Basics - UVic LSS



Secured Transactions Final Outline – Waldron – Fall 2010Asif AbdullaTable of Contents TOC \o "1-3" \h \z \u Basics PAGEREF _Toc154049634 \h 3History of Secured Transactions PAGEREF _Toc154049635 \h 4Vehicles for Debt Financing (Pre-PPSA) PAGEREF _Toc154049636 \h 5Overriding Policy Considerations PAGEREF _Toc154049637 \h 6Tensions: PAGEREF _Toc154049638 \h 8TEST FOR SECURITY INTEREST: PAGEREF _Toc154049639 \h 8SCOPE OF THE PPSA: PAGEREF _Toc154049640 \h 8Definitions: Section 1 PAGEREF _Toc154049641 \h 8“Security Interest” means: PAGEREF _Toc154049642 \h 8Scope: Sections 2 and 3 PAGEREF _Toc154049643 \h 9Section 2: Scope of Act – Security Interests PAGEREF _Toc154049644 \h 9Section 3: Deemed Inclusions PAGEREF _Toc154049645 \h 9What is NOT Applicable to the PPSA – S.4 PAGEREF _Toc154049646 \h 10Acceleration Clauses: PAGEREF _Toc154049647 \h 10Perfection of Security Interests: PAGEREF _Toc154049648 \h 111. Attachment: PAGEREF _Toc154049649 \h 11i. Value is Given: PAGEREF _Toc154049650 \h 11ii. Debtor’s Rights in the Property: PAGEREF _Toc154049651 \h 11iii. Writing Requirements for SAs: PAGEREF _Toc154049652 \h 122. Perfection’s Other Requirements PAGEREF _Toc154049653 \h 13i. The Registry System PAGEREF _Toc154049654 \h 13ii. Possession of the Collateral PAGEREF _Toc154049655 \h 17iii. Temporary Perfection PAGEREF _Toc154049656 \h 18Deemed Security Interests PAGEREF _Toc154049657 \h 18Seize or Sue – Part 5 PPSA – Particularly with Consumer Goods: PAGEREF _Toc154049658 \h 19Transfers of Accounts or Chattel Paper - Assignments PAGEREF _Toc154049659 \h 19Consignments: PAGEREF _Toc154049660 \h 19Leases for a Term of More than One Year PAGEREF _Toc154049661 \h 20Future Advances / Tacking: PAGEREF _Toc154049662 \h 22Future Advances that are Distinct from the Original SA PAGEREF _Toc154049663 \h 22Collateral and Proceeds PAGEREF _Toc154049664 \h 23Proceeds PAGEREF _Toc154049665 \h 24Serial Numbered Goods – Proceeds Registration Requirements: PAGEREF _Toc154049666 \h 24Example – Identifiable proceeds: PAGEREF _Toc154049667 \h 25Tracing PAGEREF _Toc154049668 \h 25Lowest Intermediate Balance Rule: 3 Rules: PAGEREF _Toc154049669 \h 26Example – Traceable Proceeds – Cont’d from Above: PAGEREF _Toc154049670 \h 26Subordination of Unperfected Security Interests PAGEREF _Toc154049671 \h 27Protection for Trustee in Bankruptcy: PAGEREF _Toc154049672 \h 27Protection for Judgement Creditors PAGEREF _Toc154049673 \h 28Protection for Transferees of Collateral and Buyers of Goods PAGEREF _Toc154049674 \h 28Ordinary Course of Business Transfers PAGEREF _Toc154049675 \h 29General Priority Rules PAGEREF _Toc154049676 \h 32Default Priority Rule – s. 35(1): PAGEREF _Toc154049677 \h 33Other Residual Priority Rules in s. 35: PAGEREF _Toc154049678 \h 33Example: Two-Debtor Problem w/ s.35(1) Leading into s.35(8) PAGEREF _Toc154049679 \h 34Priority Between Unperfected Security Interests PAGEREF _Toc154049680 \h 35Purchase Money Security Interest (PMSI) PAGEREF _Toc154049681 \h 35Section 34 - PMSI PAGEREF _Toc154049682 \h 36Subordination Agreements PAGEREF _Toc154049683 \h 38Specific Competition Sections PAGEREF _Toc154049684 \h 39Competition w/ Interest Holders Given After Transfers of Collateral PAGEREF _Toc154049685 \h 39Section 51 – Chang of Debtor / Transfer Debtor’s Collateral PAGEREF _Toc154049686 \h 39Competition w/ Transferees of Negotiable or Quasi-Negotiable Collateral or Intangible Collateral PAGEREF _Toc154049687 \h 40Section 31 – Protection of Transferees of Negotiable and Quasi-Negotiable Collateral PAGEREF _Toc154049688 \h 41Chattel Paper and Accounts Receivable PAGEREF _Toc154049689 \h 41Section 41 – Assignments of Intangibles or Chattel Paper PAGEREF _Toc154049690 \h 41Chattel Paper Security Interests PAGEREF _Toc154049691 \h 42Example: SI Review for Chattel Paper PAGEREF _Toc154049692 \h 42Section 31(6) – Priority of the Chattel Paper Purchaser PAGEREF _Toc154049693 \h 42Example: Priority of Chattel Paper and CPPs PAGEREF _Toc154049694 \h 43Accounts Receivable Security Interests PAGEREF _Toc154049695 \h 43Section 34(5) Priority Rule for Accts Receivable – w/in PMSI Section PAGEREF _Toc154049696 \h 43Returned and Repossessed Goods PAGEREF _Toc154049697 \h 44Section 29 – Returned and Repossessed Goods PAGEREF _Toc154049698 \h 44Example: Repossession w/ NO CPP – s.29(1) and (2) PAGEREF _Toc154049699 \h 45Example: Repossession with a CPP – s.29(1) – (6) PAGEREF _Toc154049700 \h 45Competition w/ Holders of Interests in Fixtures PAGEREF _Toc154049701 \h 46Section 36 – Security Interests in Fixtures PAGEREF _Toc154049702 \h 46Competition with Holders of Interests in Crops PAGEREF _Toc154049703 \h 47Section 37 of the PPSA is for Crops PAGEREF _Toc154049704 \h 47Competition with Holders of Interests in Accessions PAGEREF _Toc154049705 \h 47Section 38 of the PPSA for Accessions PAGEREF _Toc154049706 \h 48Circular Priority PAGEREF _Toc154049707 \h 48Competition with Other Lien Holders PAGEREF _Toc154049708 \h 49Section 32 – Priority of Liens: PAGEREF _Toc154049709 \h 49Default and Remedies PAGEREF _Toc154049710 \h 49Marshalling PAGEREF _Toc154049711 \h 50Example: Marshalling PAGEREF _Toc154049712 \h 50Default PAGEREF _Toc154049713 \h 50Remedies – Sections 55 and 56: PAGEREF _Toc154049714 \h 51Section 56 – Rights and Remedies PAGEREF _Toc154049715 \h 51Section 17 – Rights and Obligations of SPs in Possession of Collateral PAGEREF _Toc154049716 \h 51Provision of General Notice PAGEREF _Toc154049717 \h 51Receivers and Receiver Managers – Sections 64, 65, 66 PAGEREF _Toc154049718 \h 52Section 64 – Appointment and Qualifications of Receivers PAGEREF _Toc154049719 \h 53Seizure and Sale PAGEREF _Toc154049720 \h 53Right to seize PAGEREF _Toc154049721 \h 54Voluntary foreclosure PAGEREF _Toc154049722 \h 54Redemption and Reinstatement PAGEREF _Toc154049723 \h 55Right to sell PAGEREF _Toc154049724 \h 55Commercially reasonable Sale PAGEREF _Toc154049725 \h 56Post Sale (disbursement and deficiency) PAGEREF _Toc154049726 \h 56Consumer Goods (special treatment) PAGEREF _Toc154049727 \h 57Jurisdiction of the Court PAGEREF _Toc154049728 \h 58Remedies for non-compliance with the Act PAGEREF _Toc154049729 \h 58Conflict rules (changing jurisdiction) PAGEREF _Toc154049730 \h 59Sellers PAGEREF _Toc154049731 \h 60Buyers (CG) PAGEREF _Toc154049732 \h 61Bank Act Security PAGEREF _Toc154049733 \h 62History PAGEREF _Toc154049734 \h 62Bank Act PAGEREF _Toc154049735 \h 63Motivations to take BAS PAGEREF _Toc154049736 \h 63Timing issues PAGEREF _Toc154049737 \h 63Pattern PAGEREF _Toc154049738 \h 63Provisions PAGEREF _Toc154049739 \h 64Tacking PAGEREF _Toc154049740 \h 66Allocation of payments PAGEREF _Toc154049741 \h 66Filing notices PAGEREF _Toc154049742 \h 66Competition between PPSA and BA PAGEREF _Toc154049743 \h 66Cut-Off Rules – Quick Guide PAGEREF _Toc154049744 \h 67Negotiable and Quasi-Negotiable Rules – Quick Guide PAGEREF _Toc154049745 \h 68Some Background to Add: PAGEREF _Toc154049746 \h 69BasicsA secured transaction is when a creditor (C) takes an interest in property (real or personal) for which a debtor (D) has some rights, as security for the repayment of a loan or the performance of an obligation.C has a security interest (SI) in the property, also known as “collateral”.Title and possession in the collateral generally remain with D or can be split between the D/C.Two main statutes govern secured transactions: The BC Personal Property Security Act (PPSA), and The federal Bank Act History of Secured Transactions16th C - The “pledge” was recognized English courts. It was, and remains, the simplest form of a security.D borrows money from C. C wants to secure the loan and wants something to realize on, in the event that D does not pay back the loan in full. D transfers to C some form of personal property. Once possession of the personal property transfers to the C, the property becomes “collateral”. But because title and possession were not separate, C would also obtain title in the collateral. Once D repaid the loan in full, equity would step in and imply an “equitable redemption”, allowing the D to re-convey possession and title of the property. However, if the loan was not repaid, C could keep the collateral or sell it to someone else.Pledges still exist today, but are not truly covered under the PPSA (Part 5 - rights and remedies expressly excludes pledgors and pawnbrokers). Closest equivalent to a pledge is a negotiable document perfected by possession.Examples: pawnbrokersIssue: in context of commercial D, who want to borrow money to buy a piece of machinery, unfair if C keeps machinery until loan paid off17-18th C - pledges less useful; led to bundle of property rightsAs England became more industrialized, pledges were less useful since it prevented a D from using the property purchased from the loan to payback that loanCourts divided property law into a bundle of rights to facilitate commercial lending:Right of use (D)Right of possession (D)Right of title (C) With the right of use and possession, the D could use the collateral to generate revenue and payback the loan. If D defaulted, C could take collateral since they had title in it. Since the D had a “deferred right of title”, title would vest once loan paid back. Bundling of property rights led to several types of secured transactions:Chattel mortgage (Lender, Vendor, Debtor)D needs a new horse and goes to V. D cannot pay full purchase price, only half. V cannot finance the purchase b/c not in the financing business, so D goes to L for a loan. L wants some security for the loan and so enters into a loan agreement with D. When horse is bought, title passes from V to D, and then to L. If not provided for in the K between D and L, equity will imply a term of “equitable redemption” so title returns back to D upon payment or performance. If D defaults, L has one of two options: (i) foreclosure - L goes to court for an order that allows it to sell the horse “in full satisfaction of the debt”, but L swallows any loss; or (ii) order for sale - court order allowing for seizure and sale of the horse, and suing for any shortfall from the sale.Remedy of order for sale under PPSAConditional Sales Agreement (Vendor, Debtor)V is in financing business and will allow D to pay half purchase price, and will then finance the balance. Title remains with V until D pays off loan (i.e. deferred title or 50% of title if pay half of purchase price).The pocket-lien problem (possession looks like ownership) in chattel mortgages and conditional sale agreements.If D wants more financing later on, he might go to another C (C2) and offer as security the horse. Without a registry system, C2 would not know that a previous security interest was on the horse. This gives rise to two competing claims from Cs which is a problem where, on default, the D will tend to owe more than the collateral is worth.To encourage commercial lending and borrowing, a registry system was created:C1 registers a lien against the personal property. If C2 didn’t check registry before taking a SI in the property, it would be their loss. After checking registry, C2 may decide to take a SI in D’s other property, or charge a higher interest rate on the loan to allocate risk. Mid-19th C - pre-PPSA registry systems developed in EnglandRegistry system developed in piecemeal fashion with a separate registry for each type of transaction (i.e. CSA, chattel mortgages, etc.) and then by type of collateral (e.g. motor vehicle registry) 20th C - move to unitary registration systemProblem with collateral or transaction specific registries was that if you registered under wrong act, SI would be invalidated or SP would have lower priority. Also, each registry had different rights and remedies on default.Creditors began to lobby governments for more rationalized system to reduce transaction costs and increase market place efficiency. Debtors also complained that under some registries, creditors were able to download transaction costs to them.1951 - US developed the Uniform Commercial Code, with article 9 dealing with secured transactions Late 1950s - Ontario used article 9 as a template to draft its PPSACBA drafted a national PPSA modelled after Ontario PPSAVariations of the CBA draft have since been adopted in every province All provinces now have substantially similar PPSAsVehicles for Debt Financing (Pre-PPSA)LeasesUnder a K, a lessor grants use and possession of a certain type of personal property for a period of time, and D makes payment for this use. Eventually, K language got too complicated and leases fell into disuse.PPSA simplified the law and, as a result, leases have come back as a vehicle in secured transactions.AccountsUnpaid debt + written obligation to pay = account (intangible, chose in action). Used by debtor/vendorsAccount debtor (buyer) account creditor//debtor (assignor) creditor/account purchaser (assignee). Accounts sold to account purchaser at a discount (allocation of risk to D).Account debtor can pay account creditor or account purchaser, depending on terms of assignment2 types of assignments:SecurePre-PPSA, if account debtor defaults, the account purchaser would transfer the account back to D to go after account debtor for payment. Allocates risk to the D.Non-securefor small vendor/D who needs financing urgently, if account debtor defaults, account purchaser takes loss. Allocates risk to C, so larger discount on account (i.e. 50% instead of 10%).Circulating Assets / DebentureD intends to use accounts and inventory to generate revenue, but the nature of such assets means that they are always in flux.When D pays back part of loan, amount to re-pay changes.Issues (now addressed by PPSA):After acquired property issue: CL courts struggled with nemo dat ouod habet in determining whether after acquired property could be collateralRight of disposal issue: can the D sell the inventory or does he need written permission from C?Solution: Floating charge (net would catch accounts and AAP, property sold would fall out of net) which upon crystallization (time of default) becomes a fixed charge. Anything caught in the net at the time of crystallization can be realized on by the C.PPSA got rid of floating and fixed chargesTrustsC provides financing for D to buy inventory. D and C have “executed trust document”: C (beneficiary) D (trustee). D (trustee) holds financed property “in trust” for C (beneficiary). When a buyer buys an item of inventory, under the trust instrument, the D would take the money and hold it in trust for C. Clauses in K usually required D to put payment from the financed inventory into a separate account in the C’s (beneficiary) name. If D defaulted, other creditors could not make a claim on the account (see Royal Bank of Canada: trial court held that the furniture of Class 1 and 3 buyers were held in trust by the debtor-vendor).Issue: But often the D did not put C’s money into a separate account, and as a result it got mixed up with the proceeds of other inventory. And, on default other creditors would take action on the account. Policy: To ensure that D was properly holding money in trust for C, C had to monitor D which increased transaction costs. Overriding Policy ConsiderationsBorrowing allows businesses to take part in activities that they otherwise could not have taken part inLeverage – Borrowed money used to invest, thereby creating more income, even after paying down the interest rate on the loanSpreads the risk of business failure – bank recovers losses through interest from other loans, fess, etcLender’s risk – the higher the risk to the lender, the higher the rate of interest they will chargeTo reduce risk, Security is provided to cover loses – lending can be offered at a lower rate**PPSA protects rights of Cs, so policy rationale to shift onto them the transactional costs and risks of not registering (C is in best position to investigate, can ask for more information, doesn’t have to make loan)Facilitating commercial lendingBundling of property rights (possession, use, ownership)Advances and tackingUsing f/s for more than one SA (43(5))Orderly realization – appointment of receiver fixes priorities – FermanekAbility to file f/s in advance of loan – secures C’s priority AND ensures funds can be released to D immediately upon loan approval because search is already occurred – s.43(4)Subordination agreements – s.40 – facilitate commercial lending and D’s asset base growthNotice to prevent misrepresentationImpetus for development of a registration systemCommercial consignment does not include consignments where the consignee’s creditors know that the consignee sells/leases the goods of others (s. 1(1)(d)), and accordingly the PPSA does not require such consignors to register in the PPR.Notice describing collateral (p. 12 - describing f/s)Allocation of riskSee PMSI priorities PMSI lender vs. PMSI vendorRisk is placed on lenders of the occasional dishonest dealer – section 30(2) cut-off rule (ordinary course of business)Vigilance, prudence should be rewarded (not sitting on your rights)Fixtures - Fixture Notices - e.g. 36(5)Robert Simpson (p. 28)2 debtor situation (35(8))Creditor-FriendlyRegistration errors see Gold Key; Coates; UF Media; Re MunroAllows for recovery of expenses for upkeep when lost to judgement creditors – s.35(6)(d)Least cost avoidanceSee Kinetics (KTI)HailbeckFairnessHailbeck (p. 12)GMS Securities v. Rich-WoodConsumer ProtectionS. 30 - Multiple Jurisdiction Transactions - S. 5(3) ; S. 6(2)Protects against the potential for civil disputes in limiting perfection by possession: (Royal Trust)If perfection was allowed by seizure or repossession, it would create a scramble for collateral seizures – may lead to civil disputesTensions:section 28 – where innocent purchaser who checks registry thinks they are safe to purchase collateral and then creditors are able to alter the financing statement within 15 days, innocent purchaser losesUnsecured creditors vs secured creditors:equitable tracing rules – tension between secured and unsecured creditors protection – only proceeds deposits can raise the proceeds balance – to protect unsecured creditorsTiB priority over unperfected SPs – protection for unsecured creditorsTiB’s can take advantage of misleading registrations to remove perfected SIs even though the provisions are meant to protect prospective future creditorsTEST FOR SECURITY INTEREST:Is the item personal property?NO – not subject to the PPSAYES – s. 2: does it in substance, create a SI?YES – secures payment or performance of an obligation Is it excluded under s.4?YES: not covered by the PPSANO: covered by the PPSANO – is it deemed included in s. 3? (transfers of account or chattel paper, lease > 1yr, commercial consignments)YES: is covered by PPSA, except for Part 5 (s.55) remediesNO: is not subject to PPSASCOPE OF THE PPSA:S. 2: for PPSA, substance matters more than form of K between 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 between parties, preserves contractual 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.