ENFORCEMENT OF RIGHTS

Document Sample
ENFORCEMENT OF RIGHTS Powered By Docstoc
					                                                               TABLE OF CONTENTS
Table of Contents .............................................................................................................................................1
Introductory Materials ....................................................................................................................................4
  Accounts Receivable Factoring ...................................................................................................................4
o With or without recourse ..........................................................................................................................4
  Chattel Paper ................................................................................................................................................4
  Floating Charges ..........................................................................................................................................4
  How does a creditor make a decision of secured versus unsecured lending ..........................................5
  Types of covenants .......................................................................................................................................5
  Acceleration clause.......................................................................................................................................6
  Events of default...........................................................................................................................................6
     Failure to pay principal and interest on due date .................................................................................6
     Covenant default ......................................................................................................................................6
     Cross default .............................................................................................................................................7
     Execution of judgments ...........................................................................................................................7
     Committal of an act of insolvency ..........................................................................................................7
Application and Non-Application of the PPSA .............................................................................................8
  Is a license personal property under the PPSA .........................................................................................8
  Non-Application of the PPSA .....................................................................................................................8
Creation of a PPSA security interest ..............................................................................................................9
  Attachment of a security interest................................................................................................................9
  Cases ..............................................................................................................................................................9
  Other Questions ...........................................................................................................................................9
  Floating charge ...........................................................................................................................................10
Perfection By Possession................................................................................................................................12
Perfection by Registration .............................................................................................................................13
  How do you perfect a security interest .....................................................................................................13
  What is perfection – s.19 ...........................................................................................................................13
  What is a financing statement? What does it include? ...........................................................................13
  Submitting financing statement of financing change statement ............................................................13
  Protections of registration under the PPSA ............................................................................................14
  Financing Change Statement – s.47 - 57 ..................................................................................................14
  Can file a financing change statement to: ................................................................................................14
  What can’t you do with a financing change statement ...........................................................................14
  Debtor’s Dealing in the Collateral ............................................................................................................15
  What happens if a financing statement or financing change statement is erroneous .........................15
Priority Rules .................................................................................................................................................16
  Unperfected Security Interests .................................................................................................................16
  Key question re: validity of the financing statement ..............................................................................16
  Priority under the PPSA ...........................................................................................................................16
  Other important parts of s.30 ...................................................................................................................17
  Investment Property – s.30.1 under the amended PPSA .......................................................................17
Purchase Money Security Interests – PMSI ................................................................................................18
  A PMSI has one of two forms ...................................................................................................................18
  There is a big problem with refinancing a PMSI ....................................................................................18
  Can you have two PMSI’s in the same property .....................................................................................18
  Inventory PMSI ..........................................................................................................................................19
  Proceeds of PMSI .......................................................................................................................................19
  Collateral PMSI .........................................................................................................................................19
Subordination .................................................................................................................................................20
                                                                                                                                                                      1
Fixtures, Accessions and Comingled Goods ................................................................................................21
  Fixtures .......................................................................................................................................................21
  What are the rules for fixtures .................................................................................................................21
  Accessions ...................................................................................................................................................21
  Comingled Goods .......................................................................................................................................21
Proceeds ..........................................................................................................................................................22
  What could proceeds be.............................................................................................................................22
  Tracing ........................................................................................................................................................22
  Can you convert a proceeds claim into a trust claim? ............................................................................22
  What happens if money goes through a bank account and buys new property? ................................22
  Continuation of security interests.............................................................................................................23
What is “the ordinary course of business” and When is a Buyer a Buyer ...............................................24
     Camco Inc. v Olson Realty ....................................................................................................................24
     Motor vehicles – special rules ...............................................................................................................24
  When does a buyer become a buyer .........................................................................................................24
     Buyer Example .......................................................................................................................................24
     Buyer of Chattel Paper Example ..........................................................................................................24
Leases, Consignments and Assignments and Trusts ..................................................................................25
  Leases ..........................................................................................................................................................25
     Key factors for the tax department in determining if a lease or a sale .............................................25
     Adelaide Capital v Integrated Transportation Finance .....................................................................25
  Consignment ...............................................................................................................................................25
  Assignments ................................................................................................................................................25
  Trust ............................................................................................................................................................25
Liens, Deemed Trusts, and Other Non-Application of the PPSA..............................................................26
  What is a lien? ............................................................................................................................................26
  Liens under the PPSA ................................................................................................................................26
  Liens given by statute are not PPSA interests .........................................................................................26
  Where do liens come from? .......................................................................................................................26
  Deemed Trusts ............................................................................................................................................26
  How do you get deemed trusts ..................................................................................................................26
  Insurance ....................................................................................................................................................27
  Other exceptions under s.4 ........................................................................................................................27
     Pawnbrokers Act ....................................................................................................................................27
     Sale of the whole company ....................................................................................................................27
     Assignment to a collections agency .......................................................................................................27
Enforcement of Rights ...................................................................................................................................28
  When do enforcement rights arise...........................................................................................................28
  After default then what? ...........................................................................................................................28
  How do you take possession? ....................................................................................................................28
  Can go to court to get.................................................................................................................................28
  How do you realize on security .................................................................................................................28
  How do you decide? ...................................................................................................................................28
  Power of Sale ..............................................................................................................................................28
  What happens after the sale has been completed ...................................................................................29
  Foreclosure .................................................................................................................................................29
  Right of redemption ...................................................................................................................................29
  Why would someone use foreclosure........................................................................................................29
  Are you entitled to give intention to foreclose in every circumstance  NO .......................................29
  What about the guarantor of a debtor when the debtor goes into default ...........................................29
Conflicts of law and the PPSA ......................................................................................................................30
                                                                                                                                                                     2
  There are usually three questions to be asked.........................................................................................30
  General provisions for conflicts of laws ...................................................................................................30
  What happens when the goods are brought into Ontario ......................................................................30
  Starting point in conflict of laws ...............................................................................................................30
Bank Act Security ..........................................................................................................................................31
  What is Bank Act security .........................................................................................................................31
  What can’t a bank take security over under the Bank Act ...................................................................31
  Bank Act does not give priorities ..............................................................................................................31
  What is the legal effect of a Bank Act security interest ..........................................................................31
  Is a bank required to register its interst under the PPSA ......................................................................31
Suretyship .......................................................................................................................................................32
  Types of guarantees ...................................................................................................................................32
  Types of credit enhancement ....................................................................................................................32
     Primary forms ........................................................................................................................................32
     Secondary forms.....................................................................................................................................32
  Defences – apply to both indemnity and guarantee unless otherwise stated ........................................32
Sale of Goods Act ...........................................................................................................................................33
  Sections of the Sale of Goods Act..............................................................................................................33
  Implied terms of Contract under the Sale of Goods Act ........................................................................33
     Implied Condition ..................................................................................................................................33
     Sale of Goods by Description ................................................................................................................33
     Implied condition as to quality .............................................................................................................33
     Sale by Sample........................................................................................................................................33
  Do the provisions of the Sale of Goods Act crossover and apply at the same time ..............................33
Consumer Protection Act ..............................................................................................................................34
  Application of the Act ................................................................................................................................34
  Definitions ...................................................................................................................................................34
  Part II of the CPA  Consumer Rights and Warranties ......................................................................34
  Part III of the Act deals with unfair practices ........................................................................................34
  Part VIII of the Act is about credit disclosure ........................................................................................34
     Motor Vehicle Manufacturers’ Association v. Ontario ......................................................................34




                                                                                                                                                                  3
INTRODUCTORY MATERIALS
Accounts Receivable Factoring
 AR Factoring  instead of security the company sells the receivables
      o With or without recourse – can the purchaser come back on the seller for any amount not collected
      o With or without notice – can you go directly to the debtors and say to get paid or does money flow
          through the seller to the purchaser  seller may want without notice so customers don’t know
      o With recourse and without notice – loan equivalent
      o Without recourse and with notice – sale equivalent
      o Key question in this is who assumes the credit risk – with recourse the seller does and vice versa
 Financing through a sale of AR may breach of a prior security interest  caught by PPSA – is a security interest
      o PPSA does not care which form the transaction takes – treats them equally

Chattel Paper
 Chattel paper – recognizes a monetary obligation and a security interest  Example is a car lease or finance
  agreement
 Securities dealer may take a company’s chattel paper and bundle it into a securitization trust and then sell units on
  the market – usually to insurance companies, pension funds and the like looking to grow their asset base
      o In such trusts there is often a ranking of unit holders
               1st level gets a lower interest rate, 2nd level gets a higher rate, 3rd level and so on
                       often the residual level will be purchased by the company selling its chattel paper – it is
                           the highest interest rate but also the highest risk  In this way the company protects
                           against bad debt – assumes the risk of non-payment
      o For companies this is an attractive way of selling their AR
      o These types of transactions work because the public may want more interest than the bank is willing to
          provide but are willing to buy these trusts for less interest than is being paid into them
      o This is a huge area of financing – worth billions of dollars  Any recurring payment can be securitized

Floating Charges
   Easier to deal with under the PPSA – does not mean they are not a problem
   This is because there may be competing interests between PPSA interests and those arising under other statutes
   Pre-PPSA we had legal and equitable mortgages – same with securities
   Legal security interest is always greater than an equitable security interest
         o Because ownership interest is greatest interest possible
   Equitable interest is a right to assert security interest subject to paying out the one who has legal interest
   If one can have an equitable interest short of ownership why can one not have an equitable interest in all assets
   With legal interest a company cannot sell assets but with an equitable interest it can
   Can assert a non-title interest over all of the assets of a company at any time – everything something which falls
    within the definition of the claim then security applies to it
         o In the event of default the security interest crystallizes and the lender gets a legal interest in all of the
             property that fits the description of the charge
   With floating charges there will always be legal interests in property
   The floating charge arose to create a security interest in inventory – which must be allowed to move
   Over time the floating charge grew to include more assets
   In order to defeat equitable security – floating charge – suppliers could include in the loan documents stipulations
    that legal title only transferred after they were paid for
   Had competing registries and statutes creating security interests
   The PPSA creates a single system for this
         o Applies to every transaction without regard to the person who has title
         o The statute creates procedures for creating and perfecting security arrangements regardless of form
         o The statute sets out the rules on ranking of security interests
         o PPSA rules only apply to PPSA securities and where there are competing securities the rules do not apply


                                                                                                                       4
 The old concepts of equitable and legal interests do not apply under the PPSA but may still apply when there are
  interests competing under different statutes
 Floating charge still exists it just has a different form under the PPSA
      o Can have a straight security interest on specific property or floating inventory or possibly over AR as well
           or even over all of the assets of a business provided that the assets fit the description of the charge
 Important consideration is “was the security interest perfected under the PPSA?”
 Factoring AR = selling receivables to raise cash
 Some of these transactions look a lot like disguised borrowings with the AR as security
      o They look a lot like loans especially when done without notice, with recourse
 Going to look at creditors as they arise
 What are creditors trying to do with respect to loan documents etc.

