Chapter 1: Background of PPSA
-Pledge: promise to repay loan, or lender keeps the property (ex. Lord Jon’s ring) and can sell it
-Does not work in modern day because:
-Buyer does not yet own the equipment they want to finance
-Buyer needs possession of equipment to earn money to pay for it
-Impractical to pledge big items of collateral (and vendor would have to keep it)
-Why would business borrow money?
1. Leveraging: increasing rate of return on investments
2. Capital: borrow money to provide capital to start a business
3. Risk spreading: spread risk of failure between your own capital and creditor’s capital
-Why does lender take SI in collateral?
-To decrease their risk (if debtor fails, they can regain some portion of their loan)
-The less risk = lower interest rate
Conditional Sales Agreement “Unpaid vendor is a moneylender”:
-Vendor retains legal title and purchaser retains possession
-Purchaser keeps collateral so long as she makes payments. When fully paid, title transferred
-If purchaser defaults, the vendor repossesses collateral and sells it
Chattel Mortgage:
-Vendor does not want to be money lender. Use third party financer
-Bank lends money to debtor. Debtor gives money to vendor. Vendor gives title to debtor. Debtor gives title to bank. Now debtor owes bank payments, same as with CSA
Lease: Was being used as a form of CSA and was difficult to tell them apart
Registry: This system was created to protect SIs of subsequent creditors
-Problem: there were separate registries for leases, CSAs, CMs, assignments...very confusing.
PPSA: created in early 1980s and unifies system. Not concerned with title, just concerned with SIs
s.73: Subject to s.74, the PPSA prevails over all other Acts unless there is a section in other Act that specifically overrides PPSA (“big stick” provision)
s.74: Exceptions: Business Practices and Consumer Protection Act (or any other consumer protection legislation) and Land Title Act trumps PPSA
s.75: References to things at are in essence SIs will be governed by PPSA
s.20: (Unperfected SIs are subordinate to JC, trustee, BFPVw/oN)
(a): A SI in collateral is subordinate to the interest of judgement creditors (i – iv) if the SI is unperfected when the judgement arose
(b): A SI in collateral is not effective against:
i. trustee in bankruptcy if SI is unperfected at date of bankruptcy
ii. liquidator appointed under Winding Up Act if SI is unperfected at date that winding up order is made
(c): A SI in chattel paper, document of title, instrument, money, intangible or goods is subordinate to the interest of a transferee who:
i. acquires an interest under a transaction that is not a SA (just a purchase)
ii. gives value
iii. acquires the interest without knowledge of the SI and before the SI is perfected
Applications:
-Landlord’s judgement (JC) for rent is subordinate to Bank because Bank is perfected: Marine Holdings
-PPSA takes precedence over Builder’s Lien Act: Marine Holdings
Chapter 2: Transactions Creating SIs
“Debtor” includes a lessee under a lease of a term of more than one year, commercial consignment, account or chattel paper (not full definition)
What does PPSA cover?
s.2: Included: Everything that in substance creates a SI will be governed by PPSA (does not include a mortgage or charge on land)
s.3: Included: PPSA also applies to three actions that do not secure payment or performance of an obligation (transfer of account or CP, commercial consignment, lease for term of more than one year)
s.4: Excluded: transactions that are regulated by other statues, and transactions under federal authority
What is a Security Interest?
