1
OVERVIEW OF THE PPSA
**PPSA protects rights of Cs, so policy rationale to shift onto them the transactional costs and risks of not registering (C is in best posn to investigate, can ask for more I, doesn’t have to make loan).
-S. 2: for PPSA, substance matters more than form of K btwn C & D – PPSA applies to every transaction that in substance creates security interest.
-S. 3: deemed inclusions into PPSA, even if they don’t create SI (part 5 remedies do not apply)
-S. 4: deemed exclusions from PPSA, even if would create SI.
-S. 9: will still look at K btwn parties, preserves Ktual freedom of parties where K does not conflict with PPSA.
-S. 12: describes how SI attached to collateral.
- S. 19: requirements for perfection, cannot protect against other Cs unless perfected.
#1: SCOPE OF THE ACT
I. Definitions: Section 1
- “Collateral” means
“personal property that is subject to a security interest”
- possessor of personal property grants SI, as soon as SI attaches it becomes collateral.
7 types of personal property can become collateral (defn of SI in s. 1):
- Money: actual $, not credit or cheques.
- Chattel Paper: “means one or more writings that evidence both a monetary obligation and a security interest in, or a lease of, specific goods or specific goods and accessions”
- Instrument: cheques, bill of exchange, letter of credit
- Security: “means a share, stock, warrant, bond, debenture or similar record…”
- Document of Title: writing covering identified goods, stating they will be delivered to named person
- Intangibles: tends to be accounts, can be IP.
- Goods: Always tangible, can be 3 types…
a)Consumer Goods: “primarily for personal, family or household purposes”
- s. 67: if D defaults & have SI in CGs, you can either: 1) seize CGs in full satisfaction of debt; or 2) leave CGs with D & sue for debt
- for any other kind of collateral can seize, sell AND sue (so CGs often excluded from SIs)
b)Inventory: raw materials, a work in progress, held for sale or lease, materials used or consumed in business…
c)Equipment
TEST: use of good at material time determines category (can move btwn categories)
s. 1(4) – material time (except for special rules) is at attachment of SI.
- “Security Interest” means
(a)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, but does not include the interest of a seller who has shipped goods to a buyer under a negotiable bill of lading [represents title to the goods] or its equivalent to the order of the seller or to the order of an agent of the seller, unless the parties have otherwise evidenced an intention to create or provide for a security interest in the goods, and
(b)the interest of (certain transactions)
(i)a transferee arising from the transfer of an account or a transfer of chattel paper,
(ii)a person who delivers goods to another person under a commercial consignment, and
(iii)a lessor under a lease for a term of more than oneyear,
whether or not the interest secures payment or performance of an obligation;
*defined broadly to try and get most things into SI – as long as C has interest in D’s personal property & that interest secures payment (promise to pay, can be in other goods doesn’t have to be $) or performance (other obligations not amounting to payment) then = SI.
II.Scope: Sections 2, 3 & 4
s. 2: does it in substance, create a SI?
-Yes: is it explicitly excluded by s. 4?
-Yes: not covered by PPSA.
-No: is covered by PPSA.
-No: is it deemed included in s. 3?
-Yes: is covered by PPSA, except for Part 5 remedies
-No: is not covered by PPSA
A.Section 2: Scope of Act – Security Interests
- Whether in substance creates SI, look to whether relnship btwn parties is that of D/C.
TEST: objective, look at (1) purpose/context of transaction; (2) relnship of parties; (3) practicality/commercial reality of transaction; (4) intention of parties (Skybridge Holdings)
s. 2(1): subject to section 4 [exclusions], this Act applies
(a)to every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral, and
(substance of agreement is what counts, title is almost irrelevant)
(b)without limiting paragraph (a), to a chattel mortgage, a conditional sale, a floating charge, a pledge, a trust indenture, a trust receipt, an assignment, a consignment, a lease, a trust, and a transfer of chattel paper if they secure payment or performance of an obligation (for greater certainty)
(2): doesn’t apply if security or instrument must be regis in Land Title Office (ie mortgages, right of passages…) (no conflict with PPSA & LTA).