How does a creditor make a decision of secured versus unsecured lending
 Look to the financial position of the borrower  if assets far outweigh liabilities there may be a possibility of
  lending without security
 But what if a new company with no track record
      o Bank will want whatever security it can get from the company
      o May go to the shareholders for some type of security
      o For example may want the shareholders to guarantee the debts of the company
                May want security for the guarantee
                In the form of shares in the company, or some other security
                But this is not a lot more security
                May, through this, get the ability to walk away with the company – can run it for profit, especially
                    if the company is worth more than the sum of its parts
                          By getting this type of security – shares – there will be less people to split up the proceeds
                             if the company goes under
                Could also have the problem of the shareholder going insolvent
                          Then need to fight with other creditors for proceeds
 Under what conditions will the bank lend to a company and for what security
      o Bank will want to be the number one creditor  may offer the best rates
      o Do this to avoid having competing creditors  Bank may also come in, give funds to pay off all of the
           other debts and be left as the sole creditor with security over the assets of the company
                          Attractive for a company that has tiers of creditors asking for different returns on their
                             investments – can lower overall interest charges
 A bank, or other lender, may be only willing to accept a certain amount of credit risk – if things get worse they
  will want out of the deal – will accept a lower rate of interest but in return will want a higher degree of stability
  and if the stability changes they may want out of the deal
 In order to ensure that the company maintains its financial stability the bank may incorporate covenants into its
  loan
      o If the covenants are breached then the loan is accelerated – bank demands its money back then
      o Covenants box in the company and limit its ability to do certain things, but provide security for the bank
           because it can know what the company is doing and if it does not like it can demand its money back
      o Covenants outline the extent of the risk that the lender is willing to assume

Types of covenants
   No more secured debt If more secured debt then the bank ranks lower – less recovery  This is called a
    “negative pledge”  May be a provision that A can get more secured debt but only if it also secures a similar
    portion of the loan from the bank
        o May also allow “carve-outs”  For example may allow PMSI’s to be created
                  But may limit the overall size of the PMSI’s
                  May allow PMSI’s provided that the only security in the PMSI is over the asset and is not for
                     over a certain proportion of its purchase price
        o Or may allow for an increase in secured debt up to a set amount
        o The carve-outs allow A some flexibility
                                                                                                                       5
        o    But the bank will want to ensure that if all of the carve-outs are maximized that it can still recover on the
             loan  Will want to be able to trip the covenants if need be
   No more unsecured debt
         o More unsecured debt will limit the ability of the bank to recover – will have to share with other creditors
         o But A will have unsecured debt from time to time – utilities, wages, taxes
         o May wish to limit it to certain types of unsecured debt  No more borrowed money
         o Or may put a cap on the amount of unsecured debt that can be accrued
   No debt in the subsidiary
         o Because the bank will only have the same claim on the subsidiary as A – that of shareholder and will only
             get paid once all others are paid  Will rank lower than unsecured debt in B  called subordinated debt
         o May allow for subsidiary to only borrow through the parent  And bank is the provider  Would not be
             subordinated because the bank ranks against creditors of the parent
         o Could also have the subsidiary guarantee the loans to the parent  Pledge its assets as a guarantee 
             Called an upstream guarantee  Could also, under the guarantee get B to provide security over its assets
             in the event that A defaults  Lender will try to sweep all of the assets of A and B into its net to increase
             the probability of recovery
         o Also could say that there can be no sale of shares in the subsidiary  Unless all are sold  Because if A
             sells preferred shares in B the claim of the lender will rank lower than those of the preferred shareholders
                   Even if A sells common shares it will dilute the pool of shareholders and the lender will have a
                      decreased interest in B and have a more difficult time in recovering its money
   No dividends – no share repurchases – no shareholder loans Again this is a part of the lender’s wishlist 
    Trying to keep A from giving away assets that could be security  Because loans are promises to repay for the
    shareholders  But the lender may allow dividends - If the company makes profits can give dividends - Does not
    affect the position of the lender because asset value stays the same - Because earnings increase assets  The
    intent of this type of covenant is to ensure that there is no loss of assets  Bank wants shareholders’ to rank
    below its money
   Ratio maintenance E.g. debt to equity ratio should stay the same  Equity ranks below creditors  So if
    company sells equity it can borrow more money – ratio is the same  But if A loses money then equity will
    decline  Will lower ratio and could reduce the ability to recover  Will increase the risk to the bank and the
    bank will either - Want out or want to renegotiate
         o Debt service ratio  Can A continue to honour its obligations as they come due
                   Interest and principal repayments vs. earnings (or cash flow)
                           Cash pays debts
                           But earnings can be affected by other factors
                   Want this ratio to be 1:1 or better
   Covenants are a matter of push and pull – bank wants most security it can get, company wants freedom to operate
    – need to reconcile  Need to balance security interest of the bank vs. the operational needs of the company
   Bank may be prepared to offer relief under the covenants if the situation changes – for example the company
    makes money and is expanding – little risk to the bank
   If a borrower breaches a covenant the bank can accelerate payment – demand the money all at once
   With all of the covenants it may appear to be secured debt – but all the lender gets is a right to demand accelerated
    payment – does not have a right to seize assets – needs to go to court to get an order for the money

Acceleration clause
If A defaults the lender has the right to accelerate payment
 Without the acceleration clause you are into contract law and need to determine if the default is enough to breach
    the contract and demand payment or is it simply an issue for damages
        o It is difficult to prove and quantify damages
 This clause allows a lender to say pay me now because the contract is at an end

Events of default
Failure to pay principal and interest on due date Payment default - Lender may waive for a good reason
Covenant default Borrower breaches a covenant - May have a grace period allowing company to fix default
                 For example a ratio may be out of whack at the end of a quarter but is easily fixed
                                                                                                                        6
Cross default  When borrower defaults on another loan then the lender can accelerate payment
Execution of judgments  Judgment in excess of a certain amount has been levied against the company and the other
party is seeking to collect judgment - Or just a judgment of a certain amount may trigger this default
Committal of an act of insolvency  May allow a grace period for a company to defend an insolvency filing

 What rights does a lender have when an event of default has occurred
       o Right to demand repayment, sue, get judgment and collect
       o To petition borrower into bankruptcy
 If the lender has security they can move against security
 May have a right through contract to appoint a manager or receiver and manager to run the business pending sale
       o If more value in operating the business than selling it –see in cases where lender has all asset security
 All lenders have these rights but usually it never happens
       o Because company can go through CCAA
       o Gets an issue staying all rights of creditors pending a plan to reorganize
       o This happens when the business is still worth saving
       o Allows companies time to get things in order




                                                                                                                     7
APPLICATION AND NON-APPLICATION OF THE PPSA
PPSA applies to
      o Any transaction that in substance creates a security interest – s.2(a)
      o Leases, assignments or consignments that secure payment or performance of an obligation – s.2(a)(ii)
      o A transfer of an account of chattel paper even if it does not secure payment or performance - s.2(b)
 Security interest = interest in personal property securing payment or performance of an obligation
      o Personal property – defined in Act to include chattel paper, documents of title, goods, instruments,
          intangibles, money and securities and includes fixtures but does not include building materials that have
          been affixed to real property
 Under the PPSA the old concepts of form do not matter
 Old notions of property – legal vs. equitable – do not matter  Question does transaction create security
 Investment property is one of the new definitions in the amended PPSA  reflects current realities
 Today companies don’t necessarily issue share certificates
      o Instead go to CDS and say they have a number of shares to sell  transaction gets entered into the system
          when the company gets the money for them from the dealers  if an individual wants to buy shares they
          go to the dealer who will register it in their account and do the transaction on CDS
 The PPSA in essence is creating a new type of personal property to which it applies
      o In the old system having a certificate would be a security  Having an uncertificated interest was not
      o It no longer matters

Is a license personal property under the PPSA
 Depends upon the statute that authorized the license and the discretion available in granting/rescinding license
     o Sugarman v Duca  nursing home license, limited discretion, statute contemplates security, is property
     o National Trust v Bouckhuyt  tobacco quota is not property because the control over it is absolute 
        even though the quota could be sold in a market it was not property – could not exclude others
     o CIBC v Hallahan  milk quota was deemed to not be property
     o Foster Re:  taxi license was property  need to look at the discretion of the licensing board
             If the discretion is absolute it looks more like a privilege
             If the discretion is constrained it looks more like a right resembling property
     o BMO v Hale  another milk quota – was held to not constitute property
     o Saskatoon Auction Mart v Finesse Holsteins  Sask. case says that a milk quota is personal property

 Contracts can also create property interests – or prevent them
       o Professional sports teams for example where the owner is not free to move the team or sell it without
           league approval – can limit the ability to transfer with absolute discretion in some cases
 Forbes
       o If something has significant value and is not routinely traded then why should it not be personal
           property for the PPSA
 PPSA s. 2 (b)  PPSA applies to a transfer of an account or chattel paper
       o Account - means a monetary obligation not evidenced by chattel paper or an instrument, whether or not it
           has been earned by performance, but does not include investment property
       o But account is not included in the definition of personal property in the PPSA
 In the car dealer example if the finance company does not perfect its interest under the PPSA – it is an interest by
  s.2(b) – then the trustee in bankruptcy will have a superior claim to the finance company
 Why would the PPSA be interested in these types of transactions Because if a company has factored its
  receivables it is difficult for other lenders to gauge the true strength of the company  Trying to prevent fraud,
  also need some way for others to know what is going on  Cannot see receivables – they are a book number
 PPSA requires two things  That a security interest attach  That a security interest be perfected
 How do these work with absolute transfer of AR  because a transfer is included in definition of security interest
       o The registration puts subsequent lenders on notice that the AR has been transferred

Non-Application of the PPSA
 S.4 of the PPSA list things that the PPSA does nto apply to
                                                                                                                     8
CREATION OF A PPSA SECURITY INTEREST
 The PPSA is a race statute  is about who gets to register first
 A PPSA security interest is perfected when it has attached and is perfected (registered) – s.19
 An unperfeced security interest fails against certain other interests as outlined in s.20
 A security interest is only enforceable against others if it has attached – s.11
 A security agreement is effective according to its terms and is effective against third parties - S.9(1)
 A defect, error, or irregularity does not render an agreement unenforceable against a third party – s.9(2)
      o Unless the third party was actually misled by the error, defect, irregularity or omission
 Failing to describe some of the collateral does not render a security agreement ineffective – s.9(3)

Attachment of a security interest
 There are three preconditions to attachment – s.11(2)
      o Secured party or a person on behalf of the third party obtains possession of collateral or a security
           agreement is signed containing a description of the collateral – s.11(2)(a)
                Description must be sufficient to allow the collateral to be identified
      o Value must be given – s.11(2)(b)
      o The debtor must have rights in the collateral – s.11(2)(c)
      o Parties can agree to postpone the time for attachment – post-amble to s.11(2)
 Basically all interests, in order to attach, must have a security agreement
      o With the amendments may also need for possessory interests
 Security agreement is defined in the Act  The document could come after the security interest is perfected
 Can a security agreement be partly oral – yes – Has to be signed by the debtor and include a description of the
  collateral that is sufficient to allow for identification purposes

Cases
 MacEwan Agricentre v Beriault – purported security agreement did not have a good description of the collateral
  nor did it have the creditor’s name on it – court said it was not an enforceable agreement
       o Even though nowhere in the statute does it say that you need the name of the creditor
 BDO Dunwoody v Astral Communications – there was no signature of the debtor on the security agreement 
  statute says you need one, court said the lack of one is fatal to the security agreement
 Ayerst v Ayerst – security agreement refers to a schedule outlining the property to which security interests
  attached. All parties knew what the property was, no one was misled, court said it was okay. But the statute says
  that you need a description of the property
 How do you reconcile these
       o No signature – statute says need signature – fails in court
       o No name of creditor – statute silent – fails in court
       o No description of collateral – statute says need it – succeeds in court

Other Questions
 Do you need to use special words to create a security interest  no
     o 356447 BC Ltd v CIBC  creditors lent money to a company and did not register their interest for six
         years afterwards. Bank had sought to have their interest discharged because no financing statement had
         previously been registered – so they registered, court said it did not matte when it happened
     o Atlas Industries v Federal Business Development Bank  but need at least some type of language
         evidencing the intention to create a security agreement
              In this case the debtor had signed a work order and the vendor (Atlas) sent invoices – after the
                 appointment of the trustee – saying that it retained title until paid – applicant claimed that the
                 work order – signed – plus the invoice – retaining title – gave rise to a security agreement
              Court disagreed as there was no evidence that the debtor was knowingly entering into a security
                 agreement  also there was no evidence that the signatures on the work orders were authorized
                 by the debtor


