SECURED TRANSACTIONS – FALL 2007 – PROFESSOR CATHERINE WALSH
I.INTRODUCTION AND OVERVIEW
1.Moveable and Immovable Security Interests
2.Federal/Provincial Issues
II.FORMAL AND FUNCTIONAL CONCEPTS OF SECURITY
A.Consensual and Non-Consensual Concepts of Security
1.Consensual and Non-Consensual Security in the CCQ
CCQ 2664
2.Consensual and Non-Consensual Security in the Common Law
B.Hypothecary and Title-Based Concepts of Security
1.Concepts of Security in the CCQ
a.Hypothec
CCQ 2660
b.Sale with the Right of Redemption
CCQ 1750
CCQ 1756
c.Security Trust
CCQ 1263
d.Instalment Sale
CCQ 1745
CCQ 1749
e.Leasing
CCQ 1842
CCQ 1847
2.Concepts of Security in the PPSA
a.Security Interest (Comprehensive)
ON PPSA 1 (definitions)
ON PPSA 2(a)
C.Transactions “Deemed” to be Secured Transactions
1.Assignments
a.Assignments in the CCQ
CCQ 1642
b.Assignments in the PPSA
ON PPSA 2(b)
2.Operating Leases
a.Leases and Leasing in the CCQ (why are we dealing with this twice?)
CCQ 1851
CCQ 1852
The CCQ does not distinguish between a financial lease and an operating lease with a term of greater than one year, unlike the PPSA.
b.Operating Leases in the PPSA
The PPSA does distinguish between a financial lease and an operating lease with a term of greater than one year, unlike the CCQ.
ON PPSA 2(c)
3.Consignments
NB PPSA 3(2)(a)
4.Sale of Goods Without a Change of Possession
NB PPSA 3(2)(d)
II.CREATION OF (CONSENSUAL) SECURITY RIGHTS
A.General Considerations
B.Granting Security to Secure the Obligation of a Third Person
1.Securing the Obligations of a Third Person in the CCQ
CCQ 2681
2.Securing the Obligations of a Third Person in the PPSA
ON PPSA 1(1)
C.Permissible Parties
1.Permissible Parties in the CCQ
CCQ 2683
CCQ R. 5 Regulation respecting the register of personal and movable real rights
Art. 15.01
CCQ 2684
2.Permissible Parties in the PPSA
NB PPSA s. 13
C.Exempt Assets
1.Exempt Assets in the CCQ
CCQ 2668
2.Exempt Assets in the PPSA
NB PPSA 58(3)
D.Requirements for Creation/Attachment of Security Rights
In brief:
ON PPSA 11
1.Existence of Secured Obligation
a.Existence of Secured Obligation in CCQ
CCQ 2661
CCQ 2687
CCQ 2688
CCQ 2691
b.Existence of Secured Obligation in PPSA
ON PPSA 11(2)
ON PPSA 13
2.Grantor’s Right in Collateral
a.Grantor’s Right in the CCQ
CCQ 2666
CCQ 2670
b.Grantor’s Right in the PPSA
ON PPSA 11(2)
ON PPSA 12
3.Evidence of a security agreement
a.Evidence of a security agreement in the CCQ
b.Evidence of a security agreement in the PPSA
ON PPSA 9
ON PPSA 11
III.THIRD PARTY EFFECTIVENESS (PUBLICATION/PERFECTION)
A.Creation/Attachment, Perfection/Publication, and Priority
B.Purposes of Perfection/Publication
The purpose of perfection/publication is to protect third parties by enabling them to learn of the security interest.
Perfection/publication is also related to priority, in that it provides an efficient means of ordering priority rank between secured creditors.
C.Consequences of Failure to Perfect/Publish
1.Failure to Publish in the CCQ
CCQ 2663
CCQ 2703
CCQ 2934
CCQ 2941
2.Failure to Perfect in the PPSA
D.Non-hypothecary Security Rights
1.Publication Requirement for Non-hypothecary Security Devices
CCQ 1263
CCQ 1745
CCQ 1750
CCQ 1756
CCQ 1847
Leasing:
The rights of ownership of the lessor have effect against third persons only if they have been published; effect against third persons operates from the date of the leasing contract provided the rights are published within 15 days.
CCQ 1852
2.Non-Hypothecary Security Devices and Bankruptcy
Giffen (BC PPSA, 1998) – Iaccobucci
Lefebvre (CCQ, 2004) – LeBel
Ouellet (CCQ, 2004) – LeBel
BIA s. 2
E.Effect of Change of Mode of Publication/Perfection
1.Change of Mode of Perfection in the PPSA
2.Change of Mode of Publication in the CCQ
CCQ 2707
F.Automatic Publication/Perfection
Sometimes a security right is treated as automatically published/perfected (ie, creation is sufficient for publication/perfection).