B.Section 3: Deemed Inclusions
- deemed inclusions, even though don’t secure payment or performance, possession & use look like ownership (potential confusion) so must register to maintain priority (notice fcn)
s. 3: Subject to ss. 4 [exclusions] and 55 [rights & remedies on default], Act applies to
(a)a transfer of an account or chattel paper
(b)a commercial consignment, and (see pg 4)
(c)a lease for a term of more than one year (see pg 5)
that do not secure payment or performance of an obligation
1. (3) A lease under paragraph (b) of the definition of “lease for a term of more than one year” does not become a lease for a term of more than one year until the lessee’s possession extends for more than one year (start counting when D gets possession of items subject to lease).
“Commercial consignment” means a consignment under which goods are delivered for sale, lease or other disposition to a consignee who, in the ordinary course of the consignee's business, deals in goods of that description, by a consignor who,
(a)in the ordinary course of the consignor's business, deals in goods of that description, AND
(b)reserves an interest in the goods after they have been delivered,
BUT does not include an agreement under which goods are delivered
(c)to an auctioneer for sale, OR
(d) to a consignee other than an auctioneer for sale, lease or other disposition if it is generally known to the creditors of the consignee that the consignee is in the business of selling or leasing goods of others (ie pawn shops)
C. Section 4: Deemed Exclusions
4 Themes…
-deal with non-consensual interests
-falls w/in federal jurisdiction (ie bankruptcy, Mineral Act…)
-dealt with in Land Titles Act
-specific exclusions dealing with accounts
s.4 – Except otherwise provided in the Act, the Act does not apply to the following:
(a)A lien, charge or other interest given by a rule of law or statute unless the enactment contains an express provision that this Act applies. (i.e. these are non-consensual, PPSA interests are consensual so where the govt has a right i.e. liens under the income tax act, they are not covered).
(b)SA governed by an Act of Parliament of Canada that deals with rights of parties to the agreement or the rights of third parties affected, including:
-Ship mortgages – Cda Shipping Act.
-Agreement governed by the Bank Act.
(b/c fed statutes trump prov statutes via paramountcy, division of powers)
(c)Assignment of insurance claims or transfers of interest or claims under annuity. (b/c these transactions have their own rules and statutes under Insurance Act)
(d)The creation or transfer of an interest in present or future wages (covered by ESA already)
(e)The transfer of an interest in an unearned right to payment under a K to a transferee. E.g. transfer for lawn mowing responsibility to a friend. Transfers of Ks or assignment of debts does not fall under the PPSA.
(f)The creation or transfer of an interest in land (governed by the Land Title Act which has primacy), other than an interest arising under a “licence.”
(g)The creation or transfer of an interest in a right to payment connected to an interest in land (assignment of rents is normally found in the Land Title Act). E.g. lender may take assignment of rents in the purchase of an apartment building. PPSA still applies to conflicting interests i.e. when giving a mortgage on a mortgage unless it has been registered in the Land Titles Office.
(h)Transfer of accts or chattel paper as part of a sale of a business (priority rules of the PPSA don’t work in these situations and you don’t want to worry about registration when you buy a business, exclusion for buying ALL of business only)
(i)A transfer of accts made solely to facilitate the collection of the accts for the transferor. E.g. law firm assigning its unpaid bills to a #ed company who will then sue the former client; also included are debt brought by collection agencies.
(j)The creation or transfer of an interest in a right to damages in tort.
(k)An assignment for the general benefit of C made in accordance with bankruptcy law [federal jurisdiction] (PPSA cannot take away the rights of the TiB but these two statutes can work together).
(l)A mineral claim – under Mineral Act;
III.Specific Transactions
A.Consignments
Consignor delivers goods to consignee (authorized to sell/dispose of, remit $ back to consignor). Consignor retains title until passes to buyer upon sale.
- 3 Kinds are important for PPSA:
- Common law or “true” consignments
-PPSA does not apply
-3 Important distinctions:
a)Consignee has no legal obligation to buy the goods
b)Consignee has no legal obligation to pay until goods are sold
c)Consignee can return goods with no service charges (unrestricted right to return)
- Security Consignments
-s. 2 of PPSA applies, in substance these are transactions which secure payment (disguised loans)
-will be security consignment in any one of 3 situations (look to K):
a)explicit or implicit obligation on consignee to purchase goods at some point (termed “forced sale”)
b)K explicitly/implicitly provides for restricted or limited right to return goods.
c)Consignee has to account to consignor for predetermined amt of $ whether or not goods are sold.
- Commercial Consignments
-s. 3 of PPSA applies, even though they do not secure payment or performance (not in Ont), but no remedies under Part 5.