                                                                                                                      9
 Act of possession may be attachment and perfection at the same time
       o Effectively if a creditor possesses the collateral you do not need a security agreement – no chance of fraud
 What is value under s.11 – look to definition in PPSA  past consideration is no consideration does not apply
       o Must give something to get a security interest
       o E.g. get a security agreement over loans to be made over the next year on day 1 and register
       o On day 20 another comes along and takes security over the same collateral
       o On day 50 make a loan relying upon the earlier agreement for security
                 Security interest attaches when the loan is made
                 Because it does not matter what order events occur in, so long as the interest is perfected at some
                    point in time
 It is possible for a security agreement to secure future advances – s.13
 It is possible for a security agreement to allow for after-acquired property to be covered – s.12
 Debtor has to have rights in the collateral
       o Example – garage goes bankrupt and has cars in it, creditor claims security over the cars, but does the
           garage have rights or is it just a bailment
       o To give rise to rights in the collateral it must be more than a naked bailment
       o Kinetics Technology v 4th National of Tulsa – company wanted specialty furnaces built – furnished
           debtor with units to be retrofitted but debtor went under part way through. Company wanted furnaces
           back but bank said fell under its general charge – court said that the delivery of the furnaces was like a
           deposit on the work to be done giving the debtor – and bank – rights. Bank would have won but court
           said it was in the ordinary course of business for the debtor so the company won
 Does a security interest attach to money obtained as proceeds of fraud?
       o R v CIBC  money in a bank account because of fraud. Crown claimed it as proceeds of crime, bank
           claimed it had priority – court said that priority over the money went with the Crown only to the extent
           that the money could be identified as proceeds of crime – any money put in the account after it was
           known that the money was criminal would go the the Crown

 A perfected security interest = attachment + mechanical perfection (registration)
 Under s. 20 there are listed those who would defeat an unperfected security interest
 Value can be past consideration – can also have future consideration – such as the bank agrees to give money
  when certain conditions are met – a promise for a promise is good consideration so long as the promise is
  enforceable, as well the security agreement itself can be consideration
 Proposed s.11 (2)
 For a security agreement to be valid you need
      o To have the debtor’s name  To have the debtor’s signature  To have the creditor’s name – MacEwen
           A sufficient description of the property  An intention of the debtor to enter into a security agreement

Floating charge
 When does the security interest attach
      o Is it at the time when the agreement creating the floating charge is entered into
      o Or is it at the moment when the floating charge crystalizes
 Maybe the floating charge is not a real security interest until the debtor says that it is
 S. 11(3) – If the parties have agreed to postpone the time for attachment, the security interest attaches at the
  agreed time instead of at the time determined under subsection
 Another question
      o Is the nature of the floating charge such that the parties agreed that the charge only crystalizes and
          becomes a security interest when the creditor says so
 Fundamental question is whether or not the floating charge is a present or future interest
      o Forbes – has to be a present interest – debtor agrees at the time they enter into the security agreement to
          give security – is an equitable charge which becomes legal when it crystalizes
      o If it is a present interest it attaches when the agreement is signed, if a future it attaches when it crystallizes
      o Credit Suisse Canada v 1133 Yonge Street Holdings




                                                                                                                       10
For the proposed s.11(2)(b)
        o If the creditor possesses the collateral then there is no need for a description of the item – it knows what it
            has, others have no possibilty of taking it
        o But look at the wording of (b) – does it indicate that you need a security agreement regardless of whether
            or not the creditor or the creditor’s agent has the possession  in the latter case no problem but in the
            former there is some question
                  Seems to read as if you do, in fact, need an agreement in either situation
                  At the same time however you do not need a description of the collateral
                  Will, if a security agreement is necessary, need to satisfy all of the statutory and common law
                      requirements (above)
        o Cannot have the debtor in possession, or the debtor’s agent, because then it is no different from non-
            possessory interest and would fall under the other sections of 11(2)
        o One thing to bear in mind is that possessory security interests are not usually registered but non-
            possessory interests are registered
Proposed 11(2)(c)
 the collateral is a certificated security in registered form and the security certificate has been delivered to the
    secured party under section 68 of the Securities Transfer Act, 2006 pursuant to the debtor’s security agreement
        o A security certificate in registered form is one that has a name on it – either a share certificate or
            debenture  but not all debentures need a name – called bearer bonds  in Canada it is not possible to
            have bearer shares, though in Panama it is
        o The person named on the certificate is registered with the company as the holder of the certificate and has
            certain rights  Can get the holder to sign the transfer portion – on the back of the certificate – and either
            enter the name of the business taking it as security or leaving it blank
                  If left blank the transferor still has all of the rights –voting, dividends etc.
                  If signed then it will be registered under the new name
                  If left blank will be registered under the new name if default occurs
        o Under this section need the following
                  Need to have a security agreement
                  The transfer needs to be good under s.68 of the Securities Transfer Act
                           Does not apply to private companies
                                  o But need to meet the restrictions on transferring of shares in private companies
                                            E.g. no transfer without board, or all shareholder’s approval
                                                     Get a document evidencing approval or else could be in trouble
Proposed s.11.1
A security interest in favour of a securities intermediary attaches to a person’s security entitlement if,
        (a) the person buys a financial asset through the securities intermediary in a transaction in which the person
        is obligated to pay the purchase price to the securities intermediary at the time of the purchase; and
        (b) the securities intermediary credits the financial asset to the buyer’s securities account before the buyer
        pays the securities intermediary.

 Definition of securities intermediary is in the Securities Transfer Act but essentially it is a broker, dealer, or bank,
  or other who trades securities in the ordinary course of business
 Key points of proposed s.11.1
      o No security agreement is necessary  The interest attaches with zero formality
      o The section creates an enforceable security interest
                The dealer has a right of set-off – if the dealer is purchasing shares without the buyer having paid
                   the money it is highly likely that the buyer has other securities with the dealer – can set-off
                The right exists against all assets in the buyer’s account  supports contractual right of set-off
 In a security agreement you need to take account of contractual rights – such as franchise agreements – that the
  debtor may have because under the contract the debtor may not be able to provide security without breaching the
  contract and allowing the other contracting party to void the contract void – this could irreparably harm the debtor
 Also usually want a clause saying the debtor acknowledges that value has been given when signing the agreement
      o But shouldn’t rely on it to hold up It is better to give actual value – such as a promise of a future loan –
           so long as the promise is enforceable
 In effect a good security agreement allows you to say that you have an attached interest

                                                                                                                       11
PERFECTION BY POSSESSION
 If an interest has been perfected in any way and is again perfected it is deemed continuously perfected – s.21(1)
        If perfected can change method of perfection as long as continuously perfected; will not affect priority or
           security interest  for example have perfection by possession but give up possession – if register is OK
 The PPSA provides for a number of things that can be perfected by possession – s.22(1)
       o For perfection by possession must be the creditor or the creditor’s agent who possesses – s.22(1)
                Cannot be the debtor or the debtor’s agent
 But cannot perfect an interest in intangibles or fixtures under s.22
       o Intangibles, by their nature cannot be possessed – for example a share certificate, chattel paper or an
           account only evidence an obligation they are not per se, the obligations
       o Fixtures – to possess would to have an ownership interest in the land to which they are attached
 Documents of title – just evidence a right to something else – e.g. the right to receive a shipment of grain
       o Can have a possessory interest in the document of title because it provides a security interest in the grain
       o Can perfect an interest in goods held by a bailee by perfecting an interest in a negotiable document of title
           issued by the bailee – s.26(1)
 Have special rules for certificated security – s.22(2) and investment property – s.22.1
       o For certificated security and investment property the secured party needs to take delivery of the collateral
       o Delivery  s.68 of the Securities Transfer Act = Securities are in form that are deliverable are
           transferred in way that constitutes a distribution under the OSA  Secured party must be put in a position
           where, if there is a default, they may move to take possession  Same act that allows delivery of security
           into pledge that constitutes attachment and perfection
                Re: MC United Masonry  secured party received a security interest in shares of a closely held
                    corporation without board approval and even though shares had not been transferred on the
                    register  court said it was okay but would have to abide by corporation’s rules re: disposal
 Need to have actual possession to perfect by possession  cannot be constructive posssession, cannot be by
  disabling machinery
       o Re: Raymond Darzinskas – need to have actual possession cannot be disabling machinery etc.
 Repossession by receiver acting for the creditor counts so long as the receiver only acts for the creditor
       o Cannot be agent of the debtor
                Sperry Inc. v CIBC  credit agreement of the bank said that the receiver would be the agent of
                    the debtor – as a result bank did not have possession of collateral and lost
       o Deloitte v. Folden  repossession by a creditor is perfection by possession, subject to above limitation
 Possessory possession for investment properties exists if you control the investment account
       o Dealer who manages investment accounts effectively possesses them
 Possession only perfects an interest where there was an intention for the possession to be in relation to a debt





                                                                                                                   12
PERFECTION BY REGISTRATION
How do you perfect a security interest
 Perfection by registration is a mechanical process – related to the PPSA provisions
 Need to register a financing statement to perfect a security interest – s.45 – but this does not tell you much
 Look to the regulations to determine the form of the financing statement – s.27 – and the contents of it – s.3
 For consumer goods need the debtor to sign the security agreement first S.45(2)
      o Have differential treatment for consumer goods to protect them and to make it easier to get credit
 Do not need the security agreement signed first for other goods S.45(3)
 A financing statement can perfect more than one interest created by more than one agreement - S.45(4)
      o Even where the security agreements or interests are not part of the same transaction - S.45(4)(a)
      o Or whether the agreement is signed by the debtor before the financing statement is registered - S.45(4)(b)
      o Section allows for the tacking on of future interests  enables creditors to take enough security up front
          to allow for them to advance future funds

What is perfection – s.19
 Perfection occurs when an interest has attached and all steps needed for perfection under the PPSA have been met
 Does not matter what order they occur in
      o Coexists with s.45(3) – can have an interest registered before it attaches
               Why allow for registration first – to let others know what is going on and to preserve priority

What is a financing statement? What does it include?
 Reg  S.27 – financing statement shall be in Form 1  s.3 “financing statement shall set out the following…”
 Financing statement is good for up to 5 years for consumer goods, 25 years for other goods, or 99 for perpetual
 S.3 provides certain information that is useful when it comes to searching the registry – name, D.O.B., VIN, etc.
      o Need to know how to search for records – so need the name
      o In the case of motor vehicles need to search for any security interest entered against the vehicle so need
          the VIN to search by VIN
      o Name and address of secured party is important because if another wants to take security they will want to
          know who has security in order to attempt to negotiate an inter-creditor agreement
      o Also so that others are aware of who has the security interest
 On Form 1 there are boxes indicating what the security is over – inventory, equipment, consumer goods etc.
      o There is also a box marked “other”
               May be everything else – floating charge – or some more narrow definition – just depends
      o Which box is checked is important because if you want to vary the boxes – category of security – you will
          need a new financing statement which will only have priority from the date that it is registered
      o Also because it may not be possible to change the collateral description later on
      o There is an option to include a description of the collateral – but not necessary
      o When a motor vehicle there must be a description including the VIN
      o For consumer goods need to have the value of the principal being secured  No such stipulation for other
          security – because an indicated value would limit the ability to tack on to the security at a later date
 Collateral does not need to be described but it often is  Maybe creditor does not expect to make future advances
      o Also the creditor may not want to have others contacting them to figure out what assets they have secured
 S.23  information on the form shall be in black – typewritten, upper case, no punctuation etc

Submitting financing statement of financing change statement
 Can submit the financing statement or financing change statement by delivery – s.46(1) – electronically – s.46(2)
 Electronic submission eliminates the basket problem – where filings are in the basket when you check registry
      o Electronic registration makes it easier to know what priority you have




                                                                                                                 13
Protections of registration under the PPSA
 Can obtain a certificate of registration – s.43 – certificate will say whether there is any registered interest at that
  time, whether there is a lien under the RSLA etc.
 There is also insurance in case a certificate is issued that is incorrect – s.44(1) creates it s.44(4) - application

Financing Change Statement – s.47 - 57
 If things change you can file a financing change statement and not lose priority – but need to adhere to time limits
 Can register a financing change statement at any time during the registration period – s.49 – to
       o Correct an error or omission in a previous registration – s.49(a)
       o Amend a previous registration if no other provision permits– s.49(b)

