Business Borrowing
Why?
To invest in things that the business doesn’t have the capital to do
Spreading the risk of failure (creditor takes some of the loss
Leverage can use it to get a higher rate of return than would be available on the business’ own capital
Foundation of any security interest agreement: if A doesn’t pay, B takes the interest and sells it to cover the loan. If A pays, keeps property.
Lenders tailor their interest rates to the risk (among other factors). Security interests reduce the risk, and therefore allow for lower interest rates.
How Did Borrowers Give Security?
16th C England – The Pledge
Give an item to the lender as a pledge that you will repay a loan
Still exists today – pawn shops
Rules:
If you pay back the money you borrowed, you get the item back. If you don’t pay the money borrowed, the lender gets to keep the item.
19th C – Conditional Sales Agreement (CSA)
Borrower needs to hold the item for some reason, can’t relinquish physical possession
E.g. Borrower wants to buy item, agrees w/ vendor to pay over time. B gets possession, and gets to keep as long as payments are being made. If everything is paid, title will be transferred from V to B.
Vendor in this scenario is an unpaid vendor. An unpaid vendor is a money lender.
Take the risk, being paid back gradually – same position as a traditional money lender.
19th C – Chattel Mortgage
If vendor doesn’t want to be a money lender (i.e. wants all the money paid up front), buyer can go to bank/third party lender and get a loan to purchase the item.
V is paid up front; buyer takes possession
Buyer transfers title of the item to the bank/lender.
If pays everything, bank will transfer title to buyer. If not paid, bank will sell item and recoup losses from the proceeds.
Registration Requirement
NB: Nemo dat
If buyer doesn’t have title to the item, can’t sell it to a third party or offer it as security to a lender.
Vendor who holds actual title would prevail.
When CSA made, must file document in central public registry. So when buyer wants to sell loom to new purchaser or get loan from bank on strength of the security, the new purchaser or bank can check the registry.
Registry statutes had to be accompanied both by the lure of this safer business practice for buyers and lenders, and by attaching penalties to unregistered agreements.
If not registered, there were certain parties against which the party (initial borrower/buyer) would be prohibited from enforcing their title rights against:
1. BFPs;
2. Other creditors;
3. Other secured creditors (such as the bank)
4. Judgment creditors
Chattel Lease
Vendor (now lessor) leases property to purchaser (lessee), giving P possession while P makes lease payments over time
If make final payment, title transfers
Option to purchase at the end (sometimes an obligation to purchase at the end)
Can accomplish the same thing as a CSA, and covered by registry, though separate statute.
Disguised security agreements
Consignments
Transfers of accounts receivable
these could make someone look like they owned valuable property, w/ potential to deceive/defraud others into giving credit/property/money when ≠ actually own item
Legislation
Several provincial statutes dealt with these issues
Now all in PPSAs
Article 9 of US Uniform Commercial Code:
Adapted into Canada. Basically every Canadian jurisdiction has an adaptedß version of Article 9.
Personal Property Security Act [PPSA]
Background
Gathers all of these sorts of financing methods and calls them all ‘security interests’
Governs every document that it designates as a security interest.
Regulates creation and effectiveness of security interests
Brings in some transactions ≠ true security interests, but which have the same capacity to deceive people as to true ownership (deemed security interests).
If you don’t register, there are consequences.
Not protected against same 4 groups from above.
Under the old statutes, a problem:
Set period for which registration was valid; when expired, ≠ registered any longer. This had unpleasant consequences.
Under PPR, you pick your registration period – can choose anywhere from a year to infinity.
Allows for rationalization of priorities
What is Captured?
Jurisdiction (Conflict with other Laws)
General Rule: S. 73: Conflicts with legislation in general
Subject to section 74, if there is a conflict between this Act and any other Act, this Act prevails unless the other Act contains an express provision that it, or a provision of it, applies despite the Personal Property Security Act.
So, in most cases, PPSA will be the presumptive governing legislation. But...
S. 74: Conflicts with land title or consumer protection legislation
(1) If there is a conflict between a provision of this Act and
(a) the Business Practices and Consumer Protection Act or a provision for the protection of consumers in any other Act, or
(b) the Land Title Act,
the provision of the Business Practices and Consumer Protection Act or other Act, or the Land Title Act, prevails.
(2) Nothing in subsection (1) affects the application of sections 36, 37 and 49 to the Land Title Act.
So, consumer protection and LTA legislation take precedence over PPSA.
Note: not all provinces have made their LTA the dominant act, but we have in BC (probably due to a guy with political clout at the time PPSA was made)
S. 75: References to other Acts
(1) A reference in an Act, regulation, agreement or document to the Book Accounts Assignment Act, R.S.B.C. 1979, c. 32, the Chattel Mortgage Act, R.S.B.C. 1979, c. 48, the Company Act, the Manufactured Home Act or the Sale of Goods on Condition Act, R.S.B.C. 1979, c. 373, that relates to a security interest is deemed to be a reference to this Act or to the corresponding provisions of this Act.
(2) A reference in an Act, regulation, agreement or document to a chattel mortgage, conditional sales contract, floating charge, pledge, assignment of book accounts or other similar agreement is deemed to be a reference to the corresponding kind of security agreement under this Act.
PPSA Gives Pre-Eminence over Other Legislative Means for Collecting Money
Or at least, it gives the chance to take pre-eminence, by perfecting the security interest.
There are certain parties (listed in s. 20) who will always win out over an unperfected SI, but properly perfected SIs will prevail even over these parties (judgment creditors, TiB, BFPs for some SIs). [Marine Buildings Holdings Ltd. v. Proton Engineering & Construction Ltd.]
Perfection: SI has the strongest protection it can get.
Doesn’t mean it will always prevail over other creditors, but it’s the best position this creditor can be in.
PPSA is primarily provincial.
Property & civil rights transactions (mostly)
Collateral is often easily moveable, meaning we get into jurisdictional questions
How do you know which province’s registry to search?
Where do you file a F/S?
Determining the Appropriate Jurisdiction
Sections 5-8 (5-7 are most important)
Section 7 is the controlling section 5 says it’s subject to 6-8; 6 says it’s subject to 7.
7(2) S. 7 applies to:
SIs in intangibles
Goods but only particular types.
Excludes foreign registered ship (covered by maritime law)
Goods of a type normally used in more than 1 jurisdiction, if goods are equipment or inventory leased or held for lease by debtor for others.
So, the specific goods don’t have to be used in more than one jurisdiction, it’s just that it’s a type of goods normally used in more than one jurisdiction
So, e.g., motor vehicles; aircraft; earth-moving equipment; cranes.
But note: goods must be equipment, or inventory leased or held for lease by debtor to others
Non-possessory SI in an instrument, negotiable doc of title, money or chattel paper (things where you don’t take possession)
Rule to determine perfection: look at debtor location.
7(1) defines where a debtor is located.
(3) if debtor relocates or transfers collateral to someone in another jurisdiction, then:
SI remains perfected in BC if it’s perfected in the new jurisdiction in accordance w/ this timeline:
Take the date of relocation, then 60 days from that.
Did the original creditor, at any time w/in those 60 days, find out about the relocation or transfer?
Say they found out at Day 10. Take 15 days from the date of knowledge (Day 25).
At any time in the 60 day period, did the registration in the original jurisdiction expire?
Suppose it expired on Day 40?
Take the earliest of the three dates 25, 40 and 60 in this case, so day 25 is the date by which SP needs to register in the new jurisdiction. Otw unperfected.
Things that could vary:
Date of knowledge if they don’t find out until just after 60 days, the date of knowledge +15 days = 76.
Expiration Date some reg’ns don’t expire, so there IS no date.
60 days is the hard limit can’t have more than 60 days to reregister/reperfect.
Process:
First, consider which of 5, 6, 7 governs the place you need to check and the place you need to register.
Debtor = trucking company; truck traveling b/w Vancouver and Kelowna s. 7. It’s of a type that is commonly used in multiple jurisdictions.
Now find out the place of business, or head office if they have one to know where to register.
Say Toronto.
Where do I look to see if there are pre-existing SIs in the truck
First: PPR in the jurisdiction of their office. So, Ontario in this example.
If situation changes (i.e. relocation), you have to reperfect w/in the time frames discussed above.
Note: you can reg a FS at any time, so you don’t have to wait for the relocation to happen, etc.
What if it’s not s. 7?
S. 6: if the parties to SA agree that goods will be kept in another jurisdiction
E.g. people buy a car in a different province than they live.
(1) If goods are removed to the other jurisdiction w/in 30 days of SI attaching, then perfection etc. are governed by the other jurisdiction
(2) If the goods are removed but later brought back to BC: SI is deemed to be an SI under s. 5(3) (so long as it was perfected in the other jurisdiction)
Basket section is s. 5:
(1) We’re looking at the location of the goods place where collateral is located when the SI attaches.
Example
Client selling family car; purchaser is just an individual. Both parties (and the collateral) are in Victoria
1. What section?
≠ s. 7. mobile goods, but not equipment.
≠ s. 6, b/c not planning to move the goods.
So, s. 5!
2. How to perfect?
It’s all in BC, so file FS in BC. Note: generally not worth it to file in multiple jurisdictions in a situation like this.
3. SI from another jurisdiction will remain perfected if you reperfect w/in the timeline.
Say the individual bought the car in AB when living there. Creditor properly reg’d in AB PPR. Now they bring the car to BC.
AB creditor must reperfect FS in BC in the time frame we discussed above in s. 7 context (same time frame/limits – 15 days after knowledge; date of expiry; 60 days hard line after date of relocation)
BUT: this SI is subordinate to someone who acquires SI w/o knowledge of the SI and before it is perfected in BC
Basically, BFP gets priority. Protection for innocent buyers! But this only applies to s. 5 and 6 goods s. 7 mobile equipment etc. – no protection for BFPs.
Juckes (Trustee of) v. Holiday Chevrolet Oldsmobile (1983) Ltd. [1990, SKQB]
S 7 equivalent.
BC and SK both had provisions treating leases for +1yr as SIs; so you have to take same steps to protect as if true SIs.
But in Manitoba, Holiday didn’t have to do anything to protect themselves – and they didn’t.
Juckes sent truck to SK & moved his business (change in debtor location), then went bankrupt
When debtor relocated to SK, creditor didn’t rereg, even though SK treated it as a SI.
They were way out of time, and then the TiB came along and tried to take the truck, b/c ≠ reperfect.
Court noted a rule in SK PPSA similar to our 8(2)
So, if you consider Manitoba: Holiday didn’t have to do anything, b/c common law applied and they were the owner of the truck.
For all intents and purposes, we could consider the interest of Holiday to be perfected in MB. SO, when the place of business changed to SK, to protect itself H should have perfected under SK PPSA, or become unperfected.
They didn’t do so, therefore TiB wins.
COMMENTARY: case has been heavily critiqued by ppl who say court should have applied the equivalent of our s. 7(4)
If the law governing perfection doesn’t req’ public registration, or notice relating to it, then SI is subordinate to
(a) an interest in an account payable in BC, or
(b) an interest in goods etc. that was acquired when the collateral was located in BC
SK had identical provision.
Note: MB now has a provision treating long term leases as SIs, but at the time they didn’t req’ registration for perfection.
Court said it didn’t apply, b/c MB had a system for reg’n of SIs said (4) only applies where there’s no system for reg’n of SIs at all.
But...there’s no jurisdiction we’re likely to look at that doesn’t have some kind of reg’n system. Argument that (4) didn’t mean no system at all, but meant that the particular thing in question didn’t have to be registered.
Now, there’s actually an argument that (4) wouldn’t have made a difference anyway:
If SK (4) applied, the interest of Holiday would have been subordinate to an interest in the truck acquired when collateral was in SK (unless H’s interest was perfected, which it wasn’t.)
But, argument that TiB didn’t ‘acquire an interest’ – arguable that that would be a purchaser or another SP. However, there is some indication in case law that TiB does takes charge of property for bankrupt, SIs are crystallized etc.
In order to make a diff, you would have to say the TiB ≠ get an interest [or, did??] in the goods if the sn applied. Seems iffy, unlikely this sn would make a difference anyway.
Re Searcy [1991, BCSC]
Young man and his father co-purchase a vehicle. (co-debtors)
SI on vehicle. Originally purchased and parties originally lived in Calgary.
S. 5 goods.
So, you’d reg in AB
Problem: Junior moves to BC in Feb and then goes bankrupt (March 1st)
TiB usually makes inquiries about who might have interest in bankrupt’s property, sends letters.
So, sends letter to GMAC, who got the proof of claim and mailed it in, then reg’d SI in the truck in BC on April 5th .
Problem: they filed w/in 60 days, but not w/in 15 days of getting notice.
Got notice on March 8th that he was in BC and bankrupt (had his address on the notice), and therefore must have known the vehicle had moved but they argued although they knew HE had moved, they didn’t know the vehicle itself had moved. Payments were still being made, etc.
Held: they didn’t have knowledge. April 5th registration was ok.
Objective test: have notice when reasonable person in all the circs etc. would have had notice.
For a corp, info must come to mging director or senior em’ee w/ resp for those matters
So, first req’mt: Who got the info?
Second req’mt: info must come under circumstances where reas person would take cognizance of it.
So, when would a reas person have known the car was in BC?
Court in this case didn’t get into this detailed analysis – just said ≠ enough knowledge.
GMAC won, TiB lost, held to have reg’d in time.
Northwest Equipment v. Dewoo
S. 5 goods
Excavator, bought in BC by BC company, moved to Washington State
Dewoo (creditor) ≠ know about or consent to sale.
Then moved (again w/o creditor’s knowledge) to AB
Issue 1: OCB sale? In that case, Dewoo’s interest would be cut off
Held: Court finds ≠ OCB sale
Reasons
1. Sold not as inventory, but in bulk as part of a sale of ¼ of inventory.
2. Sold for shares and vendor normally sold for cash
3. Purchaser was a dealer (held equipment/inventory for lease), not usual kind of customer that debtor normally sold to
4. Transaction was completed on the eve of insolvency (always suspicious), and transaction was never advertised
So, not cut off.
Issue 2: Consented? No.
Originally perfected in BC, then taken to Washington state as goods held by Northwest (which was located in Washington)
Dewoo failed to reregister.
Then goes to AB, and they again ≠ rereg
Ultimately, lost perfection in the excavator
Court says that doesn’t matter SI continues and was properly perfected at time of sale. The fact that it became unperfected later doesn’t extinguish creditor’s interest.
NW got their interest subject to DW’s SI, and even though it later became unperfected they can’t just ignore it now.
NW argument: in AB, they leased the excavator to another company. When they leased it they reg’d FS in AB PPR w/ respect to the lease.
So, now NW has perfected, DW has unperfected, so NW says they take priority as holders of validly perfected SI.
But: court says your lease to 3rd pty co wasn’t a SI not a true SI, not a lease for more than one year. So, since no SI, FS has no effect.
So, became unperfected, but since they were perfected at the time NW came in, they keep their priority.
Also: even if the lease created an SI, you wouldn’t apply s. 35(1) (as NW tried to)
This is more problematic – probably right, but maybe not.
Two-debtor problem: 35(1) doesn’t say “given by the same debtor”, so it can resolve
But here: at time of transaction, the operating mind of NW was the manager of the original debtor (who sold the stuff to NW). So, obv this was a corp deal whereby he then became a senior em’ee, and he then handled the lease in AB.
