Secured Transactions – Fall 98 - Waldron Security that accompanies commercial lending transaction on property other than land. Lenders take risk and in return they gain interest charges. They obtain money from savings accounts. Make profit on spread between what they pay in interest on savings from what they charge on loans. Ensure that they are paid back by taking a security Security = Right of a lender to take borrower’s property and sell it to collect loan upon borrower’s default. (e.g. plant equipment, machinery, inventory, accounts receivable/debts, I – Historical Perspective Pledge – borrower turns collateral over to lender as security. Ok for small, liquid, easily transportable items. Property as bundle of rights – Ability to divide title from possession (similar to lease). Lender could be given title and borrower has possession. Security in title Chattel Mortgage: Owner has both title and possession of assets. To borrow $200,000, he transfers title to assets as security Conditional Sales Agreement: Vendor has title and possession of assets = unpaid vendor = lending purchase price to owner. Owner is granted possession but vendor maintains title until paid in full. Retention of title by unpaid vendor as security. i) Unpaid vendor = money lender ii) For vendor to get money in a lump sum they will sell their rights, chattel paper, to a third-party lender, Finco. An assignment of the rights of vendor to financial institution. Problem: Same asset could be posed as security to several lenders. Nemo dat quod non habet. Requirement of a registration system so that title could be verified. Documents needed to be recorded at a registry where subsequent purchasers or lenders could verify authenticity. Failure to register transactions rendered them invalid against certain individuals. Transfer of title could become void. Subsequent purchasers who were innocent and had acted in good faith would be protected. The trustee in bankruptcy of the borrower would also be protected. Security = right to seize and sell item of borrower’s property to pay for the debt that is in default Security arrangements still must be registered. A debt is property that can be owned by the lender. Xco has accounts receivable = $500,000 and wants to borrow $100,000 Finco will loan money for an assignment of part of Account Receivable. i) Problem where accounts receivable is always changing. Statute that you could not only sell present debt but future debt as well can assign present and future accounts receivable as security. Floating Charge (replaced) is essentially the ability for Xco to give Finco security over its inventory. Not fixed to any one item until Xco defaulted, then floating charge crystallized. Secured Transactions – Fall 1998 - Waldron 2 II - Personal Property and Security Act, 1990 II.A - Introduction Section 9 Uniform Commercial Code tried to codify a more simple way of obtaining security devices. Similar statutes have been passed in provinces since then. Personal Property Registry in which you must register all security transactions. Provides a system of priorities Provides a code for the enforcement of security interests Tries to cover in a unified system, all types of security devices. The rights of lenders in a consumer situation to seize or sue is limited. Choice b/ween seizing the item or suing the individual II.B – Application of Act II.B.1 - Section 2 Qualified by s. 4 Act applies to every transaction that creates a security interest w/out regard to its form and w/out regard to the person who has title to the collateral. Eliminates title as a governing principle Security Interest = an interest in goods, chattel paper, a security, a document of title, an instrument, money or an intangible that secures payment or performance of an obligation. And 3 specific transactions from definition section. Section 2.1(b) gives more specific examples of where the act applies Lease: No fundamental difference in rights b/ween lease and cond’nal sales agreement. A kind of lease represented by a sale in another form. Sale w/ security interest although it looks a bit different. i) Lease = security interest and accounted for w/in PSSA. Trust: Retain legal title and give beneficial title to someone else. Trustee is constrained in very serious ways as to how they can use property. Bankruptcy of trustee does not affect rights of beneficiaries. Wholesaler can establish a trust such that any money received by Retailer from sale of goods would be deposited into a trust fund for the benefit of Wholesaler. Wholesaler = beneficiary of trust. If Retailer went bankrupt beneficiary of trust fund would be protected. Wholesaler will use the trust to ensure payment or to secure payment of a debt. Transfers an interest in money collected by Retailer. i) Known as a trust proceeds clause. Consignment: Wholesaler could ship stuff to Retailer yet maintain ownership. Retailer will sell them and then pay a fee to Wholesaler once sold. If fee is not paid, then Wholesaler can re-collect inventory. Deemed Security Interests from definition of s/i (s. 1) and deemed security transactions s. 3. Transfer of an account or chattel paper Commercial Consignment A lease for a term of more than one year i) Even if they do not secure payment or performance of an obligation The act encompasses true security agreements and deemed security agreements. A security interest is proprietary in nature in that a secured party who has a valid security interest is not treated as an unsecured creditor. A transaction that provides for a security interest should be viewed for most purposes as a legal charge on the collateral Secured Transactions – Fall 1998 - Waldron 3 Trust as a Security Interest Hounsome Estates v. John Deere Ltd. (bkcy.) (1991) Ont Crt. Gen Div. Hounsome’s operate corp known as Snowball. They bought equipment from John Deere. Snowball assigned debts to JD as a security interest. JD took a personal guarantee from H’s in debts of their company. Often large creditors will negotiate personal guarantees from shareholders. H’s are owners and creditors of the company. To invest money into Co. Can buy shares from company Or may loan money to corporation. Typically main way of investing in company. When Snowball fails both H and John Deere become creditors of the company Snowball had trustee in bankruptcy Gather all property of bankrupt and to distribute it evenly among all the creditors of the co. H’s file claims in bankruptcy and are paid amount of money as creditors. $44,963.28 They were also guarantors of the loan from Snowball towards JD. The H’s themselves also had to declare bankruptcy. TB2 was appointed to care of their creditors. JD is creditor to both Snowball and H’s Order of priority in bankruptcy law stating that anyone who is a secured creditor may come to take their secured assets first. Second, the assets of the bankrupt only comprise the property actually owned by the bankrupt. Trust arrangement in para 5 of the guarantee. Money collected from Snowball is held in trust for JD and therefore should be returned to them rather than to be held as part of the estate. Argued that the true nature of the trust is a security interest and not a true trust falls w/in PPSA so must be registered in the appropriate office or it will be invalid for certain purposes. Trustee in bankruptcy can avoid an unperfected security. Court held that it was a trust being used as a security arrangement. Security interest is lost for the protection of potential creditors who want to know the true state of affairs of the debtor. Highlights the purpose of a trust in a security arrangement. Lease as a Security Agreement: If the lease is a proper security it must be properly protected under PPSA or it will be lost. Unclear on how to draw the distinction b/w a true lease and a Security Lease Re Ontario Equipment (1976) Ont. S.C. Lease of a truck for 3 years, open-end lease. Lessee made payments and had use of truck but needed to carry insurance, pay for maintenance, etc. At end of 3 year term, it was expected that lessee would return truck to lessor and that lessor would sell truck at market value. The lessor was guaranteed a price of $2,500 on resale. Lessee made up or received difference and had right of first refusal. Lessor argues that truck belongs to him. Lessee becomes bankrupt, who is entitled to truck. TIB says that this is a sale w/ security interest and must be recorded in registry or else security is void and truck falls in hands of TiB. According to BC statute this would be a deemed security transaction. Was it a dressed up sale, keeping security for truck or was it true lease? Focus on what happens at end. This arrangement did not expressly contain the provision that lessee would take ownership at end or it was not such that price of truck was so insignificant that lessee would obviously buy truck at end of arrangement. Crt holds that this is a true lease agreement. Secured Transactions – Fall 1998 - Waldron 4 If the purchase price bears a resemblance to the fair market price of the property, then the rental payments were in fact designated to be in compensation for the use of the property = real lease Where price of option to purchase is substantially less than the fair market value of the leased equipment, the lease will be construed as a mere cover for an agreement of cond’nal sales. Crt indicates that guaranteed price $2,500 is significant (w/ option to buy made it not a sale). Would the arrangement have been different if at the end of lease term, the lessee will owe the dealer $2,500 and that can be dealt with in any way possible? Sale by lessee or by lessor or strict buyout. Importance is the intention of the parties. It can’t be said that the final transaction is such that no reasonable lessee would refuse to purchase the vehicle some indication that it may be a sale; however condition was in place to maintain proper maintenance, repair and careful use of vehicle. The lessor, over the life of the vehicle will recover his cost together w/ a reasonable profit. Case concludes by finding a straightforward leasing agreement. Standard Finance Corporation Ltd. v. Coopers & Lybrand Ltd. TiB argues w/ company that argues that it is true owner and lessor of photocopier. Bankrupt = Econ. Econ leased photocopier from National Typewriter & Office equipment for $171.83 over a period of 65 months. At the end of which they could purchase the machinery for 10% of the original cost. The monthly payments were sufficient to allow P to recover purchase price of the machine + interest. Lessor only purchased the machine at the time the lease arrangement was agreed upon. Agreement entered into for advantages from Income Tax Act (requiring option to purchase for not less than 10% at the end of agreement) This was really a sale, set up as a lease for tax purposes. The 10% had no relation to the agreement and was made up – arbitrary price. Determined w/out regard to the condition of the equipment. The critical fact was intention of the parties. The effect of the transaction was to sell machine and for Econ to use it w/out having to pay the full amount of the purchase price at time of acquisition. Lessor recovered all costs, but was unable to lease the machine again at the end of the term. This was a means of financing the price of a photocopier. Lessor had not registered security arrangement so they lost interest and went to TiB The fact that purchase price option may have approximated the fair market value of the property at the end of term is not determinative of itself. Consignments as a form of Security Agreement If the court finds that an agreement is “dressed-up” like a consignment but the court finds is truly a security agreement then it will fall w/in PSSA and if not registered may be found void under s. 20. Under consignments goods remain property of consignor, never intention to depart w/ legal ownership. Consignee is not obligated to pay for goods unless or until sold. Consignee generally has right to return goods that won’t sell. Sale on condition can look very similar. Distinguishing feature is usually right to return of unsold goods – not determinative. Re Toyerama Toys have been shipped from Regal to Toyerama under a consignment agreement. Toyerama becomes bankrupt. TIB and Regal argue who the toys belong to. Toyerama will only pay for toys that are sold or are shipped either to Retail stores or to third parties. Payment per plan. Secured Transactions – Fall 1998 - Waldron 5 Court holds that it was a consignment critically b/c they were only obligated to pay for toys once they had been sold or disposed of. The agreement did not contemplate what would happen to toys that had not been disposed of – read into agreement. We see no security interest created by the consignment in the toys that never left the warehouse and availability for removal didn’t provide security for the payment of toys that had not been disposed of. If it’s a consignment that is intended to perform a security interest then it would fall w/in the act. Indication that there were reasons for making this arrangement other than to protect toys from creditors. Criticism p 45 footnote 35, Cumming & Wood. Letter was silent as to what would happen if items were not sold or sent out to outlets If it is consignment, still ask whether it is for the purpose of security. Is it intended to secure payment of performance of obligations II.B.2 - Deemed Transactions, s.3 Subject to ss 4 & 55, this Act applies to A transfer of an account of chattel paper A commercial consignment, and A lease for a term of more than one year i) That do not secure payment or performance of an obligation. Chattel Paper = a promise to pay (promissory note) & a security interest in an item (goods). An item of property that gives certain rights (to collect debt) Chattel Paper is generally sold to financial institution for immediate money. This is immediately a security interest (transferee of chattel paper), by definition of act and security interest of underlying goods. Transfer of Account = several debts by store, for example, assigned to financial institution. Commercial Consignment = certain types of consignment will automatically be included w/in PSSA whether or not they secure payment of performance of an obligation. Defined on p. 2 A consignment under which goods are delivered for sale, lease or other disposition to a consignee who, in the ordinary course of the consignee’s business, deals in goods of that description by a consignor who, i) In the ordinary course of the consignor’s business, deals in goods of that description, and ii) Reserves an interest in the goods after they have been delivered But does not include an agreement under which goods are delivered i) To an auctioneer for sale, or ii) To a consignee other than an auctioneer for sale, lease, or other disposition if it is generally known to the creditors of the consignee that the consignee is in the business of selling or leasing goods of others. Toyerama fits w/in the description They normally deal in toys Regal toys normally deals in that sort of goods There is reservation of an interest as indicated in the letter Was toyerama in the business of selling goods of others? Deciding whether or not something fits w/in s. 3 is not necessarily determinative. You may still fall w/in normal definition of a security interest. BC would require a 2-step process considering the commercial consignment issue first. Secured Transactions – Fall 1998 - Waldron 6 If it is a commercial consignment then it automatically falls w/in the act, then do not go through procedure of deciding whether it is a security agreement. A lease for a term of more than one year Defined on p 5 i) Lease for an indefinite term ii) A lease for a term of one year or less where the lessee, with the consent of lessor, retains uninterrupted for excess of one year iii) A lease for a term of one year or less where The lease provides that it is renewable for one or more terms automatically The total terms including the original term, may exceed 1 year But does not include i) A lease involving a lessor who is not regularly engaged in the business of leasing goods ii) Lease of household furnishing, or appliances as part of a lease of land where goods are incidental to the use and enjoyment of land iii) Lease of a prescribed kind of goods regardless of the length of term of the lease. Consider Lease provision in wrt Re Ontario Equipment (1976) Ltd. if it would arise in BC today under PPSA Lease would fall w/in the act as an included transaction. To determine whether or not something falls w/in the act, ask yourself Does interest secure payment or performance of an obligation? Is the transfer of kind specifically described in definition? Section 55 Process for realization: seize the item, sue the debtor. Section 55 does not deal w/ the same kinds of agreements as in Section 3. If the K provides provisions for realization then that is what they should do. PPSA describes how The code for realization would not apply to agreements that would not be a security agreement otherwise than because it is a deemed transaction. If it is found that agreement is not to secure payment or performance of obligation. It is a true lease Lease of up to 18 months with a registered lessor specifically included transaction. Registration requirements apply. PPSA s. 3 says that PPSA will apply to the transaction except for Part 5 Therefore, to seize the goods must do so under the requirement of the lease agreement. Does interest secure payment or performance of an obligation Yes – interest is w/in definition of s. 1 i) PPSA will apply to that interest NO – Ask: Is the transaction of kind specifically described in definition? i) Yes – Transaction will fall w/in the definition of security and PPSA will apply. EXCEPTION: Section 3 states that part 5 does not apply ii) NO – PPSA is inapplicable Creditor in a consumer transaction is limited in choice of remedies. Section 5: they can seize the car or sue her for the full value of the debt that she owes. II.B.3 - Relationship between Lessor’s Rights and Rights of a Secured Party B.C. Central Credit Union v. Skyview Hotels Ltd. Secured Transactions – Fall 1998 - Waldron 7 The P’s (security holders) hold 5 identical mortgages and debentures in the amount of $5 million. They charge all the present and future acquired assets of the grantor Skyview Hotels. They mortgaged their entire undertaking. Upon default, creditors may appoint receiver and manager. The agreement was properly registered The Apellant, TTS leased telephone equipment to the hotel for a term of 70 months with an option to purchase the equipment in the 61st month. This option represents a conditional sales agreement and it was not registered. A lease for more than 12 months = included transaction. Skyview was in default, a demand of payment of the entire accelerated principal and interest was made. A receiver and manager of Skyview was appointed. The receiver has used the telephone equipment One security interest holder has lost its security interest (collateral) due to non-registration and another security interest holder makes use of the first security interest holder’s collateral. Falls w/in s. 20. Other secured creditors who have gained interest in goods and have a registered interest will benefit from a void security interest. TTS’s interest becomes subordinate to that of other creditors. TTS argues that when receiver operated hotel and used their equipment then they were entitled to rent payments given (unjust enrichment). TTS admits that when equipment is sold, that they will have lost their interest. TTS interest was subordinate once interest was taken over by receiver, manager and no further obligations were owed to TTS. Receiver was entitled to use the equipment w/out payment of rent to TTS. No obligation is imposed upon receiver. TTS might recover some money if anything is left over after secured creditors have recovered their investment II.B.4 - What is not included in PPSA? First Nation’s Property J.E. Brooks & Associates Ltd. v. Kingsclear Indian Band (1991) NBCA There are provisions w/in the Indian act such that the real and personal property of an Indian or a band situated on a reserve is not subject to a security interest (cannot be seized, etc) Items purchased by the Queen w/ Indian money or money appropriated by Parl for use by Indians or that was given to Indians or to a band under a treaty or agreement b/w a band and Queen, shall be deemed always on a reserve. Treaties and statutes relating to Indians should be given a broad and liberal interpretation. J.E. Brooks sued Kingsclear Indian Band for $59,000 and received judgment. They became a judgment creditor. Once registered they may claim property under the Execution Act. Under that authority they took the Band’s Bus. Case relates to bus that was bought with funds loaned from the gov’t. Being paid by money from the gov’t. It was seized while off reserve Invalid seizure. Bus was purchased with money from the Crown School bus was along its route, and the pattern of use established that the “paramount location” of the school bus was on the reserve. Commercial Lending to native bands. Securities can be obtained by Incorporating a company, such that property belonging to the company is not protected by Indian Act. (common law) Lender lends money to trusted elder on an unsecured basis. He/she then lends the money to interested persons. The elder can enforce the provisions. Secured Transactions – Fall 1998 - Waldron 8 Section 4 (a) **Lien, charge or other interest given by a rule of law or by an enactment unless the enactment contains an express provision that this Act applies (b) **Provincial Legislation Mortgage under the Canada Shipping Act Any agreement governed by Part V, Division B of the Bank Act (c) Interest payable under a policy of insurance as indemnity or compensation for loss of or damage to collateral. There is a separate act (d) Assignment of wages, salary, pay, commission, or any other compensation. Never used, not effective, not covered by PPSA (e) Highly individual transactions are not covered by the Act. (f) **Creation or transfer of an interest in land, other than an interest arising under a licence. Governed by Land Title Act Licence = right to harvest timber or Christmas Trees (g) **If buying apartment building, lender may take assignment of rents. A receiver of rents may be appointed to collect rents and to pay down debt. They are probably not interest in real property, but our Land Title Office has always allowed them to be registered under that act. (h) Sale of accounts relating to a whole business. They are unique, priority rules relating to PPSA don’t work in this circumstance (i) Transfer of account made solely to facilitate the collection of the accounts for the assignor. Collection agency (j) Creation or transfer of an interest in a right to damages in tort (k) Trustee in bankruptcy acts pursuant to and acts w/in the authority given to it by the Federal Bankruptcy Act. It works in concert w/ provincial Acts. PPSA cannot take away rights of TB that were given by federal