Can file a financing change statement to:
 Evidence a subordination agreement – s.50
 To evidence an assignment of an interest – s.47
       o S.47(1) – where the interest was perfected by registration
       o S.47(2) – where not perfected by registration  can name assignee as secured party – s.47(1) does not
           apply (s.47(2)(i)) or naming the assignor as secured party – s.47(1) applies (s.47(2)(ii))
       o S.47(3) – in either case the assignee becomes the secured party of record
 To maintain a security interest where the debtor has transferred their interest in the collateral
       o If the debtor transferred with consent the secured party has 15 days to file the statement – s.48(1)
       o If the debtor transferred without consent the secured party has 30 days from the later of – s.48(2)
                (a) the date of transfer where the secured party had knowledge
                (b) the day the secured party learns of the transfer
 To maintain an interest where the debtor’s name has changed – have 30 days from finding out – s.48(3)
 To reduce the registration period of a financing statement – s.51(2) – useful if period needs to be extended
 To re-perfect a lapsed security interest – s.52(2)
       o But the interest will recommence from the filing of the financing change statement  S.30(6) – shall be
           deemed continuously perfected except against interests taken in the lapse in perfection
 To discharge or partially discharge a registration – s.55
 Can demand financing change statement when obligations have been met and want to release collateral – s.56(1)
       o If this is the case the secured party must comply – post-amble
 If the person who registered has not acquired an interest can ask for a financing change statement – s.56(2)
       o If this is the case the party who filed the financing statement must comply
 If monies are paid into court secured party may be ordered to wholly or partially discharge the
  registration – s.56(5)  Court may also order the registrar to amend the financing statement and land
  registry records
 If the goods are consumer goods and all obligations are met the secured party must discharge the interest
  within 30 days – s.57(1)
       o If the secured party fails to do so they may have to pay the debtor damages – s.57(2)

What can’t you do with a financing change statement
 Can’t change an expired registration
 Can’t create a security interest in consumer goods under a new security agreement
      o No tacking on  Can’t increase the amount of security – s. 45(4)
 Can’t change the classes of collateral – s.46(3)  to do this you need a new financing statement
 Can’t correct a completely invalid registration
      o But s.49 says we can correct errors – but not if the error is likely to mislead a reasonable person – S.46(4)
 S.23 says that you can perfect a security interest in any type of collateral by registration
      o Unlike the limitations under perfection by registration
 Financing change statement  Amends an existing registration already in the system  maintain priority ranking



                                                                                                                            14
Debtor’s Dealing in the Collateral
 What happens if the debtor transfers the collateral to another person
    o If the creditor authorized the dealing they have 15 days to file a financing change statement – s.48(1)
             If they do not do this then their interest will become unperfected
    o If the creditor did not authorize the dealing they have 30 days from the later of - s.48(2)
             The transfer if the secured party had knowledge and has the information to file - s.48(2)(a)
             The day the secured party finds out about the transfer - s.48(2)(b)

What happens if a financing statement or financing change statement is erroneous
 Only invalidated if the error or omission is likely to mislead a reasonable person – s.46(4)
     o There are two ideas in this section
               Some registrations may be invalid
               Some errors are fixable by using a financing change statement
                        But even in cases where there is an error likely to mislead you would still likely file a
                           financing change statement as well as a new financing statement in the hopes of
                           maintaining your priority
     o Re: Lambert  financing statement relating to a motor vehicle, consumer goods. Name was wrong but
         the VIN was right. Man goes bankrupt and trustee searches using only the name but finds nothing
               Trustee claimed that it was misled by the erroe in the financing statement
               Court said that the reasonable person test is objective  question is not if the trustee was misled,
                  but rather would a reasonable person be misled. Further reasonable person meant reasonable user
                  of the system, someone who knew how the system worked and would have known that you could
                  search by VIN as well as by name
                        Only for consumer goods do you need the VIN if not consumer goods should still use
                           VIN  just to play it safe – s.28(5) motor vehicle sold not in ordinary course is taken free
                           of any interests unless the VIN is right
               Court also said that a correct name and wrong VIN would be fatal  because without the right
                  VIN you would not know about prior interests – e.g. buy from a used car dealer get free of any
                  interests created by them but not of any that existed before so if registered absent VIN would not
                  know about them
               Trustee knew about both means of searching – name and VIN – and should have used both
     o GMAC Leaseco v Moncton Motor Homes Ltd.  the name was wrong with Motor Homes as one word
               The statute in New Brunswick says that if the name is wrong then the financing statement is
                  invalid  said that in a paper system there would have been no problem as someone searching
                  would have found the registration but in an electronic system it is not the same
               Also court said that not all possible users of the system would have the VIN or access to it 
                  need to consider that as well

 From s.28(5) above, we see that the buyer is affected by knowledge
     o Knowledge of prior interests, however, does not affect any others under the PPSA
 Key in determining whether a registration is invalid  does the mistake make it impossible for others to ascertain
  whether or not there are other registrations




                                                                                                                    15
PRIORITY RULES
 Under the old system of document registration it was deemed that a properly registered document served as
  constructive notice to others
 It was also deemed that if you did not register, or registered improperly then you lost common law rights
 But PPSA changed things  no longer have constructive notice other than registration, also PPSA priorities apply
 A security agreement is effective according to its terms and is valid against third parties - S.9
 Unless attached a security interest is unenforceable against third parites - S.11
 Security interest is always good against the debtor even absent perfection and attachment

Unperfected Security Interests
 There are several actors who will beat an unperfected security interest – s.20
     o A perfected security interest or a lien given by statute or rule of law- s.20(1)(a)(i)
               Even if the second interest attaches later than the first one and the creditor registering the second
                  interest knew of the first interest  Rights and priorities are not based on knowledge
     o One who assumes control through execution, garnishment etc. - S.20(1)(a)(ii)
     o One who represents the creditors of a debtor including a trustee in bankruptcy - S.20(1)(b)
               The trustee’s interest is valid from the effective date of bankruptcy  A creditor, who gets
                  knowledge of the debtor’s bankruptcy and is able to get the security interest perfected prior to the
                  appointment of the trustee is okay
     o Couple of issues with the trustee in bankruptcy
               The question in these cases is the constitutionality of the provision
                        Issue arises because the Bankruptcy and Insolvency Act stipulates that the trustee
                           acquires no greater rights in the collateral than the debtor has
                        How then can the trustee rank higher than a secured creditor with an unperfected security
                           interest when the unperfected security interest is good against the debtor
               International Harvester – PPSA says what it says, trustee wins over unperfected interest
               Re: Giffen – trustee claims a leased car – more rights than the debtor – interests were not
                  registered in the car – trustee wins
                        Case could impact others currently moving forward – banks under CPA
     o Transferee for value of chattel paper, documents of title etc. - S.20(1)(c) – knowledge is important – must
          not have knowledge of the security interest
               E.g. in buying a used car in a private transaction there is supposed to be a UVIP – Used Vehicle
                  Information Package – which includes a PPSA information sheet listing prior registrations
                        If no registrations then all is good, if there is then they need to be addressed
                        But if the vehicle is purchased from a used car dealer – in the ordinary course of business
                           – then there is no UVIP and the buyer takes the vehicle free and clear
                               o Dealer should have done a VIN search prior to buying the car from the one who
                                    sold it to the dealer

Key question re: validity of the financing statement
        o   Would a reasonable person be likely to be misled by the error or omission
               If yes then the financing statement is invalid

Priority under the PPSA
 S.30 priority rules only apply when no other provision of the Act is applicable - S.30(1)
      o S.30 looks like a simple, straightforward provision, but it is difficult conceptually
 First priority rule  order of registration - S.30(1)(1)
 Second priority rule – between one interest perfected by registration and another perfected by possession –
  interest perfected by registration ranks first if it was perfected first – s.30(1)(2)(i) – one perfected by possession
  ranks first if it was perfected first – s.30(1)(2)(ii)
      o These two provisions are opposite sides of the same coin


                                                                                                                           16
 Third priority rule – if between two interests perfected by possession the one who perfects first wins -
  S.(30)(1)(3)
      o But how could this conflict ever arise – cannot have two having possession at the same time
      o S.21 - If a security interest is originally perfected in any way permitted under this Act and is again
          perfected in some way under this Act without an intermediate period when it was unperfected, the
          security interest shall be deemed to be perfected continuously for the purposes of this Act.
      o S.30(2) - For the purpose of subsection (1), a continuously perfected security interest shall be treated at
          all times as if perfected by registration, if it was originally so perfected, and it shall be treated at all
          times as if perfected otherwise than by registration if it was originally perfected otherwise than by
          registration.
 Fourth priority rule – if between two unperfected interests the first to attach wins - S.30(1)(4)
      o Generally this provision means that whoever has their security agreement signed first will win
                But could also come down to whether or not there has been value given

Other important parts of s.30
 Future advances have the same priority as the first advance - S.30(3)
      o Remember that financing statements, for other than consumer goods, do not need to include the amount
               Can therefore be provisions for future advances – need to be careful
 Future advance is subordinate to judgment creditors and trustee if the advance is after judgment or filing - S.30(4)
      o However, it is unlikely that a creditor, after receiving notice of the seizure would ever advance more
          money
      o This provision allows for the execution creditor to seize the property, sell it, pay off the secured debt on
          the property and retain the remainder
      o Perhaps this provision is there to ensure that the execution creditor advises the creditor in writing of the
          seizure so that the creditor is aware of it
      o But one making future advances for reasonable expenses is exempted from this - S.30(4)(a)
      o Also where the secured party is bound to make the advance they are exempted - S.30(4)(b)
               In this case the secured party who has to provide future advances to the debtor is protected – such
                  as under a line of credit or other arrangement
 Registration and/or perfection of the interest in collateral is the same as the registration as to proceeds - S.30(5)
      o Section just provides for cases where collateral is sold and is no longer the property of the debtor
      o In such cases the security interest transfers to the proceeds of the collateral
               In earlier car dealership example the security was in the car that was sold, once it is sold then the
                  security interest transfers to either 1) the cash received from the sale, 2) the chattel paper created
                  upon the sale, or 3) a combination of 1) and 2).

 Knowledge is not important – can register a subsequent interest even knowing there is another interest and will
  defeat it if the first interest is unperfected – Robert Simpson v Shadlock and Duggan

Investment Property – s.30.1 under the amended PPSA
 There are new rules in the proposed changes to the PPSA to deal exclusively with investment property – s.30.1
 In essence what s.30.1 boils down to is three rankings
      o The one who has control over the securities account
      o One who has a pledge of the share certificates but not actual control of them
      o Registered interests
 S.30.1 is a response by the PPSA to changing dynamics of the lending environment
      o Shares are easily transferred – difficult to track and onerous to keep registering them
      o Often shares are used as security and need a system to ensure effective tracking
      o Also much of securities trading does not actually involve the physical exchange of securities – just
          electronic entries




                                                                                                                     17
PURCHASE MONEY SECURITY INTERESTS – PMSI

 PMSI’s are en exception to the priority rules found in s.30 of the PPSA
 PMSI is defined in the Act
 S.33 exists because if a bank has a floating charge any new property will be subject to it  would limit the ability
  of the company to acquire additional assets
 PMSI’s do not limit the scope of the bank’s ability to recover because the asset base is increased
 PMSI’s allow for some retention of the legal vs equitable distinction – are a type of title retention – until paid for
 One problem though is that the PMSI has been expanded beyond its initials scope of a provider of goods to the
  debtor to include one who provides financing
 The holder of the floating charge may want to limit the debtor’s use of PMSI’s - Because if the debtor gets
  PMSI’s it will have to service its debts – PMSI’s will reduce the amount of cash to service the initial debt
       o It is therefore in the interest of the one holding the floating charge to construct effective covenants
                May want to limit the total amount of PMSI’s, the types of PMSI’s or the amount of the purchase
                   that can be financed
 PMSI holder has priority because, through the provision of the PMSI, the debtor has acquired more property and
  allowing the PMSI holder to get priority will not take anything away from the holder of the floating charge
       o The PMSI will not impact the holder of other security interests

