Basic Concepts by shenreng9qgrg132

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									Secured Transactions, Prof. Siebrasse                                     Basic Concepts

                             Basic Concepts

1. Basic Concepts
2. Basic Concepts
  a. Freedom of contract
  b. Scope
  c. Attachment
  d. Perfection
3. Freedom of Contract
  a. S.9 – Freedom of Contract
    i. Except as otherwise provided in this or any other Act, a
         security agreement is effective according to its terms.
    ii. Does not mean complete freedom of contract
       (1) Abolition of common law constraints on lending
       (2) PPSA creates debtor rights
  b. Freedom of contract v consumer protection
    i. Is it good for debtors if lending law is “pro-debtor”?
       (1) E.g. long notice period, court supervision, before SP can
           seize assets
4. Scope – Substance over Form
  a. 3(1) Subject to section 4 [exceptions], this Act applies
    i. (a) to every transaction that in substance creates a security
         interest, without regard to its form and without regard to the
         person who has title to the collateral, and
    ii. (2) [deemed security interests e.g.]
    iii. (b) to a lease for a term of more than one year,
    iv. [some consensual non-security/ownership interests are
         governed by the PPSA]
5. Attachment
  a. Attachment means creation of a security interest
    i. Creditor becomes a secured creditor
    ii. Obtains rights against the collateral itself
  b. Attachment alone is inadequate to secure rights good against
       the world
    i. Attachment without perfection results in rights which are
         good against the debtor, but which are ineffective or
         subordinate in priority to most competing third party
         interests
6. Attachment
  a. 12(1) A security interest. . .attaches when
    i. (a) value is given,
       (1) [“„value‟ means any consideration sufficient to support a
           simple contract and includes an antecedent debt or
           liability”]
    ii. (b) the debtor has rights in the collateral, and
       (1) Can‟t use collateral that isn‟t yours
Secured Transactions, Prof. Siebrasse                                      Basic Concepts

       (2) But, need not have a full ownership interest
       (3) Any real rights, ie any right to the property itself,
           including an equitable right
    iii. (c) except for the purpose of enforcing rights as between
         the parties to the security agreement, the security interest
         becomes enforceable within the meaning of section 10.
7. Attachment – S.10
  a. Evidentiary requirement
    i. Protects third parties by defining the scope of the actual
         security interest
       (1) It is not uncommon that the registered description of the
           collateral is broader than the actual collateral
  b. Two methods
    i. Possession s.10(1)(a)
    ii. Writing requirement s.10(1)(b)
  c. When the requirements of s.10 are met the security interest is
       effective against a third party
    i. This does not guarantee priority against a third party

8. Perfection
  a. Attachment secures SP rights against D
  b. Perfection secures SP rights against the world (third parties)
9. Perfection
  a. Perfection is a publicity requirement
    i. How can a third party know whether you own the thing that
         you possess?
    ii. A publicity requirement is needed to avoid the problem of
         secret prior interests
  b. Two methods of perfection
    i. Possession (for certain types of collateral) – s.24
    ii. Registration - s.25
10. Perfection
  a. Failure to perfect results in loss of priority
    i. S. 35(1)(b) a perfected security interest has priority over an
         unperfected security interest;
    ii. “in order to make a security interest effective against third
         parties, the Act requires that the secured party "perfect" it
         by performing some act of public notice.” Commentary to
         s.19
    iii. Practically correct, but not technically correct
    iv. If s.10 is satisfied, the security interest is effective against
         third parties, but if unperfected will almost always be
         subordinate in priority to third party interests
11. Perfection
  a. S.19 A security interest is perfected when
    i. (a) it has attached, and
Secured Transactions, Prof. Siebrasse                                   Basic Concepts

