Secured Transactions OUTLINE – SPRING 2010

Professor Heather Raven

Important Definitions:

Collateral “personal property that is subject to a security interest” If no SI, just personal property

  • To do this, there must be an obligation for payment/performance, and the debtor has to agree to convey an interest in their personal property to the creditor (chattel mortgage), OR agree that the creditor can keep the title until such time as the entire obligation is discharged (conditional sales agreement)
  • Any personal property can become collateral – personal property is all that which is not real property

The possessor of the personal property grants the SI, as soon as SI attaches it becomes collateral

7 types of personal property can become collateral

  1. Money (actual, not credit or cheques)
  2. Chattel Paper “means 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”
  3. Instrument – cheques, bill of exchange, letter of credit
  4. Security – a share, stock, warrant, bond, debenture or similar record
  5. Document of Title – writing covering identified goods, stating they will be delivered to a named person
  6. Intangibles – tend to be accounts, can be IP
  7. Goods – always tangible – 3 types – the use of the good at the material time determines the category it will fit into (material time s. 1(4) = attachment of SI)
  8. Consumer Goods – primarily for personal, family or household purposes
  9. S. 67 – if a debtor defaults and have a SI in CG’s, you can either seize the CG’s in full satisfaction of debt or leave them with the debtor and sue for debt
  10. Other kinds of collateral allow you to seize, sell AND sue, so CG’s not often used as SI’s
  11. Inventory – raw materials, work in progress, held for sale or lease, materials used or consumed in business
  12. Equipment

Security Interest means interest in collateral that secures performance of an obligation…

(a) 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 BUT DOES NOT INCLUDE the interest of a seller who has shipped goods to a buyer under a negotiable bill of lading [represents title to the goods] or its equivalent to the order of the seller or to the order of an agent of the seller, unless the parties have otherwise evidenced an intention to create or provide for a security interest in the goods, and

(b) the interest of (certain transactions)

(i) a transferee arising from the transfer of an account or a transfer of chattel paper,

(ii) a person who delivers goods to another person under a commercial consignment, and

(iii) a lessor under a lease for a term of more than a year,

whether or not the interest secures payment or performance of an obligation

Note: this is defined broadly to get as most things into SI as possible – as long as the creditor has an interest in the debtor’s personal property & that interest secures payment or performance then = SI.

PPSA/Scope of the Act

2-3-4-9-19-12

  • These are the basic sections of the act that gets us into the act
  • These sections tell us if the act applies to our fact pattern

Overarching question – is the transaction in a debtor/creditor context? (Skybridge)

NO: PPSA doesn’t apply

YES: s. 2 – does it in substance create an SI?

YES: is it explicitly excluded by s. 4?

YES: Not covered by PPSA

NO: Covered by PPSA

NO: is it deemed included in s. 3?

YES: Covered by PPSA, except for Part 5 Remedies

NO: Not covered by PPSA

Section 2 – Scope of the PPSA

(a)applies to every transaction that in substance creates a SI (secures payment or performance of an obligation), regardless of form and w/o regard to the person who has title of the collateral AND

(b)Includes: (IF they secure payment or performance of an obligation)

  1. Chattel mortgage
  2. Conditional sale
  3. Floating charge
  4. Pledge
  5. Trust indenture
  6. Trust receipt
  7. Assignment
  8. Consignment
  9. Lease
  10. Trust
  11. Transfer of chattel paper
  • When looking at a transaction to determine whether PPSA applies, look at substance not form.
  • Parties can call it anything they want. But even if there is a clause that says “no PPSA application”, the act can still apply

Section 3 – Deemed inclusions into PPSA(subject to s. 4 exclusions)

Security interests that do not secure payment or performance (NOTE – Part 5 Remedies don’t apply)

(a)Transfer of an account or chattel paper

(b)Commercial Consignments

-Do both consignor & consignee deal w/ good of this kind in OCB?

-If so, does the consignor reserve and interest in the goods after delivery?