1.Automatic Perfection in the PPSA
As per ON s. 24.2 and NB s. 26.1, certain kinds of security interest may be perfected by possession, and remains perfected for the first ten days (ON) or fifteen days (NB) after the collateral comes under the control of the debtor. This is most commonly applied to instruments (eg, cheques, promissory notes), certificated securities, and documents of title (eg, bills of lading or warehouse receipts).
A negotiable document of title operates as the equivalent of goods for the purpose of transferring title to the buyer. It can thus serve as collateral; the buyer will obtain financing from the bank to purchase goods, and the bank will take a security interest in the bill of lading as collateral. This is usually a short-term financing, because the buyer will sell the goods in turn, which means the bank must relinquish the bill of lading. It is impractical for the bank to register their security interest, because they will likely relinquish the bill of lading within a few days. Therefore, the interest remains perfected for the first 10 or 15 days after the bill of lading is returned to the buyer. After this time, the bank has to register to maintain continuous priority.
2.Automatic Perfection in the CCQ
CCQ 2703
CCQ 2704
CCQ 2706
CCQ 2708
Blouin – READ THIS CASE!
CCQ 2710
CCQ 2711
IV.REGISTRATION
A.Type of Registry System
CCQ 2969
B.Advanced Registration
1.Advanced Registration in the PPSA
2.Advanced Registration in the CCQ
3.Policy Justifications for Advanced Registration
CCQ 2944
The registration of a hypothec against someone’s assets impairs his ability to get additional secured credit, because potential creditors will know they are second priority.
This is why ON does not permit advanced registration for consumer goods, for example.
Other provinces do permit this, however, arguing that registration is not evidence of the existence of a security right; it merely signals that a right may exist.
C.Required Registration Information
1.Maximum Value
a.Policy Justifications for Maximum Value
D.Effect of Error or Omissions
Errors and omissions usually arise in connection with the grantor’s legal name, particularly where the grantor is a natural person.
Recall that movable registries are indexed according to the grantor’s name.
Some common law jurisdictions permit natural persons to use nicknames and other forms on legal documents, while others do not.
These inconsistencies pose great challenges to electronic systems, particularly when it comes to the validity of the registration.
oSay I buy a car under a nickname, and register under my nickname.
oA secured creditor searches under my legal name, and nothing comes up: is the registration valid?
The court’s test is whether the error/omission would mislead a reasonable searcher in a material way. The underlying question is what the system accepts as a legal name.
Lambert (ON PPSA, 1994)
Exode Automobile Inc. (CCQ)
V.COMPETING CLAIMANTS: PRIORITY AMONGST SECURED CREDITORS
A.General Rule
1.First to Publish Rule in the CCQ
CCQ 2941
2.First to Register Rule in the PPSA
B.Knowledge/Notice of an Unpublished/Unperfected Right
1.Knowledge in the CCQ
CCQ 2963
2.Knowledge in the PPSA
C.Priority with Respect to Later Advances
1. Priority and Later Advances in the CCQ
2.Priority and Later Advances in the PPSA
3.Policy Justifications with Respect to Later Advances
D.Exceptions to General First to Publish/Register Rule
1.Purchase Money Super Priority
a.Purchase Money Security Interest in the PPSA
b.Purchase Money Security Interest in the CCQ
i.Vendor’s Hypothec
CCQ 2948
CCQ 2954
Maschinenfabrik Rieter (QCCA, 2005)
ii.Non-hypothecary Devices
iii.General
c.Policy Differences in Purchase Money Super Priority
2.Serial Numbered Goods
a.Serial Numbered Goods in the PPSA
i.Equipment
ii.Consumer Goods
iii.Inventory
b.Serial Numbered Goods in the CCQ
3.Voluntary Subordination of Priority Between Secured Creditors
a.Voluntary Subordination in the CCQ
CCQ 2956
b.Voluntary Subordination in the PPSA
c.Intercreditor Agreements
d.“Assigning” Priority
Innovation Credit Union (Sask. C.A., 2009)
Radius Credit Union (Sask. C.A., 2009)
VI.COMPETING CLAIMANTS: BUYERS
A.Secured Creditor’s droit de suite
B.Exceptions to the droit de suite
1.Failure to Publish/Perfect
2.Authorized Sales
3.Sale in the Ordinary Course of Business
a.Sale in the Ordinary Course of Business in the PPSA
b.Sale in the Ordinary Course of Business in the CCQ
i. Hypothecs
ii.Non-hypothecary Security
CCQ 1713
CCQ 1714
c.Remedies for Sale in the Ordinary Course of Business
4.Serial Numbered Goods
5.Low Value Goods
VII.COMPETING CLAIMANTS: UNSECURED CREDITORS AND NON-CONSENSUAL SECURED CREDITORS
A.Prior Claims and Legal Hypothecs
1.Prior Claims
CCQ 2651
2.Legal Hypothecs
CCQ 2724
B.Judgment Creditors in the PPSA
C.Special Priority Rules for Construction Suppliers
1.Construction Suppliers’ Priority in the CCQ
2.Construction Suppliers’ Priority in the Common Law
D.Impact of Federal Bankruptcy Legislation on Priorities
VIII.ENFORCEMENT OF SECURITY ON DEFAULT
The creditor exercises enforcement measures when the debtor is in default. The default may occur by virtue of bankruptcy, or it may be a default to one creditor.