- S. 73/74: generally, the PPSA wins in conflict with other legislation; One of the functions is to create a registry for secured propertyDefinitions: Section 1“Security Interest” means: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, andthe interest of (certain transactions)a transferee arising from the transfer of an account or a transfer of chattel paper,a person who delivers goods to another person under a commercial consignment, anda lessor under a lease for a term of more than one?year,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.Scope: Sections 2 and 3Section 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 appliesto 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)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).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 toa transfer of an account or chattel papera commercial consignment, and (see pg 4)a lease for a term of more than one year (see pg 5)that do not secure payment or performance of an obligation1. (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).Is it a Security Interest?Skybridge Holdings v. British Columbia, 1999 BCCA – C/D Relnship to see if SITravel 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…Purpose of transaction- Here received deposits as agent of consumers, cannot analogize to C/D relnship.Role and Relationship of the PartiesPracticality and Commercial Reality- was it practical for each consumer to register & perfect? No, wouldn’t have occurred to them that they were even Cs.Intention of the parties- Did parties intend to create D/C relnship? No, here customers became Cs unintentionally through bankruptcy. How the PPSA Prevails Over Other Legislation – Perfected SIs over Judgement CreditorsMarine Building Holdings v. Proton Engineering & Construction, 1993 BCSCBank gave loan to Proton; GSA for accounts receivable; Proton not paying rent and was sued – resulting in a judgement creditor; Landlord vs. Bank for entitlement to money in accounts receivableHELD: Bank gets the money – PPSA – Bank had perfected SI, which trumps other legislationNOTES: Had the SI not been perfected, s.20 of PPSA would have given priority to JCWhat is NOT Applicable to the PPSA – S.4Doesn’t apply to lien charges or given rule of law or enactmentPPSA is about consensual agreementsDoesn’t apply to SA governed by the Government of CanadaDoesn’t apply to Bank Act security – chartered banks onlyDoesn’t apply to claims under insurance or transfers of interest under wages or transfers under annuities – these each have their own regulatory instrumentsDoesn’t apply to the transfer in the interest of land – Land Titles Act wins over PPSA!Doesn’t apply to licence under the Act – TimberDoesn’t apply to collection of income from land title – rentAcceleration Clauses:Lenders usually put a clause in SAs allowing them to accelerate the payments where defaults experiencedConsumer goods have the right to reinstate agreement after defaultPerfection of Security Interests:Perfected SI are as good as a SI can be in terms of priority reasonsS. 19: an SI is perfected when it has attached AND all steps required under the Act have been metPerfection is a two step process:1. Attachment under s.12 – value, rights (not necessarily ownership) and writing (s.10)2. All other sections of the Acti. Registration of a financing statement (Majority of times);ii. Possession of the collateral; ORiii. Temporary Perfection (s.28(3))1. Attachment:The valid SI must attachS. 12: SI attaches when: value is given; debtor has rights in the collateral, AND the SI becomes enforceable against 3Ps under s.10Requirements for attachment under section 12:i. Value is given ii. Debtor has rights in the personal property that will become the collateral iii. Except for the purpose of enforcement, satisfaction of the writing requirements in s.10i. Value is Given:Roughly equivalent to consideration concept in contracts, but with variations:Includes antecedent debt – previous debt counts as good valueForbearance is good consideration also – threat to call in a debt is okWe are worried about you paying back, so now we want security – value satisfiedWhat Constitutes Value?Toronto-Dominion Bank v. Nova Entertainment, 1992 ABQBC leant N money; N was paying it back but did not finish by due dateC extended the loan and took an SI in all of N’s paapIssue:Is the forbearance good value to form attachment of the SI to the antecedent debt?Held:Value is all that is require, this is less than consideration standard in normal KsWhere a C grants an extension of time for payment of the past due debt, and at the same time obtains from the D security for the debt, the proper inference to be drawn in the absence of evidence to the contrary is that the extension was granted as a result of the C’s new securityii. Debtor’s Rights in the Property:No requirement for “sufficient rights”, just rights in generalOwnership is not required to constitute debtor’s rights in the propertySome interest is required though – it does not take much more than mere possession to qualifyHow Broad is the Notion of Rights?Kinetics Technology International v. The Fourth National Bank of Tulsa, 1983 US CAK had a purchase agreement with O for O to prepare a furnace for K; O had a secured LOC with Bank in all inventoryK sent parts to O to for the furnaces but kept title of them, and would take title of furnaces upon completion and delivery of them;Second loan taken by O – secured against accounts receivable; O went out of businessBank took possession of property, including K’s partsIssue:Does O have sufficient rights in K’s parts to satisfy attachment to B’s SI in inventory?Held:Possession alone is not enough for attachment, requires something moreHere there was something more, they had the right to use the goods to construct items for saleThis would be enough to satisfy attachment requirement(However, in this case, K takes the goods free of B’s SI because they purchased them in the ordinary course of O’s business via progress payments)Notes:In BC, this could have been decided on a different principle:The goods didn’t secure a payment or obligation, also not a deemed SITherefore, no obligation to perfect, K is just true owner of the goodsIs Title Required to Have “Rights”?Haibeck v. No. 40 Taurus Ventures (1991 BCSC)No title required – here a Conditional Sales Agreement with the delivery of the collateral to the debtor was sufficient to satisfy the requirement for “rights in the collateral” under PPSAiii. Writing Requirements for SAs:S. 10(1): SI is only enforceable against 3P if:(a) collateral is in the possession of the SP – NOTE: possession not from seizure(b) collateral is a certificated security in registered form and has been delivered to SP(c) investment property and SP has control, OR(d) debtor has signed a SA that contains(i) description of collateral by item or kind: goods, investment property, instruments, documents of title, chattel paper, intangibles, money, crops or licences(ii) description of collateral…investment stuff(iii) statement that SI is taken in all of the debtor’s present and after acquired prop(iv) statement that a SI is taken in apaap except:(A) specific items or kinds of personal property, OR(B) one or more of the following: goods, investment prop, instruments, docs of title, chattel paper, intangibles, money, crops or licences(2) SP is deemed not to have take possession of collateral that is in the apparent possession of debtor(3) subject to (6), description is inadequate under (1)(d) if it describes collateral as consumer goods or equipment without further reference to the kind of collateral(4) description of collateral as inventory is adequate, only where held by the debtor as inventory(5) SI in proceeds is enforceable against 3P – whether or not detailed in the SA(6) if personal property is excluded from a description, the excluded property may be described as consumer goods without further reference to the item or kind of property excludedWhat Consequences Follow from Failing to Comply with Writing RequirementsRiepe v. Stingray Holdings, 2002 BCSCBI enters into a lease with S; the truck is transferred to P’s father; P goes to S and they come to a new deal. P buys the truck from father. Father falls behind on payments to S S repossesses the truckP claims its his truck now, S claims its their SIHeld:P gets the truck because S’s Si is not in writingThis doesn’t mean that S can’t collect the money its owed, just means they don’t have SI against 3PNotes:Without the ability for others to find out about the SI (Notice), innocent parties are effectedS.10 – must know that there is an SI, not in the future and the assets must be clearHow Precise Need be the Wording in a SA674921 BC v. New Solutions Financial Corp, 2006 BCCAGSA between partiesIssue:Is the wording of the amended agreement precise enough to attach SI according to s10Held:NoOnly refers to the word “assets”; Failure to describe by item or kind or by reference to class of goodsAlso just referred to after-acquired property, and not present property2. Perfection’s Other RequirementsRecall, in addtion to attachment, perfection also requires one of the following:i. Registration of a financing statement (Majority of times);ii. Possession of the collateral; ORiii. Temporary Perfection (s.28(3))i. The Registry SystemRegistration of a financing statement can be done electronicallyMust contain: parties’ names, types of collateral, period of registration – can be infinitePurpose is to alert individuals to the existence of SI in the propertyGoverned by Part 4 of the PPSA – registration can occur against anybody’s name as a debtor even if there is no SIRegistration only effects perfection, no notice of knowledge of an SI is supposed to be relevantSI can be transferred with or without financial change statementSection 25 – Subject to 19, a SI is perfected via registration of a financing statementSection 18 – Acquisition of Information from Secured Parties:Allows for creditors to take a look at what a SI entailsParties that can make this demand are: debtor/creditor/sheriff/person with interest in the property of the debtorNOTE: this lacks the availability of a potential creditor to searchBut D wants the credit, so they’ll authorize the potential creditor(1) Debtor, creditor, sheriff, party w/ interest in the property or authorized person, may deliver in writing a requirement for any information in (2)(2) copy of the SA; statement in writing of the amount of indebtedness and terms of payment of that indebtedness; written approval of itemized list of personal property attached; written approval of amount of indebtedness and terms of repayment; location of the SA to enable inspection of the SASection 43 – Registering a Financing Statement:Registration Generally(1) f/s must be sent to office of registry(2) Registration is effective from the time assigned in the registry office(4) f/s may be registered before a SI is made and before SI attaches(5) registration may relate to one or more than one SASee RBC v. ACS Sask in Future Advances belowSeriously Misleading (Error or Defect in Registration)(6) Validity of registration of a f/s is not affected by a defect, irregularity, omission or error in the f/s or in the registration of it unless the defect/irregularity/omission/error is seriously misleading(7) If debtor(s) are required to be disclosed OR serial numbered goods AND is seriously misleading by way of defect, in the name of the debtor or the serial number – reg invalid(8) No one need be actually misled by a defect for it to be seriously misleading(9) failure to provide description in a f/s in relation to item/kind of collateral does not affect the validity of the registration with respect to other collateral in registrationCan a Financing Statement Relate to a SI that Comes Into Existence After the Filing of the F/S?674921 BC v. New Solutions Financial Corp, 2006 BCCAAffirms that GSA were perfected with prior filing of F/SS.43(5) f/s may relate to more than one SAS.44(1) SP may specify any period of time for effectivenessS.43(4) lender may file f/s before D executes the loan agreement or even agreed to borrow at allPolicy: Ensures that funds can be released to a borrower immediately upon loan approval because the search has already occurred, and filing has already occurred so C has priorityPPS Regulations – Registration Requirementss.4 – required information: name and address of SP; name of each debtor and addresss.6 – describing the debtor by name: no commas/periods allowed in name for commercial partiess.7 – full name requirementsDescribing Collaterals.9 - (1) collateral must be described as followsserial numbered consumer goods must be described by serial numberEquipment that is serial numbered must be described by SN or in accordance with s11Collateral must be described in accordance with 11 if the collateral isConsumer goods not SN, equipment not SN, or inventory either SN or not(2) Collateral that is proceeds must be described as follows:consumer goods that are SN – described by SNEquipment that is SN – described by SN or by word “proceeds” followed by description in accordance with s.11Collateral that is inventory/goods/non-goods non SN – by “proceeds” followed by description in accordance with 11S.11 – (1) where not to be described by SN, must be entered in whichever is applicable of:Description of the collateral by item or kindStatement indicating that a SI is taken in all debtor’s present and after-acquired propertyStatement indicating that a SI is taken in apaap except specific items or kinds of propertySubject to (2), description as inventory(2) description as inventory is only valid where the collateral is held as inventory(3) description is inadequate if it describes collateral as ‘consumer goods’ or ‘equipment’ without further reference to the kind of collateralGoods Generally:Consumer goods may be SN or non-SNSN goods MUST be registered by SN – more protection to consumersInventory can be SN or non-SNAlways registered by item or kind – in accordance with s.11Equipment can be SN or non-SNGoods that are SN MAY be registered by SN; non-SN should be by item or kindNon-Tangibles + InstrumentsNever serial numbered – item or kind registrationHow Much Info About After-Acquired Property Ought a Registration Reveal?Regal Feeds v. Walder and Nivervill Credit Union, 1995 MBQBPurpose of the f/s is to alert creditors, not necessarily tell them the details of the SASA need not be confined to the property owned at the time of formation – future acquisitions can be includedS.13 – a SA that provides for interest of after-acquired property, attaches without specific appropriation by the debtor – with a few limitationsIf the intention is clear, then the aap is included, inventory is broad enough to describe aapSeriously Misleading RegistrationThe provisions protecting against misleading registration are to protect innocent creditors who search for collateral/debtor and are unable to find anything and enter SA not aware of prior SITiB’s consistently challenge perfection of SI so as to obtain higher priority to the goods, even though they are never actually misled – they do not depend on the accurate registrationRule: Objective test – Reasonable Person:If no match using the correct search criteria – seriously misleadingIf near match(es) – may or may not be seriously misleadingAre the mistakes sufficiently serious that a reasonable searcher would not realize that the registered items are the same goods being searched for?Section 43(6): Irregularities don’t invalidate unless they are seriously misleadingSection 43(7): If one or more debtors are required to be disclosed in the registration or collatearl is consumer goods that are serial numbered, and there is a seriously misleading error with regards to one of the debtors’ names or the SN, then the registration is invalidNote: does this apply to Equipment? – Names are always required, so might applyIt’s odd that it’s limited to consumer goodsSection 43(8): Do not need to prove that anyone was actually misledWhat can be Left Out of the Registration of a Name and Not be Seriously Misleading?Re. Munro, 1992 BCSCDebtor’s middle name was omitted and there were errors in the SNHeld: Not seriously misleadingOne-digit errors are not seriously misleading to the reasonable personTotal accuracy in SN or names is not necessary – searches still yield the desired collateralShould the Registry Computer Program Determine What is Seriously Misleading?Coates v. General Motors Acceptance Corp, 1999 BCSCTruck registered with incorrect SN, when searched by next creditor, did not come up at allHeld: Not seriously misleading1. Objective Test for whether registration is seriously misleading, not whether actually misled2. Total Accuracy is not required for name and SN3. Seriously misleading descriptions of either the name/SN will defeat registration4. A seriously misleading registration is one that:a) would prevent a reasonable search from disclosing the registration ORb) would cause a reasonable person to conclude that the search was not revealing the same chattel or debtorObligation is on the searcher to review similar registrations5. The reasonableness of the registry filing system itself in terms of its design and capabilities, is not assessed in this determination; it’s only a question of what the system will revealWhat is the Scope of s.43(6) and Does it Apply to Grammatical Errors?Re Alda Wholesale, 2001 BCSCNo SNs file, and the f/s may have had grammatical errorsIssue:Whether errors that do not appear in the searchable fields (name/SN) of the f/s can constitute “seriously misleading” registration?Held:Yes, the defect contained is seriously misleading to the parties contemplating providing financingNothing in s.43(6) limits attacks on validity to searchable fieldsTest: Whether the defect would be seriously misleading to any reasonable person within the class of persons for whose benefit registration and other methods of perfection are requiredHere: not clear whether all categories must be leased; not clear on if “all attachments, accessions” refers to all categories; clearly supposed to be inventory but not described as such; no attempt to indicate apaap; “goods” does not allow reasonable searcher to conclude which of the three categories are being describedPolicy: PPSA urpose is to give notice of all prior SIs – principles of certainty and predicabilityii. Possession of the CollateralAssumes that person in possession of property has an interest in it, so SP can be perfected by simply taking possession of it – others see this and know they have an interest – noticeDoes not work for non-tangible itemsMost commonly used for perfection of chattel paperSection 24 – Perfection by Possession:Subject to 19, possession of the collateral by the SP perfects SI in: chattel paper, goods, instruments, negotiable docs of title, and money UNLESS possession is a result of seizure or repossession.