(a) An interest in certain types of personal property that secures payment or performance of obligation
-Interest: rights are transferred to another party
-Personal property (listed in definition of SI)
-Obligation: Usually the repayment of a loan, could also be performance of an action
(b) Three transactions are included, even if they don’t secure payment or performance of obligation
i. transferee of an account or CP
ii. person who delivers goods under commercial consignment
iii. lessor under a lease for term of more than one year
NB: last two are included because of their capacity to deceive someone about ownership
Future advances and tacking
-PPSA allows parties to agree that SA given today can cover future advances as well
-This means the obligation secured will fluctuate (decrease with each payment, increase with tacking)
s.14(1): SA may provide for future advances
s.35: deals with priority of future advances
(5): except in limited circumstances in subsection 6, the priority of the original SI applies to all advances, including future advances
-Facilitates debtor’s ability to borrow because 1st priority creditor more willing to make advances
-2nd priority creditors could still protect themselves by using acceleration clause or priority agreement with 1st priority creditor
(6): limits tacking with respect to judgement creditors, unless advance fits into one of these 5 categories:
a. advances made before interest of JC arises
b. advances made before SP acquires knowledge of JC’s interests
c. advances made in accordance with statutory requirement or legally binding obligation to person other than debtor who entered picture before SP had knowledge of them
d. advances made for the protection/preservation of the collateral
e. advances made to cover taxes in order to protect collateral
Test:
1. Future advances take priority of original SA unless there is a JC
2. If JC, future advances take priority of original SA if advance fits into categories a – e
Application:
-X has 1st priority, Y has 2nd priority, Z has 3rd priority. Z cannot purchase X’s 1st priority through an assignment and then tack on 3rd priority loan in order to beat Y: Canamsucco
Acceleration Clauses
-Acceleration clause: upon default, creditor can demand full payment or seize collateral at its discretion
-Clause must be written into contract, and is limited by PPSA
s.16: If SA has acceleration clause in it, the SP can only accelerate payment if he in good faith believes and has commercially reasonable grounds that prospect of payment/performance is impaired
What is Collateral?
“Collateral” is personal property subject to a SI:
-Goods: 3 types of tangible personal property
1. Consumer goods: used for family/household purposes
2. Inventory: held for sale
3. Equipment: residual category of everything that is not consumer goods or inventory
-Instruments
-CP
-Document of title
-Investment property
-Money
Form of SA and Description of Collateral
s.9: Subject to statutory requirements, SAs can say whatever they like
s.11: If SA is in writing, debtor must be given copy within 10 days. Can apply for court order to enforce
s.10(1): SI is only enforceable against third parties if:
(a): collateral is not a share certificate and is in possession of the SP (if SP is holding the property then debtor cannot dispose of it by deceiving third parties...not practical unless it is a share certificate)
(d): debtor has signed a SA that contains descriptions i – iv:
i. description of collateral by item or kind, or by reference to: goods, investment property, instruments, documents of title, CP, intangibles, money, crops or licenses
ii. ignore
iii. APAAP
iv. APAAP except: A) specified items or kinds of personal property or; B) goods, investment property, instruments, documents of title, CP, intangibles, money, crops or licences
s.10(3): description of CG and equipment needs further reference to item or kind (ex. Cannot take APAAP in all consumer goods...must be more specific because these categories are broad)
s.10(4): can describe inventory simply as inventory, but only adequate while it is held as inventory
s.10(6): can use simple “consumer goods” description without further reference to item or kind if you are using it to exclude consumer goods (ex. APAAP in everything except consumer goods)
Application:
-“Assets” is inadequate description of collateral in SA: New Solutions
Enforceability
Ultimate goal is perfection:
Step 1: satisfy s.10 because it leads to attachment
Step 2: satisfy s.12 (attachment)
Step 3: satisfy s.19 (perfection)
Definition of SI again:
(a) Real SI: An interest in certain types of personal property that secures payment or performance of obligation
(b) Deemed SI: Three transactions are included, even if they don’t secure payment or performance of obligation
i. transferee of an account or CP
ii. person who delivers goods under commercial consignment
iii. lessor under a lease for term of more than one year
NB: s.55: remedies section upon default does not apply to deemed SIs (use common law remedies)
i. Chattel Paper
-One or more writings that evidence both a monetary obligation and a SI in, or a lease of, specific goods or specific goods and accessions
ii. Commercial Consignment
-A consignment under which goods are delivered for sale or lease if:
-Consignor and consignee must both deal with these types of goods in OCB
-Consignor must reserve an interest in the goods after they have been delivered
-Not a commercial consignment if:
-Consignee is an auctioneer for sale
-Creditors know that good is being delivered to consignee (other than auctioneer for sale) who is in OCB of selling or leasing goods of others (because creditors will not be deceived)
Application:
-Commercial consignment is subject to PPSA unless consignor can prove creditors “generally know” that consignee is in OCB of selling goods of others: Furmanek
-What one particular creditor knew or did not know is irrelevant; apply “generally known” to all creditors in objective manner: Furmanek
-PPSA will only apply to inventory actually assigned at the time receiver is appointed: Furmanek
iii. Long Term Lease
-Contrast real SI with deemed SI:
Ex. Short term lease where at the end you can pay balance owing on purchase price and own car (this is real SI because in substance it creates payment and performance of an obligation)
Ex. Long term lease where you never intend to purchase car (this is a deemed SI because lease > 1 year)
-Important because: if lease is real or deemed SI, then PPSA applies and unperfected creditors are vulnerable to s.20 people (JC, trustee, BFP)
-True lease or disguised CSA? Consider what happens at the end of the lease:
True lease: option to acquire item based on realistic assessment of FMV
Disguised CSA: option to buy at nominal value (because lease payments covered purchase price)
Test for real or deemed SIs covered by PPSA:
