Law 316: Secured Transactions G. Morgan (Waldron, Fall 2012) | Page 1
Secured Transactions Outline(Waldron, Fall 2012)
Road Map
PPSA, Bank Act or Bills of Exchange Act?
PPSA: any creditor
Bank Act: creditor must be a bank
Bills of Exchange Act: negotiation on bill of exchange, promissory note, cheque, consumer bill or note
Personal Property Security Act
Do you have a secured interest?
What is your collateral?
goods
consumer goods
inventory
equipment
other stuff: instruments, money, licenses, etc.
Is the transaction covered by the PPSA?
is the transaction named in PPSA s. 4 (major exclusions)?
yes no PPSA
if no, does the transaction secure payment or performance of an obligation?
yes all PPSA applies
if no, is the transaction named in PPSA s. 3 (transfer of an account or chattel paper, a commercial consignment or a lease > 1 year)?
yes deemed security interest = PPSA Parts I-IV apply (not Part V – Realisation)
n.b. PPSA s. 1(3): lease must be > 1 year AND the lease has run past 1 year to be a deemed security interest
no no PPSA
Did the security interest attach?
PPSA s. 12: attachment = a) value; b) rights in the collateral; and c) except for the purpose of enforcing rights between parties, s/i enforceable under PPSA s. 10 (formality requirement) [generally, signed and written security agreement]
PPSA s. 13: attachment steamroller (exceptions: crops and generally consumer goods unless replacement of original collateral)
Is there a signed and written security agreement? If no, do you need one?
PPSA s. 10: formal requirements for a security agreement to be enforceable against third parties
Did the creditor make a subsequent advance on the same collateral?
PPSA s. 14: tacking
Do you have a perfectedsecured interest?
Is the security interest perfected?
PPSA s. 19: perfection = (a) attachment + (b) all steps for perfection under PPSA completed
Three ways to fulfill PPSA s. 19(b):
PPSA s. 24: possession (but not seizure)
PPSA s.25: registration of a financing statement
temporary perfection provisions (period of time to either possess or (re)register the collateral)
PPSA ss. 26, 28(3),
Did the creditor extend the money to purchase the collateral?
PPSA s. 22: perfection of PMSIs
Did you register your secured interest properly?
Is the security interest perfected?
PPSA s. 19: perfection = (a) attachment + (b) all steps for perfection under PPSA completed
Three ways to fulfill PPSA s. 19(b):
PPSA s. 24: possession (but not seizure)
PPSA s.25: registration of a financing statement
temporary perfection provisions (period of time to either possess or (re)register the collateral)
PPSA s. 26, 28(3), etc.
Did something happen to your secured interest?
Was the collateral sold?
cut-off rules(see below)
PPSA s. 28: proceeds
n.b. requires a proper collateral description for the s/a to cover the proceeds
tracing rules: lowest intermediate balance; tracing by subrogation
n.b. PPSA s. 1(5): equitable tracing rules can be applied to secured relationships that are not trusts
Did the debtor change names or transfer the collateral to someone else?
PPSA s. 51: re-registration requirements
Did you accidentally discharge your financing statement?
PPSA s. 35(7): re-registration no more than 30 days to retain original priority (w/ exceptions)
Did you make a mistake in your registration?
PPSA s. 43: seriously misleading
objective test (Coates)
Who gets the stuff?
Is the security interest cut-off?
PPSA s. 20(c): bona fide purchaser for value gets the collateral subject to an unperfected security interest
PPSA s. 28(1): authorized dealing (express or implicit authorization)
PPSA s. 30(2): OCB sale
PPSA s. 30(3)(4): bona fide purchaser for value of consumer goods provided not fixtures nor purchase price/market value > $1000
PPSA s. 30(5): cuts off grace period (15 day windows) for innocent third party buyers in PPSA s. 28(3) [proceeds]; s. 29(4) [returned goods]; s. 51 [transfer of collateral to new debtor OR change in debtor name]
PPSA s.30(6)(7): un-perfects serial numbered goods not registered by serial number for innocent third party buyers
PPSA s. 51: transfer of collateral to new debtor OR change in debtor name
n.b. the specific priority rule always applies before the residual priority rules in s. 35(1)
Does a specific priority rule apply?