(2) SP does not have possession if the collateral is in the possession of the debtorWhen is it Too Late to Perfect by Possession?Re Bank of Nova Scotia and RBC, 1987 SKCAT1: RBC had perfected SI in all D’s property, apaapT2: D purchased two SN’d trucks and the CSA were assigned to BNS (chattel paper)T3: D went bankrupt, receiver appointed by RBCT4: BNS registered SI in trucks, f/s included SNs of the trucks – not PMSI b/c not w/in 15 daysIssue:Did RBC perfect the SI in after-acquired property by possession via appointment of receiver?Held:Did not satisfy the stat requirements to perfect by possession – RBC subordinate to BNSTwo requirements: 1. That it’s actually held; 2. That its held as collateralReasons:Truck was seized under the power of the SA because D was in default; the purpose of perfection by possession is to provide notice, but here this is just seizure in the contemplation of defaultNotes: BC s.24 explicitly rules out seizure or repossession!What Constitutes Perfection?Royal Trust v. Number 7 Honda Sales, 1988 ON DivT1: D bought car from Honda with a cheque – NSF – Honda repossessed vehicleT2: D borrowed money from C to buy out the vehicle. Loan secured by promissory note, a chattel mortgage and assignment of insurance proceeds – perfected via f/sT3: Honda commenced action against D for specific performance – returned the vehicle, D sold itIssue:Did the repossession of the truck constitute possession under PPSA sufficient to effect perfection of the SI that would take priority over the SI of C (royal trust)Held:Honda/D at no point intended SI – no steps taken to that regard. Even if it were, there was no perfection via possessionPerfection by possession requires that the interest was taken with the purpose of realizing on the obligation owed – must be physical possessionReasons:At all times, D was considered the owner, was supposed to be a flat purchasePossession fails: 1. It was not possession, it was repossession2. The possession required to effect perfection must be for the purposes of collateral, here this was basically a bailment situationPolice:If perfection was allowed by seizure or repossession, it would create a scramble for collateral seizures – may lead to civil disputesiii. Temporary PerfectionAllows for temporary perfection where SP parts with possession temporarily for sale, exchange, transport, packaging, etcAllows for a 15 day grace period on re-perfecting – after 15 day period, SP can still re-perfect, but if another party perfects first, they will be subordinate to that partyProceeds: s.28(3) allows for continuous perfection under for perfection under original collateral that was not perfected via f/s – would cover temporary perfection of the collateral (below)Section 26 – Temporary PerfectionA SI perfected under 24 in(b) a negotiable doc of title or goods held by a bailee not covered by a negotiable doc of title, which the SP makes available to the D for the purpose of:(i) Ultimate sale or exahnge(ii) Loading, unloading, storing, shipping or transhipping, OR(iii) Manufacturing, processing, packaging or otherwise dealing with goods in a manner preliminary to their sale or exchange,Remains perfected, despite s.10, for the first 15 days after the collateral is in control of the DAfter the 15 days, a SI referred to in this section is subject to regular perfection of SI rulesDeemed Security InterestsA deemed interests, like a true lease or consignment, allows the creditor to use any common law remedy; while a regular SI is limited to part 5 of the PPSASection 3 (above) deems SI for transfers of accounts/CP; leases >1yr; and commercial consignmentsThese deemed interests do not have the benefit of application under section 55See Subordination of Unperfected Security Interests for Detriments of being deemed SISeize or Sue – Part 5 PPSA – Particularly with Consumer Goods:Where a creditor wishes not to be limited by the restrictions in Part 5 of the PPSA, they would rather be “deemed” SIs than regular SIsConsumer goods also give the debtor rights to re-instate the agreement after defaultTransfers of Accounts or Chattel Paper - AssignmentsNOTE: See “Chattel Paper Security Interests” Below.Consignments:Consignor delivers goods to consignee, who is authorized to sell/dispose of the goods and remit the money owed back to consignor.Consignor retains title until it passes to the purchaser upon sale from the consigneeCommon Law or “True” ConsignmentsPPSA does not apply to these3 important distinctions:Consignee has no legal obligation to buy the goodsConsignee has no legal obligation to pay until goods are soldConsignee can return goods with no service charges (unrestricted right to return)Security Consignments:S. 2 of the PPSA applies, in substance these are transactions which secure payment (loans)Must look to K for 3 situations where it will be a security consignmentExplicit/implicit obligation on consignee to purchase goods at some pointK explicitly/implicitly provides for restricted or limited right to return goodsConsignee has to account to consignor for predetermined amount whether or not soldCommercial Consignments:S. 3 of PPSA applies, even though they do not secure payment or performanceNo remedies under Part 5Consignment under which goods are delivered for sale in the ordinary course of the consignee’s business by a consignor who:Deals with the goods of that description in the ordinary course of their business ANDReserves an interest in the goods after they have been deliveredBut does not include an agreement under which goods are deliveredTo an auctioneer for sale ORTo a consignee other than an auctioneer for sale, if it is generally known to the creditors of the consignee that the consignee is in the business of selling or leasing goods of othersCreditors are not deceived because they know the goods belong to others!Is a Consignment a True Consignment or a Security Consignment? Re Toyerama, 1980 ONToys were given to T on consignment with clause that if they were delivered from the warehouse to sales outlet that payment structure was triggered; T went bankrupt w/ toys sent out to retailersIssue:Whether the remaining toys now in the possession of the TiB were sold by Creditor to TIf not, whether the arrangement between the parties was a “consignment intended as security”Held:Language of the agreement is consignment-like except for clause that provides for payment upon delivery from the warehouseConsignment intended as security? NOThere was no security interest created by the consignmentNotes:Why not a commercial consignment?In ON, there was no provision for commercial assignments in the ActHere once found to be a true consignment, PPSA doesn’t applyIn BC, we’d have to ask if it were a commercial consignment, then even if it didn’t secure payment/performance, then it would apply as a deemed interest and would lose to the TiB because of s.20 PPSAHere, commercial consignee requirements are all met, and the analysis would turn on whether Creditor knew that T was generally in the business of selling others’ goods or notWhen Can it be Said that Creditors “Generally Know” that a Person is in the Consignment Business so as to Prevent Dealings with that Person Being Termed Commercial Consignment (Deemed)Furmanek v. Community Futures, 2000 BCSCF owned the Jewellery store; partially financed to S; S gets a loan from CF; S owes both F / CFS takes jewellery on consignment from SC, becomes inventory, SC doesn’t registerS defaults, tells SC to retrieve jewelleryArguments:F / CF claim that it was a commercial consignment because failure to register = SC unperfectedSC claims it for herself and said F/CF have general knowledge that S is in the ordinary business of consignment, and therefore not a commercial consignment – not a deemed SIIssue 1:Did creditors have “knowledge”?Held:NO – Test is general knowledge by creditors, not actual knowledgeKnowledge of general business community in that areaDoes not mean just one, but many creditors know of the ordinary consignment businessF was a previous owner and CF was a sophisticated lender!Issue 2:Was jewellery covered by SI over inventory? Held: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 theftAs soon as receiver was appointed, S lost ability to run own business – priorities fixedLeases for a Term of More than One YearDoes not include: A lease involving a lessor who is not regularly engaged in the business of leasing goodsA lease of household furnishings or appliances as part of a lease of land if the goods are incidental to the use and enjoyment of the landA lease of a prescribed kind of goods regardless of the length of the term of the leaseGrant lessee possession and use in exchange for $ for specified period of time, Lessor retains title“True” Lease for < 1yearPPSA does not apply; Payments are for use of the itemLease for More than 1 YearPPSA s.3(b) appliesS. 1(3) – possession is requiredPolicy: possession looks like ownership, want to register to prevent fraudDisguised Sale / Hire-Purchase AgreementsPPSA s.2 applies – creates an SIExpress/implied obligation for lessee to buy (during or end of term) is really a disguised conditional sales agreementLook at: 1. Intention; 2. Deposit; 3. Whether option to buy at end is < market value; 4. Indicia of ownership (Newcourt Financial)Is a Lease a True Lease or a Security Lease?Daimler Chyrstler Services Canada v. Cameron, 2007 BCCATruck leased from dealership, payments not made, truck repossessed and sold, dealer sued for 30k as per lease terms for the lost payment and loss on the re-saleIssue:Whether the lease was a true lease or a security lease?If true lease – then creditor can exercise rights under CL If security lease – creditor is limited by Part 5 – specifically consumer goodsIf it were a disguised sale, then it could be considered a security leaseHeld:True lease – not subject to limitations in Part 5Must look to factors that describe the types of leases:Option to purchase – if sale, but the time you come to the end of the lease, most of the value of the item should already be paid for – nominal amount remainingIf it’s a lease, then the price at the end of the lease would reflect a fair market value of the product – here just paying for the use of an item, therefore true leaseDefault clause on its own is not enough to label it a security leaseMost important factor is the residual valueHow is a True Lease Distinguished from a Security Lease and What Difference Might it Make for a Lessee?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…Intent (was it to secure payments or provide payments for use?)Purpose/Existence of Deposit (was deposit required? Was it refundable?)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)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 ambiguousWhat 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)Future Advances / Tacking:Generally the PPSA protects creditors’ priority where future advances are made to the same debtor for the same collateralProtects via registration, so when subsequent SI attempted, prior can be seenS. 14: An SA may provide for future advances(2): an obligation to make future advances is not binding in situations of s.20(a)(i and ii) where there is knowledge of the court ordered seizure.S. 35(5): The priority that is granted under (1) applies to all advances, including future advancesRecall, s.35(1) is the residual priority rule.Can a SP Tack on Indebtedness Obtained Through an Assignment of a SI?Canamsucco Road House v. Lngas, 1991 ONC owns a restaurant and sells it to L; C had SI with Bank; L forms GSA with C for payment over time, which creates a second SI in the restaurant – L is aware of Bank’s SI; C defaulted on payments to Bank, L took over payments to maintain possession; L borrows from second creditor – creates new SI in restaurant; Bank then assigns loan to the second creditor.Issue: The 2C was originally subordinate to C’s SI, who was subordinate to Bank’s SI. Does the assignment give 2C priority over their entire loan amount with future advances or just the initial amount assigned over to them?Held: Priority does NOT apply to the future advances where an assignment is made. The equities between the parties are frozen at the time of the assignment, future advances are not tacked onIt was found that the type of priority advancement sought by 2C was not intended by PPSAPolicy:Facilitated commercial lending, notice to prevent misrepresentation, protect party’s expectationsC expected to retain 2nd priority over everything after the Bank’s original priority.Future Advances that are Distinct from the Original SAIn BC, future advances are covered by the original filing of a f/s, even for distinct loansCan a Single F/S Perfect Multiple SIs Even When the Subsequent Loans Constitute Separate and Distinct Transactions?Royal Bank of Canada v. Agricultural Credit Corp of Sask, 1994 SKCAT1: ACS had perfected SI with D for all property in the amount of Loan AT2: RBC has a perfected SI with D for all property in the amount of revolving LOCT3: ACS made subsequent loans B and C and perfected themIssue:Whether the registration of the single f/s can perfect SIs arising in connection with distinct loansHeld:ACS has a perfected SI in all loans with the same senior priority – A caries forward to B/CReasons:S.14(1) may secure future advances whether or not the advances are given pursuant to an obligation in the SAS.35(5) if future advances are given while SI is perfected, the future advances hold the same priority as the original advance heldComments:If the Bank wants to be protected against future advances, they could have sought a subordination agreement from ACS as a prerequisite to offering credit to DThis ruling may limit D from finding subsequent lenders - prior SPs not willing to subordinate Collateral and Proceeds“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 creditSecurity: “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…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 debtfor any other kind of collateral can seize, sell AND sue (so CGs often excluded from SIs)Inventory: must actually be used as inventoryEquipmentTEST: 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.Can a Security Interest be Created in a Licence Personal Property?Saulnier v. Royal Bank of Canada, 2008 SCCFishing licence is personal property for the purposes of PPSAIncome streamIf not personal property, fisher’s ability to borrow will be very limitedProceedsPPSA recognizes rights of parties to maintain their SI in proceeds derived from the collateralProceeds are traceable whether or not there is a fiduciary relationship between the SP with an interest in the proceeds and the person who has the rights in the proceedsIdentifiable or traceable personal property, fixtures and crops, derived directly or indirectly from any dealing with collateral or the proceeds of collateral AND in which the debtor acquires an interestNote: s.31(6) gives CPPs priority over SIs in CP as proceedsSection 28 - Proceeds(1): If collateral gives rise to proceeds, the SI continues in the collateral UNLESS the SP expressly/impliedly authorizes the dealing, AND extends to the proceeds; BUT, if the SP enforces a SI against both collateral and proceeds, the total recovered is limited to the value at the date of dealingExample: unless expressly/impliedly authorize….inventory creditors impliedly authorization that the inventory is to be sold free of and SI in the collateral(2) A SI in proceeds is continuously perfected SI if the interest in the original collateral is perfected by registration of an f/s that:Contains description of the proceeds that would be sufficient to perfect a SI originallyCovers the original collateral, if the proceeds are the kind that are within the description of the original collateral, ORCovers the original collateral, if the proceeds consist of money, cheques or deposits(3) If SI in original collateral was perfected other than in the manner in (2), the SI in the proceeds is continuously perfected, but becomes unperfected on the expiration of 15 days after the SI in the original collateral attaches to the proceeds, unless the SI in the proceeds is otherwise perfectedPolicy: Smart purchasers check the registry and are put on noticePolicy: (3) offers opportunity for creditors to amend f/s to cover proceedsSerial Numbered Goods – Proceeds Registration Requirements:s. 9 of the PPS Regulations(2) Collateral that is proceeds must be described as follows:consumer goods that are SN – described by SNEquipment that is SN – described by SN or by word “proceeds” followed by description in accordance with s.11Collateral that is inventory/goods/non-goods non SN – by “proceeds” followed by description in accordance with 11NOTE: Serial numbered Consumer must be described by SN, or for Equipment, must be described by SN or using the word “proceeds”.Do Proceeds of Proceeds Constitute Proceeds?Re CIBC & Marathon Realty, 1987 SKCAK borrowed money to buy inventory. CIBC had SI and perfected with f/s in inventoryK rents premises from M, defaults on rent – M exercises right to distrain for rent (seize property in exchange for rent); M seizes inventory; CIBC protests because they have perfected SIThere was a strict clause that required K to pay the Bank whenever inventory sold, this not doneIssue:Original inventory is gone and has been replaced by new inventory financed by old inventory’s proceeds - does CIBC still have a perfected SI in the new inventory?Held:Just because the strict, unrealistic clause was not adhered to, the terms of SA does not affect CIBC’s rights against the 3PThese are proceeds that are contained within the bank’s perfected SIExample – Identifiable proceeds:T1: X gives SI to B in restaurant equip (not described as equip in f/s - insufficient)T2: X sells one of his freezers to Y in exchange for cheque for $6k (falls w/in s.28(2)(c))Y should have checked the registry before buyingB holds an SI in the cheque and the freezer T3: X takes cheque to B2, deposits $5k; takes out $1k in cashT4: X pays $1000 to Mastercard to settle debt (s.31(1) – cut-off in satisfaction of debt)Now there’s a cheque, the $5k acct (debt owed to X) and $1k in cash to MCBank has a continuously perfected SI all of them subject to any cut-off rules:S.28(1): Bank can follow original collateral, unless the bank impliedly or expressly authorizes the deal (if X had been a vendor of appliances) – NOS.31(1): Protection of negotiable and quasi-negotiable collateral - YESHolder of money has priority over SI in money perfected under s.25 if the holder:Did not know about the SI ORIs a holder for value, whether or not they knew of the SIMC took the interest of $1k for debt - value S.31(2): If a creditor receives an instrument made by a debtor in delivery of a debt owing to the creditor, then it takes priority over other SI, whether