A PMSI has one of two forms
 Either the claim of an unpaid supplier – part (a) of the definition of PMSI
 Or the claim of a financer of the purchase – part (b) of the definition of PMSI
      o The financer, through providing funds, allows the debtor to acquire rights in the collateral
      o Unisource Canada v. Laurentian Bank – allowed debtor to acquire title, was more than lease = PMSI
 PMSI does not include sale and lease back transactions  do not allow the debtor to acquire any more assets
 How broad is part (b) of the definition of PMSI – allowing the debtor to acquire rights in the collateral
      o Is it a PMSI if financer provides money to pay off another creditor  debtor does not acquire more rights
      o Agricultural Credit Corp. v Pettyjohn and Credit Union Ltd. v Ilnicki (Sask)
                Say that refinancing is a PMSI
                Pettyjohn – got the cattle before he got the money but had approval of loan – is a PMSI
                Ilnicki – got a consolidation loan to pay off other PMSI’s – said was a PMSI b/c rid him of others
      o North Platte State Bank v Production Credit Association (US)
                Had cattle with a PMSI from PCA, bought more, did not get money from bank until 1½ months
                   later, already had title, could get no more rights, was not a PMSI from the bank
      o Could get around this issue by going to another financer to pay off the first – the second then assumes the
           position of the first – s.21(2)
      o May file a financing change statement – s.47 – for assignment of interests – don’t need to but should

There is a big problem with refinancing a PMSI
 Does not seem to be allowed under the Ontario PPSA  But the Saskatchewan cases say it is okay  The US
  case seems to say that it is not okay  Probably best to do an assignment and not have to worry about it

Can you have two PMSI’s in the same property
 Yes in two ways
      o Vendor and financer  Vendor finances some portion of the purchase price and financer the rest
      o Financer and financer  Two financers together provide the financing for the purchase
 But who wins
      o If a vendor and financer the vendor wins – s.33(3) – financer should get an inter-creditor agreement
      o If a financer and financer look to s.30 priority rules – could share but PPSA is not big on sharing
              Again probably best to get an inter-creditor agreement in place to deal with this type of situation



                                                                                                                     18
Inventory PMSI
 Inventory – s.33(1)
 Must be perfected before debtor obtains possession (s.33(1)(a)(i)) or a third pary obtains possession for debtor (ii)
 PMSI provider must notify secured parties before the debtor obtains possession – s.33(1)(b)
 In the notice must describe the inventory to which the PMSI will be attached – s.33(1)(c)
 Inventory is a common type of PMSI security – for example car dealers will have PMSI’s from manufacturers
 There are a couple of problems with inventory PMSI’s
       o When a trustee or receiver is appointed you have competing interests
                PMSI holder will want to get their property back – but need to show proof of what is theirs – need
                   to identify the property
                This is difficult when you have mixed inventory
       o The other major problem is the issue of proceeds
                Need to know what the proceeds are  what did the PMSI turn into
                         For example a car dealer sells a car for a used car trade-in and chattel paper
                                o These are the proceeds
                The PMSI applies to the property and its proceeds
                Do you need specific itemization of the proceeds or can you aggregate the proceeds from all of
                   the items provided
                Chrysler Credit v Royal Bank – court said that you can aggregate the proceeds – put them all
                   together until the amount owing is paid off rather than have individual proceeds from individual
                   piece of collateral  Forbes likes this case better than the next one – is fairer to financers
                Unisource Canada v. HSBC – from Ontario and says the opposite of Chrysler – goods were no
                   longer identifiable as printer had printed brochures, PMSI only applied to the raw paper on hand
                         Problem with Unisource is that vendors often screw suppliers by not paying and selling
                            inventory to pay for other things instead
 What if an inventory supplier says that in addition to taking a PMSI over the inventory they are supplying that
  they want a PMSI against all inventory
       o Is this a PMSI – Clark Equipment v. BMO – cannot extend your PMSI over other inventory

Proceeds of PMSI
 Could be many things  Chattel paper – Cash - Used car traded in - What about receivables
     o Massey Ferguson Ltd. v. BMO – when the goods subject to a PMSI have been sold the PMSI supplier has
         a prior claim to the proceeds from the sale

Collateral PMSI
   Can have a PMSI in goods that are not inventory – s.33(2)
   The rules for PMSI’s in collateral that is not inventory are much simpler than for inventory
   Must perfect before or within 10 days of debtor or a third party acquiring possssion of the collateral – s.33(2)(a)
   For intangible must perfect before or within 10 days of the attachment of the PMSI in the intangible – s.33(2)(b)
   S.33(2) is much simpler than inventory  have 10 days to register, do not have to register before possession
        o Under s.33(2) the debtor must acquire the collateral as a debtor
        o Unisource Canada v Laurentian Bank
        o Brodie Hotel Supply v USA – Brodie had a hotel, debtor wanted to try to run it, decided he could make a
            go of it, and got financing from Brodie – at that point became a debtor of the creditor and PMSI arose

   What if you do not register the PMSI within 10 days  Then goes to s.30 rules – is only a perfected interest
   What if you never register the PMSI  Then goes to s.20 rules for unperfected security interest
   PMSI = super-priority
   The priority of a PMSI follows through to the proceeds
   Non-inventory PMSI is easier than inventory PMSI – can register after
   If you don’t comply with s.33 you lose the super-priority and then fall under the s.20 and s.30 rules
   There are provisions in the PPSA that give you a better interest than s.30 does if you have a registered but
    unperfected security interest

                                                                                                                     19
SUBORDINATION
 It is possible to subordinate security interests to other interests – s.38
 Can do this in the security agreement or through other means – for example in an inter-creditor agreement
       o Not necessary to have privity of contract – when the secured party agrees in the security agreement to
           subordinate their debt they are not contracting with the other secured parties but with the debtor
 Subordination agreements alter the priorities found under s.30
       o Chiips v Skyview Hotel – security agreement allowed for PMSI’s to rank higher, the PMSI’s were not
           perfected but the court said that regardless they still ranked higher because the security agreement did
           not limit applicability to only perfected PMSI’s  also for PMSI’s the subordination was necessary to
           allow the debtor to carry on business, without them it would be impossible to get financing, even PMSI

 How far can this line of thinking be taken?
     o If a creditor agres in the agreement that others will rank higher then that is okay
     o But can inferences in the agreement be sufficient
              Is a clause saying that no other security interests can be created except for PMSI’s enough
 Two cases flesh out this idea –
     o Engel Canada v TCE Capital Corp  Engel provided machines to the bankrupt company over which
         TCE had a general charge. Engel did not perfect its interest in time – the general interest included
         security over unencumbered equipment but the Engel machines were encumbered – seems to be that the
         agreement implies that there could be encumberances leading to subordination, Engel wins
     o Kubota Canada v Case Credit  says the opposite of Engel. Court says that there needs to be some sort
         of positive language in order to create subordination, cannot rely solely on negative pledges in the
         security agreement  do not need express language creating subordination but need something
         evidencing that intention

Engel Example
 Borrower wants to buy equipment, bank has general security with floating charge  Usual financer declines
 Borrower gets the equipment anyways, assuming the financer will pay for it but the financer refuses so the
  borrower finds another financer to finance it  gets one but the PMSI was not registered in time
 Bank’s financing agreement included a negative pledge – no other interest will rank higher
 Bank says that an improper PMSI is not sufficient to rank higher than it
 Financer says that it was understood that the equipment would be purchased with a PMSI because that is the way
  the company had always purchased equipment
 Court agreed with the financer  said that it was understood that a PMSI would be created in this circumstance,
  that the bank’s interest was understood to rank below this PMSI and therefore s.38 applies
       o Representations and covenants in security agreements can create subordination

 Engel may be coloured by the intention of the parties that a PMSI would rank higher than the bank
     o But it would appear that you would need evidence to show that this was the intention of the parties
 IMPORTANT – need to ensure specificity in the security agreement to avoid uncertainty over intention

Engel – Circular Priorities Example
 A is first to register and perfect its interest  Security agreement includes a floating charge and agreement for
  security to banks for short term credit needs secured only be receivables
 B is second to register and perfect its interest  Security agreement includes a floating charge and no carve-outs
 C is a bank that lends and takes security in the receivables
 In this case under s.30 A > B and B > C but under s.38 C > A and A > B
       o No technical way to resolve this  Practically A can buy out C and tack onto its original security

 Forbes likes Kubota case because there are a lot of traps in Engel  no creditor would agree to be beat by a PMSI
  – whether perfected or not  Creditors would be shocked to learn that they rank below unperfected PMSI
  interests  But in Engel it is clear that the parties intended for there to be a PMSI and for the security interest to
  rank below the PMSI

                                                                                                                      20
FIXTURES, ACCESSIONS AND COMINGLED GOODS
Fixtures
 The rules for fixtures and accessions are the same
 Fixtures and accesssions have the effect of being able to alter the priorities under s.30
 Fixtures are not really exceptions to s.30, but accessions, like PMSI’s are
 Fixtures relates to the priority between interests in land (non-PPSA) and a security interest in the fixture (PPSA)
 Property often gets affixed to land – big equipment for example
      o One either has an interest in the property before it gets affixed or after it gets affixed
 What happens to the PPSA interest where the property is sold?  One issue is the degree of annexation
      o There is no definition of fixture in the PPSA – need to look to case law
      o Cormier v Federal Development Bank  Any degree of annexation is sufficient to make it a fixture
                If it is attached by any means other than by its own weight then it is a fixture

What are the rules for fixtures
 If interest attached before the goods became a fixture it has priority over the real property interest – s.34(1)(a)
 If interest attached after goods became a fixture it has priority over subsequent real property interests – s.34(1)(b)
       o Remember – only attachment is important here
 Security interest is subordinate to the interest of a subsequent purchaser for value – s.34(2)(a)
 Security interest is subordinate to subsequent advances on a prior real property interest – s.34(2)(b)
       o But these only apply if there was no knowledge of the security interest unless it is registered under s.54
 Can register the security interest in fixtures under the land registry – s.54(1)
 The registration can be for a fixture – s.54(1)(a) – or a right to payment under a mortgage or lease – s.54(1)(b)
 Reason for having deference to s.54 is that a purchaser of land will check the land registry and not the PPSA
  registry – if it is registered in the land registry then the purchaser has notice of the interest in the fixture

Accessions
   Goods that are installed in or affixed to other goods
   The competition with accessions is between those that have interests in the goods that are attached to one another
   If interest attached before the goods became an accession then the interest has priority – s.35(1)(a)
   If interest attached after goods became an accession then interest has priority over later interests - s.35(1)(b)
   Again, as with fixtures, the important time is the time of attachment of the security interest
   Interest in accessions is subordinate to a buyer of an interest in the whole – S.35(2)(a)(i)
   A creditor with a prior interest in the whole who makes subsequent advances – s.35(2)(a)(ii)
   The interest in the accession is subordinate to one with an interest in the whole who assumes control through
    execution etc. – s.35(2)(b)
         o Limitation though on these is that they must be made before the interest is perfected
         o Because if it is perfected it will be registered and they will know about them

Comingled Goods
 Comingled goods – comingled goods are goods that lose their identity through the manufacturing process or
  through some other process by being mixed in with other goods
 The interest in the comingled good continues in the comingled good – s.37
 Also if more than one good subject to an interest makes up the mass they rank proportionally – s.37
 This applies to all things – seems foreign to the PPSA which is about winning not sharing
       o S.37 will reorder not only s.30 but also s.33
       o PMSI and non-PMSI goods for example rank proportionally under comingled goods
 If there is an unperfected interest in the comingled goods it does not rank with the others that are perfected – but it
  may result in a residual amount
       o For example there are three suppliers that supplied inputs to make the product – two have perfected
           interests – will get an interest in the comingled goods and after they are paid off the unperfected interest
           may be able to claim the remainder

                                                                                                                      21
PROCEEDS
 Where proceeds arise the security interest continues unless the secured party authorized the dealing – s.25(1)
 Authorization can be express or implied  implied is usually security interest in inventory – needs to be sold
 Proceeds – is defined in the PPSA, can also have proceeds of proceeds – e.g. chattel paper sold for cash
 There is no definition of tracing in the PPSA so it is necessary to look to trust law for a definition
 If the secured party did not authorize the dealing with the collateral the interest continues in the collateral
       o But need to comply with s.48(2) about filing a financing change statement
 The claim against the proceeds remains valid and as strong as the claim against the collateral – s.25(2)
 Security interest in proceeds remains continuously perfected if the interest in the collateral was perfected – s.25(3)

