Secured Transactions: MacDougall: 2010/2011 Term 2
● These notes are a compilation of my class notes, notes from MacDougal’s book, and from the course package.
● The grammar and spelling below is atrocious and I can’t be bothered to fix it.
● Good luck! Hopefully some of this is helpful.
Chapter I: SITUATING THE PPSA
● Secured transaction is where the creditor takes an interest in property over which the debtor has some rights as a way of ensuring the debtor will be able to pay him back
○ this works because the secured party may have preference over other parties when it comes to bankruptcy
● PPSA and Bank Act cover this area of law, but Bank Act only covers situations where chartered bank takes a security interest in particular types of property from particular debtors.
● PPSA is much more comprehensive
○ modeled on article 9 of the UCC, adopted with modifications throughout Canada
● BC and other jurisdictions have recently made some changes to take into account interests in investment property
● PPSA replaced a series of statutes
○ Sale of Goods on Conditions Act
○ Chattel Mortgage Act
○ Book Accounts Assignment Act
● Before PPSA, form of transaction was important, and the form of trnasaction could lead to the interests in various registry.
○ plus, registration lapsed after 3 years, leading to all sorts of probelms with respect to lapses.
Legal Aspects of a Secured Transaction
● intersection of laws
○ typically a creature of contract creating an intangible property interest (called a debt),
○ basically a type of property interest created by contract and thus voluntary
■ different from non-consensual interests like liens or encumberances.
○ law of contract governs the existence and nature of the relationship between the D and the SP
○ the law of property governs the entitlement of the SP to the collateral, botha s against the D and as against the rest of the world.
○ without the contract element, the interest created would be non-voluntary
○ without the property elemet the interest would only hold against the debtor, not against the world
Purpose of Security Interest
● basically to give the creditor some comfort that the debt will be repaid
○ but the creditor will typically be happiest when the D simply performs the duty owed.
Common Law of Secured Transactions
● PPSA regime is based on Articles 8 and 9 of the UCC
● common law still provides a backdrop
US Law - UCC
● in the 40s and 50s, the US reexamined and reformulated all the commercial law, produced the model code: UCC, which was eventually adopted in various ways across the US.
● Article 9 deals with PPSA, article 8 with investment securities
How the PPSA Affects the Common Law
● doesn’t deal much with creditor-debtor relationship, levaing this to common law and other statute
● it does deem certain interests to be security interests
● limited form requirements, small modification to consideration
● deeply impacts the common law rules on priority, and sets out how SI can be used remedially
● common law and equity had rules about SI- what counted, and how it could be used.
○ plus, these rules were highly dependent on the form of the SI- bailment vs leases vs mortgages, etc.
○ PPSA covers all of these, and also some other interests-like leases via deeming.
○ covers other transactions through a brought definition of “purchase”
○ however, some true security interests are NOT covered by the PPSA
○ so the statute is both over and under inclusive.
Continuing Legacy of Pre-PPSA Law
● used to be separate regime for each type of SI, and each was treated differently
● PPSA does not care as much about the type of SI (except for land interests)
○ however, it does exclude certain things, and include others.
○ so form of transaction may still be complicated.
Partial Adoption of UCC
● while PPSA modeled on UCC, most other commercial statutes remate based on UK system, where form is important
● PPSA treats all the old ways of getting SI as “secured transactions”, as long as they represent the giving of a security interest in personal property to secure payment or performance of an obligation.
○ Must still create these interests following the old rules.
● prioirty competitions between interests that arose before the coming into force of the act are determined by the prior law
○ this is becoming rare as time passes.
● Federal Bank Act still follows onld English approach
Federal/Provincial Jurisdiction
● regulated by both levels of government- joint jurisidiction
● where federally-charetered banks are involved there can be a conflict between the federal law and the the PPSA
○ federal legislation is paramount
● courts have thus far been good at making the two sets of rules work harmoniously.
Development of the PPSAs and US Law
● UCC is constantly changing, new articles arising to address new issues.
○ usually new articles are adopted throughout the US
● Article 9 has made its way through Canada over the last 30 years or so
● Most provinces followed Ontario’s adoption
○ mostly the same as PPSA,
● no big changes since BC has joined
● most recent change is the implementation of a new Securities Transfer Act in many provinces, including BC
○ recognises the reality that interests in shares are ofeten held indirectly through an intermediary and is modelled on article 8 of the UCC
○ PPSA need some changes to accomodate this.
○ makes rules analogous to those for regulary property
● Quebec has no PPSA
● US Case law can be useful in interpreting the PPSA since very similar, but must make sure the language of the two jurisidctions is close
● UK precendent useful for interepting Bank act, and for certain types of form of secured transactions.
Continuing Effect of the Common Law
● except where inconsistent with the PPSA, the common law rules still apply in determining the nature and effect of secured transactions
○ nemo dat applies where statute silent.
● PPSA has no defintion of “ownership”, so common law must fill gap
● equity has limited effect, since PPSA intended to be rigid
○ not based on actual notice or fairness, but on parties following certain proceedural steps and the application of predictable rules.
○ equity would destroy this system
○ but a couple of equitable doctrines do still apply and are important
■ tracing and marshalling
Paramountcy of the PPSA when in Conflict with Other Statutes
● where other statutes conflict, PPSA generally prevails
○ except for Land Title Act and the Business Practices and Consumer PRotection Act.
■ and any consumer protection provision in any statute
PPSA: ss. 73-76
● these provisions deal with the conflict rules
○ subject to a few exceptions, the PPSA prevails over any other act which conflicts with the PPSA, unless the other act SPECIFICALLY says it prevaisl over the PPSA
● exceptions in s. 74
○ Business Practices, Consumer Protection Act, and other provisiosn intendeding to protect the consumer
○ Land Title Act
● all references in other acts to Chattel Mortgage Act, etc. lead to the PPSA instead.