or not they had knowledge of the SI - NOThis didn’t happen here, the cheque wasn’t used to pay off the debtS.31(3): A purchaser of an instrument has priority over SI in an instrument if the purchaser: gave value, had no knowledge of the SI, and takes possession of the cheque – YESHere, B2 is a purchaser of the cheque for value – the creditSo the cheque itself has been cut off, and so has the $1k cash to MCThe account for $5k remains a continuously perfected in B’s SI as proceedsHere, the account is “identifiable” and would fall under B’s SIIssue:Suppose the funds are co-mingles with an account that already has $8k in it…example bellowTracingEquitable rules for following funds into mixed fund accountsPPSA adopts these rules where proceeds are Identifiable OR traceableRegardless of fiduciary relationships (trusts is dead)Lowest Intermediate Balance Rule: 3 Rules:Total amount of deposits constituting proceeds forms the proceeds balance of the account; and only the proceeds that are deposited can raise the proceeds AND the account balanceFunds deposited not reflecting proceeds raise the account balance but not the proceeds balancePresumption is that the debtor uses their own money first! – until the acct balance < proceeds balanceThis represents the equitable presumptionExample – Traceable Proceeds – Cont’d from Above:Where the creditor sees that the proceeds balance is reduced, they can contact the acct administrator to stop transactions from the acctPOLICY:, at T6, that the proceeds balance is not replenished, this occurs to protect unsecured creditors – the Secured creditors are protected enough!!Proceed DepositsNon-Proceed DepDebitsAcct BalanceProceed BalanceT180008000T25000130005000T31000140005000T4800060005000T5200040004000T6100050004000How Does the Lowest Intermediate Balance Rule for Tracing Money Proceeds Operate in Practice?Universal CIT Credit Corp v. Farmers Bank of Portageville, 1973 USRyan owns car-dealership and floor-planning his inventory; has a SA with CIT and was supposed to deposit the money for sales of cars into an account to be proceeds for inventory supplierR was not doing well – CIT terminated arrangementR goes to Bank (unsecured creditor), and tries to give the money there rather than CITR debits accounts to Bank; CIT wants the proceedsIssue 1:Does the Bank have any right to the proceeds?Held:No, this was an attempt to defraud the senior creditorIssue 2:How to determine how much CIT was able to take from the account – mixed fundsHeld: Bank had to return the amount it took out of the account to the extent that the original debit exceeded the non-proceeds balance thereby causing the proceeds balance to be reducedSimilar to T5 above – in the chart, $1000, would have to be returnedHow have the Equitable Tracing Rules been Altered in the PPSA ContextAgricultural Credit of Sask v. Pettyjohn, 1991 SKCAP owns cows, buys cows, sells them, buys more. C had SI in original cowsHeld:Tracing rules expanded to a “close and substantial connection in which the new property can be characterized as a replacement for the old property in which the SP had an interests, and the new property needs to play substantially a similar role in the commercial operations of the debtor”Close and Substantial Connection TestIssue:Did the interest cover the whole new heard?Held:The percentage ownership in the original heard was about %50, so the interest in the new heard will be about %50 as wellPolicy: Creditors should have responsibility to monitor secured itemsNOTE: Re River Industries Ltd (1992 BCSC)Subordination of Unperfected Security InterestsS.20(a): if you have a judgement creditor, and there is an unperfected SI in some of the D’s property, then unperfected SI is subordinate to the judgement creditor’s interestS.20(b) – unperfected SPs are deemed not effective against the interest of a TiBS.20(c) – subordinates an unperfected SP to the interests of the transferee where the transferee is not a SP and gives value for collateral without knowledge of the existing SIProtection for Trustee in Bankruptcy:S.20(b) – unperfected SPs are deemed not effective against the interest of a TiBTiB stand in the place of the debtor, and represent the interests of unsecured partiesEnsure that the risk is shared between the secured and non/secured partiesTiB manages the distribution of the bankrupt’s goods to SPsTiB doesn’t get the property to just distribute to unsecured partiesThey first must give it to the perfected SPsThen give it to true owners – other agreements – unsecured creditorsThen unperfected SIs – these lose to the TiB under s.20(b)Because of this, unperfected creditors wants to show that they don’t fall into the PPSA when faced against TiB, otherwise they could lose their interest under s.20(b) – so they don’t want to be considered “deemed interests”Can the Trustee in Bankruptcy Have a Better Position in Relation to the Collateral than had the Bankrupt Debtor?Re. Giffen, 1998 SCC – Iacobucci JiT1: G leased car through BCT who leased care from Lessor; Lessor aware of GT2: G went bankrupt and neither BCT or Lessor registered f/sT3: TiB appointed; Lessor seized and sold the vehicleTiB brought motion pursuant to s.20(b)Issue:Whether lessor/BCT’s unperfected SI was ineffective against the rights of the TiBProblem: This puts the TiB in a better position than the original D was inHeld:S.20(b) operates to defeat the unperfected SI of the lessor in favour of the TiBReasons:Issue of priority, not an issue of titleTiB acts as representative of unsecured creditors – PPSA gives TiB greater interestPolicy: true owner/SP must forfeit title if failed to register interest as required by PPSAProtects unsecured creditorsALSO SEE: Orion Truck Centre Ltd (re), 2003 BCSC in “Consensual Transfers” belowProtection for Judgement CreditorsS.20(a): if you have a judgement creditor, and there is an unperfected SI in some of the D’s property, then unperfected SI is subordinate to the judgement creditor’s interestS.35(6): gives JCs priority over perfected SPs where the SP gains knowledge of the JC/seizure and makes subsequent advancesS.36/37/38: gives JC’s priority over SI in fixtures/accessions/crops where the SP of the f/a/c did not file the appropriate notice in the LTO/PPRSee Competition with Fixtures sectionExample:T1: D enters SA with B, B lends $100k – SA provides for advances up to $200k – f/s registeredT2: D gets $50k more from BT3: D is sued, JC takes enforcement proceedingsT4: B advances another $25kT5: JC seizes D’s property and B becomes aware of the seizureT6: B advances another $25kT7: Collateral at risk, B extends $5k to preserve the goods.s. 35(5) gives B priority for all future advances subject to (6)s. 35(6) allows priority for JCs within the prescribed categories:(a) T1 and T2 occurred before JC was introduced – B retains priority(b) T4 $25k given before knowledge of JC – B retains priority(c) T6 - $25k given after knowledge of JC – since this advance was not made within a statutory requirement or legal obligation to D, and does not fit within any of the exceptional categories, JC has priority(d) T7 $5k – expenses incurred by SP for protection/preservation/repair of collateral – B’s priorProtection for Transferees of Collateral and Buyers of GoodsS.20(c) – subordinates an unperfected SP to the interests of the transferee where the transferee is not a SP and gives value for collateral without knowledge of the existing SIS.28(1)(a) – a SP can expressly or impliedly authorize that collateral be dealt with free of SIWhere collateral is inventory, assumed that SP has authorized the dealingOrdinary course of business sales - belowWhat Constitutes Value for the Purpose of Section 20(c)?RBC v. Dawson Motors, 1981 ONT1: RBC advanced a loan to D for the purchase of a vehicle – perfected SI Aug16T2: Aug15, D sold vehicle to Dawson, who ran a search on it and found nothingT3: Dawson transferred the actual value after perfected on Aug16Issue:Is Dawson a purchaser for value before RBC’s perfection or after?Held:The promise made on the 15th by Dawson does NOT constitute value, RBC’s perfected SI winsReasons:Dawson did receive notice of RBC’s perfection prior to advance – allowing the promise to constitute value would be to allow Dawson to partake in debtor’s fraudWhat is the Basis for an Implied Permission to Sell?The Queen v. RBC [“Sparrow Electic”], 1997 SCC – Iacobucci JIssue:The licence theory holds that a bank’s SI in debtor’s inventory, though it is fixed and specific, is subject nevertheless to a licence in the D to deal with that inventory in the ordinary course of business – Does this apply against s.28(1)?Held:No, the licence can have no effect on this situation. The SI in inventory only disappears if the debtor actually sells the inventory and applies the proceeds to a 3P debt – cut-off for proceedsOrdinary Course of Business TransfersIn some circumstances, the PPSA allows for collateral to be “taken free” of interestsThis occurs only when dealing in the ordinary course of businessPurpose of the section is to permit commerce where majority of inventory in society is financedThe section is only concerned with SIs granted by the seller in the given transaction - Wheaton Test from Fairline Boats:Must consider all the circumstances of the sale – Question of Fact:1. Is the transaction one that is normally entered into by the seller? Normal everyday consumer or is he a dealer?2. Is the sale conducted at the seller’s regular place of business?3. The quantity of goods sold; what quantities are common to the business?4. Price charged – abnormally low or was it reasonable price?Market value suggests normal reasonable priceTest from 216200:A sale in the ordinary course of business includes a sale to the public at large, of the type normally made by the vendor in a particular business where the basic business dealings are carried out under normal term and consistent with general commercial practice No private sales between individualsTest from Ford Credit:Ordinary business is to be determined by a question of fact, objectively assessed, taking into consideration all circumstances which were known, or ought reasonably to have been known by the purchaserSection 30 DOES NOT require consent from the SP – only contemplates the debtor and the purchaser in assessment of ordinary course of business salesSection 30 – Buyer or Lessee of Goods(2) – A buyer/lessee of goods sold/leased in the ordinary course of business of the seller/lessor takes those goods free of any perfected/unperfected SI in them granted by the seller/lessor, whether or not the buyer/lessee knows of the existing SIUNLESS the buyer also knows that the sale constitutes a breach of the SA for the SI(3) – A buyer of goods acquired as consumer goods takes free from SIs in the goods if the buyer(a) Gave value for the interest acquired, AND(b) Bought or leased the goods w/out knowledge of the SI(4) – (3) does not apply to SI in fixture or goods over $1,000(5) – Buyer of goods takes free from SI that which is temporarily perfected, during any of the 15 days periods referred to in those section if the buyer:(a) Gave value for the interest acquired AND(b) Bought without knowledge of the SI(6) – If goods perfected under s.25 (serial numbered), the buyer takes free of SI if(a) The buyer bought without knowledge of the SI(b) The goods were not described by SN in the registration(7) – (6) applies only to goods that are equipment and that are defined in regulations as SN’d goods(8) – A sale referred to in (2), (3), (5), or (6) may be for cash, property or credit and includes delivering goods under pre-existing contract for sale, BUT DOES NOT INCLUDE transfer as security for, or in total or partial satisfaction of a money debt or past liabilityDoes s.30(2) Allow a Buyer to Take Free Only of SIs Given by the Seller?RBC v. Wheaton Pontiac Buick Cadillac GMC, 1990 SKQBA sold car to B – not in ordinary course of business, and it was subject to a SI with RBC by AB sold car to C, who sold to D in the ordinary course of business;A defaulted on payments to RBC and RBC went and seized the car from DIssue:Does s.30(2) protect consumers in the ordinary course of business against SIs in the collateral NOT offered by the seller in the transaction?Held:NO. – RBC retains perfected SI in the collateral because it was never cut offReasons:There’s a gap in the legislation here. S.30(2) only offers protection against SIs offered by the seller who then sells to the buyer in the ordinary course of businessComments:D can still recover her interest even though seized by RBC – she has a claim against the dealer who offered the car free and clear of encumbrances. Likely C has a claim against B in the same nature, and B against A – who’s broke…What Constitutes the Ordinary Course of Business?Fairline Boats v. Leger, 1980 ONSCP sold Boat to B; B sold boat to DP took possession of the boat after B’s default; D subsequently ‘illegally’ took possession backIssue:Did D purchase the boat from B in the ordinary course of business?Held:No. This was not a sale conducted in the ordinary course of businessReasons:Purpose of the section is to permit commerce where majority of inventory in society is financedMust consider all the circumstances of the sale – Question of Fact:1. Is the transaction one that is normally entered into by the seller? Normal everyday consumer or is he a dealer?2. Is the sale conducted at the seller’s regular place of business?3. The quantity of goods sold; what quantities are common to the business?4. Price charged – abnormally low or was it reasonable price?Market value suggests normal reasonable priceHere, abnormal sale, suspicious, super cheapWho is a Buyer in the Ordinary Course of Business?RBC v. 216200 Alberta, 1986 SKCAIssue:Whether title transfer is required, or possession for the sale to have occurredWho is a buyer in the ordinary course of business?Held:Title passes when the parties intend for it to pass, at the time K is formedA sale in the ordinary course of business includes a sale to the public at large, of the type normally made by the vendor in a particular business where the basic business dealings are carried out under normal term and consistent with general commercial practice No private sales between individualsShould the Sale of Goods Act Determine When There is a Sale?Spittlehouse v. Northshore Marine, 1994 ONCAP paid for 90% of boat purchased from D – K said title to pass at full paymentT has perfected SI in the boat granted by DIssue:Whether P was a buyer and D was a seller in the ordinary course of businessHeld:They were buyers and sellers in the ordinary course of business – take priority over T’s SIReasons:Sale of Goods Act is not relevantHere there was a clear agreement to sell/purchase – sufficient to secure “sale” under PPSAOnce paid, P may take advantage of PPSA to take priority over the perfected SI of TNotes:Technically, this sale is really an SI – so for the purposes of PPSA, title is irrelevant for competition between SIs – They had possession, it was perfected.Recall:s.28(1) – allows for disposal of inventory free of SI where explicitly/impliedly licenced by SPs.30(2) – Cut-off rule for sales made in the ordinary course of businesss.30(8) – Exceptions to cut-off rules – limited against transfers in partial satisfaction of pre-existing money debt or past liabilityWhat is the Relationship Between s.30(2) and s.28(1)? Can the Parties Themselves Designate a Transaction to be in the Ordinary Course of Business?Ford Motor Credit v. Centre Motors of Brampton, 1982 ONHCT1: Vehicles purchased by M and financed by PT2: M sold cars to Defendant (D)T3: D sold the car for proceedsP claims that M sold collateral without consent as requiredIssue:Whether sales to D were in the ordinary course of business of MHeld:Cars were sold in ordinary course of business and therefore D took them free of P’s SIReasons:Section 28(1) focuses on arrangements between the SP and the DebtorSection 30(2) focuses on the dealings between the debtor and purchaser – blind to the relations of the SP and the DebtorSection 28 is subject to the rest of the Act, section 30 is not30 does not require consent from the SPOrdinary business is to be determined by a question of fact, objectively assessed, taking into consideration all circumstances which were known, or ought reasonably to have been known by the purchaserNotes: Risk is placed on lenders of the occasional dishonest dealerGeneral Priority RulesCompeting SIs are determined based on priorityIn some cases, one party’s SI extinguishes (detaches) the SI of another – uses all the valueFiling of a f/s does not provide active notice, but does initiate the priority sequenceActual knowledge is not required generally – unless specifically mentioned by PPSACan Actual Notice of a SI Affect the Priorities as Established by PPSA?Robert Simpson v. Shadlock, 1981 ON HCJT1: R sold D chattels for installation at motel property – notice given to S of R’s SIT2: D mortgaged the motel with S – S registered under PPSA for chattels; then R registeredIssue:Is priority determined by order of registration, or whether actual notice may defeat a claimHeld:Priority belongs to the party that registered the SI – SUnless notice is expressly required under the Act, it is generally irrelevantDefault Priority Rule – s. 35(1):(1) Where no other priority rule applies:(a) Among perfected SIs in the same collateral, priority is determined in the following order:(i) The registration of a f/s without regard to the date of attachment of the SI;(ii) Possession of the collateral in accordance with s.24, w/out regard to attachment(iii) Perfection under s. 5 and 7 (conflicts), 26 (temp), 29 (SI in returns/repossess), 78(b) a perfected SI has priority over an unperfected SI; AND(c) priority among unperfected SIs is determined by the order of attachment of the SIs(2) For the purposes of (1), a continuously perfected SI must be treated at all times as perfected by the method by which it was originally perfectedOther Residual Priority Rules in s. 35:Proceeds:(3) The time of registration, possession or perfection of a SI in original collateral is also the time of registration, possession, or perfection of its proceedsNOTE: s.31(6) gives CPPs priority over SIs in CP as proceedsSerial Numbered Goods:(4) SIs in equipment that are serial numbered goods, is not perfected for the purposes of (1), (7) or (8) unless the f/s contains a description of the goods by serial numberNOTE: not unperfected for unsecured creditors, but would lose against other perfected SIsFuture Advances:(5) Subject to (6), the priority under (1) applies to all advances, including future advancesAgainst Lawful Seizures and Judgement Creditors(6) A perfected SI has priority over the persons referred to in s.20(a) only to the extent of(a) Advances made before the interests of the persons arise or before seizure(b) Advances made before SP acquires knowledge of: (i) interests of the