act. (l) Mineral Claim under Mineral Tenure Act. III - Attachment and Perfection Attachment: the process whereby the creditor gains an interest in the property that will form the basis for the security. Writing Rights Value PLUS Registration Possession Perfection: achieve the greatest degree of certainty and to rank as high as possible in the hierarchy of interest. To obtain the best claim possible. III.A – Creation of the Security Interest S. 9 Parties who agree to a security interest can govern it by the terms of their own personal agreement Coming into existence of a security interest is a matter of K b/w creditor and debtor. Taking an interest in particular property gives creditor something to fall back on in the event debtor does not pay = secured III.A.1 – The Security Agreement The K b/w debtor and creditor that creates the security interest = security agreement. It need not take any particular form if it only affects relations b/w the parties. If it affects 3rd parties then must meet formal requirements of s. 10 PPSA. Secured Transactions – Fall 1998 - Waldron 9 Amount owing by debtor to secured party and how amount will be repaid Description of collateral, obligations of parties wrt treatment of collateral Events that constitute a default by the debtor and what secured party is entitled to do in the event of default. When creditor takes interest in “all present and after-acquired property” = “all PAAP” Section 10 does not apply to security agreement b/w immediate parties. Security agreement still may be enforced inter partes but will not be enforced to the detriment of 3rd party. Enforceable against third party if collateral is in possession of the secured party; or The debtor has signed a security agreement that contains a description of collateral III.A.2 - Collateral Any personal property can become collateral. Section 4 places some restrictions. Subject matter of the agreement. Personal Property could include Goods Intangibles (accounts) Under the act, personal property is defined in 3 categories (they are all encompassing). The category relates to the use of the item (functional): Inventory – things held by a business for future sale, use or lease Consumer goods – goods that are used or acquired for use for personal, family or household purposes. Equipment – goods that are held by a debtor other than as inventory or consumer goods (residual category) S. 1(4) Unless otherwise provided in this Act, the determination whether goods are consumer goods, inventory or equipment shall be made as of the time the security interest in the goods attaches. If registration is invalid, you may lose your interest Ways to describe collateral A description in item or kind or by reference to: goods, securities, instruments, documents of title, chattel paper, intangibles, money, crops or licence A statement that a security interest is taken in all of the debtor’s present and after acquired personal property; APAAP Could also take a security interest in APAAP then include an exception. Ways that collateral cannot be described S. 10(3), subj to subsection (a), a description is inadequate for the purposes of subsection 1(6) if it describes the collateral as consumer goods or equipment w/out further reference to the kind of collateral. Take a security interest in inventory. It may be impractical to list it in any other way. They do not want to have restriction placed upon them. III.A.3 – Attachment Before you can perfect a security interest, the interest must attach. Three general requirements for attachment (s. 12) Value is given The debtor has rights in the personal property that will become the collateral Satisfaction of the writing requirement of s. 10 (unless enforcing rights only between 2 parties or creditor takes possession of collateral) i) Must be in writing with a description of the collateral, unless creditor has possession of the collateral Attachment in the Context of a Floating Charge Re Huxley Catering Ltd. (1982) Ont. S.C. Secured Transactions – Fall 1998 - Waldron 10 Before declaring bankruptcy, Huxley agreed to sell land and premises from which it carried on its catering business. Sale completed by TB. Bank claims proceeds of the sale under an assignment of book debts which had been given by the co. to the bank several years before the K for sale was made. Security was registered. Floating charge would list a number of occurrences, at which time the charge would crystallize and would become fixed upon those items that were present. One of the occurrences was an assignment in bankruptcy. Argument by TB: floating charge was over debts, therefore it had not attached to anything. Crystallization did not happen until bankruptcy. By that time, the purchase money had immediately gone in hands of trustee in bankruptcy. Argument substituted the definition of attachment for the moment of crystallization. Inconsistent w/ PPSA PPSA means by attachment when charge comes into being, then further perfected by registration. Value has been given. Assignment of books debts was a floating charge. The security interest attached w/in the meaning of the PPSA to all debts as they arose. It crystallized into a specific charge when the directors resolved to make an assignment in bankruptcy and co. thereby cease to carry on business in ordinary course. Assignment of book debts gave bank priority over TB. TB will lose to a secured creditor who has a perfected security interest By virtue of s. 13, a security interest may attach to items that are not yet in existence. The security interest will attach to them at the moment that they come into existence. PPSA no longer uses concept of floating charge. Section 2(1)(b) Act applies to floating charges. What Constitutes Value? Toronto Dominion Bank v. Nova Entertainment Inc. NE is a wholly entertained subsidiary of Blue Sky (BS). BS had invested in NE. They owned all the shares. When giving money to NE, it purported to lend money (+-$800,000) In 1990 NE gave BS a secured interest in APAAP and all indebtedness. Subordination agreement. NE to get $600,000 from Vencap and in return BS would forebear any claim against NE and subordinate its claim to Vencap. TD bank lent money to NE and were owed a debt but took no security. Who gets money first, TD or BS? BS is secured. TD argues that security interest is not attached b/c no value was given. Advances were made before security agreement was entered into. Court holds that sufficient value was provided as defined in PPSA: “any consideration sufficient to support a simple contract, and includes an antecedent debt or antecedent liability” Furthermore, in return for giving that security interest BS, there was sufficient forbearance to constitute value. It was a properly perfected security interest. It is common where there is a debtor-creditor relationship for security to be arranged ex post facto. Fraudulent preference – a creditor should not jump in when insolvency is imminent to pull rank over other creditors. Rights in Collateral Rights can be short of full ownership. They can in fact be very minimal. Cases speak to policy. Kinetics Technology Interntional Corporation v. The Fourth National Bank of Tulsa US p. 32 Secured Transactions – Fall 1998 - Waldron 11 KTI had K w/ OHT. KTI would obtain some goods, send them to OHT where they would be used to produce box units which ultimately produce furnace economizer for KTI. KTI would make progress payments OHT had separate financing arrangement w/ Bank. Bank took security interest in all property including inventory. It was properly registered. OHT in financial difficulty, KTI advancing money to Bank. OHT shuts down and Bank moves in seizing all inventory including completed boxed units and other part forwarded by KTI. KTI argues that components belong to them and that OHT did not have sufficient rights in products that such a security agreement could attach. KTI-OHT agreement stated that title in goods essentially remained w/ KTI or were transferred to KTI once payment were made. Bank argues perfected security interest. It is signed and describes collateral. OHT had rights in all the items on the premises. Court holds that KTI had loaned equipment to OHT rather than capital and should have secured itself. Some degree of control or authority over collateral placed in debtors possession constituted sufficient rights. Court ultimately decided based on a cut-off rule: If a secured creditor has a secured interest and if that item in which the secured creditor has interest is sold in the ordinary course of business, the secured creditor loses their security interest. Paid for by progress payments. Section 30(2) cut-off rule whereby a buyer leased or sold goods in the ordinary course of business, will take free of any perfected or unperfected security interest in the goods given to the seller. Once item has been purchased in ordinary course of business, any security interest in that item is lost. OHT had rights over some of those goods, although still owned by KTI. Argument could be made that OHT did not have sufficient rights over those goods. In a priority competition w/ other creditors. PPSA doesn’t deal so much w/ relation b/w secured creditor and the owners. The court doesn’t consider relationship of creditors to relationship of owners. Court does not decide whether KTI was a creditor. P. 123 Secured party might obtain a defeasible posessory title of the debtor which, although effective against any stranger, is not effective against the true owner. Must consider w/ whom the secured creditor is competing and what rules would apply. Where competing w/ other creditor PPSA will apply Where competing w/ others PPSA may not apply. Haibeck v. No. 40 Taurus Ventures Ltd. (1991) BCSC p 35 Debenture issued by No. 40 to RoyNat and properly registered. Later No. 40 negotiates a CSC w/ Builders this is subsequently registered as well. No. 40 default, argument b/w RoyNat and builders as to whether both security interests are valid and if so, who has priority. Builders had delivered appliances in CSC to No. 40 but they had not paid purchase price title remained in the name of Builders’s Court finds that both constituted valid security interests. However, did No. 40 have sufficient rights over appliances for RoyNat’s security interest to attach? Residual Priority Rule [s.35]. If there is a competition b/w two security interest Equitiy tend to favour builders. If competition b/w 2 perfected security interests, priority is given to the first one who registers Secured Transactions – Fall 1998 - Waldron 12 Court holds that right to possession or right to have title upon payment are sufficient rights for attachment. Rights in collateral is very broad and encompasses a good many interests beyond legal or equitable title Rights may be derived from ownership or may be possessory in origin PMSI = Your priority can be lost to an unpaid supplier of goods who gets purchase money security interest. Under these rules the unpaid vendor of goods must register by a certain time in order to get top priority. 15 days after delivery to register! General Electric Capital Equipment Finance Inc. v. Inland Kenworth Inc. (1993) BCSC p 39 Richard Parr has acquired two trucks from P. One under a lease agreement, w/ option to purchase and other under CSC. In both cases, title was retained by P. One truck registered in BC Motor Vehicle Branch in name of DCT Chambers Trucking, other = Tri Way Transport Inc. Vehicles had servicing done but payment not advanced, repairer’s liens placed on the vehicles but a variety of names. The description of goods could be faulty. Who is correct “owner”? Competition b/w secured creditors repairer’s liens. Argue that there is seriously misleading defect in the name of the owner invalidating security interest. Court determines that it must be under the name of the “owner” as registered in the BC Motor Vehicle Branch as this is information that is most easily accessible to repairers. Some of the liens were properly registered. P could have insisted that its name be shown as a joint owner. Suggesting that they could have protected themselves. Philosophy behind repairers liens may be to protect the value of the property. Repairer’s liens act will govern lien’s and have super-priority on s. 32, p. 258. The one non-consensual lien that takes priority over the act. Question of registration under PPSA, but pursuant to Repairer’s lien act. They are registered under same registry as PPSA If doc. is seriously misleading the lien may have no effect whatsoever. Can sometimes register according to serial number of item. Serial numbered goods. i) Equipment may be registered by serial number ii) Inventory you cannot register by serial number iii) Consumer goods must be registered by serial number III.B – Perfection Section 19, p 157 A security interest is perfected when It has attached, and All steps required for perfection under this Act have been completed Regardless of the order of occurrence. Section 24, p 183 Perfection by Possession Section 25, p. 190 Subject to s. 19, registration of a financing statement perfects a security interest in collateral. Temporary Perfection – certain provisions in the Act, whereby Act deems you to be perfected for a certain period of time. Sometimes absolutely. Perfection by grace period. The order in which all requirements occur, so long as they are all present is insignificant Once you are perfected, any competition between creditors will look back to the date and time that the Financing Statement was filed. Secured Transactions – Fall 1998 - Waldron 13 Section 18: A bank may be considering the possibility of providing credit to an individual but finds that another bank has security interest. The debtor can authorize the bank to act as its agent to seek more information. Only particular parties are privy to information. Even though you find a security interest against a person, you cannot find out exact details unless you fall w/in s. 18 W/out perfection, could lose security interest to a group of people outlined in s. 20. Could also lose ranking wrt to other creditors. III.B.1 – Perfection by Registration Regal Feeds Ltd. v . Walder and Niverville Credit Union Ltd. Question of animals that are being used as collateral. Some are not born or conceived at the time that the agreement was reached. The security agreement clearly contemplates any future animals that come w/in the possession of the debtor but this is not indicated in the register Court holds that register is only intended to disclose the existence and basic nature of the underlying agreement It does not need to set out specific details or make any reference to after acquired property. Not a defect of the financing statement. See ss. 12, 13. Regulations for description of collateral ss. 10-13 s.43 Registration of Financing Statements Must be submitted to an office of the registry (2) Effective from the time assigned to it in the office of the registry and if issues at same time consider registration numbers assigned to statements (6)Validity of registration is not affected by a defect, irregularity, omission or error in the financing statement unless defect, irregularity omission or error is seriously misleading (8) Where it is alleged that a defect, irregularity, omission error is seriously misleading, it is not necessary to prove that anyone was actually misled by it. Objective test. TiB will almost never be misled TiB does not have to say that they were misled. TiB can attack registration by saying that it is objectively seriously misleading. (4) financing statement may be registered before a security agreement is made and before a security interest attaches. (5) Registration may relate to one or more than one security agreement. Bank may mark a security interest in all present and future property and that may apply to any future agreements so long as registration is current and collateral description is accurate. Serial Numbered goods, s.1 regs: for the purposes of repairers liens, it includes a motor vehicle, aircraft, boat or outboard motor, and for the purposes of other registrations, a motor vehicle, manufactured home, boat, outboard motor, trailer and aircraft. Debtor, s. 9 regs: Name and full mailing address of each debtor must be given and where the debtor is an individual, the debtor’s birthdate may be given. You can always search by name. = universal search criteria Collateral Description, s. 11 regs: Consumer goods that are serial numbered goods must be described in accordance w/ s. 12 Give description of collateral, including serial #. If not, registration is invalid no perfection Secured Transactions – Fall 1998 - Waldron 14 Consumer goods that are not serial numbered, collateral must be described in accordance w/ s. 13 item or kind. Equipment that is serial numbered goods, collateral may be described in accordance w/ either s. 12 or 13 Validity of financing state will not be affected If choice is to describe by item or kind, then interest is protected. However, not protected against other secured creditors who have registered by serial number. Equipment that is not serial numbered, collateral must be described according to s. 13 Items of inventory, where serial numbered goods or otherwise, the collateral must be described in accordance w/ s. 13. There are often mistakes in financing statement. Names or serial numbers. The registry tries to accommodate for errors in two ways. Search criteria that they recommend for you to use. Use broader search criteria that will bring more hits. Computer is programmed to find near matches. How do we know if something is seriously misleading? III.B.2 – Registration Errors Re Logan (1992) BCSC p 47 Trustee in bankruptcy does not have to show that he/she was seriously misled. Name was spelled incorrectly and month of birthdate was also incorrect. When entering the correct full name of the individual, the computer did not show a match. Courts are hesitant to use computer or computer program as judge of what is seriously misleading. Factor that is taken into account. Case turns on whether middle name was required or not. Because it is not required under s. 9 and whereby a reasonable search would not include it and where using the recommended search criteria would have provided a hit, the error was not seriously misleading. Don’t need such a high test. What would have been a reasonable search criteria… registration was valid. Application of TiB was dismissed. Re Munro (1992) BCSC, p 51 Omitted a debtor’s middle initial or name. So if would have just used first and last name then would have gotten a match. So not an unreasonable search to use first and last name not seriously misleading, valid registration. There was also an error in the serial number. It was found that when the correct serial number was punched into the registry computer that the computer would generate a match not seriously misleading. Total accuracy in serial numbers is no longer necessary Name and serial number registration. When dealing w/ consumer goods, if you have name or serial number seriously wrong, then will be invalid. If referring to equipment where you do not have to describe property by serial number, will an error in the serial number invalidate the registration? General Electric Capital Equipment Finance Inc. v. Inland Kenworth Inc. (1993) BCSC p 52 Case referring to repairer’s lien. Some creditors were in name of trucking co. and some were made wrt to companies that didn’t exist. Did error in debtor’s name void the registration? Serial numbers were correct. People were not misled. Test is an objective one. Court held that they had to register in both name and serial number and that a serious error would be fatal, therefore, registration was invalid. Secured Transactions – Fall 1998 - Waldron 15 B/c name is universal criteria, mistake in name might be more serious than mistake in s/n Why should their not be a subjective test of whether the error was seriously misleading. TiB does not search or rely on registry. Why should TiB get advantage b/c secured creditor made an error in registration? Secured creditor does have enormous power in PPSA to the detriment of unsecured creditor. Prejudice other creditors. We provide some support to TiB from preventing secured creditor from sweeping through and collecting everything, unless properly perfected. III.B.3 – Perfection by Possession Section 24. Perfection by possession will apply to almost everything except intangibles. Like registration it provides some sort of notoriety that debtor does not fully own the item. Possession that is required cannot be possession as a result of seizure or repossession. Must be a voluntary transfer of possession by the debtor to the creditor for the purpose of security. Above is a policy issue: 1) public order requires that creditors cannot go around seizing property. Creditor might seize property when pressure is on and realized that security is not perfected, even if not necessary. 