-EXCLUSIONS

  1. Consignment to auctioneer, or
  2. Commercial consignee generally known in the area to be selling goods of others
  3. Based on general knowledge, not that of specific creditor, but classes of creditor – objective test Furmanek

(c)Lease for a term of more than one year – includes: s. 1(1)

-Leases for an indefinite term

-Leases w/ potential to extend beyond one year

  1. Lessee keeps goods over year w/ consent of lessor
  2. Renewable option of one of the parties

-Exclusions

  1. Lease where lessor not regularly engaged in business of leasing goods
  2. Leases of household furnishings as part of a land lease IF they are incidental
  3. Lease of a prescribed good

Section 4– Deemed exclusions from PPSA, even if SI created

  • A lien, charge, or other interest given by statute or rule of law
  • Excludes non-consensual Sis

Four themes:

  • Non-consensual interests
  • PPSA founded on idea that transactions involving debtors and creditors are consensual transactions
  • Transaction falls w/in federal jurisdiction
  • Transactions dealt with in LTA or other legislations
  • If no other legislation, PPSA will apply (NOTE: very unlikely to find an interest in land not covered)
  • Specific exclusions dealing with accounts

True Consignment or Security Consignment – Toyerama

True Consignment / Security Consignment (If secures pymt s. 2(b))
-Automatic right of return***KEY
-No obligation to pay until sold or shopped
-Purpose of the transaction
- Ability to take goods back (not as seizure) / Suggest Sec Con:
-Consignee can set price (& keep profits)
-Consignee bears risk of loss or damage
-Consignee has right to buy goods and then sell them on his own account
- Obligation to buy

Consignments

Consignor delivers goods to consignee (authorized to sell/dispose of, remit money back to consignor). Consignor retains title until it is passed to a buyer on sale

  • 3 kinds for PPSA purposes
  • 1. True Consignments (aka common law consignments)
  • 2. Security Consignments
  • 3. Commercial Consignments
  • Characterization very important
  • Used a lot, particularly by small businesses – for people who don’t want huge amounts of debt from the bank or vendors – but want enough inventory to sell
  • Jewelry example (Furmanek v. Community Development) – the consignor maintains title but owner of store has possession for purpose of selling
  • Every time piece is sold, money goes into separate account for the person who consigned the jewelry
  • Trusts often used in consignments – beneficiary is party who consigned that piece of sold jewelry
  • Possession often looks like ownership
  • Can only consign goods(no other types of personal property) for PPSA purposes – not investment property or money

True Consignments (Common Law)

NOTE – PPSA doesn’t apply

  • Three important distinctions
  • 1. Consignee has no legal obligation to buy the goods
  • 2. Consignee has no legal obligation to pay until goods are sold
  • 3. Consignee can return goods with no service charges (unrestricted right to return)
  • The consignor delivers goods to the consignee and gives the consignee permission to do stuff with it - usually, to sell it
  • In a C/L consignment, the consignor must always maintain title
  • There will be a clause in the consignment contract it will say, I have title, you have possession
  • Usually a clause in K that says, as soon as a piece of consigned goods sold to buyer, title passes from consignor to the buyer
  • A consignee CAN voluntarily agree to purchase and therefore get title, but not likely
  • If it’s a true or C/L consignment, the PPSA does not apply
  • This is situation in Furmanek
  • All the different creditors are trying to boot out each other claiming that they are c/l relationships
  • The return response was NO, I have a security consignment
  • So knowing the type of consignment is very important

Security Consignments/Lease – PPSA does apply

  • Same set up – consignor delivers goods for the consignee to use
  • Buyer comes in, makes a purchase, title transfers
  • If there’s a tousle over security vs. true consignment then it usually comes down to contract interpretation
  • Markers of security consignment vs. other
  • 1. Express or implied obligation on part of consignee to buy some or all the consigned goods. If there’s an obligation to buy at some point, this is termed a FORCED PURCHASE
  • 2. There may be no right of return or a restrictive right of return of the goods (for example, only 25% of unsold goods)
  • 3. Or there may be a requirement for the consignee to pay a predetermined amount of money at a predetermined time – regardless of whether goods have been sold
  • This is a disguised loan transaction – not loaning money to debtor but forcing them to keep it or pay you a particular amount of money it’s a forced sale
  • So, this is a transaction that secures money or performance – and therefore falls under the PPSA s. 2