The unsecured creditor is owed a personal obligation, while the secured creditor actually has a proprietary right. Because of this, the law tries to ensure that the enforcement options available to a secured creditor are efficient. There are also safeguards against appropriate of excess value by the secured creditor. The secured creditor is not entitled to the asset itself, but to its value.
a.Enforcement in the CCQ
The CCQ allows creditors to exercise their personal and hypothecary rights against the debtor in CCQ 2748. The creditor may only exercise his hypothecary rights in addition to his personal ones; he may not add more rights through the security agreement.
On its face, enforcement in Chapter V of Book VI of the CCQ only applies to hypothecary creditors. However, recall that the title-based security devices assimilate the hypothecary enforcement mechanisms (eg, instalment sales, sales with the right of redemption, trusts). There is no enforcement assimilation for leases/leasing; they must be published for third party effectiveness, but the lessor’s remedies are not those of a hypothecary creditor. This creates a loophole, because someone could set up an instalment sale as a lease to try and avoid the hypothecary enforcement mechanism.
b.Enforcement in the PPSA
The PPSA is functional, and applies to all transactions that create a security right, irrespective of form. However, recall that certain transactions are deemed to create a security interest when they do not actually do so (eg, operating lease for a term of greater than one year, commercial consignment, etc). These are nonetheless included in the PPSA for publicity reasons. The PPSA’s enforcement measures (Part V) do not apply to deemed security transactions.
A.Preliminary Remedies
1.Surrender/Seizure
a.Surrender in the CCQ
b.Seizure in the PPSA
2. Sale
a. Sale in the CCQ
b.Sale in the PPSA
3.Taking in Payment
4.Collection of Accounts
a.Collection of Claims in the CCQ
b.Collection of Claims in the PPSA
5.Receivership and Administration of the Property of Another
a.Receivership in the Common Law
b.Administration of the Property of Another in the Civil Law
B.Rights of Grantor and Third Parties
1.Advance Notice
The grantor and third parties have the right to advance notice of enforcement action. This enables them to monitor the enforcement proceeding to ensure their interests are protected. There is a risk that advanced notice will prompt the grantor to hide/secrete the asset. If the items are perishable, too much advanced notice might mean the items are valueless by the time the secured creditor gets them.
The advanced notice requirement is closely linked to the grantor’s right of redemption: his right to recover the asset by paying the secured creditor. Giving the grantor this last chance to reclaim title is a very important element of the advanced notice requirement.
a.Advance Notice in the CCQ
b.Advance Notice in the PPSA
C.Impact of Bankruptcy/Insolvency on Enforcement Rights
IX.CONFLICT OF LAWS
I.INTRODUCTION AND OVERVIEW
1.Moveable and Immovable Security Interests
Rules in the CCQ are in some sense extremely comprehensive: cover rules for both movables and immovables
Framework for mortgage law for immovable assets in CML provinces is pretty scattered – have to go to registration acts as well as mortgage acts for each province
Law on immovable security is far more simple than for movables:
- Number of rights is usually straightforward
- Registration system is pretty straightforward
- Don’t have immovables moving from one jurisdiction to another
- In today’s world, movable hypotheques are more common – more money is involved in them (though not for the individual consumer)
2.Federal/Provincial Issues
Though we think of secured transactions as a provincial responsibility, which it is, there is also a federal component:
- Federal Bank Act and Bankruptcy and Insolvency Act (plus ships, railway cars, IP)
- Juxtaposition of two regimes creates problems – two sets of rights and responsibilities for banks – but no movement has happened on proposals to change this
Problem: because of constitutional limitations, provinces are incapable of repairing gaps and problems created by imperfect federal statutes
II.FORMAL AND FUNCTIONAL CONCEPTS OF SECURITY
A.Consensual and Non-Consensual Concepts of Security
1.Consensual and Non-Consensual Security in the CCQ
Drafters of the code attempted to assimilate the rules applying to hypothecs at two levels:
- Publication (applies to all the deemed hypothecs listed above)
- Enforcement: rules about how the creditor can seize the property
CCQ / PUBLICATION: Requirement that the creditor publish the security / ENFORCEMENT: Requirement that the creditor has to observe the rules that apply to the hypothecary rules when seizing assets
Hypothec / Yes / Yes
Sale with a right of redemption / Yes(for road vehicles or other property determined by regulation) / Yes (but some ambiguity)
Security trust / Yes / Yes
Installment sale / Yes / Yes
Lease / Yes / No
Leasing / Yes / No
CCQ 2664 / Hypothecation may take place only on the conditions and according to the formalities authorized by law.