persons, (ii) seizure of the collateral, OR (iii) order giving the sheriff right to collateral(c) Advances made in accordance with: (i) statutory requirements OR ii legally binding obligation to a person other than the debtor entered into by the SP before the SP acquired knowledge in (b)(d) Reasonable costs and expenses incurred by SP for protection, preservation or repair of collateral, AND(e) The amount of taxes paid by the SP under section 27(1) of the Manufactured Home ActNote: See example in Protection for TiBs and JCsLapse or Discharge of Registration:(7) Where SI lapses from failure to renew registration or if registration discharged w/out auth or in error, and SP re-registers SI not later than 30 days after lapse/discharge, the priority status of the SI in relation to competing perfected SIs is not affected;EXCEPT to the extent that competing SI secures advances made during the lapse/discharge periodException Eg: where subordinate SP makes additional distinct SI during the lapse period, the prior SP loses out because the subordinate SP is the innocent party thinking it held prioritySubordinate SP takes priority over the amount of the subsequent SIException Eg: Where another creditor registers a f/s during the lapse period against the same collateral, they would have no idea have the prior SI, but they are not protected by this section!S.35(7) only contemplates creditors that were immediately subordinate prior to lapseTransfer of Collateral to New Debtor:(8) If debtor transfers interest in collateral, which at the time of transfer, is subject to a perfected SI, that SI has priority over any other security interest granted by the transferee before the transferEXCEPT to the extent that the SI granted by the transferee secures advances made (a) After the expiry of 15 days from the day the SP had knowledge of the information required to register a f/s disclosing the transferee as the new debtor, AND(b) Before the SP referred to in (a) amends the registration to disclose the new debtor OR takes possession of the collateralUnless Creditor’s Interest is Cut Off:(9) Subsection (8) does not apply if the transferee acquires the debtor’s interest free from the SIExample: Two-Debtor Problem w/ s.35(1) Leading into s.35(8)Recall: section 35 does not state if it applies to SIs given by different debtors – residual priority thoughT1: D1 gives SI in apaap to Bank;T3: D2 gives SI in boiler to CU; CU registers f/sT3: D2 sells boiler to D1;PROBLEM: when D1 and D2 default, who gets the boiler? Which rules govern?Case 1: Where D1 has Bank’s permission to sell the boilerS.28(1) – Bank’s SI is cut-off and CU gets the boilerCase 2: Where D1 is in the business of selling boilers, and this was in ordinary course of businessS.30(2) – Bank is cut-off and CU gets the boilerCase 3: Where Bank failed to register f/s; and D2 is a bona fide purchaser for valueS.20(c) – Unperfected SI subordinate to bona fide purchaser for valueCase 4: Where Bank registered f/s at T1; Bank did not auth sale; Not done in ordinary businessNOTING SPECIFICALLY GOVERNS THIS SCENARIOS.35(1) – two perfected SIs, determined next by date of registration, so Bank would winDoesn’t specifically say it works for 2-Ds, but other sections limited to 1-DAlso, if this wasn’t the result, we wouldn’t need s.35(8)Puts CU in a risky position – search D’s name, would not find out about D1Can protect themselves by requesting info of where the boiler was from and checking that name in the registry as wellS.35(8) – reverses the outcome and would give the boiler to CU – more fair, as they gave credit for that SI, where as the Bank had given credit without expectation of SI in the boilerBecause the advance was given to secure the new SI.T4: CU discovers the sale of the BoilerHere, CU can register a financing change statement, where now the debtor is D2If they don’t do this within 15 days of their knowledge of the transfer, they bare the risk of losing the interest – s.35(8(a) gives grace period for f/c/s registrationT1-2: Bank discovers the boiler, and on its strength, advances another $10k to D1If the CU doesn’t register the change after knowing about it (within 15 days), Bank gets priority up to the amount of its additional advancePriority Between Unperfected Security InterestsS.35(1)(c) – priority of unperfected SIs is based on the date of attachmentHow is Priority Established as Between Unperfected Security Interests?Ontario Dairy Cow Leasing v. Ontario Milk Marketing Board, 1993 ONCABoth parties had unperfected SIs in D’s assets, Bother were attached at the same timeHeld:Parties are entitled to share rateably in the funds – pro rataComments:Criticized – no set authority in BCCL dictates the way forward because s.35(1) doesn’t applyBank would likely win because they had their interest before the other partyPurchase Money Security Interest (PMSI)PMSI occurs where the SP’s interest is in collateral that the debtor attained using the creditor’s money or creditTest in PettyJohn:1. Lender has taken a SI in the property2. Lender has given value for the purpose of enabling the debtor to acquire rights in prop3. Value has been used to acquire those rightsQuestion of fact – when a D acquires money with the purpose of acquiring item, and does so.Benefit 1: PMSIs take priority over other SIs, when they are registered within 15 days of the debtor taking possession of the collateral – s.34Benefit 2: PMSI may avoid TiB if registration in collateral w/in 15 days of D’s bankruptcyBenefit 3: PMSI in fixtures/accessions/crops gets priority over JC, where notice is filedRationale: The ability for the D to purchase more assets increases the overall worth of the D’s assets – which benefits everyonePPSA takes the position that those that help the debtor increase their asset base, should get a priority position for doing soThe ability to borrow is cruicial to the D to acquire more assets, without the PMSI, there would be no reason for subsequent lenders to lend the money if losing to prior SPsSection 34 - PMSICollateral and Proceeds – Non-Inventory:Subject to 28 (proceeds), a PMSI inCollateral or its proceeds, other than intangibles or inventory, that is perfected no later than 15 days after the day the D obtains possession of the collateral ORAn intangible or it’s proceeds that is perfected no later than 15 days after attachmentHas priority over any other SI in the same collateral given by the same debtorCollateral and Proceeds – Inventory:Subject to (5) and 28, a PMSI in inventory or its proceeds has priority over any other SI in the same collateral given by the same D if:The PMSI in the inventory is perfected at the time D obtains possession of the collateral,The SP gives a notice to any other SP who has prior registered f/s containing description that includes the same item/kind of collateral,The SP gives notice to any other party who has prior registered a SA providing for a prior SI on the same item or kind of collateral,Notice in (b) states that the person giving notice expects to acquire PMSI in inventory and describes the inventory by item/kind, ANDNotice is given before D obtains possession of the collateralNotice mailing instructionsPMSI-Vender Over PMSI-LenderSubject to 28, a PMSI in goods and its proceeds taken by a seller, lessor, or consignor of the collateral, that is perfectedFor inventory, at the date the debtor obtains possession of the collateral andFor non-inventory, not later than 15 days after the debtor obtains possession in collateralHas priority over any other PMSI in the same collateral given by the same debtorNon-proceeds SI in Accounts for new Value Over Proceeds of Inventory PMSI in AccountsA non-proceeds SI in accounts given for new value has priority over a PMSI in the accounts as proceeds of inventory if a f/s relating to the SI in accounts is registered beforeThe PMSI is perfected ORA f/s relating to it is registeredNon-Proceeds PMSI over Proceeds PMSIA non-proceeds PMSI has priority over a PMSI in the same collateral as proceeds if the non-proceeds PMSI:Where inventory, is perfected at the date the debtor obtains possession of collateralNon-inventory, is perfected no later than 15 days after debtor obtains possession of colWhat Does it Mean to Enable the Debtor to Acquire Rights in the Collateral?Agricultural Credit Corp of Sask v. PettyJohn, 1991 SK CAInterim financing – short-term borrwed funds to pay for Cows and then paid down loan to ACCSIssue:Whether ACCS obtained a PMSI in the original cattle and then the new cattle as wellHeld:There was a PMSI in the cattle – didn’t give money per se, but did give binding agreement to give the moneyTest for PMSI – 3 steps:1. Lender has taken a SI in the property2. Lender has given value for the purpose of enabling the debtor to acquire rights in prop3. Value has been used to acquire those rightsValue – broad terms – any consideration to support simple K + antecedent debt or forbearanceHere PJ used the money from ACCS to pay down financing on cows – there was always a view that ACCS loan would be for the cowsCan Providing Funds to Allow the D to Change the Nature of a Right to Property Constitute Allowing the D to “acquire rights” in the Property?Unisource Canada v. Laurentian Bank, 2000 OND had printing press, bought it from RBC for $ and entered into leasing agreement to eventually own it in the future; U was D’s other creditor that had a SI in apaapPriorities would be RBC in press and U in everything elseL refinanced the press, and paid out the loan to RBC, takes SI in the press and registers; When RBC’s loan is discharged, title passes to D;So now U seems to have priority over LD defaults; L claims PMSI in pressHeld:Yes, L has priority as a PMSI holder in the press because D got more rightsSubstance over form: even though L did not call it a PMSI, it was because it allowed D to get more rights in the collateral than they already had (title versus use/possession)Notes:This relies on title to describe acquisition of rights, even though D was in the same position as before L paid off the loanL should have had the interest assigned – or subordination agreementHow Extensive is a PMSI? – Not followed – largely criticized – old lawChrysler Credit Canada v. Royal Bank of Canada, 1986, SKCARBC had general debenture and assignment of book debts with D, which was subordinate to C’s financing of D’s purchase of new cars from manufacturerAfter PPSA came into force, RBC registered SI in all D’s inventory, 5 days later, C registeredC also filed a notice to RBC saying they were PMSIRemaining inventory upon D’s bankruptcy were in three categories (vehicles):1. Purchased by D, but not been repaid to C2. Loaned vehicles purchased by D and repaid to C3. Those incapable of being linked to the sale of new carsIssue:Does C have a PMSI over all inventory no mater the amount of their debt, including proceeds for the paid off vehicles?Held:C has priority to 1 and 2, but RBC has priority to 3Reasons:1: the moment it was taken by the dealer, a trade linked to the sale of a new car constitutes proceeds, and C enjoys the same PMSI priority in relation to that trade2: agreement shows intention for C’s SI to attach to the whole of the inventory; these trades were used to secure the revolving LOC from C3: No PMSI, no specific link can be traced from C’s funds – RBC had first registered SICriticism:Case turns on the agreement between the parties, PMSIs are not a matter of agreementsThe method of financing here shows a distinct PMSI in each vehicle, as purchasedHad they changed their method of financing and registration to reflect PMSI in the whole inventory, they would deserve the priority granted to themWhen Does the Grace Period to Perfect for Superpriority Begin?McLeod and Co v. Price Waterhouse, 1992 SKQBT1: M registered f/s in D’s goodsT2: Ford registered f/s for PMSI in a Ford Tractor (held by D)Issue:Ford did not perfect PMSI within 15 days of D’s acquisition of collateralHeld:There is a perfected PMSI that takes priority over the other SIsReasons:D was originally in possession of collateral as a lessee; they were not a debtor until received credit from FordFord didn’t accept the assignment of sellor’s interest UNTIL it provided the credit at T2So filing was done in satisfactory time-frameSubordination Agreements Priorities can be re-arranged between SPs using Ks called subordination agreementsPPSA allows for agreements to be made from senior SPs to the D - Prior SP MUST agreePurpose: To help encourage junior SPs lend to the DPolicy: encourages commercial lending; allows growth of asset base for the DSection 40 – Subordination or Postponement of Rights to Security InterestsSP may subordinate their SI to any other interest and the subordination is effective according to terms between the parties AND may be enforced by 3P’s who benefit from subordinationS. 45 (6): When SP has subordinated interest to the interest of 3P, a financing change statement may be registered to disclose the subordination at any time during the period that the registration of the subordinated interest is effective.Note: not required, but it’s available to provide notice of the subordination if wantedWhat Constitutes a Subordination Agreement and Who Can Enforce It?Royal Bank v. Gabriel of Canada, 1992 ON DivPurchase and Sales Agreement clearly contemplated and stated that the original owner would postpone priority to the purchaser’s bank via a subordination clause To allow the sale to happen, in both parties best interest to make that happenErrors in registration caused Vendor to register first, now claims priority over 3PHeld:Vendor had subordinated its priority to Bank through written agreement – valid3P’s to a subordination agreement can enforce on its termsHow Strictly Will Subordination Agreements be Interpreted?Transamerica Commercial Finance v. Imperial TV * Stereo Centre, 1994 ABQBT1: I gave CU a debenture over property and assets – registeredSubordination clause: allowed I to enter into financial agreements under circumstancesT2: I indebted to T who lent money for Inventory purchase – PMSI registered – no notice to CUIssue:Is the subordination clause sufficient to give priority to T – if it applies at all?Held:The subordination clause is capable of conferring priority on T if it were applicable to them, but here, it is not – they are not a “banker” of I CU retains priorityNotes: Had T provided notice for the PMSI, they perhaps would have had priority that waySpecific Competition SectionsCompetition w/ Interest Holders Given After Transfers of CollateralSection 51 – Chang of Debtor / Transfer Debtor’s CollateralDeals with consensual transfer not release of SIHere the creditor has knowledge of the transfer right from the start, so they should register f/c/sDeals with the change in debtor’s nameWhere unknown (not consented), s.51 is only triggered when knowledge of transfer occurss.51(1)(a and b):If, within 15 days of the transfer, there is no f/c/s registered, then any sale or perfected SI that arises between the end of that period and the date of registration of the f/c/s gets prioritys.51(1)(c):If SI arises within the 15 day period, there’s a “wait and see”If the original creditor registers f/c/s within the 15 day period, the original SP keeps priority positionIf they miss the 15 day mark, then the intervening SP takes priority over the original SPs.30(5): (recall)If there is a sale within the temporary perfected 15 day period, if no f/c/s statement was made before the purchase, the buyer takes the collateral free of SP’s interest, so long as buyer did not know of the original SI and gave value for the transferI think there’s a PMSI exceptions.33: Even if SA forbids it, the debtor has the right to transfer rights in collateralDoes s.51(2)(b) Apply to Subordinate a SPs Interest to that of a Trustee in Bankruptcy?Orion Truck Centre Ltd (re), 2003 BCSCO changed their name; When C found out about change, they didn’t file a f/c/sAfter TiB was appointed, then C filed a f/c/sIssue:Whether it was necessary for perfected SP to file f/c/s relating to change in name to maintain priority over TiBsHeld:TiB will have priority interest over the previously perfected SI of the CreditorReasons:Policy – TiB at no point relies on registry for notice; the purposes of the exceptions in s51 are to maintain fairness for purchasers/creditors that could have searched the registry.S.51(2) is clear in that it requires a SP to amend registration within 15 days of the time they receive knowledge of the new debtor information – must be followedGiffen – TiB gets a possessory interest in D’s goods upon bankruptcyS.20 deals with subordination of an unperfected SI against a TiBCompetition w/ Transferees of Negotiable or Quasi-Negotiable Collateral or Intangible CollateralThese are generally transferred hand-to-handInstruments – bills, cheques, etcChattel paper interests operate like assignments of accountsSection 31 – Protection of Transferees of Negotiable and Quasi-Negotiable CollateralA holder of money has priority over other interests ifNo knowledge of the SI ORA holder for value with or without knowledge of the SICheque payments for debts – payment via instrument made by the D and delivered in payment of a debt owing to a creditor, has priority over other perfected SIs, whether or not the creditor had knowledge of the existing SI Purchaser of an instrument has priority over a perfected SIPurchaser gave value for the instrumentHad no knowledge of the SI ANDPurchaser takes possession of the instrumentHolder of negotiable document of title has priority over SI that is temporarily perfected, where gave value AND acquired the doc without knowledge of SIKnowledge for (3) and (4) must be awareness of the SA, as well as that transfer of the interest is in violation of the agreement – (this means cheques are usually good to transfer)When is an Instrument Acquired Without Notice of a SI in it?Indian Head Credit Union v. Andrew; RBC; Garnishee, 1992 SKCAA had SA with SI for his livestock and proceeds to CUThe heard was infected and destroyed – received insurance payment for the heardCheque was only issued to Andrews – not the normal procedure, usually also to CUCU wants the payout money as proceeds of their SIA went to RBC and deposited cheque – bought a term deposit, opens an LOC and secures it against the term-depositIssue:Does RBC’s interest in the term deposit take priority over the prior perfected SI of CU?Held:CU’s priority maintained – the term deposit belongs to them in satisfaction of SI in proceedsReasons:S31(1) – doesn’t apply, there was no moneyS31(2) – doesn’t apply, there was no original debt to RBCS31(3) – RBC attempts to claim that they are a purchaser of the instrument for new valueNo ruling as to whether or not they are purchasers, there was enough knowledge that the money was likely subject to an SA, so wouldn’t have been satisfied either wayChattel Paper and Accounts ReceivableSection 41 – Assignments of Intangibles or Chattel