Exception for a motor vehicle
 If bought in good faith  take free of security unless secured party files a financing change statement (s.25(5))
      o Need to have the VIN on the financing change statement  Again takes us back to Lambert

What could proceeds be
   Receivables  Property is sold - becomes an account (promise to pay) or chattel paper (secured promise to pay)
   Trade-ins  Used cars sold to the dealership when buying a new car
   Cash  would then have an interest in the cash
   Bank deposit  money get put into the bank – the issue of tracing arises – how to identify the money
   Through the bank account  if money in the account buys other goods does interest continue into those goods

Tracing
   The issue of tracing is a big problem because of the definition of proceeds – must be identifiable and traceable
   It is pretty easy to trace from collateral to chattel paper or receivables and through to cash
   But it is difficult to trace into and through a mixed bank account
   There were really two sets of rules for tracing – at law and in equity
         o At law – cannot trace into a mixed bank account
         o In equity – in order to invoke equitable tracing you need to show that the tracing remedy arises as a
              breach of trust  could then trace through a mixed bank account
   Is a PPSA proceeds claim subject to a legal or an equitable tracing remedy  appears to be equitable tracing
         o Next question is what amount in the bank account do you have a right to
         o LIBR – Lowest Intermediate Balance Rule – James Roscoe v Winder
         o LSUC v TD Bank – LIBR does not apply to PPSA tracing – is difficult to apply with numerous claims
         o Graphicshoppe – employee pension contributions lost their character when the money was turned into
              something that could not be traced into, as a result the employees failed. Also the account had gone
              negative prior to bankruptcy
   Equitable tracing seems to say that PPSA tracing is equitable tracing and that you can trace into a mixed account
   But Ontario law seems to say that the LIBR does not apply to equitable tracing and instead pari passu prevails
   What if you have 2 PPSA claims to proceeds in the bank account
         o Will it go to the priority rules, or will they share pari passu  Would seem the PPSA priority rules apply

Can you convert a proceeds claim into a trust claim with a clause saying that proceeds are held in trust?
 Could try and it does not hurt to have that in the security agreement but it would probably not work against the
  deemed trusts such as those for employee pensions
 But it may be possible to have a security agreement with a trust provision triumph over one without a trust
  provision – remember s.38 – subordination – where debtor and creditor can agree to reorder priorities

What happens if money goes through a bank account and buys new property?
 Using the Agricultural Credit v Pettyjohn case as a basis – facts below are not exact
 Farmer has a bank account, goes to AC for financing to buy a herd of cattle ($100,000) - The loan is outstanding
  and the farmer sells the cattle and puts the proceeds in the bank - Farmer pays some bills etc. and then decides to

                                                                                                                      22
    buy a new herd of cattle - New herd costs $150,000 but the farmer only has $80,000 so loans the other $70,000
    from a bank - Farmer can’t pay off the loans so goes into default
   Both the bank and AC look to the herd as security
   What rights does AC have to the herd?
        o First need to know if the sale of the original herd was expressly or impliedly sold authorized by AC
        o What if they had a clause saying the farmer could sell it but only if he paid off the loan
                 Would therefore have no rights in the old herd – could argue that the pay off the loan part was a
                     condition to the authorization to sell that was not met and so the interest continued in the old herd
                     – but difficult to sustain
   Does AC have a right to go after the new herd – court said yes because the proceeds of the first bought the second
   Pettyjohn says that you can trace through a mixed bank account
        o Court said to forget about all of the technical tracing rules
        o Question is whether new collateral is, in substance, the proceeds of the old collateral  does new
            collateral in effect replace old collateral  If so then the security interest will continue into new collateral
   Bank will say that it has a PMSI interest – but so will Agricultural Credit
        o Each provided the money to buy the cattle
        o If AC could show that it had a PMSI then it would win  If not then it would lose if the bank had a PMSI
        o If instead of a bank providing the financing the farmer had gotten credit from the vendor of the cattle then
            the PMSI interest in favour of the vendor of the cattle would triumph – s.33(3)
   What if the herd contracted anthrax and was wiped out – would the bank and AC have an interest in the insurance
    proceeds  Yes – look to the definition of proceeds from the PPSA
   What if the herd had been wiped out through the negligence of a third party and the farmer sued in tort – would
    the bank and AC have an interest in any tort award
        o Yes – a cause of action is a choses in action, choses in action is an intangible and intangible is property –
            interest continues through the choses in action

 Do the equitable tracing limitations apply to a PPSA claim  Re Diplock
      o Court said that if the proceeds of a tracing claim end up in the hands of an innocent party who spends the
          money for their own benefit and the money is no longer identifiable then that is the end of the tracing
      o Court also said that if the proceeds end up in the hands of an innocent purchaser for value then the tracing
          remedy is over as well  Acts essentially as estoppel.
 Do these rules apply to PPSA interests  Probably not because of the PPSA provisions for innocent purchasers
               The PPSA contemplates these situations and provides rules for dealing with them
               The PPSA makes a determination as to when and whether a PPSA interest continues

Continuation of security interests
 When goods are returned to a seller or lessor who has not paid the secured party the interest reattaches – s.27(1)
 If an interest reattaches in this way it is as if the goods were never sold or leased – s.27(2)
 If sale or lease created chattel paper or an account which was transferred to another party the transferee gets a
  security interest in the goods – s.27(3)
 The transferee under s.27(3) must register a financing statement in respect of the goods within 10 days to maintain
  perfection of their interest – s.27(4) – or they can take possession of the goods as well to maintain perfection
 The interest of the transferee of an account under 27(3) or 27(4) is deemed perfected from the date of perfection of
  the interest in the account – 27(5)
 Transferee of chattel paper with an interest perfected under s.27(3) and s.27(4) has priority over the reattached
  interest under s.27(1) – s.27(6)(a)
 Betwee the transferee and any other party who has an interest in the goods the transferee’s interest is perfected
  from the time the interest in the chattel paper was perfected – s.27(6)(b)

   Unauthorized dealing with the collateral = claim against the collateral and the proceeds
   Authorized dealing with the collateral = claim against the proceeds only
   Termination of a security interest – when and how does it arise
   A security interest can be terminated even if it is properly registered and perfected
   Commerce needs to work on the basis that when a buyer purchases goods they do so free of any security interest
     without this guarantee then things would not work so well
                                                                                                                         23
WHAT IS “THE ORDINARY COURSE OF BUSINESS” AND WHEN IS A BUYER A BUYER
 If buyer buys in the ordinary course they take free of interests granted by the seller – s.28(1) – absent knowledge
       o Same thing for leases – s.28(2)
 S.28(1) intersects with s.25 – where there is an interest in collateral that can changed into proceeds
 Buyer of chattel paper who buys in the ordinary course of their business has priority over other interests – s.28(3)
 Purchaser of instrument or negotiable document of title takes frre of interests if value is given, they had no
  knowledge and the have possession of the collateral – s.28(4)
 Ordinary course of business – look to the substance of the transaction
 Remember that s.28(1) only releases security interests created by the seller so could have other interests
 Is it something that is a necessary incident to the transaction that is taking place
       o Camco Inc. v Olson Realty – selling appliances in a condo is incidental to selling the condo
 Is it something that another person in the same, or similar, situation would be selling
       o Schaus Feedlot – farmer selling corn to a feedlot though he had never done before, but other farmers do
       o Look to the form of the transaction
                Was the amount sold normal
                Was the price normal
                Would the buyer have had their suspicions raised because of the nature or context of the sale

Motor vehicles – special rules
        o   If a motor vehicle that is equipment of the seller is taken free of seller created security interests unless the
            VIN is registered – s.28(5)  back to Lambert and the importance of VIN registration

When does a buyer become a buyer
 Main issue in these types of cases is when people buy things from companies that go bankrupt before delivery
     o Spittlehouse v North Shore Marine – court said was a sale with title withheld until last payment was
          made

Buyer Example
 A buys a boat from B - B’s business is to sell boats - B bought boat from C - C financed the boat with D
 A buys clear of interests given by B but not clear of interests given by C - Unless C had the authority to sell
      o Questions - Did D’s security interest continue - Did D authorize the sale – if no then the interest continues
      o Did D know the boat was sold - If no then no problem - If yes, did D know who bought it - If yes then
           needs to register a financing change statement under s.48(5) - If no then okay
 If D filed a financing change statement then A does not have good title
 If D did not file a financing change statement then look to s.20 and A may prevail
 If D did not know of the sale of the boat then no need for financing change statement
 But this type of scenario may take you to the Consumer Protection Act and Sale of Goods Act

Buyer of Chattel Paper Example
 Car dealer with a PMSI inventory supplier - Dealer sells a car for chattel paper - PMSI claim transfers to chattel
  paper – proceeds of the collateral - Dealer sells chattel paper to a finance company for cash
 PMSI claim transfers to the cash – proceeds of proceeds of collateral
 Question is does the PMSI financer still have a claim in the chattel paper – s.28(3)(b) says that if the PMSI
  financer has any claim it is subordinate to that of the finance company
 S.28(3)(a) – deals with situations where there is a bank that has a floating charge over all assets of the company
      o Without knowledge of the finance company (actual knowledge) then the finance company will prevail

 Schaus – were there funny circumstances such that the buyer should have known something was not right
 Camco – was the collateral a necessary incident to something else – appliances with a condo
 Spittlehouse – buyer could be a buyer before possession of the property
      o If the buyer is obligated to pay the remainder of the purchase price
      o If the buyer can identify the goods

                                                                                                                          24
LEASES, CONSIGNMENTS AND ASSIGNMENTS AND TRUSTS
 PPSA applies to assignments, leases and consignments that secure payment or performance of an obligation
 PPSA does not apply to true leases, assignments or consignments  need to determine if true or not

Leases
 Companies primarily lease for tax reasons – the lessee can deduct interest payments, the lessor can deduct CCA
 Issue with leases is when is it a true lease and when is it a sale dressed up as a lease
 For the PPSA leases are important when, in essence, they create secured transactions - Lessor stills owns the
  property and the lessee pays rents
 Leases can be structured as a PMSI - lessor allows for the lessee to acquire rights to the collateral – as lessee

Key factors for the tax department in determining if a lease or a sale
 Whether the lessee is obligated to purchase the property at the end of the lease
       o If they are it looks more like a sale – lessee always had property – CCA would then apply to lessee
 If the purchase price is a nominal amount at the end of the lease
       o When low it looks more like a sale – especially if the lease payments have covered the purchase price
 Where there is an option to purchase the goods at fair market value and if the option is not exercised the lessee
  is obligated to pay a “make-whole” payment
       o Make-whole payment = cost of property + interest – fair market value – rents
                If negative then the lessee pays the negative amount, the make-whole payment
       o Tax authorities look at this as a purchase and not a lease

 Need to look at the lease in much the same way for the PPSA
     o If the lease is structured in such a way that it appears to be a sale then it is a PPSA lease
     o Crop and Soil Services v Oxford Leasing – called it a lease, court said was not
     o Adelaide Capital v Integrated Transportation Finance – looked like a lease, court said was not
              As a result of Adelaide probably best to register everything
     o Attachment for a lease = signing of the lease agreeement, perfection = registration

Consignment
 Consignment works the same was as a lease  Question – is it a true consignment or one dressed up as a sale
 Look to the following
     o Can the goods be returned to the one who provided them – car inventory example
     o Who takes the risk in the transaction
     o Is it a principal and agent transaction or something else

Assignments
 Assignment – if you sell something to another and assign title to them
 Assignments are different (so are trusts)  A company (debtor) assigns its property to C
       o Is it a real assignment or one that secures payment or performance of an obligation  gives C security
       o Re: Urman  was a conditional assignment and therefore the PPSA applies
 Can an unconditional assignment create a PPSA interest – yes s.2(b) when you assign an account or chattel paper
 If an assignment and not perfected trustee will triumph, bank would also be able to assert its floating charge