Why did NW make the lease and file the FS? Court suggests they’re trying to create a new SI which they can use to defeat another SI they were already aware of trying to use the Act to perpetrate fraud. That’s the reason the court doesn’t let 35(1) apply.
This is just dicta, because there was no SI anyway, but Waldron is concerned about the 35(1) thing if it were a SI and NW had properly reg’d FS, 25(1) should have been applicable, but likely the only reason it wasn’t is because it was an attempt to perpetrate a fraud on DW by the original debtor.
Fraudulent? Probably yes. Had actual knowledge, sold out from under DW, and now seem to be trying to use the provisions of the Act to take clear.
It’s kind of problematic on this point, but it’s probably ok.
Advanced Diamond Drilling
Braidwood – experienced commercial judge
Cut through the effort to recharacterize.
Facts
Tractor unit and trailer. At time of purchase, everyone/thing was in Ontario, but then moved to BC.
Two Creditors:
Roynat – held debenture (SI in all prop) over
National Bank Leasing – two lease agreements over the tractor and the trailer.
NBL reg’d first, had properly perfected SI in ON over the tractor and trailer
Roynat also reg’d, but second. So priority was clear at that time.
But then, T&T brought into BC.
Parties do re-reg, but in the opposite order. RN 1st, then NBL.
Issue: so now the two creditors are fighting in BC – who has priority?
Held: NBL wins.
Reasons
Simple answer: Clearly s. 7 goods. Validity of perfection is governed by jurisdiction in which debtor was located – Ontario. Debtor hasn’t moved, still there, everyone’s still properly perfected in Ontario, etc.
Note: there are more arguments on the other side, b/c the law is slightly different in ON, so we’ll look at these as well.
Recap next day:
To determine perfection, look at jurisdiction where debtor resides. Ontario. So, determined by date of reg of FS.
That’s the end, except some arguments counsel raised about the ON provision.
Their reg system req’d registration where the collateral was located.
Also, their s. 8(2) said the applicable law was the law of jurisdiction where collateral was located, including the conflict of law rules of that jurisdiction. So, counsel said s. 7 sends us to ON, which says you reg where collateral is located, which sends you back to BC law, and therefore the applicable registration is in BC.
Court says no: you don’t have to look at conflict of law rules in ON at the time the SIs attached, they were properly created and attached in ON. It’s still the debtor’s jurisdiction (place of business), and you don’t flip back to BC.
Basically, at the time SIs attached, only relevant law was law of ON, and everything was done properly there and still applies.
Otw could have just kept flipping back and forth b/w ON and BC law forever
Process for Assessing Jurisdiction Issues:
1. Figure out which section applies
Start w/ s. 7 because it’s the governing section
Is the item covered by s. 7?
Intangibles, mobile equipment, or mobile inventory leased or held by lease by debtor for others
Consumer goods will never fall w/in
If ≠ s. 7, fall back to s. 6
Then residual s. 5
2. Jurisdiction – where do you search and/or register if your client is going to take an interest in these types of items?
3. What do you do if it changes (and how will you know if it does change)?
Scope of the Act: What Is and Is Not Covered?
Test for Determining PPSA Coverage:
1. Is transaction named in s. 4?
If yes, no PPSA.
If no, continue.
2. Does the transaction secure payment or performance of an obligation?
Look to Skybridge factors.
If yes, nothing else matters, all PPSA applies.
If no, next question:
3. Is the transaction:
(1) Transfer of an account or chattel paper?
(2) Lease for a term of more than one year?
(3) Commercial consignment?
If yes, then PPSA Parts 1-4 apply, but not Part 5.
If no, then no PPSA.
Interpretation and Application of the Act – PPSA Part 1
Key Terms & Definitions
Collateral: the things that are subject to a security interest
Includes tangibles (physical property) and intangibles (e.g. accounts)
“Debtor” means
(a) a person who owes payment or performance of an obligation secured, whether or not that person owns or has rights in the collateral,
In most cases, an ‘obligation secured’ is a loan, but it doesn’t have to be. Can be an obligation to perform an act (e.g. mowing my lawn)
(b) a person who receives goods from another person under a commercial consignment,
(c) a lessee under a lease for a term of more than one year,
(d) a transferor of an account or chattel paper,
(e) in sections 17, 24, 26, 58, 59 (14), 61 (8) and 69, a transferee of or successor to the interest of a person referred to in paragraph (a), or
(f) if the person referred to in paragraph (a) and the owner of the collateral are not the same person,
(i) if the term debtor is used in a provision dealing with the collateral, an owner of the collateral,
(ii) if the term debtor is used in a provision dealing with the obligation, the obligor, and
(iii) if the context permits, both the owner and the obligor;
Creditor = party to whom debt is owed
“Secured Party” means
(a) a person who has a security interest,
(b) a person who holds a security interest for the benefit of another person, and
(c) the trustee, if a security interest is embodied in a trust indenture;
“Security Agreement” means an agreement that creates or provides for a security interest and, if the context permits, includes
(a) an agreement that provides for a prior security interest, and
(b) writing that evidences a security agreement;
“Security Interest” means
(a) an interest in goods*, chattel paper*, investment property, 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 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
*goods: physical property
*chattel paper will be explained later – a new species of property designated under PPSA
*instruments: things like cheques; pieces of paper that mean something
*money means actual cash.
*intangible: e.g. accounts receivable (most important category of intangible)
(b) the interest of
(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
consignment: item owned by you given to someone else to sell it for you – they get a fixed percentage as commission, and if not sold you can usually retrieve it or do as you see fit.
Can use consignment as a security interest. These are covered by the definition of security interest – an interest in something that secures payment of obligation...
But, when you send item to someone on consignment, they look like the owner. Hence why PPSA applies – to protect people.
See definition of “commercial consignment”
b/w two parties who deal in goods of that description in the ordinary course of their business
Restricted to real commercial situations, not including second-hand clothing store situations.
Because consignor, to protect their interest, will be required to register or potentially lose their interest to other parties.
(iii) a lessor under a lease for a term of more than one year, whether or not the interest secures payment or performance of an obligation;
Note: ‘lease for a term of more than one year’ is defined in s. 1:
includes:
indefinite term leases, and leases initially for 1 year or less that are automatically renewable or can exceed 1 year
does not include:
leases where lessor is not regularly engaged in the business of leasing goods;
a lease of household furnishings or appliances as part of a lease of land if the goods are incidental to the use and enjoyment of the land
these are governed by real property law, & PPSA excludes them
a lease of a prescribed kind of goods regardless of the length of the term of the lease
Application of PPSA
Three categories that are not covered [see s. 4]:
Things that aren’t consensual
Things the province doesn’t have jurisdiction over
Things in industries that are already highly regulated
s. 2: Scope of Act: security interests
(1) Subject to section 4, this Act applies
(a) to every transaction that in substance creates a SI, without regard to its form and without regard to the person who has title to the collateral, and
(b) without limiting paragraph (a), to a chattel mortgage, a conditional sale, a floating charge, a pledge, a trust indenture, a trust receipt, an assignment, a consignment, a lease, a trust, and a transfer of chattel paper if they secure payment or performance of an obligation.
(2) Despite section 4 (g), this Act applies to a SI in a security or instrument, but does not apply to
(a) a security or instrument that is a mortgage or charge on land if the land mortgaged or charged is described in the security or instrument or in documents held by the issuer of an uncertificated security, or
(b) a security or an instrument that is a mortgage or charge registered under the Land Title Act or with respect to which an application for registration has been made under the Land Title Act.
S. 3: Scope of Act: security interests that do not secure payment or performance
Subject to sections 4 and 55, this Act applies to
(a) a transfer of an account or chattel paper,
(b) a commercial consignment, and
(c) a lease for a term of more than one year,
that do not secure payment or performance of an obligation.
s. 55: application and interpretation of Part 5 – Rights & Remedies on Default
55(2)(a): for interests listed in s. 3, the rest of the Act will apply, but not Part 5
S. 4: Exclusions from scope of Act
Except as otherwise provided in this Act, this Act does not apply to the following:
(a) a lien, charge or other interest governed by a rule of law or by an enactment unless the enactment contains an express provision that this Act applies;
(b) a security agreement governed by an Act of the Parliament of Canada that deals with rights of parties to the agreement or the rights of third parties affected by a security interest created by the agreement, including but without limitation
(i) a mortgage under the Canada Shipping Act, and
(ii) any agreement governed by Part V, Division B of the Bank Act (Canada);
(c) the creation or transfer of an interest or claim in or under a policy of insurance except the transfer of a right to money or other value payable under a policy of insurance as indemnity or compensation for loss of or damage to collateral;
(c.1) a transfer of an interest or claim in or under a contract of annuity, other than a contract of annuity held by a securities intermediary for another person in a securities account;
(d) the creation or transfer of an interest in present or future wages, salary, pay, commission or any other compensation for labour or personal services other than fees for professional services;
(e) the transfer of an interest in an unearned right to payment under a contract to a transferee who is to perform the transferor's obligations under the contract;
(f) the creation or transfer of an interest in land, other than an interest arising under a licence, including
(i) a lease,
(ii) a petroleum and natural gas lease under the Petroleum and Natural Gas Act,
(iii) a lease, issued under the Coal Act, that confers the right to produce coal, or
(iv) any similar interest that is prescribed for the purposes of this section;
(g) the creation or transfer of an interest in a right to payment that arises in connection with an interest in land, including an interest in rental payments payable under a lease of land;
(h) a sale of accounts or chattel paper as part of a sale of a business out of which they arose unless the vendor remains in apparent control of the business after the sale;
(i) a transfer of accounts made solely to facilitate the collection of the accounts for the assignor;
(j) the creation or transfer of an interest in a right to damages in tort;
(k) an assignment for the general benefit of creditors made in accordance with an Act of the Parliament of Canada relating to insolvency;
(l) a mineral claim or a placer claim as those terms are defined in the Mineral Tenure Act.
Re Toyerama [1980, ONSC]
Facts
Regal Toys agreement w/ Toyerama R consigned a bunch of dolls/action figures to T.
Items in warehouse, some sold.
Both companies go into financial difficulty.
T makes an assignment in bankruptcy. TiB appointed to look after unsecured creditors.
Note: SCs generally take first; they scoop their entitlements and then TiB takes whatever’s left and distributes the realized amount to the remaining (i.e. unsecured) creditors, who get a portion of their money, depending on the situation.
Battles often arise between TiB and a secured creditor over who has priority to take property.
In this case, TiB wants to take the property in the warehouse, but Regal is about to seize the dolls itself.
R argues TiB can’t take the dolls, because R holds title and T simply had them on a consignment basis (i.e. bailment).
Waldron thinks this really was a SI: in reality, retaining title as security for the amount owed by T.
Issue: if it WAS a SI, then it’s governed by the PPSA, and TiB will win because R didn’t register a F/S or do anything to give public notice of its interest.
Recall s. 20: unperfected SI will lose to TiB.
Held: Not a SI. R takes it.
Reasons
R and T’s agreement omits something important: they never specified what would happen if T didn’t sell the toys.
This is generally considered the hallmark of a true consignment:
If a used clothing store doesn’t sell your items, they may let you take them back or donate them to charity. They have no obligation to pay you if they don’t sell it. There’s no general purchase price assigned to the item – just an obligation to remit money to assignor if the item sells.
Court considers another case: Re Stephanian’s Persian Carpets Inc.
If there’s no obligation to purchase any merchandise unless sold, then there’s no security arrangement because there’s no debt obligation overall.
So, there was no SI.
Note: in BC, we would need to additionally consider whether the agreement was a commercial consignment (which is included in Parts 1-4 of the Act):
The question: did the creditors of Toyerama know that T was generally in the business of selling or leasing the goods to others?
This question is used because it’s an important factor in trying to protect the interests of innocent third parties.
There isn’t enough evidence in this case for us to determine
Though it seems like T did this frequently, we would need evidence that the creditors would have known they did.
So, even in BC, TiB might have lost.
Leases
Could actually be a conditional sales agreement
Instead of selling and taking payment over time then transferring title at the end, the property is just leased to the person and at the end they have the option to buy
If a lease is intended as SA, PPSA applies to it.
If it is not a SA, but a true lease, then the Act may or may not apply.
If the lease falls within the definition of “lease for a term of more than one year”, then Parts 1-4 of PPSA will apply, but Part 5 never will.
Note: if Part 5 does apply, rights and remedies on default are limited to seize or sue. If Part 5 does NOT apply, then it’s back to Common Law, and the creditor’s remedies are limited only by equity. So, when it’s in doubt, creditors usually want their situation to be found outside PPSA.
DaimlerChrysler Service Canada Inc. v. Cameron [2007, BCCA]
Issue: was there a true lease? If so, only Parts 1-4 of PPSA would apply. If it was intended as a SA, then all of PPSA would apply.
Held: true lease; PPSA Part 5 ≠ apply.
Reasons
Court considered a list of factors that support finding a lease to be a security lease [from Prof. Cuming]:
1. Whether there was an option to purchase for a nominal sum;
2. Whether there was a provision in the lease granting the lessee an equity or property interest in the equipment;
3. Whether the nature of the lessor’s business was to act as a financing agency;
4. Whether the lessee paid a sales tax incident to acquisition of the equipment;
5. Whether the lessee paid all other taxes incident to ownership of the equipment;
6. Whether the lessee was responsible for comprehensive insurance on the equipment;
7. Whether the lease was required to pay any and all licence fees for operation of the equipment at his expense;
8. Whether the agreement placed the entire risk of loss upon the lessee;
9. Whether the agreement included a clause permitting the lessor to accelerate payment of rent upon default of the lessee and granted remedies similar to those of a mortgagee;
10. Whether the equipment subject to the agreement was selected by the lessee and purchased by the lessor for this specific lease;
11. Whether the lessee was required to pay a substantial security deposit in order to obtain the equipment;
12. Whether there was a default provision in the lease inordinately favourable to the lessor;
13. Whether there was a provision in the lease for liquidated damages;
14. Whether there was a provision disclaiming warranties of fitness and/or merchantability on the part of the lessor; and
15. Whether the aggregate rentals approximate the value or purchase price of the equipment.
Most important: if there is no option other than return, it will be considered a true lease unless all of the lease payments together add up to cover a sufficient purchaser price/the whole value of the item, and at the end the item will have no further value.
The agreement provided that lessee had to pay all monthly payments or amounts due and a residual amount less the net amount due. Court said this did not count as an agreement for sale.
CA overturned the TJ, who had followed old law now reversed by SCC
Old rule: if you leased property and the lessor took it back, then that extinguished the lease and put an end to future damages. This is no longer the law.
This can’t be the measure of a true lease – look at the factors.
But the factors are often ambiguous. So, the court focused on what was supposed to happen at the end of the defined lease term. Ask:
1. If the lessee had no option to buy the item, does the item have any value left at the end of the term?
If no value left, then the lessee has used up all the value, as though it were a sale – so this would indicate ≠ true lease.
If there is residual value, then the requirement to return would indicate a true lease.
2. What if the lessee did have the option to buy the property at the end of the lease term?
Is the price nominal, or is it set to represent the real value of the property?