Commercial Consignments – PPSA applies

“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,

(a)in the ordinary course of the consignor’s business, deals in goods of that description, AND

(b)reserves an interest in the goods after they have been delivered,

BUT does not include an agreement under which goods are delivered

(c)to an auctioneer for sale, OR

(d)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 (ie pawn shops)”

  • Note that this definition of commercial consignment is unique to the PPSA
  • Consignments that in substance do not secure payment or performance, fall under s. 3
  • Use looks like possession
  • Rationale: No need to provide notice to creditors because its already general knowledge
  • Two important differences that move CC away from a security consignment
  • First - Definition – consignment where both consignor and consignee deal with goods of that description – when look at Toyerama, both Regal and Toyerama dealt with toys
  • When defining goods, toys are toys, we aren’t looking at different kinds of goods
  • The consignor must retain an interest in the goods (usually, title but it is possible that it’s use or other type of interest)
  • Second difference – the types of commercial consignment transactions are more broad than other consignments
  • The definition – a consignment under which goods delivered for sale/lease or ANY OTHER KIND of disposition
  • True consignments – delivery for sale
  • Security consignments – secures payment or performance
  • Exceptions: IF it is generally known to creditors in that business that the consignee deals with goods belonging to others then it is not a commercial consignment
  • It could be security but not commercial
  • Lots of things are not commercial consignments
  • If either consignor or consignee don’t ordinarily deal in goods of that description, cant be a CC
  • Ex. Have a furniture store – have a dining room table that is set up with linens and dishes that they use as props to sell furniture
  • They decide they don’t want props anymore so send them to someone else to sell for them
  • This is NOT a commercial consignment – the furniture store doesn’t normally deal in goods of that type – they sell furniture, not the props
  • IMPORTANT – definition part d

Conditional Sales Agreements

  • PPSA s. 2 applies
  • Vendor finances purchase to buyer, Vendor = Creditor; Buyer = Debtor (only 2 parties)
  • More cost offloaded onto debtor/buyer, but the creditor/vendor takes on more rise
  • The D/B gets possession and use, but the C/V retains title until full price (plus interest and surcharges) is paid
  • If deault, the Creditor has right to seize and sell (no need for court order)

Leases

Granted Leasee possession and use in exchange for money over specified period of time

  • Lessor retains title
  1. True Lease for less than 1 year
  • PPSA doesn’t apply
  • Payments made by leasee are only for use of item, at end of term required to return to lessor
  1. Lease for More than a Year
  • PPSA s. 3(b) applies, s. 1(3) possession requirement
  • Policy – possession looks like ownership, registration prevents fraud
  1. Disguised Sale/Hire Purchase Agreements
  • PPSA s. 2 applies, creates SI
  • Express or implied obligation for leasee to buy (during or at end of term) is really a disguised conditional sales agreement
  • Look at
  • 1. Intention
  • 2. Deposit
  • 3. Whether option to buy at end is less than market value
  • 4. Indicia of ownership (Newcourt Financial)

Skybridge Holdings (1999, BCCA)

TEST to determine if trust covered by PPSA: objective, look at (1) purpose/context of transaction; (2) the relationship of the parties; (3) the practicality/commercial reality of transaction; (4) intention of the parties

Re Ontario Equipment Ltd (1981)

Facts: Whether a lease of a truck for term of 3 years, at end of which the lessee was entitled to buy the truck, is a lease intended as security under s. 2 of the PPSA and so must be registered under Act to protect lessor’s interest against the trustee in bankruptcy of the lessee

  • Trustee submits that the transaction is one of purchase and sale on the security of the lease which has not been registered under the PPSA and so the interest of the lessor as owner of the vehicle is subordinate to that of the trustee