2) Predictability of the act would be compromised if we permitted seizure or repossession to perfect a security interest. Evidentiary issues are raised by C & W. When is it too late to perfect by possession? Re Bank of Nova Scotia and Royal Bank of Canada et al. (1987) SK C.A. p 54 Farm Rite Equipment and RB has agreement in APAAP. Registered and perfected. Later, conditional sales contract is negotiated for two Chev. Silverado Trucks. That agreement was assigned to the Bank of Nova Scotia Fall w/in description of Purchase money security interest (s. 34) which would give Bank of NS priority over RB if properly registered. RB appoints receiver and manager of farm on Jan. 8 Bank of NS registered a security interest in the trucks by registration at Registry on Jan 21. RB argues that the appointment of the receiver manager has crystallized the interests of the secured parties. More specifically, that it’s interest in the trucks is perfected by possession (in receiver, s. 35(4)) and that Bank of NS’ interest is subordinated by virtue of s. 20. Court says that it must consider s. 20 Subordination of Interests and s. 35 the Residual Priority Rule. The appointment of the receiver manager has not triggered provisions of s. 20 b/c perfection by possession requires that the collateral be held for the purpose of securing payment or performance of an obligation, not for the purpose of realizing on it. What constitutes physical possession? S.24(2) secured party doesn’t have possession of collateral that is in the actual or apparent possession or control of the debtor or the debtor’s agent. The receiver manager was agent, but those rights were not sufficient. Seizure of goods after bankruptcy does not provide the notoriety to others. Constructive possession is insufficient – must be actual possession. Perfected interest of Bank of Nova Scotia in CSC was upheld. ROYAL Trust Corp of Canada v. Number 7 Honda Sales Ltd. (1988) Ont D.C. p. 60 O buys bike from Honda. CSC is agreed upon, however, intention of parties is indicated by their actions – no security arrangement. Honda transfers title immediately and promises Secured Transactions – Fall 1998 - Waldron 16 to deliver the bike once payment is made. O makes payment using uncertified cheque, it is returned NSF. Bike was delivered. No security interest was registered as per intention of parties that ownership be transferred immediately. Agreement between O and vendor reserving title to vendor and provided that if O did not pay that vendor had right to repossess and sell (conditional sales). O bring back bike saying that he is still owner and will recollect it once money is available. RTC lends money to O w/ a perfected security interest. Honda commences action against O for specific performance, has vehicle title transferred into its own name and sells the bike. Court holds that no security interest b/w O and Honda had attached b/c security interest only attaches when parties intend it to attach (above). Therefore it could not be perfected by possession – attachment must precede perfection Furthermore, Honda’s possessory rights were more in the nature of repossession than possession. Constructive possession is insufficient. Appellant succeeds b/c they had registered interest. Possession for perfection must be physical, as such to give notice to others, not constructive possession, sufficiently notorious. Cannot be repossession III.B.4 - Temporary Perfection, s. 26, 28, 29, … On some occasions, security interest in collateral is given a bit of a grace period to allow you to have it perfected. IV - Multiple Jurisdiction Transactions Personalty can be easily transferred. Registration generally occurs under provincial legislation. There is often problem of conflict of jurisdiction. Sections 5-8 deal w/ movable collateral. Section 8: Procedural issues involved in the enforcmeent of the rights of a secured party against collateral are governed by the law of the jurisdiction in which the collateral is located Intangibles are enforced pursuant to jurisdiction where k is agreed upon. Substantive issues involved in the enforcement of the rights of a secured party against collateral are governed by the proper law of the k b/w the secured party and the debtor. Section 8(2): … Section 7: If there is an item of collateral that falls w/in s. 7, the validity of perfection and perfection is governed by law including conflict of law of the jurisdiction where the debtor is located when the security interest attaches. An Intangible, or Goods other than a foreign registered ship, that are of a type that are normally used in more than one jurisdiction, if the goods are equipment or are inventory leased or held for lease by the debtor to others. i) They do not actually have to be used in more than one jurisdiction, but are of that type (i.e. cars, trucks, airplanes) Section 7(1) A debtor is located at the place of business, if any, of the debtor. If more than one office, then consider the office of the CEO. If no place of business, principal residence of the debtor If the debtor moves to a new location a valid security interest registered in another jurisdiction might be affected. Section 7(3) Where the debtor relocated to another jurisdiction or transfers an interest in the collateral to a person located in another jurisdiction, a security interest perfected in accordance w/ the applicable as provided in subsection (2) continues perfect in the Province (BC) if it is perfected in the other jurisdiction Secured Transactions – Fall 1998 - Waldron 17 Not later than 60 days after the day the debtor relocated or transferred an interest in the collateral to a person located in the other jurisdiction. Not later than 15 days after the day the secured party has knowledge that the debtor has relocated or has transferred an interest in the collateral to a person located in the other jurisdiction; or Before the date that perfection ceases under the law of the first jurisdiction. Whichever is the earliest. They could perfect w/in the time frame, they continue to be perfected. Could transfer interest in collateral to someone w/in same jurisdiction. Section 6 – Goods to be Removed from the Jurisdiction. If you don’t fall w/in s. 7, then verify to see if w/in s. 6 Not being used as equipment If you have a security interest in one jurisdiction but you understand that the goods will be moved to another jurisdiction, and it is in fact moved w/in 30 days, then the law relating to perfection of the foreign jurisdiction will apply. If you intended them to be brought out of the province, and they were, then brought back into the Province, see s. 5(3) Section 5: Item that doesn’t fall w/in s. 7 or 6 Security interest in goods, or possessory security interest in a security… is governed by the law of the jurisdiction where the collateral is situated when the security interest attaches. If the goods were bought in Alberta and properly perfected in AB. Then person moves to BC w/ collateral. Security interest continues in BC if you perfect in BC before the end of one of the periods i) 60 days after moving ii) 15 days after you are aware of moving iii) before date of expiration of perfection under law of jurisdiction. Closing words of subsection 3 will protect buyer for value who acts before repossession i) Mary buys car in AB ii) Mary and car move iii) Mary sells truck to a bona fide purchaser for value before it has been reperfected in the province iv) Bona fide purchaser for value wins (this protection is not available under s. 7) Juckes v. Holiday Chevrolet Oldsmobile (1983) Ltd. Long-term lease negotiated in MA. Not intended to be a security interest and not so deemed under law. Debtor relocates himself and equipment to SK where agreement = deemed transaction Debtor goes bankrupt, dispute b/w lessor and TiB. Argue: Lessor, this is not a security interest in MA, so did not have to do anything, unreasonable to have requirement in SK Lessor did everything required to protect his interest in MA perfected interest in MA Debtor moves location s. 7(3), security interest would continue perfected in SK if, registered before the earliest of 3 expiry dates. Date had passed Failed to reperfect under 7(3) unperfected security interest, taken by TiB. Section 7(4) was not applied b/c MA does have provision for registering security interests, in general. They failed to consider the fact that some interests needed to be registered in SK, but not in MA. Correct? Reality that time periods are very short, they still thought that they had no security issues to worry about (in this case) Person may try to use property to gain more collateral or re-offer it as a security interest because there is no registry. So longer delay periods would allow for greater vulnerability to lenders in new jurisdiction. Secured Transactions – Fall 1998 - Waldron 18 Section 7(4) If someone comes into province w/ an item and the jurisdiction that they have moved from does not provide for registration of security interest on those items, then that security interest (original) is subordinate only to those interests enumerated in 7(4) that were acquired after collateral was brought into the new territory. In other words, a purchaser or another secured party will prevail; however the original creditor would not be subordinated to a trustee in bankruptcy. Re Searcy (1991) BCSC p 66 Note: knowledge defined under s.1(2) Tracker bought in AB, moved to BC. This is a question of knowledge. GMAC received proof of claim (from BC) 8 March Completed and returned 18 March Interest was registered s. 5 TiB argues that creditor was affixed w/ knowledge as of 8 March or at latest 18 March and had only 15 days to perfect interest. GMAC argues that bankruptcy statement indicated location where bankruptcy had been filed but did not indicate that collateral was also in that jurisdiction (note: there was a co-purchaser) Information must be actual knowledge that truck was in BC. Criticism: would have to get information from senior mgr, that truck was moved at certain time. Section speaks to what a reasonable person would take cognizance of. Judge suggests that it is a subjective test; however, statute seems to imply objective test There is no evidence of whether the proof of claim form came to the attention of a senior manager who was responsible for this type of matter. Criticism on bottom of p. 24 C&W: To the extent that the decision suggests that actual, conscious knowledge is requited, it is incorrect. The decision can be explained on the basis that the relevant information did not reach the secured party. Consequently, there could be no knowledge. Advance Diamond Drilling Ltd v. National Bank Leasing Inc. (1992) BCSC p 67 Whether or not the priorities established in ON under the OPPSA continue to apply despite the unit being brought to BC or whether the law of BC now govern the establishment of priorities. National registered first in ON RoyNat registered second The opposite is true in BC. National Argues that they are mobile goods s. 7 of BC Act applies. It says that it is governed by law of the debtor’s location (=ON) and Ontario legislation applies where they have priority RoyNat says movable collateral and that s. 7 will apply. Section 7(2) says that perfection is governed by rules including conflict of rules law where the debtor is located. Ontario conflict of law rules require that registration must be made in location where collateral is situated at the time when the security attaches. Court says at time agreement is made, interest was properly perfected Section 7 states that test is dependent on debtor location (= ON). Argument relating to s. 8(2). They had to register in accordance w/ the relevant BC law by virtue of 8(2). Court holds that s. 8(2) deals w/ time the lease was agreed upon. At that time, debtor and collateral were in ON no foreign jurisdiction. Under s. 7 of BCPPSA this matter is determined by the law in ON. V – Priorities V.A – Section 35: The Residual Priority Rule Governed, at least in part, by s. 35 Secured Transactions – Fall 1998 - Waldron 19 Section 35 will govern large number of interests, and is general catch-all Perfected security interest has priority over an unperfected interest B/w perfected security interests, priority goes to the party who either filed a financing statement or took possession of the collateral first i) Temporary perfection rules under ss. 5,7, 26, 29 or 78 As b/w unperfected security interests, priority is determined by the order of attachment of security interests. First, determine which interests are perfected. If not, apply s. 35(1)(c) If there are one or more perfected security interest they will be given priority over unperfected interests [s. 35(1)(b)] i) If more than one priority given to first to file financing statement, gain possession of collateral, or have valid temporary perfection w/in a grace period [s. 35(1)(a)] Section 68: Proper Exercise of Rights, Duties and Obligations Section 68(1): Principles or CL, equity and law merchant, except insofar as they are inconsistent w/ this Act, supplement this Act and continue to apply. Section 68(2): All rights, duties or obligation arising under a security agreement shall be exercised or discharged in good faith and in a commercially reasonable manner. Section 68(3): A person does not act in bad faith merely b/c the person acts w/ knowledge of the interest of some other person. Question: if I have knowledge of someone’s security interest, may I also agree to a security agreement in the same collateral and then beat the first creditor to the register, in order to have priority? Roberts Simpson Co. Ltd. v. Shadlock et al. (1981) Ont. H.C. p 73 P made several CSC to debtor (chattels for installation in hotel). The debtor mortgaged his business including the chattels that were secured by P to D. D’s chattel mortgage was registered under the PPSA on 17 June. P did not register its CSC’s until 7 February. D had been given notice of the security interest held by P on 4 June. Court holds that act contemplates the date of registration only, not the date that notice was given. P’s s/i is invalid. Mental state does not prevent court from applying s. 35 rules. However, there is a limit after which court will not allow PPSA to use to defraud someone else. Both parties stood on their legal rights, neither was misleading the other Ontario Dairy Cow Leasing Ltd v. Ontario Milk Marketing Board (1993) Ont. CA, p 75 How is priority established as b/w unperfected security interests? Where the security interests are unperfected apply s. 35(1)(c) and consider time of attachment. Where attachment is at same time, then divide on a pro rata basis. Furmanek v. Community Futures Development Corp  BCJ No. 1536 (BCCA) in class F owned business and wanted to sell it. He sold co to Spargo (S). F sold shares of company. Purchase price was $153,520 Financing primarily arranged through CFD. There would also be an unpaid balance of purchase price to F. Partly an unpaid vendor. She knew that unless she secured financing from CFD, she could not make purchase. F knew that lender would generally not take second place priority position. This was understanding of F and agent’s for CFD. Entered agreement for sale and both took security interests in the assets of business. Both registered security interests – CFC first. Secured Transactions – Fall 1998 - Waldron 20 Financing statement of CFC did not secure interest in inventory of business (due to inadvertence, inventory was main asset) F’s was filed properly, including inventory. Trial judge holds in favour of CFD Priority of interests can be negotiated by voluntary agreement [s. 40]. Voluntary subordination of an interest is possible under the act. i) Deal proceeded under oral agreement that CFC would have first priority, referred to as such in written docs. Apply equitable principles under s. 68 and estop F from enforcing first priority. i) Led CFD to believe that they were getting first priority ii) F would have advantage iii) F is estopped from exploiting that advantage. Court of Appeal was happy to use s. 40 but not wrong in saying that estoppel could operate. C&W should not allow priority rules to become an instrument of fraud. Pp 280-1. Do not always ignore knowledge. Carson Restaurants International v. A1 (SK Q.B.) – class note 2 related companies w/ same principal. Entered franchising agreement. One got loan, took security interest but not registered. They then got another loan for Yorkton Deli to get equipment. They took security interest in equipment and registered the interest. A1 had registered financing statement under wrong name. Seriously misleading. Carson registered in APAAP. A1 noticed mistake and re-registered properly. Carson’s interest not valid. Led A1 to believe that they were in this position, that they had no risk and no cannot exploit something otherwise. They avoided s. 40 argument. Do the security interests that are in conflict under s. 35 have to be given by a single debtor? V.A.1 - The 2-Debtor Problem under s. 35 T-1: D gives SP #1 a s/i in D’s collateral and sp #1 perfects by registration T-2 D sell collateral to B in ordinary course of D’s business (B had no knowledge that sale by D to B breached anyone’s S.A.) T-3 B (as debtor) gives a s/i in the same collateral to SP#2 who also perfects by registration Section 30(2) will solve this problem. When the first debtor sold goods in the ordinary course of business. The first security interest is cut-off. D must be a dealer T-1: D gives SP#1 on D’s collateral but SP#1 fails to perfect before SP#2’s interest arises T-2: D#1 sells for value the collateral to B and at the time B has no knowledge of SP#1’s s/i T-3 B (as D#2) gives a s/i in same collateral to SP#2 who perfects by registration (before sp#1 perfects) Section 20(c): If before the first secured party perfects, the property is sold to an innocent party, the interest of the first party is cut-off T-1: D1 gives s/i to SP#1 on D#1’s collateral but SP#1 does NOT perfect by registration before SP#2’s interest arises T-2: D1 sells the collateral to B but the sale is NOT w/in the ordinary course of D1’s business, and, furthermore, B has knowledge about SP1’s s/i at the time of the sale. T-3: B (as D2) gives s/i in same collateral to SP2 who perfects by registration (before SP1 perfects) There is no rule in the act that contemplates this possibility s. 35 SP2 wins due to first registration. Secured Transactions – Fall 1998 - Waldron 21 T-1: D1 borrows from XBk (SP1) and gives XBk s/i in APAAP. XBk registers f/s properly T-2: D2 borrows from YCU to buy equipment for plant. D2 gives s/i in boiler to YCU and Y registers f/s in plant equipment. T-3: D1 meets D2 and sells equipment to D1. This is not a sale in ordinary course of business. YCU does not change financing arrangement. No cut-off by law or voluntary agreement T-4: D1 defaults to XBk and comes to seize assets including equipment. Bk registered first it should win. Section 35(8) will reverse this result i) Boiler was not in contemplation of parties when agreement made w/ XBk. ii) YCU did intend to have security interest in boiler. What they loaned money for. Intended to have first priority Debtor transfers an interest in the collateral which at the time of the transfer is subject to a perfected security interest (YCU), that security interest has priority over any other security interest granted by the transferee (receiver, D1) before the transfer. i) If YCU knew about sale then they had 15 days to amend the name of the debtor in the registry. Requirement to amend name on kick-in at the time of knowledge. Section 35(7): what happens when there is a lapse or an inadvertent discharge in a registration? T1: SP1 registers f/s PPR on APAAP T2: SP2 registers f/s PPR on APAAP SP1 has three-year registration period and inadvertently fails to renew registration. Where there has been a lapse or discharge was not authorized or in error, then if SP1 re-registers security not later than 30 days after lapse or discharge, the lapse or discharge will not affect priority of SP1 against competing creditor. SP2 remains in subordinate security position. If after the lapse and before re-registration, SP3 registers f/s, then the position of SP1 will not be elevated above SP3. There is a circular priority scheme There is no judicially approved solution. The Interest of SP1 should be preserved, at least wrt SP2. Consider possibility of fraud. Given outlines, solution to be determined on an ad hoc basis. You are not given notice from the registry when your security interest lapses. However, notice is provided where their entry is being discharged. Consider circularity problem again using facts above Value of collateral = $1,000; SP1 takes charge $500; SP2= $500; SP3 = $500. Each of them negotiates security interest w/out thinking that they are taking any risk. One must be left out. Value of collateral = $1,000; SP1 = 700; SP2 = $500; SP3 = 500. SP2 would be fairly treated if they received 300 (secured) SP3 could be refunded Situation does not happen very often Collateral is worth $1,000,000, Credit granted upon it and 1st priority granted Day 1, lend 250 000, take collateral in 500 lbs Day 2: lend another 250 000 Day 3: Lender 2 lends $100,000 Day 4: lender 1 lends $250,000 Where there is a k that will allow people to k and create obligation w/out escape, the obligation to make future advances is not binding on a secured party if the collateral has been seized, attached, charged or made subject to an equitable execution under the circumstances described in section 20(a)(i) or (ii) [judgment creditor under an Secured Transactions – Fall 1998 - Waldron 22 execution order] the secured party must have knowledge of this fact before making the advances. [see s. 14(2)] The advance made on day 4 from lender #1 will have same priority as money given in the first instance and when priority was first registered in the million dollars priority over lender #2 [Tacking - Section 35(5)] Execution creditors who are enforcing judgment. Those persons can stop tacking procedure if they fall w/in Section 20(a). Right of lender #1 will be preserved if fits w/in [Section 35(6)(a-d)] If it doesn’t fit w/in this step and priority will not be protected, by s. 14(2) the obligation to make future advance is absolved. i) Advance made before the judgment is rendered ii) Where the secured party does not have knowledge of The interest of another person Seizure of the collateral by the sheriff Order giving sheriff right to collateral iii) Advances made in accordance w/ Statutory requirement; or Letter of credit – legally blinding obligation owing to a person other than the debtor entered into by the secured party before the secured party acquired the knowledge referred to in paragraph (b) iv) Reasonable costs and expenses incurred by the secured party for the protection, preservation or repair of the collateral v) The amount of taxes paid by the secured party under section 52(1) of the Manufactured Homes Act V.A.2 – Tacking Section 35(5): Tacking allows a s/p to keep advancing money to a debtor on the basis of a pre-existing security interest and to get the priority of that pre-existing security interest for all amounts advanced. Royal Bank of Canada v. Agricultural Credit Corp. of Saskatchewan (1994) SK CA p. 76. Can a single f/s perfect multiple security interests even when the subsequent loans constitute separate and distinct transactions? Scenario T1: debtor borrows $250,000 from L1. L1 registers financing statement in APAAP T2: debtor borrow $50,000 from L2, registers f/s T3: debtor borrows $100,000 from L1. Security interest at T1 does not contemplate an advance at time 3. However, f/s dated at that date in APAAP is still valid. Does first f/s perfect and give priority to the later advance despite fact that there is no clause in the original security agreement? Yes Court says that interest of PPSA is consistent w/ notice registration not the registration of every single transaction W/out future advance clause, same effect can be had – tacking Original security agreement, covering the same collateral will keep rolling no matter how many advances. In PPSA you can tack future advances unless a judgment creditor comes along and if you do not fit w/in s. 35(6). This will provide priority over other creditors. Still does not provide protection against other individuals. It only provides protection against other secured creditors. For example, debtor could sell collateral. Section 35(1) only applies to the relationship b/w creditors. Secured Transactions – Fall 1998 - Waldron 23 V.B - Section 20:Subordination of Unperfected Security Interests Section 20(b). If a security interest is not perfected, that interest is subordinated to that of the trustee in bankruptcy. The TiB will gather all property together and then distribute it according to the Bankruptcy Act The TiB is, in fact, the protector of unsecured creditors. As long as debtor is in business, may be secured and unsecured creditors. Unsecured creditors may become secured by getting a judgment and obtaining execution permit. If the secured creditor is not perfected, advantage granted under 20(a) as above. Once TiB is appointed, everything is frozen and falls w/in fed legislation. Unsecured creditors can no longer convert into secured and