Trust
 When does a trust result in a transaction that creates a security interst
 Trusts are not specifically included in s.2  but s.2 is not an exhaustive list of PPSA transactions
 Important question  what is the structure of the trust - If in substance it creates an obligation PPSA applies
 For a trust question is  is the creditor a beneficiary of the trust  Who has the beneficial interest in the trust
      o Skybridge Holidays
 Trust, depending upon its nature – if money is put in trust for the benefit of a creditor = PPSA transaction

                                                                                                                        25
LIENS, DEEMED TRUSTS, AND OTHER NON-APPLICATION OF THE PPSA
What is a lien?
 Any right given by statute or law to seize hold and sell property for failure to pay an obligation
 Liens may well create PPSA interests were they not carved-out of the Act
 Two things about liens  1) You do not have to do PPSA filings for liens and 2) PPSA priorities do not apply
 If the statute that grants the lien has provisions for resolving conflicts that is it  if not then go to common law
 Title does not matter under the PPSA but in relation to liens it may as a title interest trumps equitable interest
       o Because where the Act does not apply would need to turn to common law – see Leavere
 The important thing with liens is to know how to deal with them
       o Under s.4 of the PPSA the PPSA does not apply
       o S.20(1)(a)(i) says that an unperfected security interest will fail against a lien
       o Perfected interests may also fail  due to the provisions of another Act or due to common law rules
 However the PPSA does say some things about liens

Liens under the PPSA
 The PPSA does not apply to liens given by statute  s.4(1)(a)
 Unperfected security interest is subordinate to a lien under any other Act or rule of law  s.20(1)(a)(i)
 No mention of perfected interests  do they trump liens
     o Leavere v. City of Port Colborne
 Mechanics lien has priority over a perfected security interest  s.31 – s.31 is mentioned in s4(1)(a)
     o May also apply to contractors’ lien but maybe not because PPSA does not apply to real property

Liens given by statute are not PPSA interests
 Unperfected PPSA interests will lose out to liens
 Perfected interests will have their priority dealt with by common law and/or other statutes
 Perfected interests are defeated by a mechanics lien – s.31

Where do liens come from?
 Landlord’s right to distress for unpaid rent  Only applies to commercial tenancies – distrain for unpaid rent
      o Commercial Credit v Harry Sheilds Ltd
 Innkeeper has a lien over any property of guests who do not pay  All goods in the guests’ possession are
  subject to the lien - Can include goods subject to a security interest - This is not a PPSA interest
 Municipal Act  Lien for failure to pay municipal taxes
 Repair and Storage Liens Act  Replaced the Wharehouseman’s Storage Lien Act and Mechanics Lien Act
      o Mechanics Lien  S.3(1)
      o Storage Lien  s.4(1)
      o The lien has priority over any other interest - S.6 – makes it explicit, reinforces s.4(1)(a)
      o Used to be these liens were only possessory liens but now include non-possessory liens  s.7(1)
                Need acknowledgement of the debt from the debtor (s.7(5)) and to register the interest (s.10(1))
      o Repair and Storage Liens Act is good where either
                The lienholder has the goods in their possession
                The lienholder obtained an acknowledgement of the debt and registered the lien

Deemed Trusts
 PPSA does not apply to deemed trusts created under any other Act – s.4(1)(b)

How do you get deemed trusts
 Created by statute - Pension Benefits Act – employee contributions - ESA - Income Tax Act – payroll deductions
 These are not PPSA interests
 Pension benefits and ESA amounts rank against other interests – s.30(7) – except a perfected PMSI – S.30(8)

                                                                                                                         26
Insurance
 PPSA does not apply to the transfer of an interest in or claim under any policy of insurance – s.4(1)(c)
     o Re: Stelco
 PPSA doesn’t apply to real property assignments – s.4(1)(e) – exceptions for fixtures and payments on a mortgage
     o This section again takes us to Re: Urman – assignment of mortgages
     o Could have assigned the stream of payments but cannot assign everything – section is frequently used
     o It is possible to take a PPSA interest in the proceeds from a mortgage or lease (the stream of payments)
        provided that the lease or mortgage is not transferred

Other exceptions under s.4
Pawnbrokers Act
 S.4(1)(d) – This Act does not apply to to a transaction under the Pawnbrokers Act
      o But for this exception in effect you do have a security transaction

Sale of the whole company
 S.4(1)(g) – This Act does not apply to to a sale of accounts or chattel paper as part of a transaction to which the
  Bulk Sales Act applies
      o Under s.2(b) the sale of accounts or chattel paper are PPSA transactions
      o This section applies to situations where a company buys another company through an asset purchase
          agreement as opposed to a share purchase agreement – buys the assets of the company
               This is not very common  is a very complicated transaction – asset purchases are done for tax
                  reasons when they are done
              
Assignment to a collections agency
 S.4(1)(h) – This Act does not apply to to an assignment of accounts made solely to facilitate the collection of
  accounts for the assignor;
      o Deals with the assignment of accounts to a collection agency
      o Is not for factoring because the money is collected for the assignor not the assignee
      o Important distinguishing feature  did the assignor get the money up front or to be paid later




                                                                                                                    27
ENFORCEMENT OF RIGHTS
When do enforcement rights arise
 When the debtor is in default under a security agreement – s.59(1)
 Default – failure to pay or otherwise perform the obligations secured when due or breach of covenants
     o Important to look to the security agreement in this regard  creditor needs to make a demand first
     o Demand – Waldron v Royal Bank
 Can enforce a security interest by any method permittd by law – s.59(2)
 Debtor also has rights – s.59(3) – as provided by s.17
 Security agreement can also set out the standards for measuring rights of debtor so long as reasonable (s.59(4))
 Cannot waive or vary the rights under s.17 an s.63-66 – s.59(5)

After default then what?
 Secured party shall use reasonable care to preserve collateral – s.17(1) – could have s.17 with possessory interest
 Secured party can get reasonable expenses, other conditions as well – s.17(2)
 Secured party is liable for any loss or damage for failure to meet its obligations under s.17(1) or (2) – s.17(3)

How do you take possession?
 Secured party can take possession by any means permitted by law – can render equipment unusable – s.62
     o R. v. Doucette

Can go to court to get
 An order for specific performanceAppoint a receiver to oversee the process
 An order of seizure
 A court appointed receiver  can appoint a receiver – s.60
      o If the situation is a messy one it is probably better to get a receiver appointed - But it is expensive because
          every time something needs to be changed you go back to court - As a result it is necessary to balance
          things – higher cost = less risk vs. lower cost = higher risk
 A PPSA enforcement can trigger an insolvency
      o Could get the debtor filing an assignment, or other creditors filing a petition
               In either case the act of insolvency is the failure of the debtor to make good on debts
      o Also possible for the debtor to go to the court and make an application for a proposal (BIA) or
          arrangement (CCAA)
 Basically, when a creditor tries to seize the property there are three possible outcomes
      o No insolvency – simple PPSA realization
      o Insolvency and a protection order under either the BIA or CCAA
      o Realization and an insolvency  this is what we see in many of the cases in this class
How do you realize on security
 Power of sale or Power of foreclosure

How do you decide?
   If you take property in satisfaction of the debt you have no ability to claim for deficiency
   If you take property under power of sale you can claim for the deficiency
   Also may choose foreclosure if you just want to get things over with  foreclosure is quick, easy and cheap
   But if you try to foreclose others may want to prevent it
   If there is a guarantor there is almost no likelihood of foreclosure – because foreclosure releases the guarantee

Power of Sale
 Can dispose of property after default – s.63(1)
 Type of sale contemplate – s.63(2) – usually auction because it most often will lead to the highest price
 Do not have to sell right away – s.63(3)

                                                                                                                        28
 Must provide notice to relevant parties – s.63(4)
 Secured party may buy the collateral but only at auction – s.63(8) – because otherwise looks like foreclosure
 When collateral has been sold the security interest of the secured party is discharged – s.63(9) – and any other
  security interests in the collateral if it was a buyer in good faith
 If not sold in accordance with s.63 the secured party could be liable for damages – s.63(10)
 If transferred to guarantor who pays on the guarantee is not a sale and doesn’t discharge other interests – s.63(11)

What happens after the sale has been completed
 Where the secured party has dealt with the collateral any surplus must be paid to others – s.64(1)
 In other words the ranking is  Other secured creditors with perfected interests, Other secured creditors without
  perfected interests, the debtor, but other secured creditors with unperfected interests can be defeated by the trustee

Foreclosure
 Creditor can take the collateral in satisfaction of the debt – s.65(2) –no claim for deficiency, releases guarantee
 If creditor can buy the collateral in a private sale you have, in effect, a foreclosure This is why we have s.63(8)
 If consumer goods there are special provisions – s.65(1) – must dispose within 90 days if debtor has paid at least
  60%  if not debtor can seek damages

Right of redemption
   Others have the right to redeem the collateral prior to a sale or the completion of the foreclosure
   Have to tender to the secured party who is moving to sell or foreclose, the amount that is owing to them
   Before secured party has disposed of the collateral or contracted to dispose of it redemption can occur – s.66(1)
   Why would someone want to do this?
       o Because it is better for them

Why would someone use foreclosure
 Would use it if the collateral is worth more than the debt
    o But this may challenge others to redeem the property – because otherwise they would get nothing
 Would use if there is no hope of the debtor paying off the excess, or if there is no guarantor

Are you entitled to give intention to foreclose in every circumstance  NO
 Where collateral is consumer goods the debtor can reinstate the security by paying any amount owing – s.66(2)
 But the debtor can only do this once  s.66(3)

What about the guarantor of a debtor when the debtor goes into default
   Does the guarantor have the right of redemption – YES
   But if the guarantor exercises this debt what happens
   It is not a sale
   As a result the other interests in the collateral – those not bought out – continue




                                                                                                                        29
CONFLICTS OF LAW AND THE PPSA
 Generally conflicts of laws is driven off of common law principles but The PPSA has rules for conflicts of laws

There are usually three questions to be asked
 What are the conflict of laws rules in the PPSA
 What happens when property subject to a security interest is brought into Ontario
 What enforcement rules are applied

General provisions for conflicts of laws
 s.5(1)  governed by the jurisdiction where the collateral is situated when the interest attached
 s.7(1)  for listed types of property– debtor’s location when the interest attached
       o Difference exists between these sections because of the transferability of the items in 7(1)
       o Debtor location  place of business, chief executive office, or place of residence (s.7(4)) – new 7(3)
 If laws of the jurisdiction – as per 5(1) or 7(1) are met the interest is deemed perfected in Ontario (s.8(2))
       o Law of jurisdiction means it internal laws and not its conflict rules (new s.8.1)
       o Gimli Automotive v BDO Dunwoody
 Which laws apply to the transaction – procedural = where action is brought, substantive = law of contract (s.8(1))

What happens when the goods are brought into Ontario
 S.5(2) and s.7(2)  remain perfected until the earliest of (new s.7(2) whenever debtor moves)
       o Sixty days, fifteen days after the creditor receives notice, or when perfection in other jurisdiction ends
       o But under 5(2) the interest is subordinate to that of a buyer in good faith and without knowledge
 This amounts to temporary perfection of the interest– if the conditions are met the interest remains perfected
 If relevant period ends and the interest isn’t perfected in Ontario then it’s as if the interest never existed in Ontario
       o Re: Claude A Bedard
       o Adair v GMAC
 Can reperfect the interest – is just good from that date forward – s.5(3)
 Can also perfect an interest in Ontario that was not perfected elsewhere – s.5(4)

 Under conflict of laws rules you can choose whichever laws you want to apply to your dealings with others
 But you cannot do so if the choice is meant to allow you to avoid a mandatory provision of another jurisdiction
 The Ontario courts are allowed to use the Ontario PPSA because the companies agreed that the laws of Ontario
  applied to the transaction  the companies went to court in Ontario and as a result the court can apply the PPSA
  conflict rules
 Lesson from this case  when dealing with multijurisdictional security interests you need to think things through
  about where you should be registering