    ii. (b) all steps required for perfection under this Act have
         been completed,. . .
  b. Two methods of perfection
    i. Possession (for certain types of collateral) – s.24
    ii. Registration (for all types of collateral) - s.25
  c. . . .regardless of the order of occurrence
    i. Pre-registration is effective
12. Perfection by Possession - S.24
  a. Limited to those types of property which are capable of
       possession: s.24(1)
  b. Actual possession required: s.24(2)
  c. Not favoured, as D cannot use the collateral
13. Perfection by Registration - s.25
  a. Security interests in all types of property can be perfected by
       registration
    i. 25 Subject to section 19 [attachment requirement],
         registration of a financing statement perfects a security
         interest in collateral.
  b. The registration system – the “PPR” – is the key to an
       efficient financing system
14. Perfection
  a. S.19 A security interest is perfected when
    i. (a) it has attached, and
    ii. (b) all steps required for perfection under this Act have
         been completed,. . .
  b. . . .regardless of the order of occurrence
  c. Pre-registration is effective
15. Perfection
  a. Exception in Ontario only
    i. Pre-registration not permitted for consumer goods
       (1) Multiple registration required for mixed goods
       (2) Concern re chilling effect on comparison shopping if
           agreement pre-registered
       (3) Concern re multiple registrations
    ii. Note: In Ont, D cannot unilaterally discharge inaccurate f.s.
       (1) Must apply to court
16. After-Acquired Property - S.13
  a. 13(1) Subject to section 12 and subsection (2), a security
       agreement that provides for a security interest in
       after-acquired personal property attaches to that property in
       accordance with the terms of the agreement without any need
       for specific appropriation by the debtor.
    i. D may grant a security interest in property which she does
         not own
    ii. It does not attach until D acquires rights (s.12), but then
         attaches automatically
Secured Transactions, Prof. Siebrasse                                   Basic Concepts

  b. General Security Agreement (GSA) – “All present and
       after-acquired property”
17. Basic Priority Rules
18. Priorities
  a. The priority rules depend on
    i. The nature of the parties
       (1) Secured Party
       (2) Judgment creditor (trustee in bankruptcy)
       (3) Purchaser (lessee)
    ii. The nature of the goods
       (1) Serial numbered goods
       (2) Consumer goods
       (3) Inventory
       (4) Equipment
    iii. The nature of the security interest
       (1) Perfected v unperfected
       (2) Purchase money security interest (pmsi)
19. Knowledge
  a. Knowledge of a prior interest is irrelevant to priority unless
       the Act specifically provides otherwise
    i. The priority rules make no reference to knowledge
       (1) and
    ii. 65(3) A person does not act in bad faith merely because the
         person acts with knowledge of the interest of some other
         person.
  b. Taking with knowledge of a prior unregistered interest is not
       constructive fraud and does not affect priority
20. Perfected SP v Unperfected SP
  a. Residual (general) priority rules apply “Where this Act
       provides no other method for determining priority between
       competing security interests in the same collateral” (s.35(1))
  b. 35(1)(b) a perfected security interest has priority over an
       unperfected security interest;
  c. This is true even if the unperfected security interest attached
       first
  d. An unperfected security interest is vulnerable
    i. nemo dat is not the law
21. Perfected SP v Perfected SP
  a. 35(1)(a) priority between perfected security interests is
       determined by the order of the occurrence of the following:
    i. (i) the registration of a financing statement under section 25
         without regard to the time of attachment of the security
         interest,...
  b. If SP1 attaches first, SP2 attaches second, but SP2 registers
       first, SP2 has priority.
  c. Order of registration, not order of perfection:
Secured Transactions, Prof. Siebrasse                                      Basic Concepts

    i. SP1 attaches, then SP2 registers, then SP1 registers, then
         SP2 attaches, SP2 has priority even though SP1 was
         perfected first.
    ii. Attachment is necessary for perfection, but is irrelevant to
         priorities between perfected interests
22. Perfected SP v Perfected SP
  a. 35(1) (a) priority between perfected security interests is
       determined by the order of the occurrence of the following:
       (1) (i) the registration of a financing statement under section
           25 without regard to the time of attachment of the
           security interest, [or]
       (2) (ii) possession of the collateral under section 24 without
           regard to the time of attachment of the security interest, or
       (3) (iii) perfection under sections 5, 7, 26, 29 or 74,
           [temporary perfection for goods initially perfected in
           another jurisdiction or termporarily returned to D,
           transitional]
    ii. whichever is earliest
  b. Taking possession is equivalent to registration where
       perfection by possession is permitted
23. Unperfected SP v Unperfected SP
  a. 35(1) (c) priority between unperfected security interests is
       determined by the order of attachment of the security
       interests.
  b. Order of attachment is relevant to priority only in a
       competition between two unperfected interests
24. Future Advances
  a. 13(1) Subject to section 12 and subsection (2), a security
       agreement that provides for a security interest in
       after-acquired personal property attaches to that property in
       accordance with the terms of the agreement without any need
       for specific appropriation by the debtor.
    i. S.13(2) [except crops and consumer goods]
  b. 35(5) Subject to subsection (6), the priority which a security
       interest has under subsection (1) applies to all advances,
       including future advances.
25. SP v Third Party
  a. Third Parties fall into two categories
    i. Purchasers and other transferees
       (1) In particular lessees
    ii. Judgment creditor (JC) and related parties i.e. trustee in
         bankruptcy
  b. Basic principle
    i. Third parties are subject to prior security interests unless
         PPSA specifically provides otherwise
    ii. This principle is not express
Secured Transactions, Prof. Siebrasse                                       Basic Concepts