If real value: true lease [Note: burden is on the party seeking to prove a true lease to establish that the amount to be paid is equal to or greater than market value - Newcourt]
If nominal value: paid for the item with lease payments, and it’s really a security agreement.
Newcourt Financial Ltd. (cob Financialinx) v. Frizzell [2000, BCSC]
Facts: Default on lease. Problem debtor, frequent defaults. Lessee goes to court and wants to reinstate the lease so they can be done with the debtor.
Right to reinstate the opposite of an acceleration.
Under PPSA Part 5, consumers have the right to reinstate payments up to two times/year note that this is not dependent on court permission.
Issue: is it a true lease – does Part 5 apply?
It’s clearly a lease for a term of more than one year, but it could be a security lease, which would allow Part 5 to apply. If it doesn’t, then there’s basically no right to reinstate.
Held: True lease. ≠ Part 5
Reasons:
See list of factors:
1. The intent of the parties
2. Was a deposit, down payment or front-end payment required by the lease? If so, was the payment refundable and under what circumstances?
3. Ownership at the end of the agreement and purchase options.
E.g. if the vehicle automatically passes to lessee at the end of the term, or if the option to purchase at the end of the term specifies a price lower than market value, that could indicate that the lease was really a SA
4. Indicia of ownership
If lessee bears burden of repairing and insuring the vehicle, or is to bear any loss or gain from unusual depreciation or appreciation in value, that could indicate whether it’s a true lease or SA.
Trusts
A trust may create a SI, but not always. [see Skybridge Holidays Inc. (Trustee of) v. BC (Registrar of Travel Services)]
Historical example: inventory supplier asked to supply on credit, but wants a security.
One option: I/S can give the retailer inventory on credit, with the retailer as a trustee.
This would mean that money generated from inventory is held on trust for I/S
This gives I/S considerable security: could claim beneficial ownership of the money in the retailer’s bank account
Under the typical model, TiB might claim the funds, but can’t take property that belongs to someone else.
Also, I/S could use equitable tracing rules:
Money paid to retailer by customer is transferred to credit in the bank
Trust beneficiary may be able to follow funds into a mixed-fund account and claim the portion that belongs to them.
Now, though, it’s just a SI: used to secure payment of the obligation.
Under PPSA, it doesn’t matter how you structure things, if the function is to secure payment or performance of an obligation, (which is the case in the example), it is a SI.
Commercial Consignment
S. 1: “Commercial Consignment” means 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.
Furmanek v. Community Futures Development Corp of Howe Sound [2000, BCSC]
Facts:
Jewellery business
Spargo Enterprises wants to buy F. F agrees to sell and take payment over time, but wants part up front.
CF lends money to SE, which they use to pay the up-front price to F.
But, neither CF nor F will lend money without security, of course.
So, CF takes SI over all the property of the business, including inventory.
F takes SI for balance of price, also over inventory.
CF insists on taking first priority, and F has to agree otherwise they can’t get their up-front payment.
Both creditors registered FS, but CF made a mistake in theirs.
Note: this arguably gave F first priority, but the court gave priority to CF anyway because that’s what the parties had agreed to.
Jewellery was consigned by another party: Seca.
Spargo was unable to pay either creditor, and CF and F were in a position to call in their SIs. They appoint a receiver and
Issue: was the consignment by Seca a commercial consignment?
If so, then Seca will lose because it is unregistered.
Held: Commercial consignment. Seca loses out to CF and F.
Reasons:
If creditors of Spargo generally knew that Spargo was in the business of selling goods on consignment, it will NOT be included in the definition of commercial consignment.
F knew, because they had carried on business in that way before.
But CF didn’t know.
Court decided that although F knew because of specialized inside knowledge, creditors generally did not know.
Future Advances (Tacking)
S. 14: Future advances
(1) A security agreement may provide for future advances.
(2) Unless the parties otherwise agree, an obligation owing to a debtor 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) and the secured party has knowledge of this fact before making the advances.
s. 35
(5) Subject to subsection (6), the priority that a security interest has under subsection (1) applies to all advances, including future advances.
(6) A perfected security interest has priority over the interest of persons referred to in section 20 (a) only to the extent of
(a) advances made before the interests of the persons arise, or before the sheriff seizes the collateral or obtains a right to it under the Creditor Assistance Act,
(b) advances made before the secured party acquires knowledge of
(i) the interests of the persons,
(ii) seizure of the collateral by the sheriff, or
(iii) an order giving the sheriff a right to the collateral,
(c) advances made in accordance with
(i) a statutory requirement, or
(ii) a legally binding 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),
(d) reasonable costs and expenses incurred by the secured party for the protection, preservation or repair of the collateral, and
(e) the amount of taxes paid by the secured party under section 27 (1) of the Manufactured Home Act.
There are often future advances in lending transactions – either a schedule of future advances, or more informal advances on lines of credit (which fluctuate).
The amount of the obligation can fluctuate up and down, and the security interest can give the creditor protection for future amounts loaned as well as the current amount owed.
Canamsucco Road House Food Co. v. Lngas Ltd. [1991, ON. Ct. J.]
Facts:
π owns restaurant, but is substantially indebted to CIBC, which has GSA for the debt. Bank has registered the SI
∆ wants to buy the restaurant, but first they have to deal with the debt: the bank will insist on retaining the SI over the goods until the debt is paid.
π says that if ∆ pays the π, π will pay off the bank. But ∆ can’t afford to pay everything up front, so they agree to payments over time, and π will take a new SI in the restaurant equipment/contents to secure that loan.
So, bank has first charge over the assets, and π has second place charge.
To protect ∆ against π failing to pay bank, a provision states that ∆ can take over payments to bank and deduct from the amount owed to π.
This happens: ∆ starts making payments to the bank and deducting from what they owe π
∆ has an affiliated numbered company (936 Inc.). ∆ has 936 give ∆ the money to pay off the bank.
936 pays off bank in full, and bank gives SI to 936. 936 steps into the shoes of the bank, making them the first priority creditor.
Still some $ owing to π.
Then, ∆ borrows more money from 936 to buy equipment etc., giving 936 a third SI in the restaurant.
And then the restaurant goes broke, ∆ can’t pay anyone, creditors converge.
Issue: who has priority?
936’s interest assigned from the bank clearly still has first priority, but who is second?
936 argues their second loan was tacking, and should be considered part of the first SI obligation.
Held: Not tacking – π gets second priority.
Reasons:
It would be super unfair to give it to 936 in this case.
See s. 68: requirement of commercially reasonable behavior
(1) The principles of the common law, equity and the law merchant, except insofar as they are inconsistent with the provisions of this Act, supplement this Act and continue to apply.
(2) All rights, duties or obligations arising under a security agreement, this Act or any other law applicable to security agreements or security interests must be exercised or discharged in good faith and in a commercially reasonable manner.
(3) A person does not act in bad faith merely because the person acts with knowledge of the interest of some other person.
936’s effort to tack defeats the whole purpose of the deal entered into with π in the first place. Therefore, not commercially reasonable, and not allowed.
Acceleration Clauses
S. 16:
If a security agreement provides that a secured party may accelerate payment or performance by the debtor when the secured party is or believes himself insecure or decides that the collateral is in jeopardy, the provision must be construed to mean that the secured party has the right to accelerate payment or performance only if the secured party, in good faith, believes and has commercially reasonable grounds to believe that the prospect of payment or performance is or is about to be impaired or that the collateral is or is about to be placed in jeopardy.
So, the creditor can realize on the whole security
The phrase “believes himself insecure” allows a lot of leeway: no event of default is actually required.
But, the belief must be commercially reasonable debtor usually doesn’t have funds on hand to pay, and in most cases acceleration in this situation will basically destroy a business.
Validity of Security Agreements and Rights of Parties – Part 2
s. 9: Effectiveness of a security agreement
Subject to this and any other enactment, a security agreement is effective according to its terms.
Basically, can agree to whatever you want as long as it doesn’t contradict PPSA.
s. 10: Writing requirements for security agreements
(1) Subject to subsection (2) and section 12.1, a security interest is only enforceable against a third party if
(a) the collateral is not a certificated security and is in the possession of the secured party,
(certificated security: share of company issued in share certificate – don’t worry about this right now)
If the debtor no longer has the property, this gives notice to any future lenders.
(b) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under section 68 of the Securities Transfer Act in accordance with the debtor's security agreement,
(c) the collateral is investment property and the secured party has control under section 1 (1.1) in accordance with the debtor's security agreement, or
(d) the debtor has signed a security agreement that contains
(i) a description of the collateral by item or kind, or by reference to one or more of the following: goods, investment property, instruments, documents of title, chattel paper, intangibles, money, crops or licences,
item: description of specific item
kind: description by category/type of item ‘all the debtor’s chairs’
intangibles: debts & accounts
licences
(ii) a description of collateral that is a security entitlement, securities account or futures account if it describes the collateral by those terms or as investment property or if it describes the underlying financial asset or futures contract,
(iii) a statement that a security interest is taken in all of the debtor's present and after acquired personal property, or
(iv) a statement that a security interest is taken in all of the debtor's present and after acquired personal property except
(A) specified items or kinds of personal property, or
(B) one or more of the following: goods, investment property, instruments, documents of title, chattel paper, intangibles, money, crops or licences.
(2) For the purposes of subsection (1) (a), a secured party is deemed not to have taken possession of collateral that is in the apparent possession or control of the debtor or the debtor's agent.
(3) Subject to subsection (6), a description is inadequate for the purposes of subsection (1) (d) if it describes the collateral as consumer goods or equipment without further reference to the kind of collateral.
Goods under PPSA = 3 categories (all defined terms)
1. Inventory: goods you expect to sell
2. Consumer Goods: [does not overlap with inventory] goods used/acquired for use primarily for personal, family or household purposes.
3. Equipment: residual category if it isn’t inventory or consumer goods, it must be equipment, even if that seems ridiculous. Cows on a farm = equipment.
Equipment and consumer goods are vague categories, can change.
(4) A description of collateral as inventory is adequate for the purposes of subsection (1) (d) only while it is held by the debtor as inventory.
(5) A security interest in proceeds is enforceable against a third party whether or not the security agreement contains a description of the proceeds.
(6) If personal property is excluded from a description of collateral, the excluded property may be described as consumer goods without further reference to the item or kind of property excluded.
The one time you can describe the collateral as consumer goods
In a certain situation, remedy is limited to seizing collateral or suing on the debt. But sometimes you make a mistake and seize consumer goods without meaning to, which is why this subsection exists.
S. 10 is necessary as one of the building blocks of perfection
To have a perfected security interest, you must have attachment. To have attachment, you must fulfill s. 10.
S. 11: debtor to have copy of written security agreement
If a security agreement is in writing, the secured party must deliver a copy of the SA to the debtor within 10 days after it is executed, and if the SP fails to do so after a request by the debtor, the debtor may apply to court to order delivery.
Riepe v. Stingray Holdings Ltd. [2002, BCSC]
Facts
Truck lease; agreement but no one really behaved accordingly – everyone was sort of confused.
Basically, the lease term concluded and R had the option to buy.
He wanted to buy, but he was in default on default on some payments.
R and Vendor decided to go ahead with the purchase anyway, so R kept the vehicle.
Then R sold the vehicle to his son.
R never makes payments, and creditor comes looking for the truck.
R Jr. (son of original purchaser) not precisely a BFP.
Seems likely he would have had notice that payments were due. But this isn’t relevant in this case, since the issue isn’t whether the SI was perfected.
Issue: was there a SA in writing to be enforceable against 3rd parties?
Held: no written SA; R Jr. keeps the truck.
Note: actually there was no SA at all never specified that they would take the truck if he didn’t pay. Most likely the vendor is an unsecured creditor.
Reasons
There was nothing in writing. Thus, not enforceable against 3rd parties, per s. 10
Court says it’s important to comply with the Act, because secured creditors are in the strongest position. If they don’t put it in writing and are then allowed to claim security, other creditors could get screwed over. So it’s important to be firm with the rules.
674921 BC Ltd. v. New Solutions Financial Corp. [2006, BCCA]
Facts: 674 and later NS gave loans to a debtor. After both, 674 got a GSA with the debtor.
Priority?
NS argues no written agreement for 674’s first agreement
Held: New Solutions takes priority
Reasons:
When NS took their SI, there was nothing effected against them under s. 10
It all depends on the interpretation of a clause saying “will provide” did the parties intend an immediate security description? It seems the court found they did not.
Note: the basic laws of contract are not suspended by the PPSA.
Collateral
Categories of personal property under the Act are almost always mutually exclusive.
There are two major divisions: goods, and other stuff.
Goods refers to tangible personal property includes fixtures, crops, unborn young of animals, among other things.
It’s the residual division – only specifically listed things fall into the other division.
Goods is subdivided into:
(a) Consumer goods
(b) Inventory
(c) Equipment
This is the residual category within goods.
Other Items subdivides into:
(a) Instruments
Cheques, letters of credit pieces of paper.
(b) Accounts
(Excludes chattel paper or instruments)
Monetary obligations that you can’t touch.
(c) Chattel Paper
See details below.
(d) Intangibles
This does overlap with accounts
(e) Licenses
(f) Money
Actual cash
…and more.
PPSA recognizes some things as security that the common law wouldn’t even recognize as property [see e.g. Saulnier v. Royal Bank of Canada]
Proceeds: s. 1(1)
(a) identifiable or traceable personal property, fixtures and crops
(i) derived directly or indirectly from any dealing with the collateral or proceeds of collateral, and
(ii) in which the debtor acquires an interest.
(b) a right to an insurance payment or any other payment as indemnity or compensation for loss of, or damage to, the collateral or proceeds of the collateral
(c) a payment made in total or partial discharge or redemption of an intangible, an instrument, investment property or chattel paper
(d) rights arising out of, or property collected on, or distributed on account of, collateral that is investment property.
Re CIBC & Marathon Realty Co. [1987, SKCA]
Illustrates the power of the interest in proceeds it covers proceeds of proceeds too
Third parties do not have a right to insist on strict enforcement of SAs
Facts
Marathon = landlord.
Commercial landlords have authority to distrain the goods of unpaid tenants, per the Rent Distress Act
Issue: Did CIBC have a valid SI in the inventory in question?
The right to distrain is subject to certain SIs, and if CIBC had a SI then CIBC would take priority.
Marathon said CIBC’s agreement just contemplated them lending money and being paid back, but that isn’t what happened, so they said it wasn’t a SI.
Held: for CIBC
Reasons
Content of the SA doesn’t matter. The fact that you have enforced your rights under the SA in an unexpected way doesn’t affect the landlord’s level of forewarning.
Marathon could have looked in PPR to see the SI in inventory.
Also, it didn’t matter that it was proceeds of proceeds – the SI covered those.
Tracing
Tracing rules were developed under the law of trusts
Recall: prior to PPSA, parties sometimes used trust arrangements to mimic SAs, because part of the rules of trusts relate to tracing of property.
Note: PPSA can’t touch negotiable instruments, because they’re in federal jurisdiction.
The Lowest Intermediate Balance Rule:
With tracing, we may have to figure out what amount in an account a secured creditor can come after.
1. The total amount of deposits constituting proceeds in the account form the ‘proceeds balance’.
Any proceeds deposited to the account raise the proceeds balance and also the account balance
Funds deposited that are not proceeds raise the account balance, but don’t affect the proceeds balance.