-MUST be goods that ordinarily deals with in course of business (interpreted broadly, ie selling paint then wallpaper would be ok) and retain interest
-BUT NOT if an auctioneer, or if generally known to creditors that you do this. No actual knowledge required, knowledge is of general business community in that area (Furmanek). Rationale: no need to provide notice to Cs b/c it’s already general knowledge.
B. Conditional Sales Agreements
- PPSA s. 2 applies
- Vendor finances purchase to buyer, V = C; B = D (only 2 parties)
- offloading more of cost onto D/B, but C/V takes on more of risk
- D/B gets possession & use, C/V retains title until full price (plus interest & surcharges) is paid.
- if default, C/V has right of seize and sell (gets it w/out having to get crt order & can go after D/B for shortfall)
C. Leases
Granted Leasee possession & use in exchange for $ for specified period of time, Lessor retained title.
- “True” Lease for < 1 yr
-PPSA does not apply
-Payments made by leasee are only for use of item, at end of term required to return to leasor
- Lease for More than a Year
-PPSA s. 3(b) applies, s. 1(3) possession requirement
-Policy: possession looks like ownership, want to register to prevent fraud.
- Disguised Sale/Hire-Purchase Agreements
-PPSA s. 2 applies, creates SI
-Express or implied obligation for leasee to buy (during or at end of term) is really a disguised conditional sales agreement.
-Look at: 1) intention; 2) deposit; 3) whether option to buy at end (“hire-purchase agreements”) is < mkt value; 4) indicia of ownership (Newcourt Financial)
IV.Case Law
Skybridge Holdings v. British Columbia, 1999 BCCA – C/D Relnship to see if SI
Travel agent selling package tours, ppl put $ down gradually for cost of trip in advance. Act requires pre-payment deposits be held in separate accts (quasi-trust accts) b/c of danger of bankruptcy. Went bankrupt: customers wanted $ back (accts were trusts), Cs wanted $ (accts were security for future perf, so s. 2(b) & should have been regis, lost priority).
Issue: was this a D/C relationship? No.
- Must examine the relnship btwn travel agent & custs to determine whether D/C relnship (then PPSA applies) – objective test as per s. 2.
TEST: 4 things to decide whether D/C relationship…
1)Purpose of transaction
- Here received deposits as agent of consumers, cannot analogize to C/D relnship.
2)Role and Relationship of the Parties
3)Practicality and Commercial Reality
- was it practical for each consumer to register & perfect? No, wouldn’t have occurred to them that they were even Cs.
4)Intention of the parties
- Did parties intend to create D/C relnship? No, here customers became Cs unintentionally through bankruptcy.
Newcourt Financial Ltd. v. Frizzell, 2000 BCSC – Is it a True Lease? Sets out test.
Chrysler leases jeep to F (LT), sells lease to NCF. F misses payments, NCF tries to repossess & asks for crt order compelling surrender of jeep & reimbursement for unpaid payments & I. F says lease was SI, not true lease [b/c then gets Part 5 remedies, including ability to default 2x on CGs]. NCF says it is a “true lease”, has option to purchase jeep at end otherwise it gets returned.
Issue: is lease performing security fcn (s. 2) or true lease (s. 3 b/c > 1yr)? True Lease.
TEST: 4 Factors to consider whether true lease or security interest…
1)Intent (was it to secure payments or provide payments for use?)
2)Purpose/Existence of Deposit (was deposit required? Was it refundable?)
3)What will happen at End of Lease (if must buy at end, or is option to buy at < mkt value then in substance creating SI – instalment sales K, buying little bit all along)
4)Indicia of Ownership (who pays for insurance, mechanical upkeep…)
- Here stating “true lease” shows intent but lack of knowledge by the D as to its sig decreases its weight, deposit was ambiguous
- What will happen at end of lease is most important factor, price does not have to be exact mkt value since set at beginning of term – genuine pre-estimate here.
- D bore operating costs, which could be seen as SI but also just as obligation to maintain leased property (not determinative).
Re Toyerama v. Regal, 1980 Ont SC – is it Commercial Consignment?
R consigns to T. Clause 3: when T sells/delivers to 3P, pay $/unit to R. K did not address what would happen at end of agreement wrt ownership (ie true consignment has auto right of return). T goes bankrupt, still has lots of R’s prop. TiB wants prop to pay unsecured Cs, R says prop is theirs (commercial consignment – in Ont not covered by PPSA)
Issue: was it commercial consignment or creation of SI? Consignment.
