regarding consumer goods then there is a deemed damage amount to be prescribed by the regulations. (not examined on)

• s. 67 (3): The defendant may raise as a defence the failure of the SP to comply with s. 17, 18, 60 or 61 obligations but non-compliance limits the right to the deficiency only to the extent that it ahs affected the rights of the defendant ot protect their interest in the collateral or has made the accurate determination of the deficiency impracticable.

O. The court has overriding jurisdiction.

• s. 64: Basically gives the court the right to sort out any problems that may arise.

• s. 69: this is the ancillary jurisdiction of the court can that be invoked by the court. If they can do so on affidavit evidence they will do so.

• Who can make an application? P. Right to claim a deficiency has a limitation:

• s. 53 Law of Property Act: Where a seller of goods who has a PMSI is restricted. If the seller elects to seize the goods then they have no right to sue. It doesn’t apply unless acquires from seller as consumer goods. They can either seize the collateral or sue on the debt. REMEMBER only for seller, not vendor.

• if they decide to seize then they can sue for the purchase price, or if they elect to sue then if the goods seized to pay for it are the goods the debt was for then you can’t collect any more than that. And if its taken or sued then the there is no right to a deficiency. S. 54 says it doesn’t apply if they have been damaged or s. 55 an accessory removed.

Q. Enforcement through receivership • These are relevant where you have to deal with a lot of collateral. Like a whole business usually.

• Basically receiver-managers will take the place over and run it to get the cash or sell it off.

• Can be appointed either 1) privately under the terms of the SA. 2) Sp applies to court to appoint a receiver.

• The balance of these provisions then say that the courts can exercise jurisdiction over either of these.

• s. 65 (8) the court has inherent jurisdiction over receivers. R. Exemptions from Seizure

• However, s 89 of the Indian Act creates an exemption that precludes the grant of SI to on-reserve property of Indian or a band within the meaning of the act except at the instance of a person who is an Indian and a band. A seller of goods who has retained title under the agreement for sale (ie vendor with PMSI) is excluded from operation of this prohibition.

Loewen v. Superior Acceptance Corp. Analysis:

• Were the plaintiffs in default under the SA?

• s.16: codifies the power of an SP to use an acceleration clause, but requires them to act in good faith and have commercially reasonable grounds to believe that the collateral is in jeopardy before accelerating payment under the contract.

• This is an objective test.

• There were no commercially reasonable grounds to seize since there was no default of payment on the rewritten loan, and the earlier default was written off and not relevant to payment on the rewritten loan. There was no default on the rewrite since the truck wasn’t sold and he could have called them to discuss the problems like their move to kamloops or inconsistent financial information.

• Since there were no commercially reasonable grounds, and on the whole of the evidence, they were not indefault so Superior had no authority to seize.

• Do the Plaintiffs require reasonable notice?

• They require reasonable notice as per Lister v. Dunlop.

• What did the failure to comply with notice and PPSA requirements mean?

• S. 69 (3): Provision of damages provision.

• Exemplary damages also possible.

Rapid Transit Mix Ltd. v. Commcorp Financial Services Inc. Facts: Debtor who repeatedly defeaulted on payments and been allowed to reinstate by acceptance of late payments. This occurred on 8 occasions and finally they go and seize. Gives plenty of notice to sell and enters into a contract of sale. On the same day, gets an ex parte injunction to resume. Analysis:

• The only issue is the jurisdiction of the court of QB using s. 64 powers. The QB had given the guy additional time to reinstate the SA. The PPSA says you have a right to reinstate at any time before its contracted for sale.

Here it had been contracted for sale. By giving the debtor additional time to reinstate, the court was giving more than the act gave.

• The CA said that the act does not entitle the court to alter the contractual statutory rights of the parties in any substantive way.

Notes:

• Holnam West Material Ltd. v. Canadian Concrete Products Ltd.: s. 63 used to stay enforcement of a junior creditor’s Si on the grounds that it could negatively affect the position of a senior creditor by shutting down the business of the debtor while only depriving the junior creditor of a negotiating lever. This is ok because Holnam advanced money on security that ranked prior to its own knowing it might not ultimately collect and it should not be allowed to go around this through secondary means. This would be commerciall unreasonable.