2. It is presumed that the debtor spends his own money first.
Presume you are doing the right thing, looking after creditors/beneficiaries like you’re supposed to.
When making withdrawals, don’t write down the proceeds balance until you have to. (i.e. when reality hits – if the account balance is lower than proceeds balance, proceeds balance must go down to the amount of the account balance)
3. If you lower the proceeds balance and then raise the account balance with a non-proceeds deposit, don’t raise the proceeds balance.
This is to keep a balance between secured and unsecured creditors. Secured Creditor gets first crack at the money, but whatever extra is created by this restriction will likely be distributed among less-secure or unsecured creditors.
(If you lower the proceeds balance and then raise the account balance with a proceeds deposit, raise the proceeds balance according to the proceeds deposit.)
Universal CIT Credit Corporation v. Farmers Bank of Portageville [1973, US District Court]
Facts:
Ryan owns car dealership, financing arrangement with Universal CIT.
CIT has SI in the cars on R’s lot, and consequently in the proceeds.
R deposits proceeds into an account with F Bank.
R owes F some money on a promissory note.
R gets word that CIT is going to cancel his financing arrangement (for some reason), which will put him out of business.
Wrote some cheques to CIT, but not cashed yet.
R goes to the bank and tells the manager that he’d rather pay them back on the promissory note first than just let CIT take everything (because CIT are jerks who cut off his financing)
So, tells F manager to take the $12k he owes the bank out of his account. Manager does so, after close of business that day.
Next day the cheques come in, NSF.
CIT claims the money.
Issue: can CIT trace the money and get it back from the bank?
Held: CIT gets the proceeds balance in R’s account. Bank can only keep the amount above that, and must return the rest of the money withdrawn.
Reasons:
Court goes through the whole assessment process, and there’s a chart at pg. 91.
Ultimately, there is a final account balance of $15,823.35, of which $11,429.11 was proceeds.
So, the only amount the bank was empowered to debit was the amount that didn’t belong to CIT: $4394.24.
The rest had to be returned to CIT.
Note: if the bank hadn’t had knowledge that the funds were proceeds funds and R had just written them a cheque for the debt, it’s likely that CIT would have been out of luck.
But the bank wasn’t innocent in this case – they knew the funds were largely proceeds deposits and therefore belonged to the secured party.
Also, the bank removed the funds in a strange way, after business hours.
Basically, this was a fraudulent preference debtors are not permitted to choose which creditors to pay first.
Tracing by Subrogation
Where there’s a big mess in the middle and it would be extremely expensive in forensic accounting fees to follow a thread the whole way through, we can look at just the beginning and the end.
Consider:
What did original collateral consist of? What role did it play in the debtor’s life?
Trace to new thing: does this perform the same role in the debtor’s life? Is there a connection, however confused, between the string going in and the string going out?
Agricultural Credit Corp. of Saskatchewan v. Pettyjohn [1991, SKCA]
Facts:
∆s bought cows using π facility. Court held that π held a PMSI in the cows that ∆ bought with the funds obtained from π.
π had SI in about 47% of the cows.
Under SK law, you can’t seize cows under a GSA (it’s a government rule to protect farms), but you can seize them under a PMSI.
∆ started to replace their cows with a different type of cow,
∆ said that π didn’t have PMSI over the new cows and thus couldn’t take them.
Issue: does π have interest in the new cows?
Held: for ∆.
Reasons
Tried tracing by subrogation.
PMSI holder can’t just overwhelm everyone absolutely – must let other parties have some interest.
There was no evidence that ∆ made the cow changes with intent to defraud π.
Dissent: ∆ created this mess, and now they’re getting an advantage.
Re River Industries Ltd. [1992, BCSC]
Pettyjohn applied in BC
Facts
Aucklands had SI in some inventory of the debtor.
Debtor sold inventory in bulk, along with some other assets.
Issue: Was the sold inventory still subject to A’s SI?
Held: Yes, A can follow the inventory after sale.
Reasons:
S. 28(1) doesn’t apply to cut off consent was given to sell inventory to usual customers, but not to sell all assets in bulk like they did.
S. 30(2) doesn’t cut it off either Sale of all assets is not something you do in the ordinary course of business.
Note re proportionality: π gets same fixed percentage in new inventory as in original inventory.
Perfecting a Security Interest
S. 19: SI is perfected when:
(a) it has attached
(b) all steps required for perfection under the Act have been completed
Option 1 (per s. 24): Attached & Possession
But you can’t protect by seizure or forced repossession.
Policy concern against creditors just seizing things anytime they get nervous.
Option 2 (per s. 25): Attached & Financing Statement Registered
This is by far the most common method to achieve perfection
Option 3: Attached & Temporary Perfection
In some situations, the creditor has a few days to either take possession or register a F/S, and during this interim they are considered to have perfected.
One provision that allows temporary perfection: s. 28(3)
Where proceeds aren’t adequately described for the purposes of s. 2, then creditor’s SI is protected for 15 days, but then they lose protection if they don’t take further steps.
Attachment
The first requirement for perfection.
S. 12: attachment exists when
(1) Value is given;
(2) Debtor has rights in the collateral; and
(3) s. 10 requirements are fulfilled
S. 13: automatic attachment when SA gives rights in after-acquired property.
Two exceptions to this automatic attachment:
1. Crops that start to grow after a year
2. [more important]: automatic attachment generally doesn’t apply to consumer goods
Unless the newly acquired item is a replacement for the old one.
S. 19: it doesn’t matter what order the three elements of s. 12 are completed in.
“Value” doesn’t have to be “new” value antecedent debt is ok [TD Bank v. Nova Entertainment Inc.]
Debtor Must have Rights in the Collateral
In most cases, full ownership. But not always.
A thief has no rights in stolen property
Someone who has been given a gratuitous bailment does not have sufficient rights in the property to allow a SI to attach.
Kinetics Technology International Corporation v. The Fourth National Bank of Tulsa [1983, US CA] [KTI]
Facts
OHT gave bank SI in inventory and other property.
KTI and OHT had a deal, wherein KTI had to send some goods to OHT and OHT had to build things (furnace economizers) with those goods.
Bank had SI in OHT’s accounts, and asked KTI to make progress payments straight to the bank. (so, bank was completely aware of the K with KTI)
OHT is getting deeper in debt, and bank eventually tires of it. OHT can’t carry on, hands over the keys to the bank and tells them to realize on the SI.
When the bank comes in, some of KTI’s goods are sitting on the warehouse floor, and bank takes them (along with some partially-finished units) as inventory.
Issue: Does the bank have a perfected SI in KTI’s items/the partially-finished units?
We know the bank registered a F/S, so the question is: did the bank SI attach to the items sent by KTI?
KTI said that OHT didn’t have sufficient rights for the SI to attach to KTI’s goods OHT was just holding them for the purpose of putting them into the economizers as they were built.
Held: KTI could take.
Reasons:
KTI argued mere physical possession wasn’t enough, but court said OHT was more than just a bailee with a bare possessory right also had the right to use the goods in a manufacturing process.
Court says this is enough for the SI to attach, and thus the bank SI prima facie attached and gave the bank priority.
However, KTI was making part payments to the bank, which made this a sale of the box units and the KTI goods that were there – a sale of the completed economizers.
So, in fact, it was an OCB sale, which means that the bank’s SI was cut off when the payments were made.
Problems with KTI:
Although the right result was reached, Waldron doesn’t think this was the appropriate reasoning.
It’s awkward to conceptualize this as an OCB sale for the goods that hadn’t yet been put into box units, for example.
It works, because the bank was aware of the K and had received money under it, so the result was clearly fair, but Waldron doesn’t like how they got there.
Arguably better reasoning:
OHT has sufficient rights in collateral for SI to exist. But the fact that SI exists doesn’t tell you much about what the creditor can ultimately get.
Other factors affect this:
1. Rules provided in the Act this is the first place to look.
E.g. a perfected SI takes over unperfected, which only gets what’s left over after perfected takes.
2. If there is no applicable priority rule in the Act, consider common law:
S. 68: if no other rule covers the situation, then CL and the Lex Mercatoria apply.
So, applying this to KTI:
What is the nature of KTI’s interest in the goods? Do they have SI?
W thinks no. they sent the goods to OHT, but not to secure payment or performance of an obligation [recall Skybridge]
They delivered the goods to use in building economizers. No security which could be seized on non-completion of the economizers.
Three other ways to fit this under PPSA:
1. Was it a transfer of account or chattel paper?
Clearly not.
2. Lease for a term of more than one year?
Nope.
3. Commercial consignment?
No. Goods weren’t delivered to OHT for sale to others.
So, KTI is not a secured party.
There is no rule under PPSA that will sort it out, so go to CL:
At CL, KTI has title to the goods.
Nothing in the PPSA says the bank can take ownership of KTI’s property, so CL stands.
Though, note that this won’t always save the party in KTI’s position, because sometimes the statute does overrule the CL rights of ownership.
Haibeck v. No. 40 Taurus Ventures Ltd. [1991, BCSC]
Facts
Debenture issued to RoyNat (R). No. 40 gave R a floating charge over all their assets.
R perfected SI by registering a F/S.
Then, conditional sales K with builder, SI in appliances.
Builder registers F/S and perfects.
R comes in to realize on their SI.
Issue: could R’s SI attach to the goods listed in builder’s SI?
Held: for R.
Reasons
Possession, but that’s not enough.
There is a right to pay for the goods over time and ultimately acquire ownership – so considerably more than bare possession. Court correctly finds that this is enough for SI to attach.
Registration date governs:
R had perfected well before B, so B loses.
Per s. 35(1), R has priority and can realize to the extent of the obligation owed to them. Anything left over can be claimed by B, if there is anything left.
B could have gotten priority over R, because they were entitled to a PMSI.
But, to get the PMSI, would have had to file F/S w/in 15 days of No. 40 getting possession of the appliances. So, B filed too late and therefore didn’t qualify.
So, it falls to the residual rule in 35(1) and they lose.
Note: since statutory rules apply, we don’t go to CL rights/title.
PMSI: The Superpriority
“Purchase Money Security Interest” means:
(a) a SI taken in collateral, other than investment property, to the extent that it secures payment of all or part of its purchase price;
(b) a SI taken in collateral, other than investment property, by a person who gives value for the purpose of enabling the debtor to acquire rights in the collateral to the extent that the value is applied to acquire the rights;
(c) the interest of a lessor of goods under a lease for a term of more than one year; and
(d) the interest of a person who delivers goods to another person under a commercial consignment.
But does not include a transaction of sale by and lease back to the seller, and, for the purposes of this definition, “purchase price” and “value” include credit charges or interest payable for the purchase or loan credit.
It’s a question of fact: you must have secured a loan to purchase rights.
Problem can arise if money loaned as PMSI is not spent on the anticipated purchase.
Example:
X wants to buy a new computer system for business, and you get a loan from the bank for $80k.
Money loaned for purpose of acquiring rights in collateral.
Bank gets SI in computer system and all present & after-acquired property.
But then, X finds the computer system at a lower price (say, $60k), so they buy that one and use the extra cash to go on a vacation.
So, if X defaults, the bank has a PMSI, but it’s limited to $60,000, the amount actually spent on the computer system. The other $20k is just under a GSA.
S. 34(1): subject to s. 28, a PMSI in
(a) collateral or its proceeds, other than intangibles or inventory, that is perfected not later than 15 days after the day the debtor, or another person at the request of the debtor, obtains possession of collateral, whichever is earlier, or
(b) an intangible or its proceeds that is perfected not later than 15 days after the day the SI in the intangible attaches,
Such a PMSI has priority over any other SI in the same collateral given by the same debtor.
Recall Haibeck: PPSa was new and lawyers weren’t all up on the rules. Builders could have had PMSI if they’d registered a F/S w/in 15 days, but they didn’t so they didn’t get priority.
Policy rationale underlying the PMSI superpriority:
Priority will be given to parties who assist debtors in expanding the asset-base of their business.
Note: one important class of property is not addressed in s. 34(1): inventory.
34(2): subject to (5) and s. 28, a PMSI in inventory or its proceeds has priority over any other SI in the same collateral given by the same debtor if
(a) the PMSI in the inventory is perfected at the time the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier,
(b) the SP gives notice to any other SP who has, before the time of registration of the PMSI, registered a F/S containing a description that includes the same item or kind of collateral,
(c) SP gives notice to any other party who has, before the time of registration of the PMSI, registered a SA providing for a prior SI on the same item or kind of collateral,
(d) the notice referred to in (b) states that the person giving notice expects to acquire a PMSI in the inventory of the debtor and describes the inventory by item or kind, and
(e) the notice is given before the debtor, or another person at the debtor’s request, obtains possession of the collateral, whichever is earlier.
Basically, perfection must take place when the debtor gets possession. So, the F/S must be registered by the time debtor takes possession. SP will have given value, debtor will have rights, attachment will occur, etc.
Steps to applying the Superpriority:
1. Does it fall under the PMSI definition?
2. Did they register…
For inventory: before possession, and did they notify other creditors?
For non-inventory: within 15 days of possession/attachment of SI?
Under PPSA, it’s really up to creditors to protect themselves.
PMSI allows you to supersede other creditors. So, perfection of a non-PMSI won’t save you from a creditor who has a perfected PMSI.
S. 22 gives PMSIs a grace period, during which they are temporarily perfected and protected against TiB and judgment creditors.
Note: you don’t get this grace period as against a BFP.
Policy: 15 days is a pretty common grace period used in PPSA.
Another potential problem:
If you lend money at two different times to purchase two different pieces of equipment, say a boiler and a backhoe, and one loan is paid off, then you no longer have PMSI in the first equipment.
If you want to maintain PMSI in both items until both loans are paid off, then you can agree to make payments pro rata across the two collateral.
Agricultural Credit Corp Sask v Pettyjohn [1991 SKCA]
Facts: Fairly typical business arrangement. ACC is a type of govt agency that loans creditor for farmers to buy equipment. ACC approves loan when farmer meets criteria for the program. Farmer goes to lender and shows letter from ACC that says he will get loan (the ACC does not give the money until the farmer buys the equipment). Pettyjohn takes bank to buy cows. Then they send the paperwork to ACC, and ACC sends the money directly to lender.
Issue 1: PMSI requires that value be given to debtor to purchase. Did Pettyjohn get value?
Held: Yes, it seems pretty obvious that there was a binding obligation.
Issue 2: was that value used to buy the cow? They actually took the value to payoff the lender (inter financing) – so Pettyjohn argues that they didn’t use the ACC value to directly buy cows.
Held: Value was given as part of the same transaction to buy the cows. No need to break down into little sense. Value was used to buy cows.
Waldron noted that this seems to make commercially reasonable sense.
Note: this is an example of “takeout financing” – the money is being used to remove an interim lender.
However, this can become a little more complicated, like in Unisource when it becomes a more separate transaction.
Unisource Canada Inc v Laurentian Bank [2000 ON]
Facts
T1 – Bank loaned money for printing press and registered financial statement.
However, Debtor went out and found printing press they liked. Went out and got loan arrangement from bank. Debtor then went and purchased press, sold back to bank, and then lease from bank (this is called a sale and lease back – it has tax advantages)
Sale and leaseback is EXCLUDED from PPSA
T2 – Debtor already owes money to Unisource (U). D gives GSA to U to secure payment of their paper. U registers F/S.