● s. 76 gives the LGiC power to make a wide range of regulations to deal with the PPSA.
Marine Building Holdings Ltd. v. Proton Engineering & Construction Ltd. (1993) BCSC
Issue:
● How the PPSA Prevails over Other Legislation
Facts
● MB is suing PEC for arrears in rent
● MC got garnishing order against PEC and the Bank
● Bank says it aint paying.
○ plus, bank says persuant to the PPSA it gets priority
● at the time in question, PEC owed 237K, and the bank had SI in PEC accounts
○ SI attached when bank loaned PEC the money and PEC had rights in the collateral
○ Bank perfected
Analysis
● bank has a perfected security interest, which has priority over unperfeected security interests
● while PPSA does provide some protection to judgment creditors, not with respect to competitions with perfected SI.
● there is a builders lein, but this is also subject to a perfected SI
Ratio
● with a few exceptions, PPSA takes priority over other acts
● perfected SI will typically win over other interest.
Chapter II: TRANSACTIONS CREATING A SECUIRTY INTEREST: PARTIES, FORM AND THE OBLIGATION SECURED
● PPSA is intended to cover the bulk of secured transactions.
● definition in sectio 2 sets out that any transactions wherein an interest in personal property is taken to secure payment or performance of an oblgiation is governed by the PPSA
○ form not important
○ you can call it what you want, but if it isin substance an arrangement to secure payment or performance of an obligation by taking an interest in personal property then its form is irrelevant.
● escluded transactions include fixtures, interests in land, etc.
○ certain kinds of liens
● and certain kinds of transactions are deemed to be included, despite not creating security interests.
● What is a Security interest?
○ true security interest
■ transactions that are entered into for the purpose of giving a secuiryt interest by a debtor to a secured party
■ typically a back-up device for the true debt.
● and you cannot use a SI to put yourself in a better place than you would be through the underlying security interest
○ this means you must know what is owed
○ but both the amount owing, and the value of the collateral, is goign to change
○ and so the value you can get out of the collateral will change as well.
■ creation of a SI constitutes a purchse within the meaning of thatterm in the PPSA
○ deemed SI
■ transfer of an account or chattel paper
■ commercial consignments
■ lease for a lease of over a year
■ these are all included even if not intended to secure a debt.
■ thse are then re-excluded by being exempt from some of the remedies in part 5
■ PPSA governs how, if at all, property interests of the deemed secured party fare as against property claims of third parties, including true secured parties.
● Deciding whether a SI is created
○ can be difficult to tell whether a transaction was intended to create a SI
■ sometimes obvious- chattel mortgage
○ lease usually does not involve a SI
■ title not held back as a security
○ but sometimes leases do look like a conditional sale in that the lessor does not expect toget the goods back.
○ the creation of the SI must be of the essence of the trnasaction for the PPSA to apply.
● Objective/subjective
○ substance is the key to determining whether or not a transaction created a SI, not the form of the transaction.
○ while the test is objective, the reason parties entered into the agreement may indicte their intention.
● Parties to a Secured Transaction
○ there is always at least a secured party and a debtor, but ma be multiple parties
○ Secure Party/Creditor
■ typically the creditor
■ means anyone who has a security interest, including trsutees.
○ Debtor
■ more complicated, and includes anyone who owes performance of an oblgiation to the creditor, whether or not hte person ahs rights in the collateral
● so includes a transferree of the collateral.
■ sometimes the statute is clear that it is referring only to the person who actually owes money to the SP- eg in the remedies part of the statute
■ sometimes the statute is clear that transferees are included.
■ the reason transferees are included is to encourage the SP to register against their name.
● if the SP finds out about the transfer, it should register to notify other parties.
● this can be quite burdensome on the SP
■ also includes those who have deemed SI in the goods
■ includes guarantors and indemnitors
■ Sometimes the location of the debtor is important in terms of conlfict of laws, but not for this course.
● Governing standards for Parties
○ parties must act in good faith and in a commercially reasonable manner
■ candour is an aspect of good faith
■ deliberately setting out to defeat anothers secureity interest by fraud is a breach
■ acting with knowledge of another’s interest is not bad faith.
○ knowledge
■ knowledge is important in the PSPA, measured objectively against hte reasonable person
● reasonable person not required to speculate or to ask further questions
● but may assume knowledge from facts
● objective test of constructive knowledge.
○ would a reasonable person under the circumstances take cognisance...
● could be receipt of gods without documentation, impliedly through knowledge about the functioning of a market, etc.
■ partnerships get knoweldge when the information comes to the attention of a general partner or a mangager
■ a corporation has knowledge where the managing director, an officer, or a senior managerial employee gets knowledge if a reasonable person would take conginsance.
PPSA: Sections 1(1), 2, 4
● definitions in 1(1)
● Section 2 sets out that the PSPA applies to all transactions that in substance create a security interest regardless of the form
● also lists some common law SI that are included, without being exclusive
● states that interests in land are not included.
● Section 4 sets out a series of interests that are not included in the act.
1. Parties to a Secured transaction and Standards of Behavior
● main parties creating SI are the party giving the interest (debtor) and the party receiving the interst (the secured party).
○ must be consensual, but not need to use particular terms
○ the SP is the party to whom the underlying obligatio is owed
○ so the SP is also a creditor.
● debtor is more complicated
○ includes not only typical debtors, but anyone who comes to own collateral (but does not actually necessarily owe anything)