perfected creditors. Give TiB a similar advantage security interest not perfected is not effective against TiB, s 20(b). Re Giffen  SCC p 86 Lease of a Saturn car for a term of more than one year. Lease to Ms. Giffen, she went bankrupt, lessor had not registered a security interest in PPR. The lease did constitute a security interest. TiB and lessor argue over proceeds. Lessor argues that TiB is to take control of property of bankrupt. Is leased vehicle part of her property? Title of vehicle is maintained by lessor. Principle of BIA is that trustee will step in shoes of bankrupt and this would not provide ownership of car. To the extent that PPSA might be inconsistent w/ this principle, paramountcy would apply. SCC held: the bankrupt did have some property in the car (right to use) and PPSA recognized this as rights in collateral. Now decide priority. Priority determined under provincial law. Intention of PPSA is that interest of unsecured lessor will be subordinate to TiB. Trustee’s interest is one of priority, render unperfected interest invalid. When such a claim has been defeated, trustee can give good title through operation of s. 20(b). V.C – Section 28: Security Interests in Proceeds Scenario T1: A buys blue boat. X Bank takes security interest in blue boat T2: A sells blue boat and in return receives a smaller red boat + $2,000 cash + refrigerator If A is a dealer who sold blue boat in ordinary course of business, X Bank’s interest would be cut-off in 30(2) Would section 20(c) apply? Sale while unperfected Secured party may give permission to sell s. 28(1) Section 28. Security interest will follow the blue boat unless a cut-off rule applies. Secured party also gains interest in any proceeds of sale. The bank’s interest would attach to the red boat + 2,000 + fridge. Where secured party seizes both collateral and proceeds will not exceed the market value of the collateral at the date of dealing (T2). They can grab it all but there is a limit on the amount for which they can sell it. Section 28 provides automatic right to proceeds Section 28 allows a cut-off rule where secured party authorizes the transaction Otherwise secured interest may continue in the item and include the proceeds but be capped by the market value of the item at the time of the transaction. Proceeds must be identifiable and traceable property. The debtor must have an interest in the item for it to be proceeds. From definition of proceeds (s. 1) S-s 2, 3 description of proceeds. Must have a description of proceeds that covers this sort of item. Description in financing statement must cover original collateral such that proceeds are of same item or kind. Secured Transactions – Fall 1998 - Waldron 24 Money cheque or deposit accounts. If the description is not accurate, there will continue to be a perfected security interest for 15 days. S/p must re-perfect by entering new financing statement or take possession. V.D - Proceeds in a more negotiable form Currency may be transformed into a debt on a deposit account by bank. Bank = debtor. Debtor/Creditor relationship With the same parties, there may also be an inverse relationship. Line of credit – Bank = creditor Currency and cheques and other bills of exchange must maintain a degree of negotiability. See s. 31 Section 31: Holder of money has priority over a security interest in money perfected under s. 25 or temporarily perfected, if the holder Acquires money w/out knowledge that it was subject to a s/i Is a holder for value whether or not the holder acquired the money w/ knowledge that it was subject to a s/i. Section 31(2). Creditor receives an instrument and then uses that cheque to pay a debt. The security interest holder of the cheque will lose it. Section 31(3) stocks or bond????? Instruments = bill of exchange, note or cheque from Bills of Exchange Act. Any other writing that evidences a right to payment of money; a letter of credit . But doesn’t include see enumerated list. Security interest in cheque as physical item is quickly lost… V.E – Proceeds Generally Re Canadian Imperial Bank of Commerce & Marathon Realty Co (1987) SK CA, p. 95 Bank had a written agreement w/ retailer “kiddies”. Loan was given in order to buy inventory. S/i was taken in that inventory including proceeds. Once inventory had been sold, money was to be paid back to the bank and a new loan agreement drafted for further purchases of inventory. This was not done. Kiddies sold kept turning over inventory and buying more. Proceeds from proceeds are OK and were contemplated in the agreement A lender should not be required to police the activities of its borrower daily so that any provision is rigidly enforced to avoid the loss of a s/i in the proceeds of the sale of inventory. The f/s is still valid therefore other creditors are on valid notice. Flexi-Coil Ltd. v. Kindersley District Credit Union (1993) SK CA, p. 98 What happens to a claim to proceeds which are cheques deposited to pay down a line of credit? Competition is b/w bank that has extended a line of credit to Churchill and C’s supplier of inventory. Supplier has perfected security interest in inventory and all proceeds. The proceeds were always deposited in account at bank. Account was a revolving line of credit. At all times, the account was in a negative balance. When C deposited money to the account the balance owing decreased and he was allowed to draw more money from the line. Flexi-Coil was aware of what was happening. Credit Union didn’t know that a secured party relationship existed. Churchill unable to pay debts. Flexi-Coil makes statement that certain moneys being deposited into account belong to them as proceeds from sale of inventory. Credit union raised 31(3). The secured party’s interest in instrument was cut off b/c they were purchasers for value. Second generation proceeds were never created. Secured Transactions – Fall 1998 - Waldron 25 Equitable rules of tracing allow for tracking of money into mixed accounts. Under PPSA couldn’t use Equitable Tracing Rules b/c no trustee. Court holds the rules of tracing should be imported from trust law and modified to suit PPSA Cheques that were deposited were instruments Could credit union be purchaser of cheques? Yes, b/c once cheque came in, it reduced the overdraft and increased ability to draw on account value was given. They also took possession Flexicoil argues that cheques were turned into an account. Therefore the debtor still has an interest in the account and s/p should have interest in that. But credit union was never the debtor, Co. was also in a –ve balance. Did it ever become an account in which Churchill had an interest i) NO, debt w/ credit union only ever became reduced. Churchill never gained an interest. Could not sue bank for amount that he deposited, he just reduced indebtedness. ii) Lost security interest in cheques and no accounts were created iii) The account which comes into existence when a cheque is deposited to an account in positive balance is the proceeds of a dealing w/ the cheque iv) When account is in overdraft, no property right arises, the customer is the debtor If Flexi-Coil attached a right, it could be in not better position than C. You have a security interest through s. 28 but that s/i is very vulnerable. As soon as money is paid off or passed along, it’s gone. Must maintain free negotiability of cash and money. Section 31 will limit s/i of parties who take interest in money or cash. In order to make a claim to proceeds you have to show interest of debtor in the item. There was no proceeds in clearing process b/c the interest is in the credit union trying to reduce the debt. Security interest will follow everything, through every step of the way. S/i in the actual physical cheque, in the account, in the proceeds of clearing process. All could have been subject to s/i in right circumstance. Flexi-Coil may have protected itself by asking that proceeds be put into separate account or at separate institution. Otherwise, they want to make certain that bank is aware of relationship that might deny bank’s right of set-off. Set-off Rule presupposes two separate accounts Account 1: Deposit account w/ +ve balance Account 2: Loan account w/ -ve balance Bank can set-off two sides, more or less whenever required. Can add money to loan account by taking from deposit account. What happens when money is added to deposit account = proceeds to inventory that are subject to a security interest. Different from Flexi-Coil b/c something is created Clear conflict b/w right of secured party and right of bank to “set-off” Bank can exercise its CL right of set-off until it knows of the secured party’s interest. [TransAmerica] Royal Bank of Canada v. Pizza Bell Corp (1991) SK QB, p 106 Items subject to security agreement of bank. Debtors were also indebted to PB. D’s relocated collateral were then sold by PB to 3rd party. Later sold in US. All other items cannot b located. PB is unsecured What happens to security interest or proceeds that were created through sale of these items by PB, not by debtor? Money’s realized from sale are subject to SI even though they were not sold by debtor Secured Transactions – Fall 1998 - Waldron 26 Did debtor ever have interest in proceeds: PB sold them but items were in fact owned by debtor? V.E.1 – Tracing Series of presumptions that deal w/ money going into a mixed account. C&W p. 206-12. Equitable tracing rules are bulky, require significant and costly forensic accounting that may not lead to an answer. Functional Equivalence Test Agricultural Credit Corp of SK v. Pettyjohn (1991) SK C.A. p. 109 PJ borrowed money from ACC to buy cows. ACC took security interest in cows and PJ’s agreed the collateral would not be sold w/out authorization from creditor. Also borrowed money from other creditors to buy cows. PJ sold cows and changed stock to Watusi Cows (reduced #) Proceeds went into bank account (line of credit, always in –ve) many transactions. ACC had PMSI in +- 47% of original herd of cows. Series of statutes in SK that provides debtor protection for farmers. Certain assets can be protected from debtors but cannot protect those assets in which someone has a PMSI. Argument b/w ACC and PJ In what does ACC have a PMSI? Can we follow through original funds (which were a PMSI) to the new herd of cows? How? Equitable Law of tracing (from definition of proceeds). Court found root purpose of tracing rules = establish close and substantial connection b/w original property and replacement property. Artificial process helps to make that transition. Look at principle of close and substantial connection. This can be done w/out working through all the difficult rules. Functional Equivalence Test: did the new property replace the old property (toss-out the technical presumptions). Equivalent role in the economy of the debtor of the old and new goods. Find security interest carrying over into new herd. They did not have PMSI in whole herd Cow for cow – give them the # of cow to which they were entitled (this was more expensive herd). Consider other creditors (secured and unsecured) Pro rata as a % of herd. Watusis were more expensive but money is not all accounted for may not totally reflect the value of the debt. Court chooses proportionate relationship. Was there purposeful fraud? PJ’s tried to engage in sale in order to avoid the security interest? No, they were applying statutes of SK Re River Industries Ltd (1992) BC SC, p. 117 A claiming as secured creditor. They were registered against inventory. R was in bankruptcy proceedings but stayed while trying to make arrangements w/ creditors. A continued to do business w/ R There was a sale in bulk and proceeds were derived. There was some inventory supplied by A and that was expressly excluded. A collected it. Debt to A was much more. Does A have claim to proceeds, not in the inventory (sold and transferred) but money that was received from sale of inventory. Court will apply Pettyjohn and focus on substance and effect of transaction rather than form. New and old inventory are close and substantial. Inventory was tracable in dealing w/ collateral money received was proceeds from collateral. Adopt a proportionate ratio rule depending on percentage of inventory supplied by A. Secured Transactions – Fall 1998 - Waldron 27 Universal CIT Credit Corp v. Farmers Bank of Portageville (1973) US, p 119 How does the lowest intermediate balance rule operate in practice? Chev is in dispute w/ its financier who had a security agreement in all inventory and proceeds. He is cut off from supplier Indebted to bank manager as well. Gives 12,000 to bank manager to pay debt and then takes $3,000 for himself. Knows that there are cheques written to inventory supplier. The cheques are returned NSF. The cheques had already arrived at the bank, before this deal but will not be posted until next day. Inventory supplier is able to specifically trace into the account proceeds of six cars. There is other money in account and there have been several transactions through account. Ought to be some rights over a mixed-fund account. At what lowest amount can we say that it is fair to give money to secured creditor (where proceeds were put into account)? Can never have more money in proceeds balance than accnt balance Person uses their own money first, not proceeds. Therefore first withdrawal does not reduce proceeds balance by full amount. See #4, p. 124. Where there insufficient funds from non-proceeds then must lower the proceeds balance. Non-proceeds deposits are never added to the proceeds balance. When you replace funds you do not replace funds that you might have otherwise dissipated unless you show intention to restore. An intention to restore proceeds balance. See transaction 8, p. 124 Proceeds deposit Non-proceeds Withdrawals Balance Proceeds balance deposits from account 3,400.58 3,400.58 5,700.00 9,100.58 5,700 4,125.00 13,225.58 9,825.00 3,515 .68 9,709.90 9,709.90 … 516.65 15,823.35 11,429.11 Wrt account $11, 429.11 is attributable to proceeds. Bank was only entitled to residual, had to pay money to financier The law of fraudulent conveyances supported recovery of proceeds by a s/p from a transferee out of ordinary course or otherwise in collusion w/ the debtor to defraud the s/p. V.F - Purchase Money Security Interest Attempt to recognize a special priority position of a particular class of people - lenders who lend money to expand the asset base. To do so, you advantage everyone. Purchase Money Security Interest, defined in s. 1 Security interest taken in collateral that it secures payment for all or part of the purchase price. Unpaid vendor is advancing money to let you buy the item and taking security interest in the item. PMSI also includes s/i taken in collateral by person who gives value for the purpose of the debtor to obtain rights in collateral to the extent that the money is used to acquire rights. Bank lending money for debtor to buy car. i) The loan must be given for a particular purpose (would not evolve from a general line of credit, for example). Lender may specify purpose in the agreement (not fatal to omit this clause) ii) The money must be spent in regards to the particular purpose for which it is intended. The PMSI is limited to the amount of money that is spent in acquiring those rights. Borrow $15,000; price of car = $10,000. Have security interest in all $15,000; have PMSI to the max value of $10,000 Creditor can have s/i of mixed nature. Secured Transactions – Fall 1998 - Waldron 28 PMSI must be perfected w/in 15 days If you have a lease for a term > 1 year, the interest of lessor is PMSI. Lessor is analogous to the unpaid vendor Parties supplying goods under commercial consignment is given PMSI protection. Does not include a transaction by sale and lease-back. It does not expand the asset base. Lends money on strength of assets the one currently owns. Purchase price and value includes credit charges and interest payable. If at time 2, no payments have been made but amount owing has increased from $10,000 to $12,000. Then, by definition creditor can take PMSI in value of 12,000. Cost of acquiring rights. Agricultural Credit Corporation v. Pettyjohn – as above ACC had to demonstrate that they had PMSI. SCENARIOS Borrow $10,000 to buy car, spend money on car and give s/i to bank valid PMSI Borrow $10,000 to buy car, give s/i in car. Bank wants to see car first. The title is first transferred into your name, you have acquired rights in collateral. Bank gives you money and pay the dealer. The sequence of events have changed. Value is still being given to acquire rights in car. Probably valid PMSI T1: D applied for loan T2: D received commitment to lend (ACC would reimburse once money had been spent) T3: D goes to bank w/ loan commitment letter and asks for money to make purchase. Bank lends $ T4: D buys cows T5: Loan from ACC comes through and is used to pay bank Has loan from ACC been used to acquire rights in collateral? The rights had already been acquired? Money was not given directly to vendor, it was given to interim financier. Can this be valid PMSI? Court looks at agreement overall. The binding commitment was from ACC. Something of value given by ACC which debtor used so that bank would agree to lend $. Would not have gotten bank loan w/out commitment from ACC. Value is given where a lender makes a binding commitment to extend credit, notwithstanding the fact that the advances occur later. It was this binding commitment that was ultimately used as value to acquire rights in the cattle Take global view of transaction, should not be overly fragmented. V.F.1 - Section 22: Grace period PMSI is saved for 15 days after the debtor takes possession of collateral or 15 days after attachment on intangible collateral, against folks in s. 20(a) or (b) judgment creditors or trustees in bankruptcy. Money is lent by bank to purchase a car. Security agreement is granted to bank, PMSI, not registered. Day 1: Take possession of car Day 5: Bankruptcy Day 6: Bank registers f/s re car Bank has special status as holder of PMSI. Bankruptcy fell w/in grace period and they registered before grace period expired saved. If on Day 5, debtor had sold car to a bona fide purchaser for value w/out notice bank is not given any preference. Judgment creditor and TiB are not relying on register. Could obtain PMSI interest in proceeds of sale of car, however, s. 31 may cause problems if proceeds spent to reduce debts. Secured Transactions – Fall 1998 - Waldron 29 In a competition w/ other secured parties, holder of a PMSI can obtain a preferred position, super-priority. V.F.2 – Priority of PMSI Section 34 – Priority of Purchase Money Security Interest. Divide collateral into inventory and everything else If PMSI in “something else” then get super-priority by obeying rules from 34.1 i) Must be perfected not later than 15 days after the debtor obtains possession (if intangible not later than 15 days after attachment) If lender w/ PMSI had taken s/i in car + APAAP, but value of car is less than the amount owing. The s/i in the balance owing, no priority is given over APAAP, only in item of collateral. If PMSI in inventory i) T1: D enter into loan agreement w/ bank, take s/in in APAAP and properly registered ii) T2: D enters into arrangement w/ inventory supplier. Inventory supplier will provide inventory on credit, in return for s/i in inventory and all proceeds (unpaid vendor) [from 34.2] Must perfect s/i before the debtor obtains possession of the collateral. Debtor must give notice to any other secured party who has registered a f/s containing a description that includes the same item or kind of collateral Notice must state that you intend to take PMSI in inventory and describe it in item or kind Notice must be given before debtor obtains possession of collateral. Therefore, before shipping out inventory, must register financing statement and give notice to other creditors. McLeod v. Price Waterhouse From this case, must have possession of collateral as debtor. If have possession of item for a 30 day trial period. 