Consider priority rules: s.35 – first to register gets priority over perfected interests. Both are registered – so bank gets first priority.
Then debtor decides to reorganize their finances
T3 – Laurentian (financing company) loans money to D. This money is used to pay off the bank. L then registers their F/S.
Waldron noted that L should have taken an assignment of the bank’s security interest – so then they would have gotten first priority. But L did not do that.
Then, debtor defaults on payments.
U says that they get printing press.
L must now try to argue that they have a PMSI to get priority (which, they should have gotten by assignment if they had been smart about it).
Court: Bank owned title to printing press. When L’s money was used to pay off loan, it was used to acquire title of the printing press. So this is a PMSI and then they registered this F/S, so they get priority.
Note issue – should take-out financers get PMSI super-priority?
Note: if this had not been done as a Sale and Lease back, then the question of title when L’s money pays off loan would not have arisen. So this case may turn on a lucky type situation.
Note: in most cases, lender should take an assignment rather than try to rely on this type of argument.
Chrysler Credit Canada v RBC [1986 SKCA]
Facts
Inventory financing.
The reasons CC is in the situation they are, is because they started their financial structuring under the old scheme before PPSA.
Note historical floating charge (pre-PPSA):
Eg of China shop with tons of inventory. Not going to register a CSA for each little piece. Instead, a floating charge would be registered.
Prof – this is possible when you have easily identifiable big ticket items – like cars.
T1 – D acquire car and give CM or CSA to CC
T2 – CC sell car – and would repay their loans, buy new cars.
Each car would be kept track of as separate transaction.
When PPSA came into force, CC kept treating each separate transaction separately.
CC gets into financial trouble. Bank puts a receiver into CC. CC says, hey we have PMSI in some new cars. CC takes away the new cars that they have PMSI in. There are also trade-ins. CC says those trade-ins are proceeds of cars we had security interest in. Receiver and CC are arguing over who gets the used cars. Receiver says they aren’t all proceeds of CC’s cars.
Divide the cars into three groups:
1. 4 cars - Trade in cars when CC had security interest in the old car - trade in cars (proceeds of original car) – loan not yet paid off.
3. 4 cars – they can’t show how they purchased those cars – they lose those
Difficult category - #2. – trade in cars (proceeds of original car) – however the loan on these cars was paid off in full.
Court discussing category #2: SI was worded in a way that the security interest was intended to continue even after the loan was paid off, therefore, there is still a PMSI in the cars.
Waldron noted a problem: the court based decision on the existence of a private K (SI, GSA) between parties. However, the point is not whether they have a security interest, it is whether they have priority. PMSI is based on fact, not what the parties say. Prof says that paying off the loan essentially pays off the PMSI, so yes, they still have their GSA, but they shouldn’t be able to claim priority over the cars.
Today, this is not really a problem – using structuring under PPSA:
CC would structure SI in inventory (s.34(2)) as PMSI
Note: creditor can’t decide to take PMSI, this is a factual determination
So in our case, once CC paid off the loan, the proceeds of the car were gone.
Registration of a Financing Statement
See 674921 BC Ltd. v. New Solutions Financial Corp. [2006, BCCA] for a statement of the legislation in this area.
S. 28(2) a SI in proceeds is continually perfected if the interest in the original collateral is perfected by registration of a financing statement that
(a) contains a description of the proceeds that would be sufficient to perfect a SI in original collateral of the same kind
(b) covers the original collateral, if the proceeds are of a kind that are within the description of the original collateral, or
(c) covers the original collateral, if the proceeds consist of money, cheques, or deposit accounts in deposit-taking institutions.
Note: it’s very easy to cut these off: see s. 31.
S. 43: F/S is effective from the time received at the office
It’s electronic nowadays
Every F/S gets assigned a number
This shows priority.
43(4) – may be registered before SI is made or attaches.
Confirms that creditor can register any time
43(5) – a F/S may relate to more than one SA
S. 18: a creditor, debtor, sheriff, person with interest in personal property of any party gets the right to demand the info listed in (2).
Note: potential creditors are NOT on this list.
All a potential creditor can see is the name and whether there’s a SI registered on the property – not the terms of the loan etc.
Then the potential creditor can seek more info from the debtor, who can authorize them to see the info.
Otherwise, literally anyone could just go in and demand to see your loan agreements and details privacy issue.
Error in Financing Statement
S. 43(6) an error must be seriously misleading to affect validity of F/S
(7) if it’s serial numbered consumer goods, or if debtors are required to be disclosed in the F/S, and there is a seriously misleading defect in the name of debtor (but not a debtor who has no rights in the collateral) or the serial number of the collateral then the registration is invalid.
(8) doesn’t have to actually mislead someone; it’s an objective test – would a reasonable person be misled?
(9) failure to give a description of collateral doesn’t affect the validity with respect to other properly described collateral in the F/S
Regulations re F/Ss
S. 4: must say what type of registration you want – in this class, we’re always talking about SIs, but the registry holds all kinds of things.
If SI, how many years? 1-25, or infinity.
(3) must include:
Name and mailing address of each SP
Name of each debtor
Description of the collateral
Naming
NOTE: under previous version of Regulation, a registration of a second name was option – however, this regulation clarifies that you must register a second given name if they have one.
Purpose – you need to be able to search the database accurately.
So if you enter the debtor’s name correctly, the computer should split out exact matches and near matches.
This is the only way you can search – exact and near matches
Description of the Collateral
S. 9 sets out mandatory requirements for describing collateral
Biggest issue: serial numbered goods.
Under PPSA, SN goods includes only:
motor vehicles,
manufactured homes
boats
outboard motors
trailers
aircraft
Consumer goods:
Serial numbered consumer goods must be described using a serial number.
Equipment:
Choice: serial numbered equipment must be described either using SN or in accordance with s.11
But, if you don’t register with the SN, you’re going to be vulnerable, so just do it.
Inventory
Register in accordance with s. 11
S. 11:
Description by either
Item or kind
APAAP
APAAP except certain specified items/kinds
Description as inventory
Note that this is quite similar to the s. 10 description for SA
(2) Inventory is valid so long as it is used as inventory (same as s. 10)
Note: under s. 10, you could use “consumer goods” as a category for exclusion (i.e. without further description), but you can’t here.
Questions to Ask when Registering Your Interest in Collateral:
Am I dealing with goods?
If no – then describe using s.11
What kind of goods are they?
Are they consumer goods?
Are they serial number goods?
If yes – use SN, per s. 10
If no – use s.11
Are the goods equipment?
If yes – are they serial numbered?
Use SN or use s.11
Are goods inventory?
Could describe by item or kind
Could describe as inventory
Cannot describe by SN
Not goods?
Proceeds?
Depends on s. 2: three options for a continuously perfected SI in the property, per s. 28(2).
Or, per s. 28(3), a final option if none of (2) options apply: 15 day grace period.
Amend F/S to include proceeds.
Regal Feeds Ltd. v. Walder and Niverville Credit Union Ltd. [1985, MBQB]
Facts
RT claimed priority on SI in “all hogs, boars...”
GSA: covered all the hogs etc.
Issue: Is the description in FS good enough? Doesn’t say after-acquired.
Held:
FS is enough.
Reasons
All you’re looking for in FS is some sort of red flag – notice that you should inquire further about what is/isn’t covered
You see pigs listed in FS, now creditor is on notice that they should go figure out what pigs are covered get a copy of the SA and read it. At that point the creditor would see that it covered not just the original pigs but any new ones as well.
Re Munro [1992, BCSC]
Debtor’s middle name was listed incorrectly
Regs were unclear (at this time) as to whether you had to include debtor’s middle name when you register. (Now, clearly state that you must include debtor’s middle name)
Note the importance of computer systems in determining what’s seriously misleading.
E.g. Serial numbers are often very long, and on vehicles they may be obscured by grease etc. and hard to read.
It’s very easy to make a mistake in serial numbers.
Coates v. GM Acceptance Corporation of Canada [1999, BCSC]
Argues misleading only searched for exact matches in PPR, didn’t pull up FS of GMA, which had a slight error on serial #.
Court says if you searched exact and inexact matches, this vehicle would have showed up.
Court says total accuracy isn’t necessary – near-matches are given in PPR.
Seriously misleading:
(a) would likely prevent a reasonable search from disclosing the existence of the registration
so, if PPR wouldn’t give as a near-match
(b) if mistake would cause a person who did somehow become aware of the registration to think that it was likely not the same chattel (where error in serial #), or the same debtor (where error in debtor name)
Court declined to bring the reasonableness of the filing system into play.
Re Alda Wholesale Ltd. [2001, BCSC]
Burnyeat J
Major question: can a serious error in a non-searchable field defeat a registration?
Short answer: yes.
Here, there was a grammatical error and the issue was what the word “leased” meant in the description of the collateral.
The court held that the description was too ambiguous and invalidated the FS
Note: contrary to Regal Feeds, indication that must expressly state interest in after-acquired property but Waldron thinks this is incorrect.
Nonetheless, lawyers today often put “whether present or after-acquired” into the FS so that it won’t be defeated by that fact.
Also mistakenly indicates a subjective test, but we know it is objective.
Perfection by Possession
S. 24: Perfection by possession of collateral
(1) subject to s. 19, possession of the collateral by the secured party, or on the secured party’s behalf by another person, perfects a SI in
(a) chattel paper
(b) goods
(c) an instrument
(d) [repealed]
(e) a negotiable document of title
(f) money
unless possession is a result of seizure or repossession.
Generally, creditors won’t perfect by possession.
But some types of property will generally be perfected by possession:
Things that can be easily lost – cheques, and (most important) chattel paper
CP: piece of paper including a promise to pay debt, plus SI in some item.
Creditors normally perfect SI by taking possession of chattel paper:
1. Because they’re easy to lose, and
2. Because there is a special priority provision for creditors who take possession of chattel paper
Farm Right Equipment v. Royal Bank of Canada
RBC takes interest in APAAP, reg’s FS in June 1991
Years later, FR buys 2 trucks from D&C, secured by CSAs (which are SIs)
So, we actually have chattel paper!
CSAs are assigned by D&C to Bank of Nova Scotia. Common transaction – discount CP to bank.
FR defaults on loan to RBC, which appoints a receiver-manager
Bank of Nova Scotia realizes they forgot to register their interests (too late for PMSI, but can still reg) – run down to PPR and reg SI in trucks by serial number.
Trucks are being sold. Banks agreed to let them be sold and then fight over the proceeds.
So, who gets trucks?
Problem for RBC: although had reg in APAAP, didn’t have reg in serial #.
See s. 35(4): a SI in goods that are equipment of a kind defined as serial numbered goods, ≠ reg’d or perfected by registration for purposes of s. 35(1), (7) and (8), unless FS relating to SI and containing description of goods by serial # is reg’d.
So, since RBC didn’t reg w/ serial #, not perfected for purpose of 35(1).
So, Bank of Nova Scotia, who perfected with serial #s, wins.
But, note arguments made by RBC:
(1) At time receiver-mgr was appointed, BNS was completely unperfected – had not reg’d anything. RBC argued appointment of receiver is just like a judgment creditor in process of execution, or TiB, either of which would take priority under s. 20.
Court says it’s not actually the same. You appoint a receiver pursuant to a private agreement, but there’s no judgment, and it’s not bankruptcy. S. 20 doesn’t apply here.
(2) RBC argued they had nonetheless perfected their SI, because when they appointed a receiver they took possession of the trucks.
SK different statute, but basically the problem is that they aren’t holding it as collateral, it was seized.
Ours says clearly that you can’t perfect through possession by seizure/repossession so a BC court definitely would not have accepted this argument.
Royal Trust Corp. of Canada v. Number 7 Honda Sales Ltd. [1988, ON Div. Ct]
Facts:
Creditor advanced money to debtor to buy vehicle, and C registers SI
Debtor leaves vehicle with vendor while trying to get more funding, and never pays.
Issue: who gets it, between creditor and vendor?
Held: Creditor.
Reasons
Court says vendor wasn’t perfected, because they weren’t holding it as collateral, they were just holding it because the debtor left it in their possession.
Temporary Perfection
For example, proceeds that aren’t described in F/S 15 day grace period, during which you are perfected. Until you aren’t.
See s. 26(1) for general temporary perfection rule
Basically, some things are perfected for a grace period of 15 days.
Priority and Attachment
Various competing interests arise in property. These priority rules will help tell us who gets first cut from realization of the property.
At Common Law, there was only one priority rule: everything turned on title, and the nemo dat principle appled if someone else has title, you can’t have it and you can’t give it away.
But this didn’t really facilitate commerce well, so PPSA sets out priority rules.
If the interests at play are included within the statute, the idea is for PPSA to be a complete set of rules to govern, based on the business/economic realities of the situation.
“Review” of Priority Rules
Designed to facilitate credit.
Remember, parties can agree among themselves to change their priorities.
Four Key Principles
1. Where creditor could protect itself but fails to do so, it’s generally required to bear the risk
sometimes there’s a window in which they’re required to act, and they’ll be at least partly protected if they act w/in that window
2. Act prefers policies that expand credit and favours creditors who expand or protect the debtor’s asset base.
3. Secured creditors have a very powerful position in the realization process, but failure to notify others of their status can result in loss of priority
This is so that 3rd parties can make informed decisions protecting innocent 3rd parties.
If SCs fail to give adequate notice (which is usually done by filing FS in PPR, though can be done by taking collateral), this usually results in them losing priority, sometimes even against parties who have not relied on the lack of notice (e.g. TiB, judgment creditors)
4. Those who have relied on a piece of collateral to advance credit will take priority over those who simply gain interest in collateral incidental to the transaction
We see this in fixtures; accession; transfer in priority s. 35(8).
Categories
General Provisions (Apply Broadly)
Note: if there is a specific rule, that operates before the residual priority rules.
1) S. 20(a) and (b) an unperfected SI loses to judgment creditor or TiB. Can lose a greater interest than the debtor had in the item (can lose entire interest, esp if long term lease situation)
S. 22 15 days PMSI
2) s. 28 SI in proceeds
Depends on a proper description of the collateral
3) Residual priority rules in s. 35
Before this can apply, you have to be sure that there’s no specific rule covering the situation.
35(1) Perfected SIs generally take priority in order of the date of reg of FS (or if perfected otherwise then other)
Perfected have priority over unperfected, and perfected take priority in order of their attachment)
This rule also covers SI given by two different debtors in the same collateral.
But this subsection is the residual section of the residual clause look at other subrules before you look at (1).
(4) serial numbered goods
it’s not that you’re unperfected 35(4) makes you unperfected for the residual priority rule in 35(1), the lapsed registration rule in 35(7), and the transfer in provision of 35(8). Nothing else.
But, in many cases 35(1) will be the applicable rule, and you’ll be hooped anyway.
(5) and (6) future advances: creditor can tack future advances onto original priority position
(7) lapsed registration rule: 30 days if registration inadvertently lapses or is discharged in error if you restore w/in 30 days you slip back into your original spot. So long as nothing has changed. If someone else has reg’d a new SI, then you’ll lose. But if nothing has happened you can get in and restore your priority to before the lapse.
(8) transfer-in: reverses a presumption; protects creditor where SI item is transferred to another debtor. But doesn’t protect against cut-off rules.