PaperAccount D is a person obligated under an intangible (Account receivable) or Chattel PaperThe rights of an assignee of an intangible/CP are subject to:The terms of the k between the assignor and the D, and any defence or claim arising out of the k ANDAny other defence or claim of the D against the assignor that accrues before the D has knowledge of the assignmentNOTE: (2)(a) – implies that debts can be “set-off”A modification of a K made in good faith, and is reasonable within commercial standards, is effective against the assignee(7) If intangible/CP is assigned, the D may make payments under the K to the assignor(a) Before the D receives a notice that states (i) that the amount payable under the K has been assigned to the assignee AND (ii) identifies the K, OR(b) After (i) the D requests proof of the assignment and (ii) the assignee fails to furnish the proof within 15 days from the date of the request(9) a K term between D and assignor that prohibits assignment of the account/CP for money, is binding on the assignor, but only to the extent of making the assignor liable in damages for breach of K, and is unenforceable against 3PsChattel Paper Security InterestsMeans one or more writings that evidence both a monetary obligation and a security interest in specific goods – generally perfected by possession of the CP itselfA sells car to B, B gives A a promise to pay and a SI in the careChattel Paper = promise to pay + SI in the collateralNot Chattel Paper:A sells car to B, B owes A the money – that’s an account receivableA sells car to B, B gives A a promissory note for the value – this is an instrumentExample: SI Review for Chattel PaperT1: A (car-dealer) borrows money from B; A gives SI in inventory + proceeds to BT2: A sells car to D monetary obligation + SI in the car = CPT3: A sells the CP to FinCo, for a little less than its worthThis is actually transferred by way of assignmentThis is a sale of a SI as covered by the Act where FinCo is the CP Purchaser (CPP)A CPP takes possession of the CP for perfectionNOTE: s.55 remedies do not apply to the transfer of CPB has an SI in the car itself, and now there is also a new SI in the CP itselfThe CPP has bought the rights to receive B’s car paymentsThey also take the SI upon default of the paymentSection 31(6) – Priority of the Chattel Paper Purchaser(6) CPP who takes possession of the chattel paper in the ordinary course of business and for new value has priority over any SI in it that(a) Was perfected under section 25, if the purchaser does not know at the time that the CP is subject to a SI, (perfection by registration of f/s), OR(b) Has attached to proceeds of inventory under s28, whether or not with knowledge (proceeds)Policy – Provides for immediate cash-flow to the D, which benefits all creditors to DRULE: CPP must perfect SI in the CP and the SI in the underlying collateral to be protected against TiBAs noted in s.20(b) PPSA – protection of TiB against unperfected SPsMost common way to perfect is to take possession of the CP – only perfects the SI in CPExample: Priority of Chattel Paper and CPPsT1: S sells car to P (S is a car dealer); P gives S a promise to pay + SI in the car = CPT2: S “sells” (assigns) the CP to FinCo for cash2 SIs both held by FinCo: The SI in the car; and the SI in the CPT3a: P goes bankruptIf SI in car has not been perfected, then P’s TiB can seize the car; - s.20(b)Therefore FinCo must perfect SI in the car with f/s SN registeredT3b: S goes bankruptS’s TiB will seize the CP if FinCo’s SI is not perfected – s.20(b)Therefore the CP SI must also be perfected by FinCo – possession is the most commonAssume that prior to T2, S has a LOC with B – SI in apaap AND S has inventory financer SI in inventory and proceedsWould leave 3 SIs in the CP (B, IF and CPP)S.31(6)(a): If NO knowledge of the other SIs, then FinCo has priorityRegardless of knowledge, FinCo has priority over IF, because they have an interest as CPP as proceeds – S.31(6)(b)NOTE: See Also Example with CPP in Returns and Repossessed GoodsAccounts Receivable Security InterestsBare monetary obligation, based around selling debt in an open basis2 Ways to Create SI in Accounts Receivable: where A owes money to B (acct)B has a LOC from Bank, who has SI in apaap (including accts)Where B defaults, Bank gives notice to acct-debtor (A) to make payments to the Bank directly instead of BB “sells” the acct creating an SI in the same way CP doesThis must be perfected, cannot be perfected by Possession, so must be registeredSection 34(5) Priority Rule for Accts Receivable – w/in PMSI SectionA non-proceeds SI in accounts given for new value has priority over a PMSI in the accounts as proceeds of inventory if a f/s relating to the SI in accounts is registered before:(a) the PMSI is perfected, OR(b) a f/s relating to it is registeredNOTE: so basically, prior perfected SIs in accounts offer an exception to PMSI superpriorityCan a SP with a Second Priority to an Account take Payment from the Account D Free of the Interest of the Senior SP?Canadian Western Bank v. Gescan, 1991 ABQBG gave P an assignment of book debts (SI in acct receivable) – perfectedG also owed money to D G assigned (sold) an acct over to D, in order to settle the debt to D – unperfected SIP had priority over the SI in G’s assets, so P claims D pay the sum of acct to PIssue:Does payment made to D in form of acct constitute payment by “money” for debt and therefore take priority (cut-off rule)Held:NO – there is no payment of money – P has priorityReasons:S.31 provides cut-offs for money and negotiable instruments, not the case hereHad it been a cheque, then it would have been fineEven if D had perfected and registered, still would have been subordinate to PReturned and Repossessed GoodsSection 29 – Returned and Repossessed GoodsSIs existing before Return/Repossession are ReinstatedIf D sells/leases goods subject to SI, where a buyer takes free of the interest, then the SI reattaches to the goods if:The goods are returned to the D or a transferee of CP, ANDThe obligation secured remains unpaidPriority of those Reinstated SIs is Same as they were Before Cut-off, so long as perfectedPriority between those interests remains the same as they were before the sale of the chattel, so long as they were perfectedNew SIs are Created and Given to CPPs and Account SI-holdersGives a new SI to the CPP and the account SI holderTemporary Perfection of the New SIs Created, BUT must be Perfected (f/s) w/in 15 DaysThe new SI under (3) are perfected if the CPP’s interest was perfected and the SI in the account was perfected, BUT the continuous perfection only lasts 15 days unless a f/s is registered or the chattel is taken into possession of the CPP or account SI holderCPP and Original Perfected SIs in Collateral have Priority over Account SI-holdersThe person with the SI in the account arising out of (3) is subordinate to:SI under subsection (1), that is perfected ANDAn SI of a CPP under subsection (3)CPP’s SI in Collateral has Priority over Originally Perfected SIs (w/ 31(6))CPPs SI will take priority over SIs in (1) AND SI in goods as after acquired property that reattaches on the return, seizure or repossession of goods IF the CPP would have priority under 31(6)Example: Repossession w/ NO CPP – s.29(1) and (2)T1: M gives B SI in apaap – perfectedT2: M gives Inventory Financer (IF) SI in inventory – PMSI – s.34(2) – notice given to B perfectedT3: M acquires a car in inventory IF has priority as PMSI, then BT4: M sells car to D IF and B’s SI is cut-off via s.30(2) – ordinary course of business saleD gives CP for the car to M so IF and B have SI in the CPT5: D defaults, and M repossesses the carS.29(1) – Reattaches SIs that were cut-off at the time of sale IF and BS.29(2) – If they were perfected prior to sale, they maintain same priority IF remains priorExample: Repossession with a CPP – s.29(1) – (6)T5: M sells CP to FinCo FinCo is now a CPPT6: D defaults and FinCo repossesses the care because they hold the CP, therefore they have the right to the payments and the right to repossess on defaultInventory Financer (IF): they had SI in the CP, it could be lost quite easily because:S.31(6) – perfection of the CP occurs where new value is given for possession, regardless of knowledge of the previous SI FinCo’s new value as CPP cuts IF’s SI in CPThis is because IF’s interest is a Proceeds interest in the CPB has an SI in the CP, but also knows it could be lost easilyIf B wants to keep interest in CP, it can take steps to protect itself by:Having M stamp the CP with B’s SI – provides knowledge ORThey could take possession themselvesIF cannot take the same protective steps – not available under s.31(6)Car (colatteral): B and IF both have SIs that reattach under s.29(1) IF is prior (s.29(2))S.29(3) – gives CPP an SI in the car S.29(4) – New SI must be perfected (possession) w/in 15 days of repossessionS.29(6) – FinCo gets priority over the reattached SIs under (1), provided they would have had priority under s.31(6)Result:FinCo (CPP) definitely has priority over IF – s.31(6) priority to CPP over SI in proceedsFinCo MAY have priority over B – depends on if FinCo had priority under s.31(6):If B took possession of CP or had its interest stamped on the paper B winsIf FinCo took possession of CP w/out knowledge of B’s SI FinCo winsCompetition w/ Holders of Interests in FixturesPurpose – to protect the party that relied on the collateral in giving creditFixtures do not include building materialsDoes not include heating/ac/machinery installed inside the buildgin/outsideFixtures includes:Goods where their removal would damage another part of the property, or expose it to damagePPSA gives the party who supplies the fixture a right to remove it upon defaultGR: SIs that attach in fixtures before or at the time they are affixed have priority over SIs in the landIn order to protect that priority, the SP must file notice – s.49 at the LTOSection 36 – Security Interests in FixturesPriority Sections:(2) Section applies to land as per the Land Titles ActGeneral Rule (SI attaches before affixation):(3) An SI in goods that attaches at or before the time they become fixtures has priority over claims against the goods made by a person with an interests in the landExceptions to General Rule:(4) SI referred to in (3) is subordinate to interests of:(a) Later acquired interests for value in the land AFTER goods became fixtures AND(b) Any person with a registered mortgage on the land who(i) Makes an advance on the mortgage after the goods are affixed OR(ii) Obtains an order for sale or foreclosure after goods becomes fixtureWhere SI Attaches after Affixation:(5) SI in goods that attach after goods are already fixtures are subordinate to the interests of person:(a) Has an interest in the land at the time the goods become fixtures who:(i) Has not consented to the SI(ii) has not disclaimed an interest in the goods/fixtures(iii) has not entered into an agreement under which a person is entitled to remove the goods OR(iv) is not otherwise precluded from preventing D from removing goods. OR(b) Acquires an interest in the land after the goods become fixtures if the interest is acquired w/out fraud and before notice of the SI in the goods is filed via s.49Priority Goes to JC if no notice filed of SI in fixture(6) SI in fixtures under (3) and (5) are subordinate to a JC that registers in the LTO after goods become fixtures, but before notice of the SI is filed as per s.49PMSIs in Fixtures Maintain Priority Against JCs, where notice is filed(7) JC does not have priority over PMSI in goods where a s.49 notice is filed no later than 15 days after the goods were affixed to the land Removal of Fixtures Sections:(8) Removal of goods must be exercised in a manner that causes no greater damage than is necessary(9) Allows for reimbursement for undue damage caused by the SI-holder in the removal of fixtures, for persons OTHER THAN THE DEBTOR, who have interest in the land at time of affixation(12) SPs can retain the goods for the lesser of: the amount owed OR the market value of the goods(13) The SP must serve notice to the SPs of the landHow Can the Fixtures Section Lead to Secret Liens and How are they to be Avoided?**not applicable in BC – useful for arguments only, in BC there’s a statutory provisionManning v. Furnasman, 1985 MBCAF had a k with builder to put a furnace in a new home. M bought the house from the builderBuilder didn’t pay for furnace; F maintains that they have an SI in the fixture as it attached before it became a fixture (36(3))Held:M maintains priority over the furnace – there was no SI at allReasons:Pieces had become building material throughout the houseF should have taken property security at the time it entered K and registered lien against propertyThere was no CSA – F failed to tie the builders or owners to an agreement – registration invalidIN BC:Ordinary course of business sale – SI would have been cut-off anyways – s.30(2)NOTE: See Circularity Problems for How Fixtures Section Can Cause Problems in PriorityCompetition with Holders of Interests in CropsSame application as FixturesSection 37 of the PPSA is for CropsGives SP priority over those with pre-existing SIs in the landRegistration still occurs with the LTO – failure can result in subordination to subsequent advancesCompetition with Holders of Interests in AccessionsAn accession is a smaller object affixed to a larger oneCompetition arises between the SP of the accession goods and the interest in the wholeFollow the same structure as Fixtures/Crops – but not to do with land, personal property onlySection 38 of the PPSA for AccessionsGenerally favours interests in the goods that have become an accession provided that the SI attached before affixation of the goods in questionException: owner of the whole takes out a loan against the whole, where the creditor relied on the accession as well as the whole for valueThere is no LTO to file notice here, so SP for accessions are to be registered in the PPRWhen Does the Accessions Section Apply?Kulchyski v. Shuswap Ventures, 1994 BCSCS lent D money for the purpose of purchasing tractor – loan registered for tractor, not partsD had parts attached to it that were subject to a K’s SIIssue:Does S have an enforceable SI in the attachments to the equipment?Held:S has priority over tractor, but K retains priority over the attachmentsReasons:S.38 applies only where accession goods retain their separate identityReverses the CL principle that attached goods lose their separate identityProvides system whereby parties acquiring interests in goods can be forewarned of the existence of accessioned good interestsHere, attachments are not comingledWhen Would a Lessor of the Whole “Acquire the Right to Retain the Whole in Satisfaction of the Obligation Secured” so as to come within s.38(3)(b)(ii)Pratt and Witney v. Ellis Air, 2002 BCSCBIT1: E leased a helicopter to D with a registered SI – f/s filed with respect to the helicopterT2: P leased an engine to D – installed in the helicopter – became accessionT3: P made CSA with D to sell the engine to the D – not perfected via registrationT4: E repossessed the helicopter with accessions – returned remaining value of engine to DT5: D filed bankruptcy, and then 15 days later, P filed f/s and notice to E Issue:Which of the two SIs takes priority?Held:P’s SI in the engine has priority over E’s SI in the wholeReasons:Exception allows subordination of accession Si to an SI holder of the whole, where the SP acquires the right to retain the whole in satisfaction of the obligation secured, and where they don’t have knowledge of the accession SIQuestion becomes one of time of attachment:P’s Si in engine attached before it became an accession, E did not acquire an interest in the helicopter at that point, they already had the interest from beforeNotes:Shouldn’t E at least have priority over P for the amount they credited for the used portion of the engine (if not more)? – this was subsequent advance w/out registration of P’s SICircular PriorityWhere R1 gives A priority over B; R2 gives B priority over C and R3 gives C priority over AMay occur with fixtures and in lapse registration rulesThe PPSA does not describe how to sort this out, so courts look for the solution that works best with regard to the reasonable expectations of the parties involvedHow is a Circularity Problem to be Resolved?How can the Rules in s.36 (fixtures) Lead to Circular Prirority?GMS Securities v. Rich-Wood Kitchens, 1995 ONT1: Land purchased and mortgaged with National TrustT2: RW has SI in cabinets and then they become fixtures – under s.36(3) RW has priorityT3: 3rd mortgage to GMS – registered without notice of RW’s interest in the cabinetsS.36(4)(a) – RW is subordinate to GMS, who has acquired SI in the land with the fixtures for value without fraud and before notice of the SI filed under s.49BUT, LTA provides priority to first mortgage! – CIRCULARITY PROBLEMT4: RW registers their SI in the cabinetsT5: Property is sold by NTRW – priority over NT for fixtures; NT received priority over GMS through LTA; BUT GMS has priority over RW for the fixturesHeld:1st: NT for the amount of heir last advance (made after the fixtures attached, not in facts)2nd: NT balance of the mortgage, from which RW’s remaining value under SI is to be paidThis way, RW gets its value after the subsequent NT advance3rd: GMS for the amount of their mortgageGMS always knew it would be subordinate to NT, and here they are not effected by RW4th: NT in the amount of RW’s claimThis amount should have been prior to GMS, but GMS was prior to RW’s amount, so this protects their expectation; where NT’s original expectation was for the property without the cabinets anyways – still a loss, but least damage to the parties overallNotes:No way to prioritize without offending at least one partyHad RW registered in LTO promptly, then GMS would have been subordinate to both, no problem with circularity would have aroseThis is odd, because RW still is protected as prior to GMS in the result, NT suffersCompetition with Other Lien HoldersLien is an interests in property that a person has because that person is owed something by the person who has the rights to the propertyRepair work unpaid / Distress for rent are examplesSection 32 – Priority of Liens:A lien on goods that arises as a result of the provision, in the ordinary course of business, or materials or services in respect of the goods, has priority over perfected/unperfected SIUNLESS the lien arises under an enactment that gives priority to the SIDefault and RemediesNOTE: s.55 does not apply to deemed SIs – s.3NOTE: section 68 – duty to act in good faith and in a commercially reasonable mannerMarshallingPrinciple: Where the senior creditor is over secured, and there is a junior creditor with SI in part of the collateral that the senior creditor has interest in, then the senior creditor must look to realization