PPSA s. 20(a)(b) notice provisions
n.b. grace period in PPSA s. 22 (15 days for PMSI holder to protect itself)
PPSA s. 28 proceeds
n.b. requires a proper collateral description to cover proceeds
PPSA s. 35(4) failure to register serial number goods by serial number makes one unperfected for PPSA s. 35(1), lapsed registration rule in s. 35(7) and transfer in provision in s. 35(8)
PPSA s. 35(5)(6) future advance rules (creditor can tack future advances to priority position until the creditor has knowledge of a judgement creditor’s interest [n.b. can still tack some advances after knowledge
PPSA s. 35(7) 30 days from an inadvertent lapse or discharge of registration to re-register and retain priority (provided no one else has registered a s/i in the meantime notice principle)
PPSA s. 35(8) transfer in rule
n.b. can apply to priority between s/i given to 2 different debtors
PPSA s. 34(1)(2) PMSI
n.b. the priority rules in s. 34 only apply to S/I’s given by the same debtor
PPSA s. 34(4): PMSI vendor > PMSI lender
PPSA s. 34(5): priority for accounts financers
PPSA s. 34(6): PMSI in original collateral > PMSI in collateral as proceeds
PPSA s. 34(8)(9): PMSI in crops and livestock
If no specific priority rule apples, apply the residual priority rule
PPSA s. 35(1) residual priority rule = perfected s/i generally take priority by the date of registration of f/s (or possession if perfected by possession); perfected > unperfected; unperfected s/i generally take priority by date of attachment
- n.b. only applies if a specific priority rule DOES NOT apply including other sub-rules in s. 35 that must be considered before s. 35(1) applies
Is the stuff an instrument or another special circumstance?
Is the collateral / proceeds a negotiable or quasi-negotiable instrument?
PPSA s. 31(1): cash $
PPSA s. 31(2): instrument drawn by debtor and delivered in payment of a debt owing to the recipient (w/ or w/o knowledge)
PPSA s. 31(3): purchaser of an instrument has priority over an instrument perfected under PPSA s. 25 or temporarily perfected under PPSA s. 26 or 28(3) if a) gave value; b) acquired w/o knowledge; and c) took possession
PPSA s. 31(6): priority for chattel paper purchaser for new value
Is the property a returned or repossessed good?
PPSA s. 29(1)(2): reattached and new security interests in returned or reposed goods
n.b. last priority to the account holder and first priority to holder of chattel paper who has a right to the chattel paper
n.b. see the Moodle handout on s. 29
Is the property a fixture?
PPSA s. 36: fixtures
n.b. not priority between two secured parties but between a secured party and the land holder
PPSA s. 49: registration in Land Title Office
Is the property crops?
PPSA s. 37: crops
n.b. not priority between two secured parties but between a secured party and the land holder
Is the property an accession?
PPSA s. 38: accessions
Is the property a co-mingled good?
PPSA s. 39: co-mingled goods
n.b. no overlap with s. 38 therefore determine whether accession first
Is the property subject to a repairers’ lien?
PPSA s. 32: repairer liens
Is the project subject to a distraining landlord?
Rent Distress Act 3 PMSI > distraining landlord > security interest
Are you trying to realize your collateral?
Are you accelerating the loan?
PPSA s. 16: require commercially reasonable grounds
Are you realizing in a commercially reasonable manner?
PPSA s. 68(2)
considerations in Medi-Dent and Donnelly
Did you give notice?
To debtor: Waldron
To debtor and other creditors affected by the sale: PPSA s. 59
Is there a junior creditor with a security interest in only one item of collateral?
marshalling
Are you appointing a receiver or a receiver manager?
PPSA s. 64, 65 and 66
Are you trying to realize consumer goods?
PPSA s. 62: automatic right to reinstatement
PPSA s. 67: seize or sue
PPSA s. 58(3): if 2/3 of the value has been paid, the consumer good(s) cannot be seized
Are you just going to take the collateral?
PPSA s. 61: voluntary foreclosure
Do you still have a problem?
Is there a conflict with another provincial PPSA?