• Fecke Holdings Ltd. v. Cojocar (Sask. Q.B.)The court refused to use s. 63 to prevent a seizure of collateral when the debtor didn’t make payments claiming misrepresentation byt eh SP.

Chapter 14: Bank Act Security • This is all the SI unique to banks under the federal bank act.

• S. 427: Creates the SI. Used to be called s. 88 and s. 178.

1. The Conceptual Basis of Bank Act Security and the Scope of s. 427 Bank Act, ss. 435, 427(2),(3),(4)(a); 428(1), (2), (7)-(11).

• A bank act security is very different from a PPSA one. It is from when secured creditors were determined on the basis of title, and it hasn’t changed for some reason.

• S. 427: identifies both the type of borrower to whome a bank may lend $ on security of a Bank Act interest and the type of property the bank can take in such a collateral. It is addressed to primary producers and manufacturers and not retail.

• S. 426: Provides for a SI in hydrocarbons and minerals.

• S. 435: The title vests in the bank the day they acquire the SA. Royal Bank of Canada v. Sparrow Electric Corp.

• The BAS effectively gives the lender legal title to the borrower’s interest in the collateral when the SI is taken out.

• The borrower retains an equitable right of redemption, but the bank effectively acquires title to whatever rights the borrower holds in the assigned property.

o This is why it is a fixed and specific charge. Rectifies this with the concept of future acquired property/inventory by saying what fixed means should change to fit.

2.Future Property as Security • Bank Act, ss. 427(2): Basically a Bank Act security gives them title in both all present and after acquired

property.

• 428(1),(12).

• See Royal Bank v. Sparrow Electric, supra.

3. Future Advances and Antecedent Debt • Bank Act, ss. 429(1): Can’t get a s. 427 security in antecedent debts. Have to have the contract done before the

value given.

• Royal Bank Of Canada v. Bank Of Montreal, o Registration of a notice of intention and execution of the SA set the priority date for RB’s SI even

thought advances were not made under the agreement until after the BOM advanced money under its subsequently executed Bank Act SA with the same debtor.

o Note the effect of section 429(1). What is the policy basis for preventing banks from taking section 427 security to secure antecedent debt?

4. Proceeds • Bank Act, s. 428(12): If they have a bank act SI in the original materials, they also get it in the stuff made from

those materials.

• BA makes no specific reference to proceeds beyond the above section.

• S. 427 (1): Does not identify intangibles like accounts as property in which a bank can take an SI.

• Royal Bank v. United Grain Growers: A bank can claim on proceeds. Title in proceeds vests the moment it is acquired by the debtor.

• It seems that proper acquired as direct replacement for property owned by the bank by virtue of its BA security is deemed also to be property owned by the bank. Analogous to indentifiable. Once mingled, identifiability is lost and other principles must be turned to. Maybe use tracing laws, but those are provincial laws and this is a federal matter.

5. Registration • Bank Act, ss. 427(4): Must give notice of intention otherwise the security is void against creditors.

• Bank Act ss. 428(3)-(6)

C.I.B.C. v. 281787 Alberta LTD. (Crockett’s Western Wear) Facts: Is security void against other creditors since it registered its notice of intention to take it after the security had been given? The bank’s security would be valid and take priority if not for what was at the time 178 (4)(a). This section says that a BA SA is void against other creditors with security, subsequent purchasers or mortgages in good faith unless a notice of intention signed by or on behalf of the person giving the security was registered with the apporpirate agency not more than three years immediately before the security was given. The banks says that this meant it lost priority for so long as it was unregistered, but takes priority on registration as this seres the objective of the section (to prevent secret liens). The creditors rely on its plain wording. Analysis:

• It is the plain wording that is correct. The security is either valid when taken or not.

Note: Is the applicable priority rule under the Bank Act "first to file" as it is under section 35 PPSA?

6. Priorities: Provincial SI v. Bank Act SI • Priority dispute over property falling subject to a BA SI will be resolved on application of nemo dat since its all

about title. Banks can only acquire title subject to existing interests so if someone has a better one they will win and vice versa. Confirmed in RB v Sparrow.

• S. 4 (b) of PPSA: PPSA does not apply to bank act.