4) PMSI s. 34
34(2) Inventory
34(1) not inventory
Enables creditors to get superpriority, provided the reg FS w/in appropriate time limit, and in (2) give notice to appropriate creditors
s. 34(4) PMSI vendor over PMSI lender
34(5) non proceeds PMSI in accounts for new value takes priority over PMSI in accounts as inventory, if regs FS appropriately.
34(6) PMSI in item as original collateral takes priority over PMSI in proceeds
34 (8) helping ppl who grow their product
B. Cut-Off Rules (Basically used to Protect 3rd Parties)
1) s. 20(c)
2) s. 28(1)
3) s. 30
30 (2) OCB sale.
(3) the garage sale provision
Low value consumer goods, not fixtures; innocent buyer who gives value for the item; cut off.
(5) BFP takes free of temporarily perfected SIs
[i.e. under 26(1); 28(3); 29(4) CP etc; 51 transf of collateral]
(6) and (7) protect buyers for new value of serial #’d equipment where serial # not reg’d.
serial no reg’n not required for equipment, but if you don’t it exposes you to losing priority under these sections, and see above.
4) s. 51
Once you have knowledge, must take action w/in 15 days or will lose. Also vulnerable to innocent buyers, b/c 35(5) provides cut-off rule for innocent buyer who takes w/in grace period of s. 51
C. Rules for Negotiable and Quasi-Negotiable Property
s. 31(1) money
31(2) cheque
31(3) purchaser for value w/o notice
31(6) Chattel paper purchaser priority
D. Misc. Specialized Priority Rules (Rules Dealing With Specific Situations)
These will always operate before other rules, if they apply.
S. 29: returned and repossessed goods
Reattaches SIs that were cut off on the sale, and reinstates their priority when the goods are returned
Creates new SIs: 15 day grace period. If CP purchaser involved, will seize item if going to default, and this counts as perfection (exception to rule that you can’t perfect by repossession)
Determines priorities among reattached SIs
Account-holder gets last priority
CPP beats out all others if they would have priority to CP
S. 36 fixtures
S. 37 crops
S. 38 accessions
S. 32
Rent Distress Act s. 3
Cut-Off Rules
S. 28
(1) Subject to this Act, if collateral is dealt with or otherwise gives rise to proceeds, the SI
(a) continues in the collateral unless the SP expressly or impliedly authorizes the dealing, and
(b) extends to the proceeds
So, if the SP authorizes the dealing, the SI will be cut off.
S. 30(2) A sale by debtor in the ordinary course of business cuts of SP’s interest in the original collateral
S. 28(1) is subject to this provision.
S. 31: BFP
If the holder acquired the money without knowledge that it was subject to a SI or is a holder for value cut off.
Priority Rules
Note: creditors can agree amongst themselves as to priority when taking SIs [see Furmanek v. Community Futures Development Corp. of Howe Sound]
S. 20: if SI is unperfected, goes to three groups first:
Judgment creditors
TiB
Liquidators
Robert Simpson Co v Shadlock [1981, ON HCJ]
C1 - CSC – they sold some items on credit.
C2 - Second creditor was aware of the security interest.
C1 – was unperfected (didn’t get a PMSI or regular security interest)
C2 – got mortgage over property and at the same time, all the chattel of the motel. C2 knew that some chattel had been covered under CSC. C2 goes down to grab the stuff.
Issue: Does knowledge change the application of the priority rule?
Held: Nope. The rules are mechanically applied without regard to knowledge, unless the act says otherwise.
Note: this would be different if there is fraud. But just knowing about a prior security interest does not reduce your priority unless the act otherwise states that knowledge is considered.
Priority Disputes between two Unperfected SIs
S. 35: Requires:
1. Rights in collateral.
2. Value
3. Written SA that will satisfy s. 10
May have an attachment trigger (e.g. D buys collateral or otw takes possession) so two creditors can attach at same time.
One solution applied in case law: share pro-rata
Another solution: can’t apply 35(1)(c) b/c ≠ different dates. So fall back to CL: first SI created should get priority. (Ontario Dairy Cow)
Residual Priority Rules: s. 35
Every special rule must be considered first, but then this governs.
35(1) covers the majority of priority cases
(a) priority between protected SIs in the same collateral is determined by order of occurrence of the following:
(i) Registration of a F/S (without regard to the date of attachment)
This one is the most important.
First to register gets priority
(ii) Possession of collateral in accordance with s. 24 (without regard to the date of attachment)
(iii) Perfection under s. 5, 7, 26, 29, or 78.
(b) a perfected SI has priority over unperfected
(c) Priority among unperfected SIs is determined by the order of attachment
S. 35(5)
Subject to (6) exception
Priority of SI under (1) applies to all advances, including future advances
Totally unrestricted right to tack future advances
(6) Exception
Perfected SI has limited priority over the parties listed in s. 20(a)
Judgment creditors in the process of executing their judgment
Tacking rights are limited as against a judgment creditor, even with a perfected SI can tack for anything that falls w/in the following categories:
(a) advances made before the party’s interests arise, or before sheriff seizes collateral or obtains a right to it under the Creditor Assistance Act.
(b) advances made before SP acquires knowledge of
(i) interests of the party
(ii) seizure of collateral by sheriff
(iii) order giving sheriff a right to collateral
(c) advances made in accordance with
(i) statutory req’mt
(ii) legally binding obligation (to a person other than the debtor), entered into by SP before SP acquired knowledge referred to in (b)
(d) reasonable costs and expenses incurred by the SP for protection, preservation or repair of the collateral, and
(e) the amount of taxes paid by SP under s. 27(1) of the Manufactured Homes Act.
Example of (6) application:
Facts
T1: D borrows from CU, $200,000, SI apaap, FS
Note: SAs contemplating future advances typically include discretion to lender to stop future advances. In this example, though, assume SA makes K obligation to advance once D meets obligations.
T2: 2nd $200,000
T3: D is sued; Judgment Creditor $50,000, enforcement proceedings.
T4: next advance is due and made. 3rd $200,000.
T5: J/C has property seized; CU gets knowledge of seizure
T6: CU 4th advance, $200,000
T7: D in bad situation, CU lends additional $5000 to preserve collateral.
Issues:
So, what amounts can CU take priority for? Look down the list in 35(6), and add up the things that fall within CU’s categories (pots of money).
Anything that falls within the categories can go to CU
35(6)(a): before JC’s interests arise so, CU can get priority for the first and second installments of $200,000
(b) before SP had knowledge of JC interests so CU can take priority over 3rd installment at T4
(c) obligation to someone other than debtor so ≠ apply here.
So, seems that T6 advance (4th installment) does not get saved...despite having a binding K. Seems unfair?
But, s. 14(2): unless parties otherwise agree, an obligation owing to a debtor to make future advances is not binding on SP if collateral has been seized, attached, charged, or made subject to an equitable execution under circumstances described in s. 20(a)(i) or (ii) and the SP has knowledge of this fact before making the advances
So, s. 14(2) gives CU the right to stop the advances after T5, which they would likely do (pending the debtor dealing with the judgment debt).
(d) will save the $5000, spent to preserve the collateral
(e) does not apply.
Application of s. 35(8)
Sometimes called the “transfer in” rule
Example
T1 – D1 gives Bk SI apaap; Bk reg f/s properly perfecting SI
T2 – D2 gives CU SI in apaap; CU reg f/s properly perfecting SI
T3 – D2 sells boiler to D1
Transferring of property to D1 would give the Bk a windfall and deprive the CU from something they were entitled to
s.35(8) says that CU wins – we protect the interest of the creditor who gave value on the strength of a particular chattel
This result is oppose what we would expect to happen if s.35(1) did not apply
So the argument is that s.35(8) was brought in to reverse the s.35(1) application
Different twist on our situation:
At T4 – CU discloses sale (not consensual, but knowledge)
At T5 – sends people down to D1’s property, notices brand new boiler – advances more money. Relies on boiler to advance additional money on loan.
At T4 – CU could have followed the item and run down to PPR and reg f/s change statement naming D1 as a new debtor
Then, Bk could have gone to PPR and looked up new boiler to check.
Statute – CU has 15 days to amend F/S after knowledge
If they amend, they will have priority
Circular Priority Problems
Where A has priority over B who has priority over C who has priority over A
S. 35(7): if registration lapses, or discharges (perhaps by fraud), you have an opportunity to revive your security without losing priority. 30 day period.
This is cool, but it can create a circular priority problem:
A and B register, A is first, B is second. A’s registration lapses for some reason (maybe they mistakenly think it’s been paid off or it wasn’t set for a long enough time).
A can reregister within 30 days.
But, if someone new registers during the void, they will have priority over A – because they couldn’t have known.
So then, A gets back their priority over B, who has priority over C because they were there first, but C will have priority over A because they registered before A reperfected.
Goal: try to protect the expectations of the parties.
In this case, it might be A’s fault, so this could hurt them.
Solution: we could subrogate C into A’s position, meaning they take their portion first, and then A takes the rest of their amount, and then CU takes afterward.
Someone’s always going to lose out.
KMS Securities v. Richwood Kitchens
Facts
T1: Mtge #1
T2: supply of cabinets to party; supplier (Richwood) SI in cabinets No s. 49 notice (LT notice) at this time
T3: Mtge #2 on property
Problem! Two priority regimes at work:
First, LTA provisions, says M1 is prior to M2
Ordinarily, priority goes by date of reg’n of mortgage.
By virtue of s. 36, RW was prior to M1. But, b/c ≠ filed LTA notice and new mtgee came along (triggering s. 36(4)), RW = subordinate to M2.
So...circular priorities!
Div Ct:
Have to cut the circle somewhere – give RW highest priority. They take over M1, and now M2 is losing out. Now in a much worse pos’n than they should have been.
So they appeal.
Appeal:
What did they really get?
M2 got right to remove cabinets as opposed to M1. To get that, would have had to pay RW the value of the cabinets (per s. 36(9)).
So, take M1’s mtge amt off the top. But they have to pay off the cabinet-suppliers out of their amount of the original mortgage b/c would have had to pay that amt anyway.
Now, we let M2 come in – would always have been subject to M1’a mtge so, M2 gets their cut
And then M1 could have come back to take the $ owed to RW, but there was nothing left, so M1 had to pay RW out of own money.
Sort of unfair, since RW was the one who got them all into this mess by failing to register.
Commentary
Cumming and Woods say this isn’t the way it should have worked.
True, at T2 RW had right to remove cabinets and M1 would have had to do sthg about it. Of course, at that time there was more equity in the property.
But, at T3, once M2 comes along and reg’s w/o seeing s. 49 notice, RW doesn’t have the right to remove the cabinets as against M2.
So, can you both remove the cabinets and not remove the cabinets? In real life you either take them or you don’t.
So, should have been:
M1 takes their mtge cut off the top
Then M2 gets their cut
Then RW gets zero.
Since M1 went into deal expecting to be fully protected; advent of M2 shouldn’t have affected them or decreased their rights to collect; the only thing that impacted them was the advent of RW and M2 together (making more debts than value). RW caused the problems by not filing s. 49 notice in the first place.
But, really, there’s no good solution to circular priorities – either by some sort of subrogation, or (as here) by who has the right to remove and whether they have lost that right.
Note: the court did basically give M2 priority over M1, and thus violated the LTA priorities Waldron thinks these are sacred and should be preserved at all costs, so she prefers C&W’s take.
Subordination Agreements
S. 40(1): one party may subordinate their SI to any other interest effective between parties, and may be enforced by a third party if the third party is an intended beneficiary of the subordination.
Don’t need to register them.
RBC v Gabriel of Canada [1992 ON]
This case is a good easy example of how third party enforcement of subordination agreements works.
Facts: Sale of muffler business. One company (Comp) bought from previous owner (F). Entered into agreement – purchase price of business is $135,000; $30,000 was going to be carried on credit by vendor by promissory note and secured by a s/a of business assets.
Where was purchaser going to get the balance? Contemplated that the rest would be from RBC Small Business Loans program. They know RBC will not take second behind business vendor.
Issue: F wanted priority.
Held: RBC has power to enforce as third party beneficiary.
Transamerica Commercial v Imperial [1994 ABQB]
Facts: TA was financing inventory but failed to register before possession and give notice to Bk (PMSI)
Issue: TA now trying to rely on subordination agreement as third party beneficiary
Held: you are not a bank! Subordination agreement says bank.
Note: Subordination agreements are treated narrowly, with strict reading by the courts.
Marshalling
An equitable rule – not part of the Act, but recall s. 68 allows application of CL so long as they don’t contradict the Act.
It applies to all debtor-creditor relationships.
See below under realization.
Two-Debtor Problem
Example:
T1: D1 borrows from Bank; SI in tow truck (equipment)
T2: D1 sells tow truck to D2
T3: Credit Union lends D2 $ & SI in tow truck. Reg. F/S.
Could be cut off if:
Bank approves sale (s. 28(2))
D1 is in business of selling tow trucks (OCB sale per s. 30(2))
Unperfected:
If bank did not register FS, CU would win
Registration
Serial numbered goods?
Creditor can register by debtor name with description of item and kind, or by debtor name with serial #.
If registered by description:
See s. 35(4): a consequence of reg’ing serial #’d equipment by description: if ≠ reg by serial # and it has one, it’s not counted as reg’d for purpose of s 35(1), (7) and (8).
See s. 30(2): cut-off if sale to BFP in OCB.
SA Where More than one Advance
It’s very common for a debtor to borrow an amount and anticipate more advances in the future.
Recall: per s. 14, SA may provide for future advances.
Situations in which a SA commonly contemplates more than one advance:
Line of credit
Will fluctuate, and perhaps amounts borrowed will increase
It’s actually just a series of advances.
Borrowing for something that will be completed in stages
E.g. construction financing
If a building project will cost $1 million, a lender is unlikely to give a lump sum of the full amount.
Generally, a lender will expect the value of security to go up, so they will require debtor to submit evidence/proof of what they have bought/done
Then, once the evidence is provided, the next installment of money will be given.
Issue: what happens to the lender’s priority for future funds loaned/owed?
Recall: tacking allows a first lender to add further amounts to the original SI.
Policy concerns
If tacking is allowed, later lenders are not going to want to loan any money to the debtor.
If tacking is not allowed, the first lender may not lend any more since they don’t know what will happen to their priority.
So, a compromise:
If a creditor knows about additional creditors and the possibility of future advances, tacking will be allowed.
The case law goes so far as to say that tacking is allowed if you register a F/S, since future creditors are put on notice.
Probably subordination agreements will come into play here as well.
The broad ability to tack is highly favourable to the first creditor, making the second creditor unlikely to lend unless they can get a subordination agreement.
Note, though: PMSI will supersede a prior registered F/S, so if the second creditor has a PMSI then they’re fine.
PMSI Priorities
Two divisions:
PMSI in inventory
PMSI in anything other than inventory.
S. 34(1): PMSI takes priority over all other SIs in same collateral if they perfect within…
Intangible: 15 days after attachment
Tangible (other than inventory): 15 days after debtor gets possession.
(2) PMSI in inventory has priority over any other SI in the same collateral if
(a) Perfected at time debtor gets possession
(b) SP gives notice to other parties who have registered F/Ss
(c) SP gives notice to any prior SPs
(d) notice in (b) tells the parties that they expect to acquire PMSI, and describes inventory by item or kind, and
(e) notice is given before debtor gets possession.