       (1) Draws on basic property law: nemo dat
26. Unperfected SP v Purchaser
  a. Even though the debtor has granted a security interest in her
       property, she can sell with clear title:
    i. 20(3) An unperfected security interest in collateral is
         subordinate to the interest of a transferee of the collateral if
         the transferee
       (1) (a) acquires the interest under a transaction that is not a
           security agreement,
       (2) (b) gives value, and
       (3) (c) acquires the interest without knowledge of the security
           interest and before the security interest is perfected.
         (a)       Note: Unperfected SP also subordinate to j.c./trustee
                   in bankruptcy: s.20(1),(2)
    ii. Nemo dat is not the law
    iii. Knowledge is relevant
27. Perfected SP v Purchaser
  a. Ordinary course buyer takes free of interests given by the
       seller. . .
    i. 30(2) A 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 security interest given by
         the seller or lessor or arising under section 28 or 29,
         whether or not the buyer or lessee knows of it,...
  b. Buyer is still subject to security interests given by prior
       owners of the goods
28. Perfected SP v Purchaser
  a. . . . unless
    i. 30(2). . . unless the buyer or lessee also knows that the sale
         or lease constitutes a breach of the security agreement
         under which the security interest was created.
29. Perfected SP v Purchaser of Consumer Goods
  a. A buyer for value of small ticket consumer goods takes free
       of any security interest (not just those granted by the seller)
       (1) 30(3) A buyer or lessee of goods that are acquired as
           consumer goods takes free of a perfected or unperfected
           security interest in the goods if the buyer or lessee
         (a)       (a) gave value for the interest acquired, and
         (b)       (b) bought or leased the goods without knowledge
                   of the security interest.
    ii. Low value goods only
       (1) 30(4) Subsection (3) does not apply to a security interest
           in
         (a)       (b) goods if the purchase price of the goods exceeds
                   one thousand dollars or if the market value of the
                   goods, in the case of a lease, exceeds one thousand
Secured Transactions, Prof. Siebrasse                                         Basic Concepts

                 dollars.
30. Serial Numbered Goods
  a. Reg s.2 “serial numbered goods" means a motor vehicle,
       trailer, mobile home, aircraft, boat or an outboard motor for a
       boat;
       (1) Does not mean all goods which happen to have a serial
            number
    ii. In Ontario, only motor vehicles
  b. For serial numbered goods, registration by serial number is
       permitted
    i. But not always required
  c. Serial number registration addresses problem of remote
       security interests (interests granted by a predecessor in title to
       the seller)
31. Serial Numbered Goods
  a. All goods, including serial numbered goods, fall into three
       categories
    i. Inventory
    ii. Consumer goods
    iii. Equipment – "equipment" is the residual category: “goods
         that are held by a debtor other than as inventory or
         consumer goods”
  b. 2(2) Except as otherwise provided in this Act, the
       determination as to whether goods are "consumer goods",
       "inventory" or "equipment" shall be made as of the time the
       security interest attaches.
32. Serial Numbered Goods
General Scheme
  a. Failure to register by serial number
    i. Fatal for collateral held as consumer goods
    ii. Irrelevant for collateral held as inventory
    iii. Halfway between for collateral held as equipment
       (1) Ineffective against purchaser and secured parties
       (2) Effective against judgment creditor and trustee in
            bankruptcy
33. Purchase Money Security Interest
  a. "purchase money security interest" means
    i. (a) a security interest taken in collateral to the extent that it
         secures all or part of the purchase price of the collateral, . . .
  b. Money loaned to buy the very goods which are used as
       collateral for that loan
  c. “Super-priority” for PMSI
    i. With exceptions (inventory) and special requirements