from the collateral in order of realization that most probably protects the junior, lesser-secured creditorEffect: Court may order marshalling so that subordinate creditors are able to realize on their SIs without it negatively impacting the senior creditor. Occurs on approval by the court after application by a subordinate SPLimitation: Cannot order marshalling to the prejudice of a 3PExample: MarshallingM1 (75k); M2 (50k) B has SI over both of these for a total of $100kCU has SI for $25k in M1If court orders Marshalling (occurs upon CU’s application) then:B would sell M2 and recover $50k first, then M1 for $50k – leaves $25k in M1Where B cannot easily get to M2, they’ll sell M1 first and take $75k, then sell M2 for 25kBUT, B must subrogate interest in M2 to CUSO, CU in effect is given a $25k charge on M2Works out to basically the same result as in (a.)Cannot Order Marshalling to Prejudice of a 3P:FinCo has a SI of $25k in M2If B goes to M1 or M2 first, they are wiping out the interest of either FinCo or CUB may be required to take its interests from the two properties in ratio of their worthHere: 60k from M1 and 40k from M2 (3:2 ratio)DefaultWhere D does not meet their obligations under SANot just non-payment, but maintenance of particular financial status – default under other SA etc.SPs need not realize on security if they don’t want toOptions: 1) seize and sell 2) Voluntary foreclosure3) ignore collateral and sue for debt. Get an order and then seize any asset and sell. Why: Debtor may have other assets more valuable and more easily realizable4) accept surrender of CG collateral from debtor s.67(2)Remedies – Sections 55 and 56:Generally occur in the context of insolvency and bankruptcyRemedies can be set out in SA or can come from the PPSA:Collection of payments under intangibles/chattel paperSeizure of collateralInstall a receiver to operate the businessSue the D for any amount owed (same as unsecured)SP and D can make out their own remedies in their SA, but where remedies are close to those provided in the PPSA, the court will be vigilant to ensure that the parties do not attempt to contract out of the procedural protections for the D (Andres and Trtochie)Section 56 – Rights and RemediesIf D is in default under SA,Except as provided in (3), the SP has against the D onlyThe rights and remedies provided in the SAThe rights, remedies and obligations provided in this Part and s.36-38, ANDWhen the SP is in possession or control of the collateral, the rights, remedies and obligations provided in s.17 ANDThe D has against the SP the rights and remedies provided in the SA, those provided by any other statute consistent with this Act, and the rights and remedies provided in this Part and s.17Limits (2): cannot waive or vary rights of the debtor whose property being seized unless Act saysSection 17 – Rights and Obligations of SPs in Possession of Collateral(2) SP must use reasonable care in the custody and preservation of collateral – cannot be waived!(3) Unless otherwise agreed, if collateral is in the possession of the SP: can be waived!(a) Reasonable expenses – can be charged to the D(b) Risk of loss is generally on the D, provided no negligence on the SP(c) SP can keep additional security, dividends, proceeds, but must apply those against the D’s loan(d) SP must keep the collateral identifiable, but fungible collateral may be commingledProvision of General NoticeGenerally, there is an acceleration clause in an SARULES: SCC – Lister – Reasonable amount of time to pay was required factors:1. Whether the C faces an increased risk of losing money or security2. Whether the D has a reasonable prospect of refinancing3. Whether the D has been dishonest in any wayBankruptcy and Insolvency Act – s.243/244If the D is insolvent before a C seizes collateral, they must give 10 days notice, at which point they can seize the collateralInsolvency test:First test: D liabilities exceed their assetsSecond test: D is unable to meet its liabilities as they fall dueIf either test is met, they are technically insolvent Since this is so common, usually there’s a minimum of 10 days noticeS.16 PPSA – if SA provides that a SP may accelerate payment where the SP feels insecure, the provision must be interpreted such that the SP has the right to accelerate only where the SP has good faith belief, and commercially reasonable grounds to believe that the payment is or will be impairedSee Waldron belowSection 68(1) – Preliminary Notice from CLBefore proceeding to remedies relating to collateral, courts have imposed a notice requirement Intended to give the D a last chance to meet obligationsWhat Notice Must the SP Give Before Seizing Collateral?Waldron v. RBC, 1991 BCCARBC seized goods from W after defaultHeld:Reasonable notice in the given circumstances are requiredLister: test above.Where there is no reasonable ground for thinking that the D is dishonest, and the security is not an immediate risk, the D should have a few days to try to obtain alternate financing before the seizure takes placeD should be informed as to how many days they haveReceivers and Receiver Managers – Sections 64, 65, 66Some SAs give SP right to appoint receiver upon default, if not, can be applied from courtIntended to operate the business to facilitate its winding down or to put it back on its feetReceiver:Just focused on winding down and collecting repayment of the debtReceiver Manager:Evaluates the business, and may start to manage its operations, if they get back up to speed, then the debt is repaid and the company can be returned to the original owner2 Ways to Appoint a Receiver / Receiver Manager:Pursuant to a SACourt applicationSection 64 – Appointment and Qualifications of ReceiversYou can provide for the appointment of a receiver in your SA – generally the GSA will lay out the powers/obligations – must be licenced receiver under Bankruptcy ActPersons who are disqualified as receivers either by SA or Court:Under 18Incapable of managing own affairsCorporation that is not specifically allowedUndisharged bankruptPersons who have close relationships with the companyTrustee under a trust indenture to which the D is partyConvicted of an offence involving fraudSection 65 – Obligations of ReceiversReceiver must:Put notice in a local paperTake into custody or control of the collateral in accordance with the SA or order providing for the appointment of the receiverOpen and maintain one or more accountsKeep records of all receipts/expendituresPrepare monthly summariesIndicatedSection 66 – Court Supervision of Receiverships and Exemption from ComplianceOn application, court may do one or more of a range of options in managing receivers:Appoint a receiverRemove, replace, discharge receiverGive direction on any matter relating to duties of receiverApprove the accounts and fix the remuneration of a receiverDespite SA, make an order requiring a receiver toMake good any default in connection with the receiver’s custody, management or disposition of collateral in other property of D ORCorrect any failure to comply with this PartAppoint the jurisdiction that the court has over receivers appointed by the courtIn What Circumstances will a Court Appoint a Receiver?RBC v. White Cross Properties, 1984 SKQBThe court should only make such appointment where it is shown to be necessary for the receiver and manager to more efficiently carry out its work and dutiesHere, the appointment was being sought to dissuade other Cs from looking into actionsRBC must establish that ordinary legal remedies are defective, they have not done thatSeizure and SaleAny SP can seize collateral regardless of priorityRight to seizes.58: Right to seizeDoes not need to expressly written in SA(2): right to take possession unless SA says you cannotitems you cannot move: notionally seize and leave on sites.58(3): limitations on consumer assetsif consumer goods and 2/3 paid, cannot seizes.17: SP that has taken possession now has responsibility: reasonable care, custody and preservation of personal property that cannot be waived (3): Rights of SPreasonable expenses can be charged to debtor ie. perishablesrisk of loss is on the debtorSP can keep additional security ie dividends (Young) but must be applied to debtOnce seizedDispose (s.59)- collect debt from proceeds and disburse (s.60), sue for deficiency (if not CG)Take collateral in satisfaction of debt s.61- called “voluntary foreclosure”Voluntary foreclosureValue in collateral close to value of the debt or creditor has special useThe D can be forced to foreclose, D can object, but if not, C can take the collateral in full satisfaction of their loan – SP takes the property free of interest from D or subordinatess.61: provides process where C can take collateral in place of debt(1) SP may make proposal and must give notice to Jr, D, interest holder(2) Gives right to give notice of objection within 15 days – if objection, then collateral is to be disposed of via s59.(3) no notice of objection w/in 15 days can take. (7) in the case of an objection, C can apply to court to show objection defective ie less than debt owed OR the market value of collateral is less than total amount owing---usually just sell(8) protects 3rd party who buys- protected even if C not complied with sectionWhat Constitutes Foreclosure? – likely incorrect!!Angelkovski v. Transcanada 1986 MBQBF: restaurant, sale to D, vender decided to operate as going concern, no notice to D to indicate VFH: CL seized then appropriated for own use was to release of former obligation. But PPSA exists, no notice or 15 day waiting period initiated so no acceptance by DWhen Will a SP be Deemed to have Elected to Keep Collateral in Satisfaction of the Obligations Secured?Inland Kenworth 2004 BCSC F: purchased equipment, d defaulted, dealer retook (s.58) and put in inventory, notice, appraised and sold (s.59) and distributed (s.60)H: putting in inventory not indicative of election of foreclosure. Always had intention to sellRedemption and ReinstatementBefore SP has disposed of collateral, D or subordinate SPs may redeem itSpecial procedure for Consumer Goods - belows.62(1): Right to redeembefore disposal under s.59 or irrevocably elected to retain, debtor or Jr. can fulfil obligation plus expenses(a) any person who has right to notice can redeem(b) Consumer Goods:unless debtor agrees POST default, consumer can reinstate SA by paying $$ defaultedcan do it twice/year whatever acceleration saysCan only K out after defaults. 62(3): If SA other than consumer goods and there is an acceleration clause, debtor can apply to court who can relieve debtorRare b/c D must show why fell into areersCodifies EQ rightRight to sellSale provisionss.59(2): can sell as is, or repair and add costs to debtNo indication that creditor has a duty to repair to maximize sale but court indicates may (Donnelly)(3): private/public/whole/units/leases. 59(6): After seizure must give notice to everyone affected no less than 20 days before disposition JR, debtors , anybody with an interest and has notified seizing party (people who may lose)No obligation to notify SR creditor if Jr seizesb/c subject to SR creditor and no one will buy with their interest attachedoptions:CU asks bank to seizeSee if Bk will buy them outs.68: Everything that is done must be done in a commercially reasonable mannerDeficiency (money owed after sale)IF C fails to give notice (s.59(6)), CL says C not entitled to claim deficiencys.69(7): action for deficiency D may raise as a defence failure of C to adhere to:s.17: preservations. 59: notices.60: didn’t deal properly with $$D must show that failure caused deficiencyAccounts or CPin the case of APAAP (true SI) given to creditor, the account accepts until there is a default.Default: SI in account becomes an absolute assignment and creditor notifies other parties to pay creditor (note: changing account rules apply. See s.41 in deemed section)s.57: notification to debtorNotify an intangible or party to pay even if Debtor collected pre-notificationMay deduct reasonable collection expensesCommercially reasonable SaleUnder CL no dutys.68: imposes positive right that the sale of seized collateral is conducted in a commercially reasonable mannerWhat Constitutes a “Commercially Reasonable Sale”?Copp v. Medi-dent 1991 OC F: 2 partner dentists. Long term lease on equipment. Break-up. One continues to pay. Defaults and tries to redeem. Creditor sells to him without notice to other. Market price 79000, debt 31000, sold for 31000 which eliminated Copps equityH: not Commercially Reas b/c not market value and no appraisalWhat Happens if the SP Does Not Give Notice Before Dispositions and Does Not Make a Commercially Reasonable Sale?Donnelly v. Interantional Harvester 1983 OCC F: heavy equipment, default, seized and sold to company related to seizing company for nominal, needed repair, sold for book value, records lostH: Not CRS: convenience not market valueC may have duty to repair for it to be a CRSCase Credit ltd v. Rhodan 2004 BCSCH: C must show all things that relate to sufficient effort to obtain market value:Kind of saleAdvertising that cost effectiveAppraisalPlace of sasleCleaning, maintenance, would help if increase in price justifies costsAssistance of bailiffPost Sale (disbursement and deficiency)s.59: 1st thing to come off the top are expenses related to sale: bailiff, ads, storage but not time spent. Next are secured partiess.60: Any surplus must be accounted and paid to parties with subordiate interest, other parties with interests, debtorSP must give written accounting of sale and distribution(4): any contested $$ left with court(5): Gives SP right to deficiency judgement to extent of shortfall (limit: CG)may sue as another unsecured creditorConsumer Goods (special treatment)s.10: SA/FS writing requirements. Cannot describe collateral as CG. Must describe exactlyIf SNG must use SNPP: make it clear exactly what can be takens.13(2): providing APAAP: SI does not attach to after acquired property if consumer good (not accession) unless PMSI or replacement of collateral described in the security the security agreements.30(3): buying CG under $1000 take free of any SI- Cut offs.43(7): If either name OR SN seriously misleading for CG, registration invalids.50(2): pay off debt of CG, Creditor must discharge and remove from register within a months.58(3): Cannot seize CG if 2/3 paids.62(2): can reinstate SA twice/year if defaults.67: Rights and remedies for CG (1) all things C can do to realize CSexercise s.58/59 (seizure/sale)Voluntary Foreclosure (61)Accept surrender by debtorSubject to terms of agreement sue and get judgement(2) If SP does a)sieze b) VF c) accept surrender all unperformed obligations extinguishedCreates problem for seizing a small business: if you seize any CG you extinguish your right to sue for deficiency(3): if accidentally seize CG have 20 days to return(4) can foreclose on land with CG and not extinguish(5) PMSI and more than one item covered ie gave money a part to buy CG, if clear in SA there are two separate debts, seizing will extinguish only portion related to that item(6): sue then get order to seize under creditor assistance legislation: right to seize under judgement limited. Can only get amount for the thing seized, if less then debt cannot keep taking to get to the amount of debtstrategy: sue, then tell baliff to take everything EXCEPT the thing that has the SI b/c that extinguishes(8): accession to good removed and disposed. Ie: SI in home entertainment system but the speakers are removed. Debt extinguished but can pursue judgement on accession removed(9): Debtor destroys. IF goods substantially damaged by wilful neglect (left outside in the rain to fuck you) court can waive seize or sue(10): if proceeding under (1)(d) [sue for order] then extinguish and must discharges.69(8): If SP fails to comply with s.17 (protect collateral), 18(requirment to give info) 59(sale) 60(accounting), SP must prove that if CG failure did not affect D’s ability to protect by way of redemptionie seize, notice of sale does not include redemption priceWhen Will a SP be Deemed to have Accepted Surrender of Consumer Goods?Whitewater motors v. Amatto 1993 BCSC F: D bought truck. Mostly CG, brought into dealership. Dealer refused to accept it, but it was left thereI: Did the dealer accept surrender where it could not pursue the remainder?H: Dealer refused, never intended to sell, letter indicating not recognizing surrenderJurisdiction of the Courts.63: Supervisory jurisdiction of the courtanybody can apply to the court and the court can give any orderrelieve acceleration and give D more time to payWhat is the Court’s Scope to Make Orders?Andrews and Trotchie v. Mack Financial 1987 SKCAF: Truck sold to A, SA assigned finco. Without consent, Andrews sold to Trotchi who smashed it. Finco did not know for a long time. Default and needed repair. Finco would not deal with anything until debt brought into good standing. Defendant hid truck to prevent realization. FC gets order. A&T pursue order for relief in seizure, return pay arrears, force finco to repairH: s.63 gives broad powers to intervene but the purpose is to ensure rights and obligations fulfilled in commercially reasonably manner. Won’t rewrite SA. CaRemedies for non-compliance with the Acts.69(2): cause of action against anyone who fails to perform obligation or duty under the Actusually against C in realizations.69(3): damages reasonable foreseeable from failure to fulfil duty(4): statutory damages without proofs.58: failure to perform duty but cannot prove damage get $200 (can only get $200 or damages not both)(7): breach of duty in deficiency claim: as a defence can use certain failures of SP (notice, accounting). But they are limited to extent that failures limited ability to protect interests or making determiniation of deficiency (C sold to related Company for nominal who then sold it to a 3rd party)(8): consumer protection:If SP fails to complfor breach of warranty with s.17 (protect collateral), 18(requirment to give info) 59(sale) 60(accounting), SP must prove that if CG failure did not affect D’s ability to protect by way of redemptionie seize, notice of sale does not include redemption price(9): any provision that limits liability for failure to fulfil duty under PPSA is voidCL law that not inconsistent with PPSA survivesC is SP, A sells to B (not OCOB so not cut-off under 30(2)) who then sells to E. E can sue B (if retailer) Is the PPSA Exhaustive of Remedies for Breach of a PPSA Duty?Osman Auction Inc. v. Murray 1994 ABQB F: O sells car to R who gave a cheque (NSF). R (fraudster) sold to M who checked registry. Creditor and O both said no longer an interest. When bounced O went and registered FS at PPR. O put lien on car. In fraud cases contracts are voidable, but if 3rd party takes action before voided they get rights. M sued for damages for slander of titleH: CL action where someone claims interest in property belonging to someone else is another remedy availableConflict rules (changing jurisdiction)s.5-8: tells you what jurisdictions must be aware of your SI, where to look and what to do if the law changes. Does not change priority between creditors that in play. May with respect to intervening creditors (Northwest)SellersV(client) gets a SI in a truck sold to Purchaser trucking company that ships from Vancouver to Kelowna1) Where do register SI?To determine jurisdiction start with s.7—s.6—s.5- 7: Debtor’s jurisdiction- 6: not in 7, goods that the parties understand are to be removed to another jurisdiction and kept there- 5: not in 6/7, jurisdiction in which the collateral is located when SI attachesA) does s.7 apply?