(4) PMSI vendor takes priority over PMSI lender.
Influenced by old law: if you take a CSA vendor keeps title
Policy of encouraging vendor financing usually more economically efficient for vendor to finance than to have a 3rd party do it. Can give borrower lower rates (know precise value so less risk), so we lower their risk further by giving them a super-duper-priority.
34(5) Financing taken on a business’ accounts receivable
A common method of financing for law firms, e.g.
Example:
T1: bus borrows from FinCo. SI in accts rec’ble
T2: bus needs to expand inventory, so goes to Inventory Financer(/Vendor) and buys I on credit. I/F gets SI in invent.
IF can get priority over inventory, but also proceeds, which will likely incl. accts rec’ble.
So, even though FinCo reg’s FS showing interest in accts rec’ble, s. 34(2) puts them at risk of losing priority over a lot of them if IF loans on basis of inventory.
Requirements of s. 34(5):
(1) FinCo must have non-proceeds SI interest in accounts (met this, b/c it’s in the original collateral here)
(2) Must be providing new value to bus.
If these criteria are fulfilled, FinCo (original lender) has priority over an inventory financer w/ interest in accounts as proceeds from inventory so long as FinCo FS is reg’d before IF reg’s FS.
Note: our IF is protected:
Knows about the business since they are in it
Will search PPR to check for existing creditors (b/c will have to give notice to those to get priority for the inventory). So they’ll see the accts rec’ble obligation, and will decide whether or not they care. Usually they care mostly about the inventory on the floor, not the accts.
As $ comes into the business, will use to pay down IF to get more inventory. Money will come from injections of cash from FinCo (b/c otw all they have are outstanding debts). So, this facilitates the market, and protects the IF.
34(6) non-proceeds PMSI takes priority over proceeds PMSI in the same collateral where: (a) inventory: perfected at date of possession, and (b) ≠ inventory: perfected w/in 15 days of possession.
(Remember: generally, priority in proceeds is the same as in original collateral.)
Rationale:
Proceeds lender has more rights: can pursue items traded/sold for (through tracing?); plus, can hold non-priority seller liable for conversion
Non-proceeds lender only has interest in the collateral itself.
34(8): if perfected SI in crops/proceeds thereof, given to let debtor produce/harvest crops, either while crops are growing or w/in 6 months prior to crops growing, then SI holder gets PMSI priority over any other SIs in same collateral given by same debtor.
34(9) gives PMSI to those who lend to a debtor to enable the D to get food or drugs for fowl, cattle, horses, sheep, swine or fish or the proceeds thereof.
McLeod & Co. v. Price Waterhouse Ltd. [1992, SKQB]
Facts: Credit approval process before offer can be accepted. Takes a while, then reg f/s. Argued ≠ reg w/in 15 days of taking possession because held truck for a while before the credit K was approved.
Successful Argument: during time D had phys possession of the truck, and until Ford Credit approved the credit arrangement, truck was not in possession of the party as a debtor so, in fact, the debtor didn’t get possession of the truck until the credit K was approved.
Competition with TiB or Liquidator
Re Giffen [1998, SCC]
Facts
Employer leased car, released to employee. Long term lease w/ option to purchase at end. In this case ≠ matter whether true lease, b/c for term of more than one year so definitely SI under the Act covered by at least parts 1-4.
No one thought to register anything in the PPR. In 1992, when this happened, PPSA had only been in force for two years, and apparently it just didn’t occur to anyone.
Employee went bankrupt. Under B&I Act, TiB gets appointed to sort through debtor’s property and pay out to creditors.
Generally, TiB tries to maximize amt left for unsecured creditors.
Issue: car is SI under the Act, not perfected. S. 20 gives TiB priority over unperfected interests. But TiB can’t distribute things that aren’t actually debtor’s property.
Held: TiB prevails.
Reasons
Bankruptcy & Insolvency = federal, fed gov’t gets to define what happens on bankruptcy
But province gets to decide people’s property rights. But, CL on debtor’s property rights ≠ determinative, legislation can change it.
In this case, Prov. Gov’t of BC has changed the CL through legislation.
If you don’t perfect your SI, then your interest does not win over TiB.
Lessor’s interest in the vehicle is ineffective against the TiB TiB gets the car.
In this kind of case, title-holder is irrelevant.
Competition with Transferees of Collateral & Buyers/Lessees of Goods
Recall, some protections for buyers:
S. 28 if SP consented to transfer, buyer will take item free of SI
The focus is on what creditor knows or should know.
S. 30(2) OCB buyer takes free of SI
Transferees where SI is unperfected
S. 20(c): an SI in chattel paper, document of title, instrument, money, intangible or goods all subordinate to the interest of a transferee who:
(i) acquires an interest under a transaction that isn’t a SA
(ii) gives value, AND
(iii) acquires the interest without knowledge of the SI and before the SI is perfected.
So, basically, a BFP
Recall S. 22: perfected PMSI get priority over TiB and judgment creditors, but not BFPs.
Royal Bank of Canada v. Dawson Motors (Guelph) Ltd. [1981, ON County Court]
Facts
Advance from π bank on July 27
August 16, bank registers F/S, with incorrect serial number
But on August 15, rogue debtor drove car to ∆ and left it overnight. They checked PPR on the morning of August 16th.
August 16th check wouldn’t have turned up anything posted after close of business on the 15th
It was a slower time back then.
Issue: ∆ and π both believe they own the car. Who takes?
Held: ∆ takes over the bank.
Reasons:
If we apply the ON equivalent of 20(c):
(i) this is a sale.
(ii) SI wasn’t perfected on the 15th.
Did they give value? Court says no, but Waldron thinks they did.
A promise in return for a promise is valid consideration.
A promise to buy the car tomorrow for x amount in exchange for a promise to sell the car for that amount value.
The bank had a number of days in which to register the FS, and because they waited it didn’t show up when ∆ looked. So, on a fairness issue they bear the loss.
∆ did everything they could – searched the system, glitch meant they didn’t see the SI.
Note: court said the misstated serial number wouldn’t have been a problem, because they just added an F at the end which anyone would know didn’t belong there, so it would still be clear.
Note: if no value is given (i.e. if a gift or other voluntary transaction), then this section won’t apply.
The Queen v. Royal Bank of Canada [1997, SCC] [“Sparrow Electric Corp”]
Principle: if you combine a s. 28 implied licence to deal with s. 31 SIs in things like cheques and money, a debtor can legitimately sell their inventory and take the proceeds to pay a debt owing, and the SI of the inventory supplier will be cut off.
Issue: debtor/potential purchaser argued that since they could have sold, the SI didn’t prevail.
Held: SP keeps it. SI prevails.
Reasons: license to deal doesn’t mean SI has any less SI in the inventory until the debtor actually does something with it.
S. 30 Business Buyer Cutoff Rule
(1) definitions put in to remedy a problem relating to fixtures in Ks to supply goods & services. Addresses situations where it might be an argument whether there was a sale of the fixture at all, or whether contractor was simply being paid to build something on the property.
(2) “Ordinary Course of Business”
A buyer or lessee of goods sold or leased in the OCB of the seller/lessor takes free of any perfected or unperfected SI in the goods given by the seller/lessor or arising under s. 28 or 29 (returned goods), whether or not the buyer/lessee knows of it, unless they also know that the sale/lease is a breach of the SA.
(3) buyer/lessee of goods acquired as consumer goods takes free of perfected/unperfected SI as long as buyer/lessee (a) gave value, and (b) bought/leased w/o knowledge of the SI.
Some value has to be transferred, and you have to take w/o knowledge
(4) Two situations in which (3) protection doesn’t apply:
(a) SI in a fixture.
If you’re buying a fixture you don’t get protection under (3)
(b) if purchase price of goods is > $1000 (or if market value of lease is > $1000).
Low-value consumer goods. Sometimes referred to as the garage-sale rule.
(5) [Recall: certain sections allow temporary perfection]
A buyer/lessee takes free from a temporarily protected SI under s. 26(1) (won’t deal with); s. 28(3); s. 29(4) (returned goods); s. 51 (will get to next class), IF buyer/lessee (a) gave value and (b) bought w/o knowledge of SI
(6) [per s. 7, this only applies to serial numbered equipment]: buyer/lessee of SN equipment takes free from SI perfected under s. 25 if
(a) bought/leased w/o knowledge of SI, and
(b) goods weren’t described by serial # in SI registration
(7) (6) only applies to serial numbered equipment.
(8) a sale/lease referred to in (2), (3), (5), or (6) may be for cash, by exchange for other property, or on credit, and includes delivering goods (or doc of title to goods) under pre-existing K for sale. But doesn’t include transfer as security for or in satisfaction of antecedent debt or liability.
Royal Bank of Canada v. Wheaton Pontiac Buick Cadillac GMC Ltd. [1990, SKQB]
Facts
Key West Motor Products sold cars.
RBC had SI in KW’s inventory. FS properly reg’d; bank ≠ req’d to reg by serial # (in BC, could not have b/c inventory)
KW in liquidation. Deal w/ Stieben to sell him 4 vehicles w/ SI.
Stieben deal w/ Deschner, after it ended D bought Fiero – searched SK registry for serial #s but didn’t turn up RBC’s SI.
D bought Fiero from Mr. Stieben, then gave it to Wheaton Pontiac in trade, w/ warranty that it was free of encumbrances.
Then WP sold Fiero to Ms. Morin, warranting clear title.
Issue: Who gets the car?
Held: RBC takes back.
Reasons
Test: is it in accordance w/ general commercial practice? If no, not OCB sale.
Since the first transaction wasn’t OCB, s. 30(2) doesn’t cut off the original SI.
So, RBC can follow the Fiero to Ms. Morin.
Note: Morin would have action against WP for breach of warranty of title, who would then have action against Deschner for same, who would have action against Stieben, and so forth.
Fairline Boats Ltd. v. Leger et al [1980, ONSC]
Look at all the circumstances of the sale:
1. Where agreement was made
Ordinary place of business?
2. Nature of the parties
Ordinary customer, not financial institution etc.
3. Quantity
What is the normal amount of these goods sold?
4. Price: usually market value
In this case it was extremely low
5. Other factors
Were they in financial trouble?
6. Auction or bankruptcy?
Not OCB, per Wheaton Pontiac
Policy: allow clear title if bought in OCB
Allows purchasers to buy expeditiously without searching title
Inventory is almost always subject to some financing
Vendor is in a better position to know if debt is paid
Need to protect purchasers
RBC v. 216200 Alberta Ltd. [1986, SKCA]
One line of authority on the business buyer cutoff rule
Facts: furniture store; customers paid partial price.
Title doesn’t pass until goods are transferred – deposit insufficient.
But Sale of Goods Act overturns this – buyer’s lien. Seller’s duty is discharged if they provide the item or refund your money.
Spittlehouse v. Northshore Marine Inc. (Receiver of) [1994, ONCA]
Second line of authority
Facts:
Customer bought an expensive boat.
A classic conditional sales K: ∆ vendor retains title, buyer will pay.
Transamerica comes in and wants to take the boat back from π due to ∆ non-payment on their loan.
Held:
Reasons
So, technically, the parties agreed that title wouldn’t transfer until the full price was paid, but the court says we’ll just treat the word “sale” as what it means in common parlance.
There was no doubt that when π brought the boat home they told people they had bought it – assumed it was a sale, so court goes with that.
Note: court could have stuck to the line in RBC v. #’d Alberta and still achieved this result.
But the agreement in this case wasn’t a CSA PPSA doesn’t recognize those as a thing. Under PPSA, everything is just an SI, which simply gives vendor an interest in the boat.
So, PPSA would say πs were owners of the boat, because CSAs don’t exist anymore. It was a sale, with reservation of a SI.
Note: in BC we have legislative protection
Sale of Goods Act Part 9, s. 75 allows for a buyer’s lien.
Applies if (a) buyer pays all or part of price; (b) goods are unascertained/future goods; and (c) buyer acquires in good faith for use primarily for personal, family or household purposes.
Liens discharged when K of sale fulfilled or refund given, per s. 77
Section 51 – Transfer of Debtor’s Interest or Change of Debtors
This section protects purchasers where the debtor has transferred to a third party in a situation where the SP’s interest is not cut off. This happens in one of two ways:
A. SP consents to the transfer subject to the SI.
E.g. debt is $100k, value is $200k, A sells to B for $100k and B assumes the loan.
The interest is subsisting in the collateral, which is transferred with SP’s immediate knowledge.
B. Transfer happens without SP’s knowledge or consent.
Suddenly realize collateral has been sold.
S. 51 deals with situation A, and the need to protect people who deal with the new debtor (i.e. the person the original debtor has transferred to).
15 day grace period – begins to flow from the time the SP knows about the occurrence that puts third parties at risk
Process for applying s. 51:
1. Look at the date of SP getting knowledge
Could be date of transfer
Could be a later date when they have actual knowledge
2. Then take a date 15 days later
3. When do they register a financing change statement (FCS)?
(i.e. to change the name of the debtor)
If it’s after the 15 days, then anyone who registers between the 15 days cut-off and the actual date of registering the change will get priority.
What could happen during the 15 day delay?
If a new FS is registered during the 15-day period, that SP is in a wait-and-see position. If FCS is registered by the end of the 15 days, original creditor will get priority. BUT, if they don’t, then the new SI gets priority
So, SP can protect themselves by registering statements then waiting 15 days before advancing the funds.
If there is a sale within 15 days, s. 30(5) deals with protection of a BFP who buys during grace period
Some obligation on SP to do something or risk losing their collateral or SI
The controversial part is that the 15 days only starts to run from the date SP knows, so this can be a point of debate.
PPSA s. 1(2) definition of knowledge:
(a) A natural person knows or has knowledge when information is acquired by the person under circumstances in which a reasonable person would take cognizance of it,
Re Orion Truck Centre Ltd. [2003, BCSC]
Facts: SA; debtor changed name. Two SPs find out about the name change and do nothing. Debtor goes bankrupt, enter TiB, SPs finally change F/S.
Issue: does s. 51 give TiB rights in this circumstance?
Held: TiB has interest in the collateral on behalf of unsecured creditors.
Reasons
Turns on the specific drafting of s. 51: it expressly refers to SIs and “other interests which are not SIs”
How broad is the term ‘interest’?
Court finds TiB is included as holder of interest on behalf of unsecured creditors.
Basically the SPs had knowledge, didn’t change w/in 15 days, and the trustee came in before they did.
So, it was like a sale situation which they did nothing about, so unsecured creditors win.
Accounts and Chattel Paper
Negotiable Collateral
Where something is transferred by physically handing it over
E.g. a cheque is transferred by handing it over (or by signing the back and handing it over)
S. 31: looking at things that are easily transferable.
(1) Money: defined as a medium of exchange authorized by a government as currency
(2) Instruments: bill of exchange, any other writing that evidences transfer.
Does not include chattel paper, document of title, investment property or bond debenture.
Major categories: cheques and promissory notes
(3) Negotiable Documents of Title: writing issued by or addressed to bailee and covering goods.
Example: bill of lading.
Primarily things covered by federal jurisdiction
(4) Chattel Paper: different from instrument. One or more written documents which evidences monetary obligation of specific goods. The physical contract, the actual piece of paper, is the thing of value.