- There is no obligation to pay for goods until actually sold/shipped out.
- R owns goods on T’s premises, goods sold but not paid for belong to T (TiB, proceeds)
NB: every other jurisdiction, this would be different:
1)S. 2: Did it secure payment or performance? No, no obligation to pay until after sold.
2)S. 3: was it commercial consignment? Need both (a) & (b), & neither (c) or (d).
(a)Do parties ordinarily deal with these types of goods? Yes. (toys = toys)
(b)Did R retain interest in dolls? Yes, R retained title at all times until sold.
Exceptions…
(c)Auctioneer? No.
(d)Generally known that T deals with other ppl’s goods? In another jurisdiction, this would have been the key Q.
Furmanek v. Community Futures Development, 2000 BCSC – GenKnowledge for Commercial Consignment
Jewellery store: F partially finances sale of store to S, S gets loan from CF (lending inst) – therefore S owes both F & CF (with PIMSies, so they have priority). Takes jewellery on consignment from SC, becomes inventory (SC doesn’t register). S defaults, tells SC & they come to retrieve jewellery: F & CF want SI in jewellery as inventory (commercial consignment & didn’t regis); SC claims it for itself (F & CF would have had general knowledge - exception (d), jewellery ceased to be inv when was taken back).
Issue 1: Did creditors have “knowledge”? No.
- Test is general knowledge, not actual – not on a C by C basic, deal with classes of Cs.
- Knowledge of general business community in that area (here gen jewellery business)
- Here find that creditors would not have had knowledge, s. 3 applies.
NB: F was prev owner & would have had actual knowledge; CF was sophisticated lender!
Issue 2: was jewellery covered by SI over inventory? Yes.
- Jewellery became inventory as soon as was given to S, can’t attempt to defeat someone else’s priority by racing in and scooping it up – tantamount to theft. As soon as receiver was appointed, S lost ability to run own business.
NB: coming in & taking jewellery back was a big no-no, crt imputing that there was special deal here. Did not look favourably upon SC.
#2: ATTACHMENT & PERFECTION
Attachment: protects SI as between C & D
Perfection: needed to protect your SI from other Cs of same collateral.
- Creation of Security Interest: Attachment
*Collateral only becomes collateral once it’s subject to a security interest – will become collateral once attachment occurs (no rights against D before attachment).
- usually ss. 10 (SA) & 12 (attachment) govern, but occasionally for certain collateral need special rules (H pages 24-29)
- Security Agreement
K negotiated btwn D & C, requirements dictated by s. 10
- s. 10(1)(a): if you perfect by possession, do not need written SA
-s. 10(2): to secure by possession, must take actual possession (actual control, cannot leave in apparent control of D).
-certain collateral (securities, neg docs, instruments, money) would always take possession.
- s. 10(1)(b): Otherwise, written SA requires…
a)charging clause
b)signature (10(1)(b))
c)description of collateral (this is where the problems happen – special rules goods)
i) describe by item or kind (10(1)(b)(i))
- item: single item, must describe each individually & exactly
- kind: much more generic (ie “all grey metal chairs”)
- or “goods”, “securities”, “instruments”, “CP”, “money”, “intangibles”…
ii) take APAAP (10(1)(b)(ii))
- “all present or after acquired property”, covers what D has now & also gets in future.
- anytime D gets new personal prop that falls into any of 7 categories, it is auto subject to APAAP (s. 13).
iii)take APAAP with exceptions
- excluding any specified items or kinds of pers prop (10(1)(b)(iii)(A))
- excluding one or more of 7 collateral groups (10(1)(b)(iii)(B))
- Consumer Goods & Equipment
a)s. 10(3): subject to 10(6), can’t describe collateral as only “consumer goods” or “equipment”
- too vague, could be almost anything. Doesn’t give 3Ps adequate info, unable to make informed decision about what’s included in SI.
b)s. 10(6): if you are specifically excluding CGs from SI, then it’s okay to describe simply as “consumer goods”
- usually will exclude CGs from SIs, Cs don’t want them (s. 67 restrictions on what you can do with them in satisfaction of debt)
- Inventory
a)s. 10(4): description of collateral as “inventory” is adequate, but only while held by D as inventory (if changes character then have to amend).
- will lose SI if changes use to equipment or CGs, best to get SI in something else as well as inventory b/c of this provision.
b)s. 28: SI in inventory will give automatic interest in proceeds of sale/lease of it.