What category of goods?
consumer goods will never be governed by s. 7
s. 7: mobile goods
s. 6: goods to be moved (anticipate moving)
s. 5: everything else
n.b. PPSA s. 5 is subject to ss. 6-8 and PPSA s. 6 is subject to PPSA s. 7 therefore PPSA s. 7 is the controlling section
Three practical issues
1)where do you have to search before a client takes an interest in the items
2)where do you have to register if a client takes an interest in the items
3)what happens if something changes
Is there a subordination agreement?
parties can make subordination agreements to set up their own priority schedule
PPSA s. 40 allows a third party beneficiary to enforce a subordination agreement if for their benefit (exception to the doctrine of privity of K)
Did someone not comply with the PPSA?
PPSA s. 69
Common law remedies: breach of warranty of title and slander of title
Is a court exercising its supervisory jurisdiction?
PPSA s. 63 + three principles in Andrews and Trotchie
Bank Act
Is the creditor a bank established under the Bank Act?
Yes: Bank Act applies
No: try the PPSA
Is the borrower within one of the categories of eligible borrowers?
Bank Act s. 427(1)
Exclusions: tourism and hospitality, etc.
Does the agreement meeting the timelines?
(1)Notice of Intention Bank Act s. 427(4)(a) cannot be registered more than three years in advance of the Security Agreement
(2)Security Agreement
(3)Advance of loan Bank Act s. 429(2) security cannot be acquired unless the debt is contracted or made at the time of the acquisition of the security by the bank or the agreement to give security (promise to give security)
Priority rules
Nemo dat
Priority = order in time (first legal title transfer then the first transferee of the right to redeem title, etc.)
Bank Act s. 427(7): two priorities over security interests in the event of bankruptcy:
(1)three months’ wage
(2)producers of agricultural products who have supplied them to a manufacturer within 6 months of the bankruptcy
Seizure and Sale
requirement to act honestly and in good faith
Bank Act s. 427: generally sale at public action unless perishable or agreement by parties
Guiding Principles
PPSA
priority / which creditor gets which stuff first
Old Rule and Bank Act
nemo dat quod habet / “you can’t give what you don’t have”
Supplementary Definitions
Vocabulary
Term / Definition
Account / a debt owed by the bank to the depositor
Accounts receivable / money that is owed to a company by clients/customers, which is an asset
Bill of lading / issued by shipper and delivered to person receiving goods as evidence that the receiver received them
Collateral / physical and intangible property pledged to secure a loan
Consignment / providing items to a seller to sell on your behalf (retaining a percentage of the proceeds), with the option to take back if not sold by a certain time or donated to charity or some similar term to dispose of the item if not sold
Financing statement / legal form filed by a creditor to give notice that it has or may have an interest in the personal property of a debtor (a step in perfecting the creditor’s security notice by providing public notice that the creditor has a right to take possession for repayment of a specific debt with a certain priority)
Floating charge / security interest that “floats” (cloud) over a body of changing assessment that crystalizes according to the terms of the loan agreement
Garnishment order / a legal procedure by which a creditor can collect what a debtor owes by reaching the hands of someone other than the debtor
Holder / person with possession of the bill or promissory note
Instrument / pieces of paper that mean something (i.e. a cheque)
Lessee / a person to whom a lease is granted
Lessor / a person who grants a lease
Mixed fund account / multiple sources of deposits (i.e. sold inventory, interest, loans, etc.)