15 days will not start running until the agreement for sale has been negotiated and purchaser is established as a debtor There is a general creditor who is registered first and Ford Credit Canada Ltd who claim super-priority over proceeds of tractor by virtue of PMSI and has fulfilled requirements therefore The tractor had been leased for a number of years and when expired, they continued use. There was a subsequent buying arrangement. Arrangement for sale concluded on 16 Oct. Always intended that sale be financed. Once deal for sale was negotiated, a credit application was sent to finance company, Ford Credit. Ford Credit approved application on 2 Nov which is when f/s was registered. They had had possession of tractor for several years and, at least, had possession since 16 Oct under sales k. Court holds that there must be debtor and creditor, so time can only start running on the date that credit application was approved. Must be debtor in debtor-creditor relationship for time to start running. Described in C&Won pp 179-80 V.F.3 - Priorities from s. 34 It is possible to divide financing. Borrow money from both vendor and bank to purchase a car. Both properly registered w/in 15 days. Preference will be given to the PMSI of vendor over lender. See 34.4 i) Seller, lessor or consignor (deemed?) will be given priority over any other PMSI given in the same collateral by the debtor. Irrespective of who registered first. Secured Transactions – Fall 1998 - Waldron 30 If there are two s/p w/ PMSI and neither is seller, lessor or consignor. There is no rule that specifically deals w/ the situation apply residual rule of s. 35. T1: D buys a cash register from SP1 (supplier). Financing statement is properly perfected valid PMSI T2: D sells cash register to SP2 (trade-in) for new cash register and is financed by trade in and in financing terms by SP2. Registration of f/s valid PMSI Interest of SP1 involves proceeds s. 28. Priority position of SP1 will carry over into proceeds. One claims PMSI by virtue of proceeds; the other claims PMSI as vendor SP1 can chase old cash register, right to proceeds is bonus. Can sue SP2 for old c/r in specie or sue SP2 in conversion. Act give priority to SP2 over new cash register. When PMSI carries over into proceeds, it will sometimes lose part of it’s priority position see 34.6 i) Non-proceeds PMSI has priority over proceeds PMSI if perfected w/in 15 days. [s 34.6] ii) Proceeds PMSI right is to chase collateral or sue in conversion. Section 34.5 – A secured creditor may take interest in accounts receivable. There are also collection agencies that make business by selling accounts receivable to accounts financier. With recourse – sell accounts of my business to accounts financier. If financier cannot collect then they can be sold back to original lender. Without recourse – accounts financier takes loss on bad accounts A sale of an account is still defined as a security interest under PPSA, s. 3. T1: B Co gets money from Bank on general line of credit. In return they offer s/i in goods including accounts T2: B negotiates with inventory supplier who gains PMSI in inventory and proceeds T3: Purchaser buys TV w/ payment due in 30 days. An account is established. If there is a non-proceeds security interest in accounts (bank) given for new value has priority over PMSI in the accounts as proceeds of inventory if a f/s relating to the security interest in the accounts is registered before i) The PMSI is perfected, or ii) A f/s relating to it is registered. Remember, subject of security interest must be an account. If the account is proceeds in inventory, they may lose priority to someone who has a non-proceeds security interest under s. 34.5 Apparently, the inventory supplier is not terribly interested in acquiring or enforcing property over accounts. It is considered to be a very complicated business transaction accounts are rarely used by inventory supplier Account financier receives special protection The inventory supplier can protect itself b/c will only lose protection to a previously perfected s/i. Inventory supplier can look at PPR. Co, in the business of purchasing accounts receivable = Accounts Factor. Might argue that Bank is in fact financing the entire business Scenario 2 Bank makes loan to debtor and bank will take a security interest in accounts. D also maintains a deposit account at the bank. An inventory supplier also exists, she takes PMSI in inventory and proceeds Bank argues security interest in account and can take priority over inventory supplier. I/s argues that they have s/i in deposit account and that money constitutes proceeds from sales. This is not valid under 34.5 Discussion on p 274 - . Transamerica Case on point. Secured Transactions – Fall 1998 - Waldron 31 Court finds that act relates to trade accounts with its debtors, not deposit accounts subsection did not apply to this situation. Inventory supplier was given priority as it was able to trace proceeds into the account. No priority given to bank under 34.5 b/c not relating to trade account. Bank had notice of the security interest b/c notice had to be provided by inventory supplier to gain PMSI. Chrysler Credit Canada v. Royal Bank of Canada (1986), SK CA, p. 130 Case is highly criticized, result may be wrong. There is a competition b/w banker w/ a line of secured credit and a general security interest covering almost everything Chrysler Credit is an inventory supplier, they take security interest in inventory and proceeds and have given notice PMSI There were a series of second hand cars in question 1 - Some had been traded-in for the purchase of a new Chrysler product. These were proceeds and so priority was given to Chrysler 2 – 31 could be traced to the sale of new cars that had been financed by Chrysler Credit, but each of them had been fully paid for by the dealer. No balance outstanding on their purchase price. i) Does PMSI extend to those trade-ins after loan balance for the car had been paid off? Normally a sale in the ordinary course of business will cut off PMSI interest in collateral PMSI will attach to all of the trade-ins that are proceeds Argue that PMSI interest is dissolved at point of extinguishment of the debt wrt to original collateral and proceeds. OR All cars constitute one single indebtedness and there is a valid PMSI until the entire debt is paid off. 3 – Cars that could not be traced, Chrysler could not claim PMSI as they could not be connected to inventory, not proceeds that were identifiable or traceable. Cars are delivered to bank. Court is careful to try and interpret the intention of the parties under the agreement. They granted interest in cars to Chrysler Credit. Issue is whether or not Chrysler Credit had a PMSI in these goods The existence of a PMSI is question of fact, court seems to say that parties can arrange as to whether it was a PMSI or not. Fairness Considerations: Money to pay inventory supplier might have come in part at least from general line of credit (bank) They could have obtained the result in Chrysler Credit in other ways. Take PMSI in all inventory and then insert “application of payment” clause. The amount of proceeds would be applied weightably to the loan that is attributable to all remaining inventory. i) E.g. if there are 4 cars and one is sold for $20,000 then ¼ of that will be applied to each of the 4 cars and PMSI lasts as long as possible. Objectionable b/c it does not reflect the definition of PMSI from the act. SK has enacted legislation that reverses the rule. It has never been considered in BC. Some American states have enacted the Chrysler rule. V.G - Negotiable Collateral Governed primarily by s. 31 The negotiability of currency and bills of exchange are governed by feds. Section 31.1: A holder of money has priority over a security interest in money perfected under s. 25, or temporarily perfected under s. 28.3 if the holder Acquired the money w/out knowledge that it was subj to a s/i, OR Secured Transactions – Fall 1998 - Waldron 32 Is a holder for value whether or not the holder acquired the money w/ knowledge that it was subject to a s/i. A security interest in money will exist but is easily lost Section 31.2: creditor who receives an instrument drawn or made by a debtor and delivered in payment of a debt owing to the creditor by that debtor has priority over a security interest in the instrument whether or not the creditor has knowledge of the security interest at the time of delivery. Section 31.3: [Flexi-Coil] A purchaser of an instrument or a security has priority over a security interest in the instrument or security perfected if: Purchaser gave value for the instrument or the security The purchaser acquired the instrument or security w/out knowledge that it was subj to a security interest Indian Head Credit Union v. Andrew; Royal Bank of Canada D had a herd of cattle and had got loan from Credit Union. The herd was insured, they caught disease and had to be destroyed. S/i in cattle or proceeds was given to CU. The government would compensate him but issued cheque in his name. He did not pay off debt to the Credit Union. D goes to bank in next town and purchases a term deposit. He then uses the term deposit to secure another loan. CU discovers what is happening and pursues proceeds. Bank argues that they cannot be responsible. There is a loan and a deposit. Nothing left after exercising right of set-off. Section 31.1 did not apply, Andrew had not granted a s/i in money but in collateral. Furthermore, it was deposited into an account not holder for value and probably had knowledge. Section 31(2) did not apply b/c D did not write cheque in settlement of debt. Section 31.3. Bank argues that they were purchaser of the instrument (term deposit). Court holds that Andrew was purchaser of term deposit Taking a security interest, lien, mortgage, pledge would make bank purchaser. Court holds that 31.3.b would not offer protection b/c they had knowledge of security interest. The bank manager did ask D whether this was the case and he denied it. Court finds that information was given to a senior person of bank in which a reasonable person would take cognizance of. Credit union has security interest in cows. They are destroyed. They have security interest in cows and therefore in proceeds as evidenced by cheque. The money is deposited into an account and created 2nd generation rights. That money is used to buy a term deposit 3rd generation rights. There are now 2 parties who have secured interest in term deposit. The court holds that an application of s. 35 will give priority to the party who is the first registered. No protection offered under s. 31. Knowledge seems to be important in this case that the Bank knew that the cheque should have been subject to security interest of bank even though D denied this. If credit union had s/i in APAAP then Bank should have realized that there was s/i in it by checking PPR anyway. V.H - Accounts Section 31 does not cover debts. Defined under act as an “account” Account means a monetary obligation not evidenced by chattel paper, an instrument or a security, whether or not the obligation has been earned by performance. Once a cheque is written then the debt is evidenced by an instrument. When purchasing a car, make downpayment, sign a promise to pay + the security interest in car Secured Transactions – Fall 1998 - Waldron 33 i) A promise to pay + s/i = chattel paper ii) Chattel paper and an account are mutually exclusive iii) An account is a bare debt. Accounts are intangibles cannot perfect by possession Accounts come into PPSA in 2 ways: Can take a security interest in accounts (receivable) Accounts can also be bought outright (as a Factor). Sale of account is as much a security interest s. 1 definition of “security interest” Only general sale of account = deemed transaction, some restrictions in s.4 Section 41(9) allows the assignee to enforce the assignment of an account against the debtor Canadian Western Bank v. Gescan (1991) AB QB p. 139 Co has created general s/i in accounts. Generex, who created assignment, also owed money to D. To pay off debt they have assigned a specific debt to Gescan. This occurs after general assignment to bank (+ registration). Gescan enforces specific debt against Jen-Col and payment is made directly to D. Total debt is discharged. P holds general assignment and is pursuing money paid to D on assignment. At CL consider rule from p. 140 Dearle v Hall. First party to give notice to account debtor would win. This rule no longer applies under PPSA. Rule is from s. 35. First to register, perfected over unperfected… Two s/i have been taken. The general s/i is properly registered. The specific assignment of one debt has not been registered. The perfected interest has priority over unperfected. D argued that once assignment was paid, by virtue of s. 31 they should have priority over that money. Court holds NO. Issue is not what happens after payment is made, but who has right to payment. Priority not given to first who gets hands on collateral. CL rule of Dearle and Hall is abrogated by PPSA The general assignment of book accounts is a general security arrangement. Creditor does not expect to collect accounts until there is a default on security arrangement. Sale w/ Gescan was sale of one particular account. Transfer of account is also a deemed s/i. Priority established under general PPSA rules. If Jen-Col sent a cheque to Generax Generax endorsed it over to Gescan in payment of debt owed to Gescan, the Gescan would take cheque free of security interest. A negotiable instrument transferred for value to Gescan. In doing it by assignment, that came w/in PPSA. If they were not in default to Bank. If security interest is not enforced and they are still operating, then that is permitted General priority over assignment of debt accounts governed by s. 35 PPSA If both have PMSI in inventory, priority will be given to non-proceed accounts. See s. 34(5) Section 41: deals w/ CL and equitable rules wrt assignment. Section 41(2) [equitable rules] Will apply any time you assign an account. Account is just a debt. Chattel paper = debt + s/i Suppose A enters k w/ B. Where B will perform garden services for A and A will pay B $500 B assigns debt owed by A to C ($500). A = account debtor B can sell (assign) debt to C and C could directly sue A for the debt owing. Exception to rule of privity of k. If B never did the work for A. B/w A and B there would be an equitable defence. A would argue that B never did the work don’t have to pay. Secured Transactions – Fall 1998 - Waldron 34 i) C is subject to equitable defences that A can raise wrt B. Same defences that would apply b/w A and B will also apply b/w A and C after an assignment by B. Suppose that B received from A $100 on account. B has sold debt but unknown to C, A has already paid $100 on account. i) C takes subject to state of accounts b/w A and B as they stood prior to C notifying A that they are assignee of debt. Modifications to CL Section 41(3): Suppose k as above, where B has not yet earned the right to payment. K b/w A and B specifies work that B is supposed to do. If A changes terms of k, then B cannot ratify changes in k w/out consent from C. i) Now, A and B have ability to fiddle w/ k a little bit, in reasonable ways, without consent from C (in good faith and in accordance w/ reasonable commercial standards) ii) A is account debtor Section 41(9) A term in k b/w account debtor and an assignor (A and B) says that B is not to assign right to payment under k to anyone. Doesn’t matter much to A. B is prohibited from assigning debt and any assignment is void. But what if B does? i) Gov’t k more often exist, b/c approval of k w/ B and want to ensure that B does work ii) CL suggested that assignment was valid. iii) PPSA will allow the transfer and will make B liable for breach of k; nevertheless A must still pay C. anti-assignment clauses are no longer effective V.I - Chattel Paper Chattel Paper one or more writings that evidence both a monetary obligation and a security interest in, or a lease of, specific goods or specific goods and accessions; If A buys car from D and gives promise to pay (usually in form of a promissory note) + a security interest in the car. Together = c/p If D has line of credit from Bank which gives s/i in APAAP. There is an inventory supplier w/ PMSI in all inventory and proceeds. i) D sells car to A. What happens to two s/i in car? According to 30(2) both s/i in car are cut-off from bank or inventory supplier. ii) A gives D promise to pay and s/i in car = c/p. C/p = proceeds from sale of car. Section 28 now gives s/i to bank and inventory supplier in chattel proceeds. Inventory supplier maintains priority to proceeds Suppose A has not bought the car and D is in financial difficulty. Claim for bank, inventory supplier and TiB. Assuming proper perfection TiB will lose If car was sold to purchaser, c/p was created as proceeds of sale. Bank and inventory supplier have s/i in c/p If car dealer now goes bankrupt. C/p remains proceeds of sale so their interest stays the same. If purchaser goes bankrupt. A has TiB to look after her assets. There was a new s/i created by the c/p. The new s/i created by c/p transaction will only be valid if the s/i in the c/p itself has been perfected by inventory supplier. However, what if D did not perfect the s/i? The proceeds represented by the c/p would be unperfected If yes, TiB’s interest is subordinated. Bank and inventory supplier have interest in c/p If no, TiB will take car. C/p remains. Security interest is no good b/c not perfected. However, there is still promise to pay. C/p is still subject to interest of bank and inventory supplier. Will still rank highly wrt to other secured parties. Secured Transactions – Fall 1998 - Waldron 35 i) C/p created two-tiered security. ii) Two-tiered perfection Was the s/i in the chattel paper properly perfected? Was the initial s/i that lead to c/p (proceeds) properly perfected? iii) Two-tiered registration. Can gain benefit over TiB. Suppose there is a Dealer and an inventory supplier. Inventory supplier has PMSI. D buys car on credit and then sells it in ordinary course of business to purchaser and creates chattel paper. They sell on credit with promise to pay + s/i in car. Car dealer gets c/p. They may store it and collect purchase price. Car dealer will assign c/p to a finco. Who has priority b/w finco and inventory supplier? Inventory supplier has interest in c/p. When c/p is assigned, finco has s/i by virtue of s.3 (deemed transaction). Finco physically has c/p which is perfected by possession. C/p perfection by possession is better than perfection by registration. They take possession of c/p in ordinary course of business and for new value. Priority to chattel paper is perfected by registration. Section 31.6 C/p purchaser who takes possession has priority over those folks who have perfected by registration if purchaser does not know that c/p is subject to a s/i. Purchaser of c/p has priority over interest in c/p that arises due to proceeds of sale of inventory no matter what degree of knowledge. i) Finco gets priority over c/p despite interest of inventory supplier If bank is general financer, w/ s/i in APAAP. Inventory supplier must know what sort of credit operations the dealer is involved in Wise decision for inventory supplier to require dealer to transfer possession of c/p to inventory supplier. Commercial Credit Corporation v. National Credit Corporation, (1971) S.C. Arkansas, p. 143 National Credit was financing inventory, has s/i in car. Car was sold to E. The s/i in car was cut off (authorized sale) but gained s/i in c/p. c/p was sold to Commercial Credit E is still entitled to car, he’s still making payment. Argument is in rights over c/p. C/p is right to receive payment for car and right to seize if there is default NCC had proceeds PMSI in c/p See s. 31(6) Purchaser of c/p in ordinary course of business. Took possession for new value priority over any other s/i in c/p that attached as proceeds of inventory under s. 28 Inventory supplier who wants to be careful should take possession of c/p. Maybe could be paid more quickly by c/p purchaser V.I.1 – Returned Goods Dealer sells car to purchaser. Dealer takes s/i interest in proceeds, accounts; chattel paper. Dealer sells accounts to an account purchaser (they obtain security interest and would register in PPR. Intangibles cannot be perfected by possession). There is also an inventory financier who supplies dealer with cars and obtains a PMSI in inventory and proceeds. The bank is a general lender who has security interest in APAAP. Dealer has sold chattel paper to a separate c/p purchaser. All security interests are perfected Dealer sells car to a purchaser, part of purchase price is paid on account, open loan to purchaser, part is on c/p (=promise to pay and s/i in car) C/p sold to c/p purchaser for value and takes possession of c/p document and perfects by possession. Both bank and inventory financier have interest in car on lot. Financier has priority by virtue of PMSI Secured Transactions – Fall 1998 - Waldron 36 Once sold in ordinary course of dealer’s business, the interest of both is cut off by s. 30.2 They have interest in proceeds, an account and c/p. The dealer sells the account and the c/p. Apply special priority rule from s. 34(5). Non-proceeds security interest in account given for new value has priority over PMSI if security interest is registered first Special rule for c/p purchasers s. 31(6)(b). Purchaser of c/p which is proceeds of inventory gets priority (no matter what knowledge) C/p purchaser has security interest in c/p has deemed s/i under the act. It evidences a s/i given by the purchaser in the car. To get as good perfection as they can get, they want to take possession and make sure that c/p is properly registered. Two-tiered perfection. Suppose purchaser is unhappy w/ car and returns it to dealer in very short order. Same effect would happen if car was seized or repossessed by dealer. Dealer accepts car back. Inventory financier and bank once had s/i in car. Car is now back on lot. Section 29 It sorts out what interests are wrt returned item then works out priority position. Section 29(1): The s/i will reattach (neither become proceeds interest but original interests) if: i) The goods are returned to or are seized or repossessed by, the debtor (original) AND ii) The obligation secured remains unpaid or unperformed (dealer is still in debt to inventory supplier) Section 29(2) Where s/i reattaches then perfection and time of registration is determined as if goods have not been sold. (Back-date as if car had never been sold). The accounts purchaser has purchased a debt where there is now nothing owing. C/P purchaser will not be able to obtain more payments from purchaser. They also had right to seize the car if the purchaser refused to pay (but purchaser no longer has car so right to seize has been negated) Section 29(3) Where a sale or lease of goods creates an account or chattel paper and i) The account or chattel paper is transferred to a secured party, and ii) The goods are returned to, or are seized or repossessed by, the debtor or a transferee of the c/p The transferee of the account or chattel paper has a s/i in the goods that attaches when the goods are returned, seized or repossessed. This is a new s/i in the car that is created by this section and attaches to car. Otherwise purchaser of c/p and of accounts have nothing. Section 29(4) The s/i arising from subsection 3 is perfected if the s/i in the account or the chattel paper was perfected at the time of return, seizure or repossession but becomes unperfected at the expiry of 15 days after the return unless the transferee (accounts purchaser and/or c/p purchaser) i) Registers a new financing statement relating to the s/i in returned car or ii) Takes possession of goods by seizure or repossession of the goods or otherwise. Claim of bank on two legs. Under 29(1) and also b/c car = after-acquired property. Accounts purchaser has security interest in the account as against the dealer but does not initially have s/i in car. The sale of the account is considered a deemed s/i and is necessary for the operation of this section. Priorities Assume that the c/p purchaser and accounts purchaser registered their f/s w/in 15 days. All security interests are properly perfected. Suppose dealer goes broke Section 29.5 – A security interest in goods that a transferee of an account has under s-b 3 is subordinate to S/i arising under s-s 1 (bank and inventory financer) that is a perfected security interest and Secured Transactions – Fall 1998 - Waldron 37 A security interest of a transferee of c/p arising under s-s 3 Section 29.6 – A s/i in goods that a transferee of c/p has under s-s 3 has priority over A s/i in the goods that reattaches under s-s 1, and A security interest in the goods as after acquired property that attaches on the return, seizure or repossession. If the transferee of the c/p would have priority under s. 31(6) as to the c/p Section 31(6) – Purchaser of c/p who takes possession of the c/p in the ordinary course of business and for new value has priority over any s/i in it that has attached to proceeds of inventory under s. 28 Osbourne and First National Bank Bank had right to take back c/p to Buddy and ask for money. There is a Dealer (Buddy) who sold car to T and c/p sold to Bank (with recourse). T default and Buddy repossesses car (probably b/c c/p was sold w/ recourse). Buddy then transferred car to Jack Washburn. Not clear the nature of that transaction (ordinary course of business?). Then sold to another used car dealer who sold it to the D. Sale in ordinary course of business requires new value. Not obvious that that was done. Doesn’t matter. The car was repossessed goods s/i of c/p holder arose in the repossessed car pursuant to our s. 29(3). Only perfected for 15 days Bank claims ownership of car based on c/p despite new owner The bank did not register a new f/s nor did they repossess the car themselves. When car went to Washburn there was no perfected s/i D wins. Usually when c/p is sold, payments are made directly to the c/p purchaser. That