Starting point in conflict of laws
   S.5(1) – situs of goods
   s.7(1) – situs of debtor
   If it is a s.5 problem then you need to consider s.5(2) – timing
   If it is a s.7 problem then you need to consider which law is relevant
          o If s.7 do you still need to comply with s.5(2)
                    No because s.5 goods are not goods you expect to move around

 Most likely you will include a covenant in the security agreement stating that the debtor needs to notify you when
  they move jurisdictions
      o If they move and don’t give the notice what options are there  Becomes an unperfected interest
               Can accelerate the debt




                                                                                                                        30
BANK ACT SECURITY
What is Bank Act security
 Bank Act security provisions are found in s.427 of the Bank Act
 There are certain individuals to whom the bank can extend credit and take Bank Act security  Farmers,
  Fishermen, Manufacturers in return for interests in manufacturing inventory, Agriculture, Quarries and mines
 But banks are no longer restrained in what they can take security in  If Bank Act does not apply the PPSA will
 Bank Act security interests are carved-out of the PPSA  the PPSA does not apply to them

What can’t a bank take security over under the Bank Act
 Intangibles, Chattel paper, Accounts receivable, Proceeds, Securities, Instruments, Negotiable documents of title,
  Equipment  except that which relates to one of the enumerated businesses, Money
 For these things the bank can only take security under the PPSA  PPSA gives banks greater breadth
 But banks will normally take interests under both the PPSA and the Bank Act
 Bank Act allows for security over contemporaneous advances and future advances for a period of up to three years
  after the agreement is signed  Bank Act does not look backwards  unlike PPSA
      o If you have an outstanding loan and want to give security must pay it off, get a new one, and register it
      o After three years it would be necessary to take out a new loan, or enter into a new security agreement
 Bank of Nova Scotia v International Harvester

Bank Act does not give priorities
S.427(4) – bank has no rights against creditors and subsequent purchasers for value without notice unless registered

What is the legal effect of a Bank Act security interest
S.427(2) – banks get a first and preferential lien
        o Royal Bank v Sparrow Electric
S.428(1) – bank has priority over all rights subsequently acquired in, on or in respect of that property, and also over
the claim of any unpaid vendor
S.428(2) – priority does not extend over the claim of any unpaid vendor who had a lien on the property, unless the
same was acquired without knowledge on the part of the bank of that lien,
        o Royal Bank v Musselman Credit Union

 Through s.427(2) and 428 the Bank Act security has a legal form  it will beat subsequent interests but it cannot
  beat an unpaid vendore who has retained title to the property in question
 In essence s.4 of the PPSA says that the PPSA does not apply to Bank Act security  because Bank Act security
  is a lien
 Effect of the Bank Act security in a direct collision with the PPSA is that we will be forced into the common law
  rules  Unless the bank is up against a title retention interest they will prevail

Is a bank required to register its interst under the PPSA
        o   Rogerson Lumber

 Is it of value for banks to take Bank Act security any more  Sometimes, probably beneficial as more of a
  defensive move – to protect interest  It may be possible to defeat a prior floating charge with Bank Act security
 If come across the Bank Act on an exam what then
       o 1st – can the bank take Bank Act security in this case  Is the security permitted under s.427
       o 2nd – for those things that the bank cannot take Bank Act securty in then you go to the PPSA
 If subsequent interest (subsequent to the Bank Act security) retain title to the property it does not matter if they are
  registered  they will defeat the Bank Act security
 Bank Act security  cank cannot take title like security where someone else has legal title
       o Bank cannot get more than the debtor has
                 If the debtor does not have title the bank cannot get title

                                                                                                                          31
SURETYSHIP
Types of guarantees
 Continuing guarantee  guarantee all obligations owing between debtor and a creditor (what about tack-ons)
 Fixed debt and amount  guarantee a certain amount to a certain creditor of the debtor
 Limited recourse guarantee  guarantee the debt and give creditor limited ability recover

Types of credit enhancement
Primary forms
 Co-covenantor  Guarantor will agree that it is liable for the debt along with the borrower
 Indemnity  Guarantor enters into an agreement with the creditor promising to pay the debt if creditor asks

Secondary forms
 Guarantees  If debtor doesn’t pay, the creditor exhausted all recovery options the guarantor will pay the debt
 Comfort Letters  states the company’s policy is to inject money into subsidiary to help it meet its obligations
     o Not a contract – Only recourse would be if the conduct was tortious – still use if company does it often

Defences – apply to both indemnity and guarantee unless otherwise stated
o Modification of the debt  if debt is changed and guarantor is unaware
       S.4 of the Mercantile Laws Amendment Act – guarantor is relieved of paying on the guarantee in relation
           to the prejudice they have experienced
       Manulife v. Conlin
o Breach by creditor  if creditor breaches guarantor is not liable
       Breach of the creditors’ obligations to debtor - If creditor causes the breach guarantor need not pay
       BMO v Wilder
o Guarantees are subject to the Statute of Frauds Must be in writing or else unenforceable
 Applies only to secondary obligations - indemnitors or co-convenantors are a primary party to the obligation
       Statute of Frauds  must be pleaded as judges will not take judicial notice of it
       If you can show part performance it does not need to be in writing  part performance is not money
o Contra Preferentum  Construe the agreement against the one who benefits from it – esp. in family situations
o Unconscionability  Lloyd’s Bank v Bundy  need independent legal advice pay attention to sophistication
o Consideration  If no consideration the contract is void – in guarantees this is hard because there is often no
  direct benefit to the guarantor  Although there is often an indirect benefit (e.g. a shareholder who benefits
  because the company has more money
      o Hoon v Bank of Nova Scotia
o Disclosure  if a fact is known to creditor that could change the debtor’s perception of risk it must be disclosed
       BMO v. Intracom Investments
       CIBC v. White
o Foreclosure on security (guarantee)  Foreclosure releases guarantee since property is taken to satisfy the debt
      o Moose Jaw Credit Union v Kjarsgaard




                                                                                                                     32
SALE OF GOODS ACT
 Arose to deal with issues of caveat emptor  not much recourse for buyers in contract law

Sections of the Sale of Goods Act
 Can opt out of the implied conditions and warranties of the SGA through language in the contract (s.53)
     o Can opt out of these using express terms or by saying that SGA does not apply not for consumer goods

Implied terms of Contract under the Sale of Goods Act
Implied Condition
 Condition that the seller has a right to sell, buyer will have quiet possession, the goods are free of security (s.13)
     o Quiet possession – see it in IP cases with assertions that another has a property right (IP) in the good
     o Free of security only applies to those interests that the buyer is not aware of at the time  knowledge
     o Condition = fundamental term of contract  can rescind contract  buyer can waive this right (s.12(1))
     o If buyer accepted goods then cannot treat breach as breach of condition, just breach of warranty (s.12(3))
               Acceptance = taking goods and having reasonable time to discover any defect

Sale of Goods by Description
 Condition that goods correspond to the description (s.14)
 If sale is by sample as well the fact that the goods correspond to the sample will not save the contract
 This section has been read down by courts  applies to the goods as they are commonly known
       o Does not relate to the quality of the goods  As a result there is limited application of s.14

Implied condition as to quality
   Need: stated purpose, reliance on the sellers skill/judgment, and goods must be in seller’s ordinary course (s.15)
   Purpose  one use or if more than one use seller affixed with knowledge – only need purpose if it is unusual one
   Reliance on judgment  so long as the seller had some influence on the decision to buy that is all that is needed
   Ordinary course  even if it is the first time the seller sold this type of thing it is in their business to sell it
   Does not apply if the buyer asked for a particular brand-name, condition as to quality does not apply if inspected
   When referring to quality the issue is whether or not the good is useful – can it be used in its present form
   If dealer deals in such goods condition is implied – if not for resale question is if reasonable person accept goods
   Many of the cases under the Sale of Goods Act end up under s.15  esp. s.15(2)
   See product liability claims due to higher damages in tort and because SGA only applies to contracting parties –
    consumers are not

Sale by Sample
 Implied condition that the bulk will correspond to the sample in quality, buyer can compare bulk and sample,
  goods are free from defect rendering the goods unsaleable (s.16)
 Usually do not see s.16 by itself  usually combined with other sections in the cases

Ashington Piggeries
 Plaintiff was requested to create a type of food – did so but one ingredient killed mink – plaintiff won on the
   description – made what was asked, but lost on quality – manufacturer admitted this but would have lost anyways

Do the provisions of the Sale of Goods Act crossover and apply at the same time
East Asiatic Company Inc. v. Canada Rice Mills Ltd
 Contract for super paddy rice guaranteed as fully up to type as shown by sample of previous year’s crop  What
   arrives does not conform to sample  court said was sale by description, met description, seller entitled to costs

 There is another line of cases worth noting
     o If you have a right of inspection and choose not to inspect you have lost the abiltiy to walk away for a
          breach of a condition

                                                                                                                      33
CONSUMER PROTECTION ACT
Application of the Act
 Applies to all consumer transactions if the consumer or person selling is located in Ontario (s.2)
     o As a result it does not matter where the seller actually is located
     o There are carve-outs to the act  enumerated in s.2(2)

Definitions
        oConsumer  means an individual acting for personal, family or household purposes and does not include
         a person who is acting for business purposes
     o Consumer transaction  means any act or instance of conducting business or other dealings with a
         consumer, including a consumer agreement
     o Consumer Agreement  means an agreement between a supplier and a consumer in which the supplier
         agrees to supply goods or services for payment
               Could be a contract for goods or services  broader than the Sale of Goods Act
 The Act is meant to be remedial  it is the substance of the transaction that matters, not the form (s.3)

Part II of the CPA  Consumer Rights and Warranties
 The Act governs  cannot opt out of these rights (S.7)
     o Also cannot negative or vary implied terms as under the Sale of Goods Act (S.9(3))
 The implied conditions and warranties of the Sale of Goods Act apply to consumer transactions (S.9(2))
 There is an implied warranty as to quality of services (S.9(1))

Part III of the Act deals with unfair practices
 It is an unfair practice to make a false or misleading or deceptive representation (S.14(1))
 What amounts to a misrepresentation is laid out in the Act (S.14(2))
 Consumer can rescind a contract or seek damages where a misrepresentation has been made (s.18(1))
       o But most of these rights are not actionable – the cost of following up is too high for most people
       o What happens is there is an unfair practice
                 Can rescind the contract, not pay  Under contract law the only remedy for misrepresentation is
                    rescission  But if fraudulent it may lead to tortious liability
 S.14 gives broader misrepresentation grounds than contract law  S.18 gives greater powers to consumers than
  contract law

Part VIII of the Act is about credit disclosure
 Borrower can pay off the outstanding balance at any time - S.76(1) - But not mortgages
       o Currently class actions against the banks arguing that this violates the CPA  banks say they are federal
       o The Act sets out what kinds of charges a lender can charge a borrower (S.75)
 If the loan is assigned the assignee takes over rights and responsibilities of lender (s.83)
       o It is not yet known how this part of the Act will affect the chattel paper market since chattel paper will be
           less attractive if there are possible cost consequences involved for those purchasing the chattel paper
 Need a disclosure statement to the borrower (S.79(1)).
       o Form and content of disclosure statement is prescribed in the regulations (S.79(2) & s.79(3))
       o If disclosure is not complied with the borrower does not have to pay (S.70

Motor Vehicle Manufacturers’ Association v. Ontario
 Two options for purchase of vehicles  cash back of $1000 or low financing rate
 Challenged on grounds that financing rate did not include the rebate leading to higher cost for those who financed
 Decision  Buyer who financed increased the cost of the car and the amount paid by the amount of the rebate.
  The options were placed side by side inviting the customer to compare them (to see which was better). Rebate
  must be included in the cost of financing  true cost of borrowing must be calculated on the basis of the reduced
  cash price.
                                                                                                                    34

				
DOCUMENT INFO
Shared By:
Categories:
Tags:
Stats:
views:5
posted:11/21/2011
language:English
pages:34