Decision

  • Essential component of lease intended as security in the PPSA is that the property is ultimately to pass to the lessee, who is obliged to pay the lessor a reasonable purchase price
  • Test to determine if an agreement is a true lease or conditional sale is whether the option to purchase at end is for a substantial sum or a nominal amount
  • Critical issue of every case is intention of the parties
  • Here, no obligation to take title at end of lease term – may elect to or not
  • Lease is nothing more than straight forward leasing arrangement, trustee’s action dismissed

Newcourt Financial Ltd v. Frizzell (2000, BCSC)

Test for distinguishing true lease from security lease

Facts: Chrysler leases Jeep to F, then Chrysler assigns lease to NCF who is therefore the lessor. F misses payments, NCF tries to repossess and asks for court order compelling surrender of jeep and reimbursement for unpaid payments and interest.F claims lease was SI, not true lease (wants it to fall under s. 2 b/c wants Part 5 remedies, including ability to pay back the arrears, keep the jeep, and keep good financial standing). NCF claims it is a lease under s.3 because they want the jeep back.

  • The Jeep is a GOOD
  • Recall the 3 types of goods – here, we have a consumer good b/c F was using the Jeep for personal purposes
  • Essential to know the type of good to know how to properly perfect your security interest, and if there’s a default, consumer goods are treated much more generously – creditor can only come, take and sell – can’t seize and sue
  • W/ equipment and inventory, the creditor can come and take, sell and then sue the debtor for the difference in money owed from the amount they get from the sale

Issue: Is the lease a true lease (common law applies) or security interest (s.2)?

Decision: Gives 4 factors to consider in a determination of true lease vs. security interest

DOESN’T matter what the parties call it – not determinative

  1. Intent (was it to secure payments or provide payments for use?)
  2. Purpose/Existence of Deposit (was a deposit required? Was it refundable?)
  3. What will happen at end of lease – forced buyout or option to buy at less than market value
  4. Crucial factor
  5. Looks to clause 25 of the lease – at the end, F had option to purchase the Jeep or return it
  6. She could pay a particular price (not set out in dollars and cents) “genuine pre-estimate of the vehicle’s fair market value on the day the lease was scheduled to end”
  7. Court decides automatically section 3 applied b/c was lease for more than 1 year
  8. But Part 5 doesn’t apply so F can’t reinstate the payments and keep the Jeep
  9. IF she had to purchase, that clearly would have been a security lease and would have fallen into s. 2
  10. Indicia of Ownership (who pays for insurance, mechanical upkeep)
  • If there is an unfettered right/option to purchase for less than the market price, the courts will always find a SI b/c courts will say you have equity in the item
  • Ending: F had to forfeit the Jeep

Re Toyerama v. Regal (1980, ONT SC)

Facts: R consigns toys to T, which was a discount toy store. Clause in the contract stated that when T sells/delivers to a third party, money will be paid per unit to R. The contract did not address what would happen at the end of the agreement with regards to ownership. T goes bankrupt, still has lots of R’s property. Toyerama’s trustee in bankruptcy wants the property to pay secured creditors, but R says the property is theirs under a commercial consignment and we want them back.

Regal’s argument: Ont PPSA doesn’t apply b/c its either a true or commercial consignment, and under c/l rules they would get the dolls back

  • In ONT, only security consignments covered by the act
  • Toyerama trying to characterize it therefore as a security consignment

Issue: Was it a commercial consignment or creation of a SI?

NOTE: This case from Ontario – PPSA different, commercial consignments not covered

Decision:

  • Toys in Toyerama’s inventory at time of bankruptcy belong to R
  • Dolls already shipped out and T either has the money for or is owed money for belong to T
  • Because the obligation to pay has arisen (payment or performance) and therefore they fall under the PPSA
  • R didn’t register it’s interest, and so they fall after the secured creditors

What would have happened in BC?

S.2 – Did it secure payment or performance? No, no obligation to pay until after sold, so this would not be classified as a security consignment

  • But don’t stop there! Go to s. 3 deemed inclusions….

S. 3 – was it a commercial consignment? Need both (a) and (b) and neither of (c) or (d)