way when purchaser defaults, c/p purchaser will repossess and their interest remains perfected under s. 29(4). C/p purchaser wants to be the one who seizes. If inventory financier has lien over dealer. When dealer sells car the interest is cut off under s. 30(2). Purchaser paid cash. The car is then returned. While purchaser had car she obtained $10,000 loan in good faith from bank in return for s/i in car. The s/i of inventory financier has reattached. Section 29(7) states that bank would gain priority over everything. Protects innocent s/i that might be created under these circumstances. VI - Fixtures If someone owns land and house is built on land. House b/comes fixture owned by owner of land. Attached to land that it b/comes part of real estate. An item is a fixture if it is attached in such a way that the parties intended it to be a fixture. i) Consider degree of affixation ii) Was it intended to become a fixture. What happens if someone buys a chattel, give a s/i in it and then they affix it to real estate? At CL, title to chattel went to owner of land and any other interests (including s/i) were lost. Problems for items that were sold and became fixtures (e.g. furnace) If there is a vendor of something that will become a fixture, you can take a s/i in that item and can keep it even once item is affixed to the land, provided they file notice in Land Title Office. Controlled by s. 36 Definition s. 1 fixture = does not include building materials. Otherwise, consider CL test. Building materials = materials that are incorporated into a building and includes goods attached to a building so that their removal i) Would necessarily involve the dislocation or destruction of some other part of the building and cause substantial damage to the building apart from the loss of value of the building resulting from the removal, or Secured Transactions – Fall 1998 - Waldron 38 ii) Would result in the weakening of the structure of the building or the exposure of the building to weather damage or deterioration. But does not include i) Heating, air conditioning or conveyancing devices, or ii) Machinery installed in a building or on land for use in carrying on an activity inside the building or on the land. SCENARIO Somebody buys something, gives s/i in it, then it becomes attached to the land. See s/i in ss. 36.3, 36.4 Section 36.3 & .4 s/i attaches before or at the time the goods become fixtures Section 36.5 deals w/ s/i that attaches after the goods become fixtures T1: A buys land and gives a real property mortgage on the land to B who registers the mortgage in the appropriate LTO T2: A buys a new hot tub and borrows the money from C (S.P.) who takes a s.a. from A which lists the hot tub as the collateral. C does not file a f/s in the PPR nor does C file anything in the LTO T3: A then installs the hot tub, replacing the old tub – the hot tub becomes a fixtures Q: b/w B (real property mortgagee) and C (the s.p. who has a s/i in the hot tub), who is entitled to the hot tub should A default on the payments in regard to the hot tub. A: B/c the s/i held by SP “attached before” the goods became a fixture – and b/c on the facts there were no other persons who acquired an interest in the land AFTER the goods became a fixture [i.e. no one acquired an interest in the land after the goods became a fixture as per 26.4.a, the mortgagee of the land did not make an advance after the goods became a fixture as per 36.4.b.i, no order for sale or foreclosure was made after the goods became a fixture as per 36.4.b.ii, and no judgment was filed in the LTO by and judgment- debtor of A as per 36.6] the priority dispute is governed by s. 36.3 which gives priority to C (the s/p who holds a s/i in the hot tub) over B the real property mortgagee. No mention of perfection requirement It certainly may be argued that B did not rely upon the value of the hot tub when B became a mortgagee – to the extent that the hot tub enhances the value of the land, it would give B something that they did not have at time mortgage was negotiated. Expanded asset base Limitations in s. 36(4) D buys land and gives B (bank) a real property mortgage. D buys hot tub from s/p giving s/p a s/a which lists the hot tub as collateral – s/p files nothing in PPR or LTO D installs hot tub on the mortgaged land )if stopped here, as b/w B and SP, SP would have priority as to the hot tub B assigns the real property mortgage for value to Finco Who has priority interest? Assuming no fraud on the part of Finco, the Finco should prevail on the basis that the Finco falls w/in s. 36.4.a. And before notice of interest is filed in accordance w/ s. 49. Notice of intention to take s/i in LTO Anybody who acquires interest in land (for value) will get priority over s/p unless notice was filed in LTO D gives Trust Co a real property mortgage and the mortgage provides for a series of advances. Mortgage is registered D buys a hot tub – gives s/p a s/i in the hot tub – nothing registered in LTO D installs hot tub Trust Co makes an advance of $40,000 SP registers in LTO as per s. 49 PPSA Trust Co does not search title and makes another advance of 20,000 Secured Transactions – Fall 1998 - Waldron 39 If D defaults in regard to both s/p and trust co and the land w/out the tub is valued at only 40,000 and the value of the hot tub is 5,000 – who gets the hot tub? Under 36.4.b the holder of a registered real property mortgage (Trust co) gets priority of s/p of hot tub only in regard to advances made pursuant to the mortgage BEFORE the s/p registered in the LTO. Hence, on the facts, Trust Co has priority over s/p for the first advance of 40,000 but does not have priority over s/p for the second advance of 20,000 Entitled to rely on the way things look. If they have a pre-existing interest in the land then fixture is installed. Fixture gets priority. If fixture is installed and nothing is registered then an interest in the land is taken, then lender will take priority. i) Did lender rely upon the fixture as part of the land. If yes, they will be given priority. Who relies upon fixtures. Pre-existing party has not relied upon existence of fixture to grant interest = windfall. If to remove the item would be to damage the structure = building materials Person w/ interest in the land who gives s/i in item that later becomes affixed to the land, creditor gets priority over other secured parties. Priority does not depend on concept of registration or perfection. If after the item is fixed and priority against existing interest is established and someone later comes along and takes interest in land for value. These people may have relied upon value of fixture when making financing commitment. These people are protected under s. 36(4) unless holder of security in fixture has given public notice (in LTO not PPR) Section 36(5): attachment of s/i in goods after goods have become fixtures T1: D borrows money to buy land from Trust Co which takes and registers a real property mortgage in LTO T2: D busy and pays for a 100-ton press and then installs it on the land in such a way that it becomes a fixture T3: D borrows money from s/p to meet D’s payroll and s/p takes a S.A. from D which lists the 100-ton press as the collateral Interest of creditor that attaches after the goods become fixtures is subordinate to the interest of a person who i) Has an interest in the land at the time the goods became fixtures and who Has not consented to the s/i Has not disclaimed an interest in the goods or fixtures Has not entered into an agreement under which a person is entitled to remove the goods, or Is not otherwise precluded from preventing the debtor from removing the goods, OR ii) Acquires an interest in the land after the goods become fixtures is acquired w/out fraud and before notice is filed in the LTO Secured party can have priority if secure payrs Must give priority in LTO Section 36(5) not used very commonly. Section 36(6), (7) If there is an interest in land, registrable. To be registered in LTO must have claim to land in itself. Entitled to look and rely on LTO and may look at register. May take judgement against someone. Take judgment and am entitled to register judgment in Land Title Act. Can enforce other provision by getting judgment. Careful of judgment creditors Secured Transactions – Fall 1998 - Waldron 40 T1 D borrows money from SP who takes a s/i in a large boiler to D which was installed (affixed to the land in such a way that it became a fixture) on this same day T2 J/C obtains a $100,000 judgment against D for breach of k. T10 J/c registers her judgment against D’s land LTO T12 s/p files in LTO as per s. 49 PPSA Who has priority as to boiler – s/p or j/c? If s/p s/i was not a PMSI, then under s. 36.6 the j/c would have priority b/c j/c judgment was filed in LTO AFTER the goods had become fixtures and BEFORE any s/i was filed by s/p under s. 49. IF on the other hand s/p s/i is a PMSI then 36.7 is the relevant section and under that section the j/c does not have priority over a PMSI which is filed under s. 49 not later than 15 days after the goods were affixed to the land. On the facts here the goods were affixed on Day 1 and the s/p filed in LTO on Day 12 hence s/p would have priority over j/c Give notice to people who have interest in land before enforcing rights of realization. Other people w/ interest in land can post security to leave the fixture in place. Seizure must be done w/ minimal damage. Where s. 36 can prejudice people w/ interest in the land. Suppose apt building owner and mortgage company. Apt has an elevator. Owner wants to replace elevator and buy a new one. Bought on time w/ s/i in elevator to supplier. The elevator is installed S/i has attached at or before it b/c a fixture. Section 36(3) would apply and there is priority over mortgage holder. Elevator supplier exercises right to removal. Mortgage co is facing possibility of apt building w/ no elevator. Mortgage co can protect itself but will have to pay money to do it – not have old elevator ripped out. Mortgage co could k w/ owner to not make major repairs w/out their consent. Manning v. Furnasman Heating Ltd. Defects to s. 36. Problem has been addressed directly by statute in s. 30(1). M owns property, k w/ builder. Included was furnace, supplied by contractor. C made k w/ Furnasman (direct k b/w F and C). Price = $1950. F installed it and billed C. C did not pay F. M made payment to C. F makes filing under PPSA and filed against M. M had interest in land. Fixture was installed in land, There was s/i in fixture given to F, they were not paid. The s/i interest only attached after the fixture was installed. Section 36(5) says that priority will be given to people who had a prior interest in the land – M. S/p cannot maintain s/i w/out consent of person who has s/i in the land. M are saved b/c item was affixed then s/i arose. Court grapples for estoppel argument. Under s. 28(1) if item is sold and creditor authorizes disposal of it (free of security agreement) the s/i is lost. F knew that furnace would be installed in M’s house and that M would pay C. In effect, by not notifying M of the s/i that it was taking and by not filing a lien for so long, F impliedly authorized the sale Actions will be sufficient authorization This argument is not relied upon to settle the case. C gave lien to F. S/i interest of F was cut-off by sale in ordinary course of business C was not in ordinary course of business. Also say that it was not a sale of item but a k for services. M also won on grounds that there was no perfection of s/i when they bought the furnace from C (not in ordinary course) the s/i of F must be subordinated to theirs b/c they could not have had any notice. However, our s. 36(3) does not consider time of registration. Secured Transactions – Fall 1998 - Waldron 41 CA finds that the k did not give any s/i at all. Problem would be dealt w/ differently in BC If the facts were as above and a valid s/i interest was taken by F. Section 36(3) would be applicable section. S/i attaches at or before the time that the good becomes a fixture. Prior to the interest of the people holding interest in land. Section 30(1) Ordinary Course Sale. Case Law suggests that C business would include sale of furnace as ordinary course sale. Problem: F sold furnace to C, but did C sell furnace to M? Section 30(1) would deem that C’s sale to M was in the ordinary course of sale. Definition of buyer and seller in s. 30(1) only applies to s. 30 Gencare Services v. Tolpuddle Housing Co-operative (1993) Ont. Crt. Gen Div. P. 156 T owns land, there is mortgage on land. G supplies some electrical equipment to sub- contractor, Rimac. It is installed on the property. Probably wrongly decided. Should fall w/in 36(3). Prof: no reasons why G could not remove fixtures Aside from argument in 30(2), 36(3) should apply Court looks at whether s/i was perfected by registration in PPR or LTO. Section 36(3) does not depend on perfection to have effect Registration in LTO has nothing to do w/ perfection (deal w/ notice to other parties dealing w/ land) The supplier of electrical equipment perfected s/i but knew that it would be used by Rimac and installed in house. There was a change in ownership in the items. Section 51 speaks to collateral being sold to another party and s/p is aware of sale. Want to continue s/i in collateral after sale Must file modification of f/s statement w/in 15 days of knowledge s. 51 G knew being supplied to T and didn’t do anything to change f/s unperfected lost s/i in item. Could be argument of sale in ordinary course of business (not raised) If there are two s/i wrt to goods that are affixed to property. How do we establish priority? Not 36 dealing w/ parties who have security in land and people who have security in fixtures. Perfection and all those things will have influence where there is a competing claim on fixtures. G.M.S. Securities & Appraisals v. Rich Wood Kitchens, (1995) Ont. C.A. p. 160 Owner has pre-existing interest in land. They take mortgage from Nat Trust. Most $ is advanced when RW installs kitchen cabinets. The s/i in cabinets attached before they were installed Nat Trust makes a further advance Owner of property borrows more money from GMS Securities and gives them a mortgage on the land. Supplier of cabinets files statement in LTO. From s. 36. R-W put in fixtures after the existing interest in the land of the owner and Trust Co. Took s/i in fixtures. Attached at or before time that they were installed. Apply s. 36(3) Trust Co. makes another advance. Consider 36(4), money advanced before notice is filed. GMS Securities comes in and offers second mortgage. They have priority by virtue of 36(4). i) No notice filed by RW, they advanced money for value Circular Priority Land Title rules, first to register their mortgage gets priority. National Trust has to have priority over GMS. Secured Transactions – Fall 1998 - Waldron 42 GMS has to have priority over RW RW has to have priority over Nat Trust for everything except the last advance In resolving the circular priority problem any solution will inevitably be inconsistent w/ some statutory provision. National Trust will get their last advance $10,000 Nat Trust must be given priority over GMS (-$5,000) 93,000 Take Rich-Wood out of 98,000-5,000 5,000 GMS 30,000 National Trust can take the rest up to $5,000 2,000 Nat Trust is placed in the shoes of RW at the end. They should have gotten all of its interest over GMS. But that is not accommodated, can’t be perfect solution Doesn’t recognize all of National Trust’s priority over GMS RW could have protected by filing under LTO. When they did not file and another party came alone, they would lose their interest and would be at bottom of pile. C&W would prefer to take away right to remove cabinets against RW and put RW at bottom of priority list. VII - Accessions Accession = same type of theory as fixtures but applied to chattels. Say a propellor that is attached to a plane. It cannot easily be removed Becomes essential and integral Title of propellor is lost to the person who has the title to the aircraft. No reason why you have to apply accession. From s. 1 “accessions” = means goods that are installed or affixed to other goods A is bank and. B is the bank and owner. A buys a hot tub and has in installed, When a propellor is added onto an airplane, it mat becomes affixed In fixture, deal w/ title to land. Must put notice in LTO. If C has s/i in airplane engine, where do they indicate their ownership. There is no way to check or any chattel registration system in BC Person must register in PPR, accessions is completely parallel to fixtures Who loaned on the faith of this item. Summary of Accessions Know definition, difference from CL Know place of registering Section is parallel to fixtures section VIII - Lien Holders In general, PPSA only applies to consensual claims. An agreement which has given a s/i Lien created by statute or CL provision (outside of PPSA) Repairers Lien’s from (s. 32) Non-consensual security A lien on goods that arises in the ordinary course of business has priority over a perfected or unperfected security interest (unless separate rule under lien legislation) They have increased the value of the goods. On all other lien’s must look at statute. If statute gives priority then it shall have it. Marine Building Holdings v. Proton Engineering & Construction (1993) BCSC, p. 169 Landlord did not destrain goods. They brought an action in debt and then garnisheed for the debt. Bank argued that they were s/p and they had a s/i over accounts receivable. Court grants priority to secured party. Simple application Secured Transactions – Fall 1998 - Waldron 43 If landlord had destrained goods, then result might have been different. Destrained creditor has priority over all creditors except PMSI. IX - Taking Free Section 20 – Subordination of unperfected security interest. Transferee of chattel paper, a doc of title, a security, an instrument, money, an intangible or goods. Lose to judgment creditor, trustee in bankruptcy and to a bona fide transferee who acquires an interest under transaction (not security agreement) gives value and acquires property w/out knowledge of s/i and before it is perfected. Section 28(1) S/i interest will continue in collateral after sale unless the s/p expressly or impliedly authorizes the dealing Some action may be sufficient to authorize the dealing. When dealing w/ inventory it is assumed that supplier has knowledge that debtor will have dealings w/ the collateral (free of s/p’s interest) Section 30(2) – Buyer or lessee of goods sold or leased in the ordinary course of business of the seller or lessor takes free of any perfected or unperfected s/i in the goods whether or not the buyer know of it, unless the buyer also knows that sale or lease constitutes a breach of the s/ agreement under which s/ agreement was created. Section 30(3-4) Buyer or lessee of goods that are acquired as consumer goods takes free from a perfected or unperfected s/i in the goods if the buyer Gave Value for the interest acquired Bought or leased the goods w/out knowledge of the s/i Will not apply if the s/i is in A fixture or Goods the purchase price > 1,000 or in the case of a lease where mkt value > 1,000 Section 30(6) If goods are sold or leased, the buyer takes free from any s/i in the goods perfected under s. 25. If the buyer or lessee bought or leased the goods w/out knowledge of the s/i and The goods were not described by serial number in the registration relating to s/i Only applies to goods that are equipment and that are defined in the regulations as serial numbered goods Registration becomes invalid. Where there is possibility of registering, there will be advantages from doing so. Section 30(8). Value is generally defined in PPSA as anything that is sufficient for bare consideration include antecedent debt To take advantage of cut-off rules Give sis a new car from my lot in order to pay off outstanding debt to her. Will this cut off s/i that was placed against dealer Cannot be in total or partial satisfaction of a money debt or past liability. Royal Bank v. Dawson Motors (1981) Ont. Cty Crt. P. 172. Advance from bank to W for the purchase of car on security. Bank takes c/p and promise that W would not deal in collateral. They don’t register until August 16 th. Day before registration, W sells car, for $4,400 to Dawson. They complete the ownership transfer on that date. W brings car to Dawson the next day and received money plus new car on the 16th at 1:00 PM. Delay above used so purchaser could check PPR. There was time lag in PPR documents filed morning of 16th would not be available until later. The transfer of cars and money took place. Did purchaser take car free of s/i? Secured Transactions – Fall 1998 - Waldron 44 The item was not sold in ordinary course of business Argue 20(c). That it was sold and not subject to perfected s/i. Value must be given to take free. Court holds that the time when value was given is important. Value was given after time of perfection perfection is valid and 20(c) will not apply. Value did not come until after the interest was perfected. Value defined by PPSA = any consideration sufficient to support a simple contract. Mutual promises should have been sufficient. Probably considered that he was selling it to another car dealer (not much sympathy) IX.A - Remote Lien Problem A is a dealer and has inventory supplier. A finances sales through s/i in inventory to the i/s. A sells car to B. The sale is not in the ordinary course of business. B is a dealer. B sells car in ordinary course of business to P Is inventory suplier’s lien effective against P. Sale of B to P. There is no s/i given by B. By strict reading of s. 30(2) interest is only cut off when the item is sold by the seller (the original debtor). Section 30(2) Would only operate to cut off the s/i, if any, that B had given. But B did not give any s/i in the car P is unlikely to check register and has confidence b/c purchasing from dealer. The item is inventory so it need not be registered as serial numbered goods search in name of B and will find nothing. P has little hope unless good can be searched for by serial number. A is a dealer and sells backhoe to P1. P1 offers A a security interest. The item is equipment. P1 then sells backhoe to B w/out knowledge, for value and not in the ordinary course of business. B is also a dealer and then sells backhoe to P2 in the ordinary course of business. P2 can protect self a bit better b/c backhoe = s/n goods and could search PPR by serial number. Royal Bank v. Wheaton Pontiac Buick Cadillac (1990) SK QB, p. 175 Regarding a Fiero. Dealer disposed of it on liquidation to K&R. K&R sells to Deschner. Deschner sells the car to Wheaton Pontiac on a trade. Wheaton Pontiac then sells the car to Morin, warranting clear title. It was inventory so not registered under s/n. Did Ken Stieben acquire Fiero subject to the Bank’s s/i? Yes Did D acquire Fiero from Stieben subject to s/i of Bank? Yes Did D pass clear title of the Fiero to W P? NO Court finds that transaction b/w dealer and Stieben was not ordinary course of