A hypothec may be conventional or legal.
Conventional hypothecs are consensual (eg, I grant a creditor a hypothec via K).
Legal hypothecs are non-consensual (eg, if I fail to pay my mechanic for repairs to my motorcycle, he may claim a legal hypothec [it is a non-consensual hypothec, because our agreement was for repair, not for a security interest]).
The CCQ hypothecary rules encompass conventional and legal hypothecs, unless there is a stipulation.
2.Consensual and Non-Consensual Security in the Common Law
PPSA / PUBLICATION: Requirement that the creditor publish the security / ENFORCEMENT: Requirement that the creditor must observe the rules that apply to the security interests when seizing assets“Security Interest”
This includes any consensual transaction, regardless of form, and regardless of who has ownership of the asset, that has the function of providing security / Yes / Yes
Transactions which aren’t meant to secure performance of an obligation (leases of more than a year, consignment, sales where possession doesn’t change, assignments) / Yes / No
The PPSA applies only to consensual security rights. Although there is no specific exclusion, the Act as a whole makes this clear by requiring evidence of the agreement.
The common law grants a right of retention to repairers (repairer’s lien). Under the Repairer’s and Storer’s Lien Act, repairers now have the right to dispose as well as retain. However, traditionally the right of retention does not include the right of disposal; it is limited to retention pending payment of the bill. As such, the right of retention is a personal right, not a security right. A security right is a form of property right over the asset itself. This is why it forms an alternate source of payment.
B.Hypothecary and Title-Based Concepts of Security
1.Concepts of Security in the CCQ
The CCQ’s principal form of security is the hypothec, particularly for immovables. The CCQ recognizes a multiplicity of security devices with respect to movables, including the hypothec and title-based forms of security: sale with a right of redemption, trust, instalment sale, and leasing.
a.Hypothec
Requirement to publish: YES
Requirement that the creditor must observe the rules that apply to the hypothecs when seizing assets: YES
As per CCQ 2660, the Code’s principal form of security is the hypothec.
However, in looking at security under Quebec law, can’t limit yourself to the book on hypotheques – also have to look at the law of sale and trust
CCQ 2660 / A hypothec is a real right on a movable or immovable property made liable for the performance of an obligation. It confers on the creditor the right to follow the property into whosever hands it may be, to take possession of it or to take it in payment, or to sell it or cause it to be sold and, in that case, to have a preference upon the proceeds of the sale ranking as determined in this Code.The advantages of holding a hypothec include
(i)droit de suite(hypothec is a real right)
(ii)right to enforce the interest against the collateral in cases of default: specialized remedies
- possession
- taking in payment (only with consent of grantor [unjust enrichment issue see Section VIII. Enforcement]
- selling/causing to be sold
- application of proceeds in satisfaction of the obligation
(iii)preferential priority over unsecured creditors
In a hypothec, the grantor remains the owner.
Civil Code recognizes other institutions, beyond the hypotheque, that where title can also be used as security OUTSIDE the rules of hypotheques.
b.Sale with the Right of Redemption
Requirement to publish: YES (for road vehicles or other property determined by regulation)
Requirement that the creditor must observe the rules that apply to the hypothecs when seizing assets: YES (with some ambiguity)
In a sale with the right of redemption, the seller retains the right to have the ownership returned to him, upon fulfilment of the condition set forth in the agreement. This is defined at CCQ 1750.
CCQ 1750 / A sale with the right of redemption is a sale under a resolutory condition by which the seller transfers ownership of property to the buyer while reserving the right to redeem it.A right of redemption in respect of a road vehicle or other movable property determined by regulation, or in respect of any movable property acquired for the service or operation of an enterprise, has effect against third persons only if it has been published; effect against third persons operates from the date of the sale provided the right of redemption is published within fifteen days. As well, the transfer of such a right of redemption has effect against third persons only if it has been published.
Borrower transfers title in a piece of property to the creditor