(1) debtor located at place of business, chief executive office if more than one or residence of the debtor if no place of business when the SI attaches(2) Validity, perfection, non-perfection of SI in- Intangibles: A/R- Goods: inventory or equipment (can be held for lease) that are mobile (commonly used in more than 1 jurisdiction)Vehicles: test not what you will do but what can be commonly done- Non-possessory interest in interest: $$ or CP (Only need possession)Governed by jurisdiction where debtor locatedExample: truck is equipment (mobile), HQ is in Vancouver so reg. in BCPPR, if HQ in Alberta then ABPPRIf not a good that mobile move to s.62) What happens if D relocates?Ie: maintain presence but change HQs.7(3): to maintain perfection must register/possess in new jurisdiction by the earliest of 3 datesa) 60 days from relocation (longest)b) no later then 15 days after C knowsc) before the date of perfection lapses in first jurisdictionif C knows on day 30, has until day 45s.7(4): if juris does not have a registry system and the SP does not have possession subordinate to interest in account in BC or interest in good/instrument, negotiable doc, $, CP acquired when collateral located in BCfailure to register means perfection ends on date of relocationone means of protection would be to have D transfer collateral to someone in jurisdictionPP: Albertan buyer will look in AB PPR so don’t want to mislead3) What if the pp does not fall under s. 7?s.6 Example 1: V sells car to customer who lives in Thunder bayNot an intangible or instrumentNot equipment or inventoryGo to s.6: If you know they are buying here but will be kept in another jurisdiction, you register in another jurisdictions.5 Example 2: client sells car to individual for family uses.7 does not apply b/c CGs.6 does not apply b/c not aware of change in juris.S.5 must apply by defaultValidity and perfection on goods (not s.7) or possessory instrument law where collateral when SI attaches appliesVictoriaIssue: what happens if moved to another juris?(3): SI in goods perfected in BC but moved must register in new juris. The earliest of 3 dates:a)60 days from relocationb)knowledge plus 15c) when perfection ceases in original jurisdictionCan get perfection of miss date but lose priority to intervening interests4) What if you were not selling but buying? Where do you look?Example: Client want SI in aircraft that flies between Calgary and VancouverSearch: head officeEquipment and mobileChecking in BC not enough. Need to also check if relocated in the last 60 days. Failure could result in continuously perfected interest elsewhereExample 2: restaurant equipmentNot s.7 b/c not mobile, Not s.6 b/c not relocated, look at s.5 where collateral attachesBut always need to know if pp relocatedBuyers (CG)Example: client want to buy a used family car in BC from BC residents.7 doesn’t apply b/c CG and not inventory or equipments.6 don’t know if will relocates.5 check in BC- no liens OKs.5 goods protects buyers or lessee if innocent purchaserWhat Constitutes a Perfected SI in Another Jurisdiction with Different Rules for Perfection?Juckes v. Holiday Chevrolet 1990 SKQB F: place of business Winnipeg, leased truck for 3 yrs, 1yr moved to Sask, Bankrupt, TiB tried to get truck, at time law did not recognize lease as SIH: mobile goods so s.7, s.8(2) provides that SI perfected when SP complied with law in that juris. Even if that juris doesn’t use same language. Holiday did everything it needed to which was nothing but time period all elapsed so unperfected and TiB gets.Criticized b/c failed to consider s.7(4). Held that Sk had registry but did not for deemedWhat Constitutes Knowledge that Collateral has been Moved to a New Jurisdiction?Re Searcy 1991(BCSC F: conditional purchase of mobile CG (not s.7). Son and Dad, Son moves to BC and bankrupt but payments still coming from Alberta. Mar 8th TiB sends C proof of claim form which said dentor in BC but not truck. GMAC registered but beyond the knowledge and 15.H: “knowledge”: when reasonable person would know. But found Actual knowledge required—high threshold---wrongBetween partners only one must knowIn an organization: managing director or sufficiently SR. officerHow do the Rules Operate when Both the Collateral and the D have Reclocated?Northwest 2002 ABCA F: excavator bought in BC by BC company. Sold to Northwest and moved to Wahsington then Alberta and leased to a 3rd party, NW registered in AlbI#1: Was first sale OCOB?H: sold with over ? inventory=not, cozy relationship, sold for shares so not cut offI#2: consent H: no evidence Daiwoos interest continuesI#3: IS Daiwoos interest perfected?H: AT time took interest was perfected and still was but had there been an intervening 3rd party that was not NW (fraud) may have lostI#4: When NW leased it, they reg F/S, was it perfected?H: when they leased not more than 1 yr so not SI, F/S means nothingNot commercially reasonable to let NW use the law this way.s.5-7 does not change priority fixed at time transaction took place. IT only applies to new interests that emerge. These sections cannot be used to shake up a set priorityWhen 2 secured parties reperfect in a new jurisdiction, how is priority established?)Advance Diamond Drilling 1992 BCSC F: NBL reg 1st, Royal 2nd for a tractor and trailor (s.7). D moved to BC. NBL neglected, Royal reregistered and claimed new priorityH: priorities between 2 parties at time of transaction dictated by law that governs at the time. An intervening party may disrupt but not between existingBank Act Security HistoryOwner conveyed title to creditor with right to get title back (redemption) when mortgage paid- legal chargeRight to redeem could be transferredWorked well with static items but not well with shifting like inventory so a floating charge was created. Only available in EQ b/c title never transferredIn 1859, shippers and warehouses could give bills of lading or warehouse receipts that gave you title to whatever was in the warehouse/ship. This was expanded to manufacturers who could issue receipts of own inventory to banks for credit1867, Feds given power over banking and created Bank Act which allowed an expanded class of borrowers to give warehouse receipts and billsrequirements:notice of intention to give securitysigned agreement to give securitysame effect of warehouse receiptstransferred title and covered proceedsfixed charge on floating proceedsthe system had several features:notice system: of intention to give securitycould only be given by certain persons in certain industriesnot consumer lendingfocus primarily on primary sectors and manufacturingonly banks under the BA could take itPriority: title based: cannot give what you don’t have. Person holding title winsBank ActMotivations to take BASAvoid limitation is PPSAUsually take bothTiming issues1) filing notice of intention (Bank of Canada)427(4): not more than 3 years before taking of security. Failing to file first means failure of BAS (CIBC) but failure against 3rd parties not TiB (Divanti)PPSA no such constraint2)Taking or giving security3) Making loan or advanceBA contemplates taking security and making loan contemporaneously IF not the same time must have agreement to give BAS to give loan or security at different timesS.429(2): each new loan or advance must have a new agreementPattern1) file notice2) loan and securityor1)file notice2) give security and agreement to give BAS3) give loanDoes not allow banks to re-secure antecedent debt like PPSAProvisions s.427 Who gets what?(1) list of parties to whom Bk can make loans and what security could be lent(a) any wholesaler/shipper/retailer/dealer in agricultural products/aqua-commodities/consumer good inventory suppliersService providers are excluded(2) what bank gets: title(3) what can Bk do: when it gets security it gets rights like seizure(4) notice of intention3 relevent dates:when notice of intention filedwhen security givenwhen loan is madea) rights an powers void against subsequent creditor or giver of value unless valid notice of intention not more than 3yrs before security is given MUST BE FIRST(7) BAS given and default: 3 months wages of employees have priority. Also gives priority to claims of agri-producers of claim of value supplied 6 months pre-bankruptcyCase Law Flintoff 1964- claim of TiB to take assets covered by BAS. H: TiB stands in shoes of bankrupt so the most a TiB can get is what the debtor OWNS. Since the debtor gave BAS it no longer owns it and TiB can not get- runs counter to Giffen and PPSABMO v. Elgin 1983 OCA (The scope of collateral and the SI?)F: gave BAS on soya bean crop, later sold to EG, B sued for conversion. Argued that Bk under the 427(1)(f) gave loan for seed, not entitled to later crops and one entitled to is long goneH: No, s.427(d) is a general provisions that applies: get security for crops grown or growing- continuous interest (like proceeds)Courts don’t read provisions as mutually exclusive. Cannot just pick one to apply. General provisions apply if availableDevries v. RBC 1975 OHCJ (Proceeds)F: BAS in cows. Barn burns down and kills all. P gets to new insurance and moves to new property (cattle). Bk concerned post burning and got Palmers to sign new agreement and assignment. Sell to Mr. and Mrs Devries. Bk comes to collect.H: assignment is void b/c did not get at time of giving loan or make agreement to give BAS security. But insurance proceeds in place of cattle and new cattle are proceeds of proceeds so RBC gets new herdRBC could go after Palmers and Devries but Palmers likely spent that money right awayCIBC v. 281787 1984 ABCA (Procedural requirements)F: landlord-R not paid so had right to distrain. Crockets had BAS over inventory. Bk argued could not b/c not their property anymore as it was bank’s.Arg: flaw in Bk security. D gave promise to give security and gave security before notice filedH: If notice is not first then your BAS failedRe Davanti Contemporary Interiors Ltd. 1992 ABQB (Procedural)F: notice of intention filed 20 days after assignment of inventory. Divanti defaulted and Bk seized. Left with Divanti on sub-agency agreement. TiB appointed claiming interest in inventory as filing too late and BAS invalidH: s.427(4) does not affect relationship between bank and TiB. TiB not entitled to what they don’t have. Divanti no longer had rights TourellsF: D involved in fishing, borrowed from RBC and gave BAS. Documents properly executed. D sold fish to lionsgate and lionsgate sold to D and set off debt. B realized LG owed debt to D and took acct. rec. LG acknowledged owed money but also D owed them. Argued fro EQ right to set-offH: notice of intention under BA is constructive notice and LG right to setoff extinguished when Bk took interest (just like PPSA s.428 RealizationPriority of bank(7): B has right to sell covered property in s.427 and apply value to loan and return surplus to SI giverCan sue for deficiency and stand as unsecured creditor(8) sales:public auction unless otherwise agreedmust notify(9) assures purchaser will get good title(10): where bank sells bk must act honestly and in GF and deal with property in a timely mannerthreshold probably not as high as under PPSA, probably no duty to repair(11): Bk must expidtiously Act and sell it for as much as possible(12): gives bk right to manufactured goods if had BAS in inputs- like proceedsCase LAwCassier (Good Faith)F:Bk took BAS in Cassier’s fish. When Cassier had a large quantity of another company’s fish on hand, Bk realizedH: the other company lost its right to fish and were nothing more than an unsecured creditor. No evidence that Bk engaged in bad conducts.429timing of taking security(1) Bk cannot get bill of lading unless loan and security at the same time or agreement to give BASs.435power to hold warehouse receipts/ bill as security(2)(b): gives titleCase LawBMO v. Hall (history and purpose)F: Sask legislates Limitations of Civil rights Act. Req seizers to give notice, failure gives security back to debtor which conflicts with purpose of BA to help creditors. H gave BAS, defaulted, no notice, seizedI: validity of Prove leg? H: Intra vires b/c P and CRI: Fed right to leg BA H: also intra vires b/c s.91 and infringing parts are necessarily incidental. So doctrine of paramountcy means Prov leg inoperable. Prov. Acts cannot conflict with BATacking-Not allowed but Bk can give later advance on same loan if provided notice of intention in advance- debtor can give security on the same property to multiple parties but every party after the first gets only a residual interest. Title given to the 1st who can sell and disburse the remaining value to those with residual interestsT1: D borrowed to buy a tractor gave BAS in tractor and cropsT2: D borrowed from Bk and secured on certain crops- all grain existing and what may emergeT3: D est. line of credit w/ P bank (issue: was $$$ given)T4: D borrows for Bk, BA on grainT5: D borrows from line of creditDefault and fight over grainDisbursement:Bk secured for T1 for full T1 amount and can take from grain b/c no way would they give 100% of value of tractor. The general provision secured on crops also applies to tractor and is general enough to applyT2 covered grain so Bk secured for T2 amountP BK only gave notice but no advance. Does not matter b/c first in time and gave agreement to give BAS so P BK securedAllocation of paymentsUnder the CL creditor with multiple debts from one debtor must allocate payments to the first debt and extinguish that one before applying payments to a second debt.BAS: creditor has right to allocate payment as it see fits even if total would be enough to retire 1st debtFiling noticesFailure to file notice first=failure of BASCompetition between PPSA and BAPAramountcy of fed legislationBA is title basedPoor priority rules makes it difficult to supercedeOnly says that BAS holders have priority over subsequent holdersInadequateMust apply CL rules in conflict btwn PPSA and BAAny vendor selling to an industry that capable of giving BAS will incl. a specific provision reserving titleBenefits/limitations of BA:Required to file firstTrump PPSA parties (PMSI) when it would lose (Moosman)In the past BAS was needed to deal with uneven provincial leg. Now not finely tuned.Example:T1: D gives BAS in all propertyT2: goes and buys propertyIf seller is an unpaid vendor and D gets title, then Bk gets priority.But if vender reserves title (CSA)court will hold that live by the title and die by the title. Bk cannot get what does not haveVender retains priority in PMSI propertyBut if Bk gets BAS and vendor later takes SI in same property under PPSA: BK winsCase LawKawai Music 1993 ABCA (PPSA/BA interaction)H: Kawai reserved title so had priorityRBC v. Moosman 2003 SKCA (PPSA/BA interactionF: T1 BAS given, T2 D bought truck from vender who transferred title to D but debtor pays from CU and gives CU SI in truck (would be PMSI if gave notice under s.34)H: Vendor can reserve title but outside lender cannot, best it could get was transfer of title directly from vender. Must use CL concepts not PPSA. The moment dealer transferred to Debtor, BK got. Whatever D granted to CU was residual interestBMO v. Innovation SCC (utility of BAS questioned)F: D granted SI to property to CU under PPSA then D gave BAS on same property to Bk (not PPSA). SA said nothing re:title (under PPSA ok). CU failed to register F/S. Bank checked PPR and Bank of Canada and found nothingI: Who gets priority?TJ: CU failed to register so cannot rely on SI. Commercially unreasonable to not protect bk b/c it could not protect itself CA: cannot apply PPSA concepts. Bk takes whatever D has. CU still has a property interest in right to sieze. At the time BAS created encumbered by SI. D’s interest limited so BK’s interest limited Cut-Off Rules – Quick Guide20(c) – SI in CP, Doc of Title, instrument, money, or intangible or goods is subordinate to the interests of a transferee whoAcquires the interests under transaction that is not a SA,Gives value andAcquires interest without knowledge of the SI and before SI is perfected28(1) – When collateral is dealt with and gives rise to proceeds, the SIContinues in the collateral unless the SP expressly or impliedly authorizes the dealing30(2) – Buyer in the ordinary course of business of the sellor30(3) – Buyer of goods that are consumer goods – for value and without knowledge of SI(4) cannot exceed $100030(5) – Buyer during specific grace periods for perfection (temporary perfection), where they’ve given value and had no knowledge of SI26(1) – temporary perfection28(3) – temp perfection during time to re-register for specific “proceeds” – 15 days29(4) – returned or repossessed goods – 15 days to seize or register51 – change of debtor name or transfer to new debtor – 15 day grace30(6)(7) – innocent purchasers of equipment that is SN goods, but registered without SN30(8) – excludes from section 30 rules transfers of security to satisfy a past debt (new value only)Negotiable and Quasi-Negotiable Rules – Quick GuideCurrency – you can lose interest to just about anyoneAny innocent receiver of currency, or holder for value even with knowledge are protected31(2) – protects creditor that takes instrument in payment of debt31(3) – protects purchaser for value without knowledge of the SI31(6) – chattel paper purchaser priorityCPP for new value gets a special priorityOver party who has a claim to CP as proceeds of inventory, knowledge irrelevantOver those who have registered and SI in the CP, where no knowledge of SIStamped forms!Some Background to Add:The system has been designed to facilitate commercial borrowing, credit, etc ADDIN AudioMarker 84 Generally it’s up to parties to protect themselves ADDIN AudioMarker 155 parties that fail to protect themselves usually wind up bearing the risk ADDIN AudioMarker 167 exceptions – sometimes where there’s unexpected events, there’s a grace period – risk could be pushed to innocent 3PsFavours creditors that lend to expand the debtor’s asset-base ADDIN AudioMarker 210 classic example – PMSIPeople who particularly rely in a SI, and they appropriately protected themselves, then generally they are preferred ................
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