business sale, not typical sale of inventory and not sale to public at large Fiero still subj to perfected s/i Stieben to Dreschner, not ordinary course of business sale Give strict interpretation to s. 30(2). Dreschner did not take the car from the original debtor who gave the security interest (dealer) 30(2) will not apply Ms. Morin took the car from Wheaton Pontiac – this is ordinary course of business sale. The s/i was not given by the seller in the sale not cut off by 30(2) so Morin loses car. Morin did buy from a reputable car dealer and had a warranty of clear title, and dealer broke it she is entitled to money back They in turn might be able to get money back from Deschner Deschner could argue claim against Stieben probably gone. This is a gap in the legislation that is a risk, must take that chance. Remote Lien problem = ABCD problem. Secured Transactions – Fall 1998 - Waldron 45 IX.B - What is Ordinary Course of Business? What is the ordinary course? Question of fact, no determinative answer. Consider the circumstances of the sale. What constitutes a sale? Fairline Boat v. Leger (1980) Ont. S.C. p. 178 B buys boat from manufacturer, F. There was s/a that is assigned to Finance america. Blair gets into trouble. FinAm instructs F to seize boat. Blair retrieved it from new location, and then he sold it to Mr. Leger for about $15,000. FinAm comes chasing boat. Value of the boat was approx. $24,000 Blair was dealer as was Leger, argue that it was deal in ordinary course of business. Circumstances lead to think no (especially given price of boat) Court holds no ordinary course of business sale based primarily on price and circumstances of transaction. Factors to be considered in ordinary course of business sale. Question of fact. None are controlling or absolute. Consider all circumstances Transaction type: should be one that is a normal part of the seller’s business. Sale to usual sort of people in seller’s business Where was the agreement made? Parties to the sale (who is normal consumer) Quantity to goods sold Usual range of market price (in particular, low prices may indicate fraudulent intent) C&W have similar list on p. 235 Advertising Percentage of overall volume of sales Whose perspective are we looking at? The particular seller or the consumer Ford Motor Credit v. Central Motors Dealer (d) enters into wholesale financing agreement w/ Maitland Motor Sales – the debtor. Creditor = Ford Motor Credit. Supplier gets s/i in 3 cars on lot Para 6: Vehicles in which s/i was given were originally purchased as new cars from Ford Motor Co, then Maitland Ltd. sold them to Def on credit. Def sells them to other dealers down the line. P demands payment – had perfected s/i in cars. Did Maitland sell them free of the security interest by selling in ordinary course of business? Dealer may have implicitly consented (impliedly) If no consent then ordinary course of business sale. Just look at agreement b/w debtor and creditor. Was there some authorization to sell? If yes, s/i of s/p is cut-off by s. 28 Section 30 considers ordinary course of business sale. No matter whether there was contrary agreement between seller and D. Section 28 starts w/ subject to this act. Even if there was no authorization under s. 28, the s/i could be cut off if s. 30 applies. Definition of “ordinary course business” p. 186 Consider all circumstances that were known or ought reasonably to have been known by the purchaser i) Look at the transaction from perspective of reasonable purchaser ii) Intended to protect the purchaser where it appears as though the dealer is doing something that they normally do. Primacy of s. 30(2) – If goods are sold in the ordinary course of business, purchaser takes them free of any security interest given by seller, notwithstanding that the secured party did not expressly or impliedly authorize the dealing. Consider perspective of reasonable purchaser. Secured Transactions – Fall 1998 - Waldron 46 IX.C - What is a “sale” in the ordinary course of business Royal Bank of Canada v. 216200 Alberta Ltd (1986) SK CA, p. 187 A receiver is appointed by secured creditor after default of debtor. There are four classes of persons making claim to assets People who have paid full purchase price for personal property but not in personal possession of D. People who paid part of purchase price for personal property in the possession of D. People who paid part of the purchase price, but personal property not in possession of D. People who had cancelled or returned items and were owed refunds. Classes 1 and 3 were together. All turn on whether they bought something in ordinary course of business. Secured creditor argues that for sale, must fulfill requirement of “sale” from Sale of Goods Act. Property passes when the parties intend it to pass. Usually at time k is entered into. BUT no title can pass to buyer if the goods are unascertained and therefore not appropriated to the k Do we apply technical definition of sale? YES People from class 2 were OK – title had passed. Classes 1 and 3 were not OK – goods were not ascertained not buyers of goods sold. Class 4 – found that their money and money to 1 and 3 was held in trust for the purchase co did not have rights in the collateral CA found that they were not held in trust b/c there was no evidence of a trust arrangement b/w the parties. People to whom the co owed money became unsecured creditors From Part 9 – Sale of Goods Act. Gives purchaser who has paid money to retailer, for some item that they have not received and is not appropriated to the k. They are given first and preferential lien to the assets for that $. Only valid in consumer sales. Spittlehouse v. Northshore Marine (1994) Ont. C.A. p. 192 We generally apply strict sale of goods rules K b/w Ps w/ Northshore Marina for $555,000 boat. Ps had boat and had paid 90% of price. TransAmerica had a s/i the boat. B/c dealer had financed it through TA. Just before it would be delivered to Ps, TA seized the boat. TA had perfected s/i in boat. Ps argued buyers in ordinary course of business. The boat is ascertained However, they specifically agreed that title would remain w/ Northshore Marine until the amount had been fully paid. Title had not passed. Court could define sale by technical terms of legislation Contrasting case law from UCC. Section is included for consumer protection purposes should consider the non-technical definition of sale. Ps thought that they had purchased the boat. Court holds latter and does not opt for technical definition. Court refuses to follow case above. Courts more generally apply technical definition. Alternative: Northshore Marine had s/i in the boat. Whatever k said, the interest of Northshore Marine was only that of secured creditor. What is interest of Ps? They are buyers and they have ownership interest and Northshore marine only has s/i in boat. Use a more common definition of sale. Ps think they own boat. Secured Transactions – Fall 1998 - Waldron 47 PPSA ignores question of who has title, but other statutes do not, including Sale of Goods Act. Northshore has s/i but not obvious that Ps are owners? Have to look past Sale of Goods. IX.C.1 - Section 68 Principals of CL that are not inconsistent w/ the act are preserved X - Marshalling Suppose D has truck and backhoe. If t = $25,000 and B = $50,000. D borrows money from SP1 ($60,000) SP1 given s/i in both t and b D borrows $5,000 from SP2 SP2 aware of SP1 from PPR but know that it does not take full value of collateral SP2 takes s/i in truck D defaults If SP1 takes truck initially, they gain value and SP2 is left out b/c only have s/i in T Marshalling says that SP1 must try to treat other s/p fairly. Fairness requires sale of B first, then turn to t – take the 10,000 and leave money for SP2 Deals w/ order in which senior secured party seizes against assets. They may be made to proceed in such a way so as not to prejudice junior s/p If there is Loan 3 to SP3 for 10,000 SP3 takes s/i in B. SP2 wants sale of B; SP3 wants sale of T. They will not give any preference. They will apply a pro rata rule. SP1 will have to take it’s interest on a 25:50 rate leaving some money for both junior creditors. XI – Assignment of Security Interest by Debtor Canamsucco Road House Food v. Lngas (1991) Ont. Crt Gen Div. P. 227 There is a s/i covering creditor of restaurant, CIBC. Owner of restaurant, C, sells it to L Sale arranged such that CIBC s/i will temporarily remain in place but that C will pay it off on or before a certain date. For part of purchase price, C takes security interest in restaurant. He is SP2. L protects itself from possibility that C will not pay off CIBC charge by providing that if CIBC is not properly discharged, it can pay them off and reduce the amount that L owed to C. Vendor did not pay off CIBC. L borrowed more money from 936 (SP3). Borrowed To pay suppliers and some lien claimants and to buy new equipment To enable them to pay off SP1 CIBC is now paid off. But CIBC assigns their s/i to SP3 who provided funds. SP3 argues that they agreed to merge their indebtedness should get priority of SP1 over everything (incl SP2). SP3 might get priority over vendor for amount paid to CIBC. If SP2 is prepared to pay that amount of money back, it must be discharged. Cannot tack loan for equipment by taking an assignment by a prior secured party. After acquiring that priority position, could they have made a further advance and then tacked? Secured Transactions – Fall 1998 - Waldron 48 XII - Default and Remedies Right of a holder of a s/i to seize the chattels that are subject to s/i from Part 5. Rights are probably also granted in k. Creditor has both rights and can be exercised separately or concurrently. Except for consumer goods. Usually creditor will notify debtor that there has been a default. Security agreement usually defines events of default and are usually broader than simple failure to pay. Could include i) Failure to insure property ii) Failure to pay other creditors iii) Permitting liens to be paid iv) Failure to satisfy certain financial ratio tests v) Becoming insolvent or bankrupt. Commercial security arrangement will usually have as an event of default when creditor should deem itself to be insecure. Creditor will generally invoke an acceleration clause. Whole balance of amount owing immediately becomes due and payable. Section 16: Only applies to general event of default when we deem ourselves to be insecure or if we decide that the collateral is in jeopardy. Prevent general event of default on a whim or w/out good reason Limit the discretion where they have to act in good faith and must have commercially reasonable grounds to believe that this is true. This does not have to do with other events of default such as failure to pay. There is a way to produce default by creditor in some circumstances. Many commercial loans are written on demand basis. There may not be a schedule of payments (revolving line of credit). Agreement may provide that payment of principal and interest is required on demand. Creditor can demand payment of whole sum. If creditor demands payment of whole sum, an event of default is likely. May now decide to pursue PPSA remedies. Sue for amount of debt, or seize collateral or a combination of both. Usually seize items, sell them off and then sue debtor for the balance owing. Section 16: there could be some event of default, then acceleration clause is triggered. Balance of loan is due and payable. Loan may simply be payable upon demand. There may be no term, no schedule of payments. Where collateral is business w/ a lot of assets and may be a going concern. Lender wanting to realize on assets will typically appoint a receiver. An official qualified under PPSA. i) They may shut business down and sell business (in pieces or in whole) ii) They may take over and carry on business as going concern. Try to pay debt out of business. The first is more common, a lot of time and effort to keep it going, may be hopeless. If creditor wishes to follow #2, they must be granted that power in their instrument. If person will carry-on business, person becomes receiver-manager. XII.A - Receivership Receiver may be appointed in two ways By the creditor (as given by the lending k – must include list of powers that receiver can perform) By order of the court (inherent equitable power Law and Equity Act) i) It will be done when it is just and convenient to do so. Secured Transactions – Fall 1998 - Waldron 49 If a receiver is appointed by court, they are officer of the court. May hear any requests made for directions and are protected against personal liability for any errors they make Acting for the court and under its supervision If receiver is appointed under lending agreement, they are agent of creditor. They do not have same protection against personal liability (should they act incorrectly). They can only exercise those powers set out in lending agreement. There has historically been reluctance to approve their actions or give them guidance. Often in creditor’s interest to have court-appointed receiver. When will court appoint a receiver even when lender has the power to do so? Section 64 Applies to all receiverships Section 64.1: s/a may provide for the appointment of a receiver. The person must be licensed as a trustee under the Bankruptcy Act Section 64.2: Disqualified as a receiver if… enumerated grounds Section 64.4: The actions of people who act as a receiver but are disqualified from doing so, those actions taken remain valid Section 64.5: Receiver is not personally liable on a k if the receiver discloses in the k that he is acting as a receiver. Section 65: Obligations of Receivers Section 66: Court Supervision of Receiverships. The court may appoint a person to be receiver Section 66.2: Powers of receiver are in addition to any other powers a court may exercise in its jurisdiction over receivers Section 66.3 Unless a court order otherwise, a receiver is required to comply w/ ss. 59-60 only when the receiver deals w/ the collateral other than in the ordinary course of business of a debtor If they need a power that is not given, then must request permission. For example, receiver often must borrow. If power to borrow was not agreed upon, must ask court. Negotiate priority ranking They want to apply to court to get direction on priority issues Where receiver has to deal w/ utilities (generally have monopoly) If they are court appointed, they can give a priority to utilities. May need to have a receiver appointed so that they deal more effectively Royal Bank of Canada v. White Cross Properties et al. (1984) SK CA, p. 231 The Royal Bank is realizing upon its loan agreement to White Cross Properties. Under that agreement they have appointed a receiver-mgr. They now request that the court appoint that same receiver-mgr such that their powers will be extended and include the power to borrow money D argues that to grant Order would only serve the interest of the Bank and would not improve the place of creditors. From Ostrander v. Niagara Helicopters: “The Court should only make such appointment when it is shown to be necessary for the receiver and mgr to more efficiently carry out its work and duties.” The appointment may be made where ordinary legal remedies are defective and to preserve the property from something that threatens it. Bank has not established that any ordinary remedies are defective and nothing has been pointed out to assert that ordinary legal remedies would be defficient. Any secured party may seize collateral, regardless of priority interest. Seizure is only preliminary step to disposing of the collateral or foreclosing on it. Before seizing courts have imposed a notice requirement to give the debtor a last chance to meet her obligations. The length of notice varies. Secured Transactions – Fall 1998 - Waldron 50 XII.B – Notice of Seizure Waldron v. Royal Bank of Canada  BCCA, p. 233 From Lister v. Dunlop even when a loan is due on demand, must be given a reasonable opportunity to pay. To what types of loan does this decision apply? All What is reasonable? Consider the following factors: i) The possibility of refinancing ii) The relationship b/w debtor-creditor (long term, is there any trust?) iii) Is there a likelihood of fraud on the part of the debtor iv) Is there any reason for thinking that the security is in peril? On the facts of this case, not a general demand debenture (like Lister v. Dunlop). Bank Act Security is involved. Counsel tried to restrict application of Lister to general demand debenture. From Waldron requirement to give notice and reasonable opportunity to pay will apply to all loan agreements Overrides any terms of s/a that conflict w/ principle. Must give reasonable notice. Under Bankruptcy and Insolvency Act where a debtor is either bankrupt or insolvent (debts exceed assets or can’t meet debts as they are due) if you are going to seize goods from either of the aforementioned, must give min of 10 days notice 10 Days might not always be enough but if bankrupt or insolvent, must give at least 10 days. Not necessarily maximum – Lister v. Dunlop will apply. The remedy: sue for wrongful seizure. Sue for damages suffered, could be very large amount. In Lister seizure precipitated business failure damages were large XII.C - Disposition of Collateral XII.C.1 - Sale of Collateral Most common thing to happen after collateral is seized is that the item is sold. For it to be sold, there are several specific requirements in the Act. Section 59: Disposal of Collateral on Default. Must give certain notices. 59.2 gives s/p right to dispose w/ collateral. Most often, this right is contained w/in s/a. If not, right given by act. What to do with proceeds? i) Remove costs (of sale, seizure and repair) ii) S/p making the disposition gets their interest iii) Then proceeds distributed in accordance w/ s. 60 If there is a deficiency, lender can sue for deficiency and collect that later 59.3 collateral can be disposed of in many ways i) public sale, private sale, as a whole, in parts, by lease (if s/a so provides) 59.6 Notice must be given to specified parties 59.7 What the notice must contain (p. 436) Once sold, purchaser obtains title to the item, free of the s/i of the seizing creditor, the debtor and any s/i subordinate to them. What if debtor is defaulting only to SP2. SP1 is receiving regular payments. SP2 may seize the truck and sell. Sale by SP2 must be subject to s/i of SP1. The purchaser would take free of SP2 and Debtor’s interest in truck. Usually, SP1 would be seizing party. Any item of default is usually an event of default for all s/p Would a grace period be triggered Section 68: All actions or obligations must be done in good faith and in a Commercially reasonable manner If you do not give proper notice: you lose ability to claim deficiency. Secured Transactions – Fall 1998 - Waldron 51 Section 69: Action for Damages for Non-compliance 69.7 – in an action for a deficiency, D may raise as a defence the failure on the part of the s/p to comply w/ obligations in i) Section 17 duty of debtor to protect collateral ii) Section 18 = duty of s/p to respond to enquiries iii) Section 59 & 60 But non-compliance shall limit the right to the deficiency only to the extent that it has affected the ability of the D to protects its interest in collateral or has made accurate determination of the deficient impracticable. i) D would have to show that deficiency prejudiced them. Otherwise, no remedy Section 69(8) reverses onus for consumer goods – Lender has to prove that they did not prejudice you. XII.C.2 - What is commercial reasonableness? Does s. 68 raise the standard in seizure and sale cases above what it used to be (good faith, short of fraud)? Yes Copp v. Medi-Dent Service (1991) Ont. Crt. Gen Div. P. 236 2 dentists, leased some goods from M-D. Could not agree, fell behind in payment, collateral was seized and notice of sale was given. Made quick deal to sell goods to one dentist. The notice of sale gave right to redeem collateral upon payment of certain amount of $. Other dentist decided to redeem at 11th hour and couldn’t get hold of anyone. Sale is being attacked, not commercially reasonable manner. Test summarized on p. 240. Creditor must take reasonable care that proper value is obtained. Not reasonable sale No advertising occurred Private sale, to someone w/ an adverse-interest to a joint-debtor (not as opposed to public). While not secret it was not notorious No independent appraisal Donelly v. International Harvester Credit Corp (1983) Ont p. 241 Debtor under PPSA = broad term and will include party who is called upon to pay a guarantee. Not given proper notice deficiency was dropped (in Ontario) Very stringent test is imposed. This was sale b/w related companies, more for accounting purposes than anything. They thought they had debtor on hook for deficiency. No advertising Nature of related companies Had it on their lot for 8 months and made no attempt to sell it. i) This would constitute commercially unreasonable There were some minor repairs that were needed to equipment. W/out repairs, it might have been unsaleable. At least where, having regard to value of equipment, the cost of repairs is not too big, and the need for repair would seriously impair the sale, a lender does not act in a reasonable, commercial manner unless they repair it before the sale. Seems to impose upon lender, a duty to repair, in some circumstances Commercial reasonableness = question of fact Ford Motor Cred Co v. Preuschoff et al. (1983) Ont. P. 245 Must include s. 59 notice. Party has right to redeem until period expires at time of sale The notice of intention to sell was defficient. Secured Transactions – Fall 1998 - Waldron 52 XII.D - Section 61: Voluntary Foreclosure Must provide s. 61 notice. Creditor can simply take collateral in satisfaction of debt. Foreclosure shall exhaust any right to a deficiency Section 61: S/p may make proposal to debtor to take chattel in full satisfaction of the debt owing. Must provide notice to debtor and to other s/p. Any of them may object w/in 15 days. If not SP1 will take item in full discharge of debt. The debts of any other subordinate secured creditors will also be lost. Other s/p will always object when they have significant interest in collateral If s/p is owed more than the value of the collateral, will never opt for voluntary foreclosure b/c collateral must be taken in full satisfaction of debt. Will only happen where value of collateral and amount owed are very close in value. Problems w/ section: Time limit for objecting is 15 days… not very long Angelkovski v. Trans-Canada Food (1986), p. 246 A restaurant is sold. Owner gave s/p to creditor. Purchaser defaulted on payments. D made one attempt to sell, renovated the place, re-opened and carried on restaurant business. Did not give notice that s. 61 (voluntary foreclosure) requires. Never went to D and said, I’ll take it back, we can call it quits. On the other hand, didn’t sell and sue for deficiency or distribute surplus. Purchaser sued saying that D had exercised rights of voluntary foreclosure purchaser no longer had any