34. Jurisdictional Variation – Examples
  a. Purchase money security interests
Secured Transactions, Prof. Siebrasse                                      Basic Concepts

    i. Serial number registration is not needed for pmsi in serial
         numbered equipment in Western jurisdictions
       (1) S. 35(4) does not list 34(1) – purchase money security
           interests
  b. Serial Numbered Goods
    i. Serial number registration only required for motor vehicles
         in Ontario
    ii. Priority rules are same for
       (1) Consumer goods & inventory
       (2) Different for equipment
         (a)     Registration with serial number effective against SP
         (b)     Only P is protected
35. Re Giffen
36. Re Giffen
  a. TLC leases to Giffen, who becomes bankrupt
    i. TLC holds title
  b. TLC did not register its interest
  c. Who gets the car, TLC or trustee in bankruptcy?
    i. Giffen (bankrupt) under a true lease
    ii. TLC, clearly had better rights to the car than did Giffen,
         whether or not it registered its interest.
37. Re Giffen
  a. TLC argues trustee is entitled to distribute to the creditors
       only the "property...of the bankrupt"
    i. BIA s. 67(1)(c)
  b. Trustee argues that TLC‟s interest was an unperfected
       security interest and therefore “not effective against a trustee
       in bankruptcy. . . ”
    i. PPSA s.20(2)(a)
38. Outside Bankruptcy
  a. What would the result be if the contest were between TLC
       and a JC with a registered notice of judgment?
    i. Was the lease at issue a true lease or a financing lease?
  b. Is this result sound as a matter of policy , according to the
       SCC? Why / why not?
39. Pre v Post-Bankruptcy
  a. Regardless of the policy merits of the provincial rule,
       unsecured creditors should have the same priority pre and
       post- bankruptcy.
    i. The Court of Appeal erred . . in not recognizing that the
         purpose of s. 20(b)(i) is . . to permit the unsecured creditors
         to maintain. . .the same status vis- -vis [unperfected]
         secured creditors . . .which they enjoyed prior to the
         bankruptcy of the debtor.
  b. Why is this important?
40. Re Giffen
Secured Transactions, Prof. Siebrasse                                             Basic Concepts

  a. How does the SCC resolve the conflict between federal and
       provincial law resolved?
    i. BIA says trustee does not have right to TLC‟s property
    ii. PPSA says TLC‟s interest is ineffective against trustee
41. Re Giffen
  a. There is no conflict
    i. “Property” in BIA = “property as defined by provincial law
         /PPSA”
    ii. The Court of Appeal did not recognize that the provincial
         legislature, in enacting the PPSA, has set aside the
         traditional concepts of title and ownership to a certain
         extent.
  b. The SCC uses the PPSA to define “property” rather than
       using common law “property‟ to define the PPSA

42. Re Giffen
  a. Question is not title, but priority
    i. L‟or has title, but not priority
  b. Can trustee convey clear title to Purchaser?
    i. Unperfected SP must claim against T‟ee under s.81(2) BIA
    ii. T‟ee has priority so claim fails
    iii. Claim then deemed abandoned and t‟ee can sell clear
43. Fleeming and Flintoft
  a. [F]irst, Fleeming and Flintoft can be distinguished; and
       second, s. 20(b)(i) modifies the principle that a trustee is
       limited to the rights in the property enjoyed by the bankrupt.
  b. Basis of distinction is trusts
44. Trusts – Fleeming and Flintoft
  a. The trustee in bankruptcy cannot succeed to property held on
       trust by the bankrupt. . . . In my view, the proposition stated
       in these cases (that a trustee in bankruptcy cannot take a
       greater interest in property than the bankrupt had) should be
       restricted to the context in which they were made, namely,
       where the disputed property is held on trust by the bankrupt
       debtor.
  b. What about a financing trust?
    i. If TLC provided that Giffen held the car in trust for TLC?
45. Trusts – Fleeming and Flintoft
  a. Recall, PPSA applies to any “to every transaction that in
       substance creates a security interest, without regard to its
       form and without regard to the person who has title to the
       collateral, and . . .to a trust indenture, trust receipt, . . .trust . .
       .where they secure payment or performance of an obligation.”
  b. Only non-security trust escapes PPSA
46. Flintoft
  a. Flintoft was a financing trust
Secured Transactions, Prof. Siebrasse                                   Basic Concepts

    i. Accounts receivable owing to D held in trust for the Bank
  b. Bank‟s registeration under Bank Act was not timely
  c. SCC held clearly that property held in trust does not vest in
      the trustee
    i. No distinction made between financing trust and other
        trusts
  d. No equivalent to s.20(2)
    i. Similarly Fleeming
47. Fleeming and Flintoft
  a. [F]irst, Fleeming and Flintoft can be distinguished;
  b. Contrary to the PPSA to hold that financing trusts need not
      be registered to prevail over trustee
  c. and second, s. 20(b)(i) modifies the principle that a trustee is
      limited to the rights in the property enjoyed by the bankrupt.
  d. Correct

								
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