Obligation / a binding agreement committing a person to a payment or other action
Perfection / security interest has the strongest possible protection under the PPSA (but does not automatically mean that the protection will trump all other creditors)
PMSI / a security interest taken in collateral, other than investment property, to the extent that it secures payment of all or part of its purchase price
Receiver / realize assets
Receiver manager / continue operating business
Tracing rules / equitable remedy that allowed a trust beneficiary to “follow the money” into a mixed fund account and, using technical rules, identify the portion owed to the trust beneficiary
Transferee / one to whom a transfer is made
Transferor / one whom makes a transfer
Warehouse receipts / someone who owned goods in warehouse could authorize warehouse keeper to issue receipts to another party to transfer the goods
Breach of warranty of title / right to sue based on breach of implicit term that the party selling has the right to sell)
Slander of title / know that one has no right to the item but purports that it does (i.e. files registration in the PPR)
PPSAs. 1(1)Definitions
Term / Definition
Creditor / person who is owed payment or performance of an obligation secured
Debtor / person who owes payment or performance of an obligation secured (obligation is more than just money owing)
Obligation secured / when determining the amount payable under a lease that secures payment or performance of an obligation,
(a) the amount originally contracted to be paid under the lease,
(b) any other amount payable in accordance with the terms of the lease, and
(c) any other amount required to be paid by the lessee to obtain ownership of the collateral,
less any amount paid before the determination
Secured party / person who holds a security interest; person who holds a security interest for another; trustee, if the security interest is embodied in a trust indenture
Security interest / an interest in goods (physical property); chattel paper; investment property; a document of title; an instrument; money; or an intangible (non-physical property like account s receivable) + three interests whether or not the interest secures payment or performance of an obligation:
(i) a transferee arising from the transfer of an account or a transfer of chattel paper (incl. to make sure that transfers of accounts work);
(ii) a person who delivers goods to another person under a commercial consignment (incl. any consignment agreements that function as a security interest as well as commercial consignments that do not secure payment or performance of an obligation to protect the public)
ex: small china shop that needs to purchase inventory; small china shop takes inventory on consignment with an agreement to remit part of the purchase price when sold; the vendor has a security in the china as can claim return of the property if not sold or if payment not remitted)
commercial consignment = consignee (person receiving the goods) must ordinarily deal in goods of that description and reserves an interest in the good after they have been delivered but excludes c) an auctioneer when consigned goods are for sale, or d) a consignee 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
(iii) lease greater than 1 year including an indefinite term or a renewable lease with the total potential terms greater than 1 year but excludes a lease with a lessor who is not typically in the business of leasing goods or the lease of goods as part of a property lease, such as a furnished apartment (catch both the times where it is a security interest and the times where it it appear as if the lessee has ownership, so registration protects the public by providing notice that the lessee is not the owner)
Value / any consideration sufficient to support a simple contract, and includes an antecedent debt or liability
New value = value other than antecedent debt or liability
Bills of Exchange Definitions
Term / Definition
Bill 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” (Bills of Exchange Act s. 16)
Cheque / “cheque is a bill drawn on a bank, payable on demand” (Bills of Exchange s. 165)
Promissory note / “A promissory note is an unconditional promise in writing made by one person to another person, 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” (Bills of Exchange Act s. 176)
Holder in due course / person who has a bill that appears complete and regular provided a) became a holder before it was overdue and without notice that it has been dishonoured, and b) acquired in good faith and for value, and at time of negotiation no notice of defect in title of the person who negotiated it (Bills of Exchange Act s.55)
Policy Arguments
Policy Considerations in Secured Transactions
Policy Consideration / Details
facilitate borrowing / need capital to grow business, manage risk (permit business to save some capital in bankruptcy, spread loss to others incl. vendor), make more money (leverage: capital of $100 plus loan of $1000 at 5% = investment of $1,100 with 10% interest = $110 profit - $50 interest = $60 gain = 60% rate of return on $100)
provide security / way to ensure return of a loan (if you pay, you keep your property but if you don’t pay, you lose your property)
more favourable interest rate with better security (i.e. interest rates are tailored to the risk of the loan, among other things, with a lower risk with a better security)
economic efficiency / justification for the priority of secured debt:
willing to lend money b/c there is assurance that the loan will be repaid
need loans to promote commercial efficiency and productivity
Historical Framework for Secured Transactions
Term / Details / Key Concepts
Three types of historical security arrangements / (1)Conditional sales agreement = vendor provides financing to a purchaser by accepting payments over a defined period of time (purchaser took possession from outset but the vendor retained title until the financing was paid in full)
(2)Chattel mortgage= purchaser borrows financing from a third party to make an expenditure from a vendor who is unable or unwilling to provide term financing under a CSA. As security, the purchaser will transfer some aspect of the title of an asset to the third party.
(3)Other legal arrangements that mimic the above transactions (i.e. a chattel lease, which mimics a CSA lease payments made over time with possession of the property, which the right to purchase outright at the end of the pre-defined lease term) /
- CSA = vendor financing
- CM = third party financing
Historical context / 16th century: pledge (similar to a contemporary pawn shop)
give up a possession in exchange for $; pay back $ + interest = return of possession)