obligation to make further payment. Restaurant burned down, it was underinsured – now P wants to find position and find that D has exercised voluntary foreclosure rights Could not chase purchaser for deficiency that it could not get from insurance. However, in interpreting the provisions regarding voluntary foreclosure, court notes that it is not triggered until s. 61 notice has been given. Until notice is given, the debtor has the right to redemption If the debtor is unsatisfied w/ the notion of voluntary foreclosure, they may disagree and then s/p must dispose of collateral The effect of the statute is to preclude any actual or deemed appropriation of the collateral. Right to sue for deficiency is preserved At CL, there was a type of chattel argument. If creditor took back the chattel, and used it as though it was managing it, then can be stopped from applying for deficiency. Court finds right of voluntary foreclosure s. 61. Only way that it can be activated is by following procedure under the act (or until the item is sold) then item remains in limbo. Creditor can still claim for deficiency. Debtor has the right to object to the process if they think that there might be some surplus. Debtor is meant to be protected under this section. Court interprets act so that creditor can take chattel, use it and maintain right of deficiency. Section 61 does not compel this result. Court should still be able to use estoppel to prevent creditor from claiming deficiency when it takes chattel and uses it giving the impression to the debtor that it obligations have been satisfied. C&W criticism p. 449-50 XII.E - Acceleration Clauses (relief from) s. 62 Right of debtor to redeem collateral. The notice under s. 59 must set out fact that debtor can redeem collateral upon payment of sum (usually total amount) Did the failure to make payments = forfeiture? Courts found that accelerations clause not = forfeiture and they could not interfere. Secured Transactions – Fall 1998 - Waldron 53 If debtor misses one payment, the creditor could trigger the acceleration clause immediately. The right to re-instate has now been added (s. 62.2) for consumer goods. Debtor has right to reinstate the payment schedule up to twice per year. Exception where debtor has agreed otherwise but that must be (s. 62.1.b.) an agreement in writing after default. Where it is not consumer goods, a discretionary power is given to courts to order reinstatement anyway (s. 62.3). In real estate, court considers i) Likelihood of future default ii) Reasons why they went in default in the first place iii) Parties’ conduct under the agreement. Bank of NS v. Sherstobitoff Taking judgment against the debtor does not operate as an agreement in writing after default to waive the right of redemption in consumer goods. The right to reinstate exists until the disposition of the collateral. Person seeking reinstatement would have to pay reasonable expenses. XII.F - Supervisory Power of Court, s. 63 Very broad powers conferred upon the court. Enumerated in s. 63.2 Andrews and Trotchie v. Mack Financial (1987) SK CA p. 254 Debtor (D) bought a truck. She entered into s/a for purchase of the truck which was held by MF, D sold truck to T w/out consent of MF. T took truck, used it, truck was involved in accident. T couldn’t earn any income w/ truck until repaired and didn’t have any money to repair. D was still making payments. T phones MF to help make repairs. Payment was in arrears. MF wouldn’t help until arrears were paid. One of T’s employees hides truck. MF got an order to seize the truck and that D had to deliver it up. They bring application for contempt and truck was finally seized. The chambers judge essentially stopped the seizure and prevented them from realizing. Said that MF had to repair the truck, then allow D a chance to bring up to date the past payments. This included returning truck to D so that they could earn money to pay debt. MF appeals order. What is breadth of s. 63? Don’t have power to derail repossession unless creditor has done something wrong. Section 63 cannot be avoided by k They cannot re-write the substance of agreement b/w parties. Stop them from acting in a commercially unreasonable manner. To allow the chambers judge would be to create new rights that did not exist previously. XII.F.1 - Are remedies under PPSA exclusive for breach of a PPSA Duty? Remedies are set out in s. 69. If you don’t perform duties or obligations, creditor/debtor may sue for damages where losses are reasonably foreseeable Cause of action is provided by the statute. Osman Auction v. Murray  AB Q.B. p. 259 No, act does not preclude any other CL rights or remedies (see s. 68) Sale by an auctioneer over a party’s right for a s/i in a vehicle. The s/p registered f/s even after it was sold. Purchaser had entered into an advantageous k to sell car. Car needed to be free of lien. Secured Transactions – Fall 1998 - Waldron 54 Purchaser had to go to court to have the lien lifted and it was done but purchaser #2 was gone by this time. She lost the sale She then sued in tort for “slander of title”. Claim to have interest in someone’s property when you don’t Could she bring it when there was already a remedy under the act for an improperly filed lien. If act had created a new right remedy would be in act Where it is not a new right, that right exists, there should be no repeal of the remedy from the act no limit to sue for damages Damages granted for loss of advantageous sale. XII.G - Guarantor CIBC v. Cassidy Can you pursue guarantor when the creditor lost right to deficiency against debtor? NO Creditor lost right to deficiency b/c they did not provide notice. (Section 69 in BC, would not lose right to deficiency for failure to give notice). Cannot take more from guarantor than are eligible to take from original debtor XII.H - Section 67: Restriction of Remedies: Consumer Goods Limitations of creditors rights where chattels are consumer goods. Items that usually depreciate in value (very quickly). Almost never enough money from sale to satisfy debt (then sue consumer for deficiency) Limit placed on rights of creditors. They may seize the chattel but if so, they do so in extinguishment of the debt. In the alternative, creditor can sue. Take judgment against individual. Allow to chase assets in a variety of ways. Take execution processes that are fit. If you seize the chattel that was subject to the consumer loan, you lose rights in anything else. If you sue, you can take a judgment and you can execute in any format. Take any possessions except the one that is subject of agreement. 3 ways that debt can be extinguished. Seize as per s. 58 Voluntary foreclosure in s. 61 Accept surrender of the goods by the debtor Whitewater Motors v. Amatto (1993) BCSC, p. 263 Has there been a surrender? There must be some voluntary action on the part of the creditor that they do in fact accept the surrender. Otherwise they will not lose right to sue. Truck was delivered to the lot of the dealer and keys remitted. The dealer made no attempt to sell until permission was granted by D This was insufficient evidence that dealer had accepted surrender of the goods (even though they were on his lot for long period of time. XIII - Bank Act Security Often took security w/ bills of lading and warehouse receipts. They are documents of title wrt goods that are being transported or stored (generally). They evidenced title of goods and could be transferred from hand-to-hand. Bank would lend money to current owner of goods. Owner would give bill of lading to bank as a security arrangement If paid, bill of lading would be returned to debtor. Need for loans to primary producers (difficult to get credit b/c of seasonality of industry and irregular cash flow) Each province had own legislation, all different. Secured Transactions – Fall 1998 - Waldron 55 The Bank Act expanded the classes of people over which bills of lading could be extended. Drop transfer of bill of lading. Instead, notice provisions replaced transfer of bills of lading. = notice of intention (+ assignment of security). Lending security was title based and remains that way. Provides a fixed security (charge against specific property) Can include present and after-acquired goods Adopted a registry system which registered general notices, not the entire agreement Gaps In Bank Act Right to proceeds s. 428(12) is limited to goods produced in manufacturing that are created by using other goods. Solved by including a clause in s/a that would include proceeds rights. Trust proceeds clauses if and when the debtor disposes of the collateral, the debtor will hold all proceeds in trust for the creditor. No section that sets out right to deficiency. Priorities are crude. They depend upon analysis of title (a nemo dat regime) Bank Act security although covering broad class of persons can only be given by persons w/in specific class and only certain classes of chattels will be sufficient. Classes of industries are s. 426, 427 Hydrocarbons and minerals (oil and gas and mining) Manufacturers and manufacturing industries, aquaculturalists, farmers, fishers, and forestry users. And wholesale retailers, purchasers and shippers of those sorts of things. Things omitted: hospitality, retail stores (?) Section 427.1.d and 427.1.f. similar provisions. Farmer who wanted to go on vacation. Could not go according to s-s f but could w/in s-s d. There may be one or more provisions that apply. 3 Relevant Dates of Bank Act Security Date you’ve filed notice of intention (=f/s). Can file notice of intention prior to transaction. To be valid, notice of intention cannot be registered more than 3 years before the security is created. Section 427(4)(a) Date of advancement of the loan Loan and security must be contemporaneous or at least at time the loan is made, there must be a promise in writing to provide a security. Cannot use bank act security to secure antecedent debt. Date that security is granted and taken (usually done by agreement) XIII.A - Priorities Section 427(2) Split into 2 groups. Priority is wrt title Is there any difference in the security that you get wrt the two categories? NO The same as what you would get as if you had bill of lading SPECIAL PRIORITIES that will defeat BA security. S. 427.7 BAS is subject on bankruptcy for claims to wages for 3 months prior to bankruptcy. S.428(1) Security is subject to the claims of an unpaid vendor, where the bank is aware of the existence of unpaid vendor. A buys a tractor from Farm Equipment Dealer, and a chattel paper is transferred. There will probably also be clause relating to title, title would remain w/ dealer until paid T2: A gets loan from bank. Bank takes Bank Act security in return for loan. A s/i is taken in tractor. The Bank Act is paramount where there is a conflict Secured Transactions – Fall 1998 - Waldron 56 FED is unpaid vendor, but assume that bank is unaware of their existence. Bank Act is silent on the matter Courts have been reluctant to give priority to bank by s. 428(2) Instead they have undergone title analysis i) A has right to use tractor so long as payments are made; and ii) Right to transfer of title once full payment had been made. Bank Act Security is essentially equivalent to providing a bill of lading to bank. But A cannot give what A doesn’t have Nemo Dat. The only right that the bank can get is the right that A has Notwithstanding section dealing w/unpaid vendors has been restricted to unpaid vendors who have not reserved title. Bank will not trump interest of FED given title-analysis. Registration may not be necessary… might not override title analysis XIII.B - Constitutionality of Bank Act Security Has been found in many instances as constitutionally valid and is linked directly with Banks and Banking. What happens when legislation conflict Hall a provincial statute that would limit creditor’s ability to seize goods. Bank Act does provide a right of seizure for banks and a right of the bank to sell on non-payment of debt. Section 427(3) and 428(7) – power to take possession and power to sell goods, respectively. They do not specify any special limitations. Realization on security was not so intimately connected to banks and banking, more closely connected to Property and Civil Rights. SCC held that realization is an integral part of security part of banks and banking. Where there is conflict, Provincial acts will not operate. XIII.B.1 - Conflicts with PPSA Should bank Act security conflict w/ PPSA, the analysis will be based on a title analysis, not rules of PPSA. Section 4 PPSA excludes bank act security Cannot register Bank Act Security in the PPR. However, there is no prohibition against bank playing both sides. They should be registered. If things go bad, there is default, they choose the position that would better for them. Recommendations for PPSA. Banks are bring should be brought in line? XIV - Bills of Exchange Methods of transferring rights to payments A owes $10,000 debt to wholesaler for China. A bare debt would be an account. The Wholesaler could sell A’s account to FinCo. Subject to general law of assignment (equities and defences that parties might have) If wholesaler defrauded A about quality of China sale could be contested and assignment of debt to FinCo does not change defence. Even if sold to FinCo2 positions do not change. FinCos separate from transaction must be careful that there was no flaw in k at time it was entered into. The more remote that FinCo is, the greater the discount that will be required to compensate for that uncertainty. Risk of fatal flaw Certain kinds of evidence of debt were negotiable = if debt was evidenced by a negotiable instrument = bills of exchange (generic). When taken, under certain conditions, it was taken free from any claim and the risk of fatal flaw is eliminated. Secured Transactions – Fall 1998 - Waldron 57 If A gave W bill of exchange evidencing promise to pay $10,000. The bills of exchange is transferred to FinCo by W, then W could sue A for payment and A could not raise defence of defraud. No matter if there was flaw in title, A might have to pay on bill of exchange to the Holder in Due Course. They give to the holder, better position than to the original negotiator Governed by Bills of Exchange Act. Types Bills of Exchange – an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to or to the order of a specified person or to bearer i) Suppose C owes A a sum of money. Addressed by A to C – pay to W in 10 days from December 1st, the sum of $10,000 Must be signed by A Could be payable on demand by W Could be made payable to bearer Cheque = a bill drawn on a bank, payable on demand Promissory Notes = an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of a specified person or to bearer. i) I, A, promise to pay W on Dec. 11 the sum of $10,000. Signed A. A holder in due course = someone who holds the bill of exchange and it has been negotiated to that person. It was physically transferred w/ 1 of 2 section fulfilled It has been endorsed The cheque is payable to “bearer” AND holder has taken bill, complete and regular on the face of it and became holder before it was overdue (cheque is payable on demand, it will become overdue after a reasonable amount of time = 6 mos) and w/out notice that it had been previously dishonoured, if such was the fact. Must take bill in good faith and for value, at time the bill was negotiated to her she had no notice of any defect in the title of the person who negotiated it. Every person to whom the holder in due course transfers the instrument, that same status is conferred upon all subsequent holders. Rights and Powers of holder from s. 73 May sue on the bill in his own name Where she is holder in due course, she holds bill free from any defect of title of prior parties, as well as from mere personal defences available to prior parties among themselves, and may enforce payment against all parties liable on the bill When consumers started borrowing money to buy things, created significant changes to system T1: G negotiates to buy freezer from retailer (R) over time. G signed promissory notes but may not have understood bill of exchange. T2: Freezer is a lemon. T3: R negotiates bills of exchange to be taken by FinCo T4: G wants to take freezer back and R will take it but FinCo may still sue G for full payment of freezer. Consumer Bills and Consumer notes were created to remedy this type of situation. Killoran v. Monticello State Bank (1921) SCC, p. 7 Purchaser had bought a horse and signed an agreement wrt payment. Secured Transactions – Fall 1998 - Waldron 58 Purchaser agreed that any holder of the note would not be affected by state of accounts b/w subscriber and promisee and would be holder in due course and for value (cut off clause). There was also a promissory note. The horse died. Under Sale of Goods the k would cease to exist, you are relieved from obligation to pay for them. The vendor sold the notes and k to another part. Came into hands of MSB P said that there was a defense on k under Sale of Goods law. Bank contends that k is irrelevant as holders in due course they are immune to personal defences that they could have raised against other contracting parties. Were they holders in due course for value? If not, will the same rights apply as specified in k? Purchaser says that promissory note was not valid b/c it was attached to a sales k. Sales k depended on existence of goods sold promissory note did not meet requirements of Bills of Exchange Act. It was conditional on the sales k. Sales k hat included conditions on its own terms or under Sale of Goods. Two judges hold that they are notes, look like notes etc. Two judges say we don’t care, will enforce clause in k. Another judge agrees w/ both views. Federal Discount v. St. Pierre (1962) Ont. CA p. 013 Court realizes that negotiable instruments are being used to defraud purchasers or to insulate vendors from faulty products. A Co sold knitting machines, they were expensive and sales person represented knitting machine co and B Co. B Co entered into k with purchasers of knitting machines. The separate B Co would buy some of the purchasers knitting and would be an easy way to pay for knitting machine. Attempted to keep 2 transactions separate, but co’s were related. S-P bought knitting machine but it was not as easy to make money from selling knitting to B company as she though it would be. She stops payments on knitting machine. She did believe that she could finance purchase by selling her knitting. The k + promissory note were sold to FinCo. They are holder in due course. She was told that B Co had paid money to A Co and it was credited to her account. In fact, this had not happened. They did that to encourage people to make more payments A was aware of difficulties encountered w/ B. S-P argues that she was misled and that B co owes her money. FinCo says those are only applicable b/w parties of the k, and FinCo can claim irregardless of defence Court finds that they have to protect negotiability of bills of exchange. Look to good faith. Look at relationship b/w supposed holder in due course and the person who negotiated to it. If the party knows or should have known of problems associated w/ the issue of the note, then they will not be protected by status of holder in due course. NOT holder in due course B/c they are not holder in due course does not mean that there is no debt in existence or that there is no money owed. K is not set aside. May still be k and may still be debt Party suing for debt has to accept the same position as the immediate contracting party would have had. Court said essentially, the two parts were actually one transaction when sued for payment, she was entitled to set-off the amount that she had not been paid. Court allows counter claim for $140. P awarded balance of 243.30 and $140 was set- off. S-P pays balance Secured Transactions – Fall 1998 - Waldron 59 If Vendor V makes fraudulent sale to P. V incorporates separate company, FinCo that would purchase promissory note. V would quickly sell promissory note to FinCo and then P would have little or no recourse. Kelly doctrine reversed this. Range v. Belvedere Finance Corp  SCC p. 29 R bought a fur coat giving promissory note and conditional sales agreement for deferred payment. United Loan Corporation = FinCo. The package = CSC and promissory note, and it was bought by FinCo. FinCo became insolvent Trustee sold package and that co is now suing R for payment. FinCo phoned R and asked if good had been delivered, they were never delivered. BF (FinCo2) separated the package and are suing on promissory note notwithstanding lack of delivery of goods. Court held, b/c note was attached to CSC and not separated until lawsuit note was not an unconditional promise to pay did not meet definition. Court disregarded Killoren and distinguished. Killoren said that holder of k had all rights of a holder in due course. Lenders had 2 ways to protect status as holder in due course. Make sure k are on two separate papers. Promissory note alone should be sold and put conditional sales contract on different paper. Plus add “Killoren clause” (bearer has all powers of holder in due course). XIV.A - Part V – Bills of Exchange Act Consumer Bill s. 189(1) = bills of exchange that is issued in respect of a consumer purchase Consumer Note s. 189(2) = is a promissory note issued in respect of a consumer purchase Consumer Purchase = means a purchase, other than a cash purchase, of goods or services or an agreement to purchase goods or services. By an individual other than for resale or for use in the course of his business, profession or calling AND from a person who is engaged in the business of selling or providing those goods or services. From s. 190(1) Consumer bill or consumer note shall be prominently and legibly marked on its face w/ the words “CONSUMER PURCHASE”. From s. 190(2) if words are missing, the note is void except in the hands of a holder in due course w/out notice that the bill is a consumer note. If stamped, the holder never gets full defences of holder in due course i) S. 191 – once marked, the right of holder to be paid by purchaser is subject to any defence or right of set off that the consumer would have had in an action by the seller on the consumer bill or consumer note. ii) Section 192 – offence to deal w/ promissory notes that are not properly marked. If purchaser has borrowed money from bank for similar transaction and a promissory note was given to the Bank. Consumer purchase means purchase other than a cash purchase. Cases like Siemen find that this is cash purchase And P/N is not issued in respect to consumer purchaser In this case, P has no defence to Bank, must make payment. Section 189(3) – It will be considered a promissory note when the vendor and the third party lender are not at arm’s length. If the lender is related to the vendor then the note b/w lender and purchaser will be a consumer note If not stamped consumer purchase and the purchaser stops payment, the note is void but the loan is still payable. The debt still exists.
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