• Royal Bank v. Saskatchewan Agricultural Credit Corporation set out the approach to be used where there is a conflict between a PPSA security interest and a Bank Act security:

o Three basic rules: � (1) Set aside the PPSA from the analysis and determine the priority as if the PPSA did not

exist; � 2) Determine the priority pursuant to the Bank act � 3) Apply the first-in-time priority where appropriate.

Royal Bank v. United Grain Growers Facts: Bank registered its claim under Bank Act prior to the PPSA interest. PPSA interest given special interest under PPSA> Analysis:

• These are resolved by the first in time rule when it comes to original collateral.

• Applies the test from Royal Bank v. Sask Agricultural Credit Corp.

• This applies to proceeds as well.

Royal Bank v. United Grain Growers (Sask CA) • The first decision was correct.

Unanswered questions: 1. What priority rule governs a competition between a proceeds Bank Act security interest and a PPSA security interest where both arise upon acquisition of the disputed property by the debtor?

• Ex: BA interest arises the second the bank can claim inventory as proceeds, but a previously registered PPSA interest in APAAP also arises at that moment.

o If SP’s interest is deemed to have attached before when the debtor owned the property before it was vested in the Bank the SP wins.

o It could operate in favour of the bank too.

• Which is right? Have to look to case law about competition between a Bank and a PPSA SI in APAAP where property is original collateral.

• The case law says that priority is determined on the basis of the date the agreement creating the interest came into question.

• No answer about what happens when the debtor sells a car bought with proceeds of nventor to a bona fide purchaser for value without notice of bank’s interst. Do they take it? But given PPSA doesn’t apply maybe bank wins.

2. How does the case affect the reliability of the Personal Property Registries as a source of information regarding the existence or potential existence of prior claims to property of a debtor?

• Because the bank can have an interest in any form of property generated as proceeds whether or not it is in the categories of the bank act, a search of the provincial registry with the debtor’s name or serial number won’t reveal the interest. It could even have priority over a bona fide purchaser.

• In conclusion, Royal Bank v. United Grain Growers raises a host of potential problems. They include not only the problem of ascertaining the principles defining the scope of the implicit statutory interest in proceeds and the priority associated with that interest, but also the spectre of undiscoverable Bank Act interests conferring priority on banks over interests acquired under provincial law.

Bank Of Nova Scotia v. International Harvester Credit Corp. (Ont CA) (a) a Bank Act security may be a security interest under the Ontario PPSA. (b) A bank can opt in or opt out of the PPSA simply registering or discharging a registration under the PPSA. (c) 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. (d) 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 debtor. Set out below in simplistic form is a very brief summary of the possible priority outcomes in the types of conflicts that generally arise between a security interest taken under the PPSA and a security under section 427 of the Bank Act. LEGEND: PPSA = PPSA security interest Sec. 427 = Section 427 Bank Act security Scenario 1 1. PPSA created and registered 2. Sec. 427 registered and created result: PPSA has priority -- nemo dat Scenario II 1. PPSA registered 2. Sec. 427 registered and created 3. PPSA created result: sec. 427 his priority -- nemo dat and Bank Act Scenario III 1. Sec. 427 registered 2. PPSA created and registered 3. Sec. 427 created result: PPSA has priority -- nemo dat Scenario IV 1. Sec. 427 created but not registered 2. PPSA created result: PPSA has priority -- Bank Act Scenario V 1. Sec. 427 created but not registered under Bank Act 2. Sec. 427 registered under PPSA

3. PPSA created and registered result: PPSA has priority (SPPSA s. 4(k)) Scenario VI 1. Sec. 427 registered and agreement executed 2. PPSA registered and agreement executed 3. Debtor acquires rights in collateral result: sec. 427 has priority -- Pulsar Ventures (first in time rule)

or, if 1 and 2 are reversed, PPSA has priority Scenario VII 1. PPSA created but not registered 2. Sec. 427 created and registered in PPSA registry result: PPSA has priority because of nemo dat or sec. 427 . Not a "security interest" under PPSA Scenario VIII 1. PPSA created but not registered 2. Bank takes sec. 427 and PPSA agreement and registers under PPSA result: PPSA has priority (s. 9(2))

law 587 personal property security law buckwold · o the merchant is the agent of the supplier. o...

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