1. Does arrangement create a SI in substance?
-Yes, and not in s.4àPPSA applies
-If No, ask:
2. Is it a transfer of account/CP, commercial consignment, or lease of more than 1 year?
-Yes, and not in s.4àPPSA applies (except remedies section)
-No, then not in PPSA
Trusts
-Ex. Wholesaler sends inventory to Retailer, who holds property in trust for Wholesaler and returns percentage of each sale to them. This “trust” arrangement would be considered a SI under PPSA because in substance it is securing payment or performance of an obligation.
-Not all trusts create SI. Trust only creates SI if money is securing payment or performance of obligation. Ex. Monies paid to travel agent are in trust, but not creating SI because money does not stand as security for any repayment obligation: Skybridge
Chapter 3: Collateral and Proceeds
What are Proceeds?
(a) Identifiable or traceable personal property, fixtures and crops
i. Derived directly or indirectly from dealing with collateral or proceeds of collateral, and
ii. In which the debtor acquires an interest
(b) Insurance payment as indemnity or compensation for loss of collateral or proceeds of collateral
(c) Payment made in discharge or redemption f intangible, instrument, investment, or CP
Ex. Debtor takes cheque to bank. SP keeps SI in cheque as collateral, and gets SI in cash as proceeds of original collateral
(d) Rights arising out of collateral that is investment property
Ex. Dividends on shares
Security interests in proceeds
s.28(1): If collateral is dealt with or gives rise to proceeds, the SI:
(a): continues in the collateral unless SP expressly or impliedly authorizes the dealing (cut off rule)
(b): extends to proceeds
-So SP have automatic SI in both collateral and proceeds if the debtor sells the collateral w/o permission
-But, if SP wants to enforce their interest in collateral and proceeds, they only get market value at date that debtor dealt with collateral
-Protections for purchasers: unperfected SIs are ineffective against BPF; perfection requires registration
s.28(2): SI in proceeds is continuously perfected if the SI in original collateral is perfected by registration of FS that:
(a) contains a description of proceeds that would be sufficient to perfect a SI in original collateral of the same kind, (requires description of proceeds, and original collateral is alike)
(b) covers the original collateral, if the proceeds are of a kind that are within the description of the original collateral, or (requires description of original collateral, and proceeds are alike)
(c) covers the original collateral, if the proceeds consist of money, cheques or deposit accounts in deposit taking institutions (requires description of original collateral, and proceeds are money)
s.28(3): SP gets 15 days of temporary perfection to amend FS of original collateral to cover proceeds
Ex. Original collateral is a red boat, which is now traded for a blue boat. SP has 15 days to amend FS from “red boat” to “blue boat,” or to say “all boats”
-NB: Registering FS in APAAP is the best way to register FS to ensure proceeds are maintained as perfected SI
Application:
-PPSA gives statutory right to proceeds, as well as proceeds of proceeds, regardless of terms of SA or enforcement of strict legal rights by parties (SI in repeated sale of inventory that was financed through initial loan): Marathon
Suppose:
Bank 1 has perfected SI in restaurant equipment.
T1àRestaurant sells freezer and gets cheque for 6k
-s.28(2)(c) says Bank 1 still has perfected SI because proceeds is a cheque
T2àOpen account in Bank 2, and deposits 5k in term deposit and take 1k in cash
-s.28(2)(c) says Bank 1 still has perfected SI in proceeds of proceeds because term deposit and money
-s.31(3): says Bank 1 loses SI in cheque because Bank 2 purchased the instrument: a) giving value; b) without knowledge of SI; c)taking possession