S. 31 “holder” just means whoever has physical possession.
S. 31(2) protects creditors who take an instrument for a debt.
They take priority on the instrument even if they know about a prior SI.
31(3) A purchaser of an instrument has priority over a SI if they give value, take possession, and don’t have knowledge.
Purchaser includes someone who takes by sale, lease, discount assignment, negotiation, mortgage, pledge/lien, issues, reissue or gift.
If I give you a cheque, you are considered a purchaser of that cheque under the Act, and you aren’t protected unless you’ve given value.
Need to watch for possession, and what the actual item is.
Indian Head Credit Union v. Andrew; Royal Bank of Canada, Garnishee [1992, SKCA]
Facts:
Farmer (Andrew) had livestock, gave SI to CU in that livestock, including proceeds (which included insurance)
Livestock got sick and they all had to be destroyed, so there was a program to compensate the farmers.
So, CU had an interest in the money that would be paid for the cows.
Normally, a cheque would be issued jointly to CU and P. But there was a mix-up and the cheque was issued to Andrews.
Andrews deposited the cheque with RBC and wanted to buy a term deposit. RBC asked about CU’s interest but A said there would be another cheque for them and this was his.
So bank issues term deposit, then A borrows money from the bank using the term deposit as security.
CU comes after the term deposit.
Issue: bank argues they are protected by 31(1) as a purchaser of the cheque deposited in the bank.
Gave value, acquired w/o knowledge, and have possession, so they argue they get protection under 31(3)
Held: No, bank is not protected under s. 31
Reasons:
There was never any money involved, so 31(1) doesn’t apply. The cheque turned into a term deposit – there was no money owned by the bank, so it doesn’t apply.
Also, they knew too much so they wouldn’t get protection even if it did apply. Bank knew he owed money to CU and that CU had interest in the proceeds, and had some indication that the cheque was proceeds of the destroyed cattle.
A wasn’t a long term customer where it might have been reasonable to rely on his word – he was relatively new to the bank. They shouldn’t have just trusted him.
Note: a term deposit is not an instrument, and it’s certainly not a cheque under the Bills of Exchange Act. It could only be a piece of writing which evidences money. Rights to a term deposit are not transferred by delivery. It was an intangible, not the sort of thing transferred by handing over a piece of paper.
Chattel Paper
A transfer (sale) of chattel paper one party gives up interest in the CP in exchange for money. The transfer creates a new SI in the CP.
With chattel paper, can perfect by possession you have an SI in the car (e.g.), but also in the CP itself, to which the same rules of SIs apply.
Two-tiered perfection:
1. Ensure SI in CP is properly perfected, or SP is at the mercy of the party who gave the interest
2. Ensure SI in CP is properly perfected, to protect against transferor’s bankruptcy
Where there is an outright sale of CP, the purchaser will usually take possession this is the safest way to protect your interest in the CP.
31(6) gives special priority to purchasers of CP who take possession in OCB and for new value.
Note: accounts and CP are mutually exclusive
If it’s an instrument or an account, it’s not chattel paper.
Two defining components of CP:
1. SI
2. Promise to pay
To know what rule applies, we need to know what a thing is.
Can have a true SI in chattel paper:
An interest of creditor securing payment from the debtor.
Generally, bank won’t intervene unless there’s a default. If the debtor defaults, then the bank has the right to go in and demand payments/realize on the SI.
Recall: if it doesn’t secure payment of an obligation, Part 5 won’t apply. But everything else will still apply to CP.
Perfection
Most likely will perfect by possession. Unlikely to register a F/S – better to just take and hold the CP itself. Better protection under the Act.
31(6) If you perfect by possession of CP, you have priority over:
(a) Anyone with SI in the CP who perfected by registering F/S
(b) Anyone with registered SI in inventory and proceeds, whatever the extent of that interest, and even if CP holder knows about the interest of the other creditor.
Note: the Act doesn’t state this super clearly, but it’s how it’s been interpreted.
One of the provisions must be dominant, and Cuming and Woods say that (b) is the dominant provision here.
Application of 34(5): PMSI of an accounts financer
Note: unlike a CP purchaser, an accounts financer must have registered before the inventory supplier came on the scene.
It’s a non-proceeds SI in the account. (It’s really a sale, but it comes under the Act as a SI)
Similar to CP, except instead of taking possession, they’ve had to register F/S to perfect.
Accounts financer (non-proceeds SI) has priority in accounts over a holder of PMSI in accounts as proceeds of inventory (i.e. an inventory supplier) IF A/F registers their SI in accounts before PMSI is perfected or the F/S relating to it is registered.
So, an inventory financer can check the registry and see that there’s a prior agreement w/ A/F, and they can make an informed decision.
Canadian Western Bank v. Gescan Ltd. [1991, ABQB]
Facts
T1: lender gave $ to A, SI in accounts
T2: A assigns an account to another creditor.
A defaults. Lender goes to the books to notify people who owe accounts to pay them instead of A. But then they discover that A had assigned that account to another creditor.
Issue: lender says creditor must give up the money collected on that account, because L has rights over it.
C says they have specific interest in that account, which overrides L’s general interest.
Note: before PPSA, this was the rule (per Durl v. Hall): in a competition over an account, the first party to give notice to the account debtor would win. So, since C had already started collecting, C argued that they took.
But, under PPSA, things are different.
C holds a deemed SI not securing payment, but it is a SI
L has registered F/S and perfected their SI.
Held: C has an unperfected SI, so L takes priority.
Assignment
Recall: if there is a specific rule, that rule governs. If there isn’t a specific rule, fall back on s. 35
So, with CP purchaser, ask if they qualify under s. 31(6). If yes, apply that. If not, go to s. 35.
S. 41 – Assignments of Intangibles or Chattel Paper
(1) Account debtor means a person who is obligated under an intangible or chattel paper
(2) The rights of an assignee of collateral which is either an intangible or chattel paper are subject to
(a) the terms of the contract between the account debtor and the assignor and any defence or claim arising out of the contract or a closely connected contract, and
So, say A promises B $100 for widgets, and B assigns the debt to C for $85. But then some of the widgets are defective and get returned, so A only owes B $50 for the widgets kept.
C is now stuck because this provision gives A superior rights
Note: ‘rights of setoff
CL right to set off mutual debts so, A owes B $100, B owes A $150. Can set off the two debts and B just has to pay $50.
At CL, these rights applied only to K itself so e.g. instead of A having to return widgets, A had paid $50 extra on a previous delivery from B, and now claims that set-off from the $100, so they only owe $50. Same effect.
Because the Ks are closely related, arising out of similar transaction, A can set off the amount, and C is stuck with that too.
So, C takes subject to any rights on the K and closely related Ks including rights of setoff
If B was fraudulent and A owes nothing, C is subject to that too.
(b) any other defence or claim of the account debtor against the assignor that accrues before the account debtor has knowledge of the assignment,
Summary: s. 41 is a codification w/ some modifications from CL
Notice given to account debtor that stops running of accounts has to identify the K under which the amount payable is to become payable;
One modification: you can modify the K in ways that are commercially reasonable
Other modification – see (9):
A term in a contract between an account debtor and an assignor that prohibits or restricts assignment of the whole of the account or chattel paper for money due or to become due is binding on the assignor, but only to the extent of making the assignor liable in damages for breach of contract, and is unenforceable against third parties.
Basically preserves right to sue B for damages, but ≠ effective against 3rd parties.
Returned or Repossessed Goods SI returns after Cut-off
Most of the time, these rules are really easy to apply. The basic concept and how it plays out are very straightforward.
SI can become detached from collateral by a cut-off, but then return.
E.g. debtor sells in OCB, which cuts off SI, but then the item is returned to the debtor.
Issue: does the SI reattach?
S. 29: rules for reattachment of SIs in returned or repossessed goods
(1) if a debtor sells or leases goods that are subject to a SI under circumstances in which the buyer/lessee takes free of the SI (per s. 28 or s. 30), then the SI will reattach if:
(a) the goods are returned to, or are seized or repossessed by the debtor or a transferee of CP created by the sale/lease, AND
(b) the obligation secured remains unpaid or unperformed.
So, SIs from immediately before a reversed sale will reattach, provided that all parties still exist and registrations of F/Ss haven’t expired.
(4) A party wishing to perfect a new SI in returned goods must register F/S or take possession of collateral
Despite s. 24(1) This is the one exception to the rule that says you can’t perfect by seizure or repossession.
(5) In terms of returned goods, the SI of a transferee of account is subordinate to (1) SIs and CP SIs.
(6) IF CP holder would have priority under s. 31(6) [i.e. if they have perfected], then SI held by transferee of CP has priority over:
SPs who get SI back under (1)
Anyone with SI in after-acquired property
So, the order is generally:
1. Perfected CP holder
2. Perfected PMSI holder
3. Regular SI holder (typically a bank)
4. Accounts Financer
Process for assessing priorities over returned goods:
1. Check for the three categories of SIs listed under s. 29:
A. Reattached (generally)
B. Created for accounts financer
C. Created for CP purchaser
2. Check to see whether they are perfected
Accounts financer: must register w/in 15 days
Bank: must register F/S
CP: must register F/S, per s. 31(6)
3. Analyze priorities:
Accounts financer falls to the bottom
A perfected CP purchaser will beat everyone.
Security Interests in Some Specific Types of Collateral
Fixtures
S. 36
Once an item is affixed to land in such a way that it becomes a legal “fixture,” ownership goes to the owner of the land.
It can be tricky to determine what is and isn’t a fixture
Test: assess based on two factors
1. Degree of affixation
2. Intention of the parties
Did they intend it to be affixed such that it became a fixture/part of the land?
Not necessarily confined to an interior mental state, but looks at what people would normally think
Custom comes into play a lot here there are cultural assumptions about what goes with a house, etc.
Once something becomes part of the land, the Land Title Act rules apply:
The first thing registered takes priority
In BC, you can register a whole bunch of things. It’s not a pure torrens system.
So, you can register a judgment. (It comes up in PPR as well)
So, now there are two registration systems to look at.
This can take us into circular priority problems [see KMS Securities v. Richwood Kitchens]
PPSA has a slightly limited definition of fixture:
“Fixtures” does not include “Building Materials”
Fixtures financer provision: there is a limited right to SI in fixtures don’t include things that will wreck the house if removed.
The protected category of “building materials” does not include the following (which thus CAN be fixtures):
Heating, AC, elevators, etc. so these things can be subject to a claim.
“Building materials” means materials that are incorporated into a building and includes goods attached to a building so that their removal
(a) 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 resulting from the removal, or
(b) 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:
(c) heating, air conditioning or conveyancing devices [elevators], or
(d) machinery installed in a building or on land for us in carrying on an activity inside the building or on the land
S. 36(3): except as provided in this section and s. 30, a SI in goods that attaches before they become fixtures has priority over a claim made by a person with an interest in the land.
S. 36(4): but that party’s priority is subordinate to the SI of someone who acquired interest in the land after the goods became fixtures IF the person gave value, got SI before notice was filed in accordance w/ s. 49, and there was no fraud.
So, SI in goods that become fixtures? File a notice in accordance w/ s. 49.
Note: don’t need to be perfected to take priority under s. 36(3), but if you want to protect against someone buying the property or making an advance on a prior mortgage, etc., you need to register.
We’re only talking about competition between PPSA secured creditors and parties with an interest in the land no reference to perfecting SI in fixtures, because s. 36 applies even if SI isn’t perfected.
There are two types of SIs in fixtures:
SIs taken at or before the time the item became a fixture
Per 36(3), these have priority over interest in land
SIs taken after the item became a fixture
Per s. 36(5), these lose priority to pre-existing interest in land, unless that party consents to give priority.
Exceptions:
Registration under s. 49 will protect against losing priority to a BFP who registers later.
Registration of judgment in LTO, per s. 36(6) and (7)
Takes priority over PMSI, but PMSI gets 15 days grace to register and perfect.
PPSA tells us what creditors can do to realize their SIs in fixtures:
S. 36 (8): can’t just go in and rip it out willy-nilly must take out as carefully and neatly as they can.
(9) E Co would be liable for any damage they caused if they didn’t take it out nicely.
(10) person entitled to reimbursement under (9) can refuse permission to remove until security is given
(11) right to go to court to sort out these issues – who gets security, how much, how paid, etc.
(12) mortgagee interest is subordinate but may retain the goods on payment to SP of either (whichever is less)
(a) amount secured by SI that has priority
(b) market value of goods if removed from land
Manning v. Furnace Man [Manitoba]
Note: not applicable in BC, but useful illustrative facts/policy issues
Facts:
Mr & Mrs M bldg house; had general K’er who was buying things for process of bldg from various dealers
One thing he bought was a furnace, from Furnace Man FM supplied furnace to K’er who installed in Ms’ house.
Nothing happened for a while; they paid the K’er. But FM hadn’t been paid.
So, FM should have filed a builder’s lien (provisions under statutes that the Ms would have held back part of the price from the K’er until the lien period was over, to ensure the price would be satisfied.
But, FM never filed a lien, so that remedy was closed to them.
Sometime after Ms have occupied the house, it occurs to FM that they haven’t been paid.
Issue: FM claims they have an SI in the furnace, with priority over the Ms, and wants to remove the furnace. In the middle of winter. In Manitoba.
The Manitoba Act provision didn’t contemplate SI attaching at the time the item became a fixture so this wouldn’t be a problem in BC.
Held:
Reasons
Ms argued that they bought the furnace from the contractor in an OCB sale, which cut it off. But court said the contractor wasn’t in the business of selling furnaces.
Though…you could see how a construction business must ordinarily require you to sell installations for the house, etc.
Note that s. 30(1) of the BC Act is supposed to cover this exact problem: definition of OCB “includes the supply of goods in the ordinary course of business as part of a K for services and materials.”
So, we wouldn’t have this issue either.
Lower court: so, when did FM’s SI attach?
Didn’t attach before, so it must have been after. So, subordinate to the Ms.
CA: there was no SI
The K didn’t give one, just a promise to pay.
Note: clearly the courts didn’t have much sympathy for FM.
In particular, they could have used the Builder’s Lien Act to protect themselves.
In that case, the Ms could have withheld the appropriate amount until the lien period expired, so really everyone could have been protected.
Crops
s. 37
Pretty similar to the fixtures system.
Farmers may have to borrow $ to preserve crops.
Note: recall s. 12: you can’t have attachment of SI in crops until the crops become “growing crops”
SI doesn’t attach until crops start to grow, but after that, SI in crops takes priority over pre-existing interests in the land.
Accessions
S. 38
Definition: “goods that are installed in or affixed to other goods”
e.g. snowplow attached to the front of a truck; tires on a car; etc.
Registration
Where there is competition between one party with SI in land and one party with SI in fixtures, two registration systems exist.
Where there is registration of title (certificates of title, covered by s. 36), you can figure out who owns a property and what interests exist in that property.
BUT, there is no registration system for cars.
In Canada, at least in the US many states actually do have certificate of title systems for cars.
So, if there’s no LTA requirement we register under the PPR.
Use the same structure and requirements as for fixtures, but use PPR for both, don’t need to register in LTO
Deals with competition between parties with SI in item and parties with SI in something affixed to the item.
First, look at the item and determine whether it’s an accession or commingled goods.
If the identity is lost, it’s commingled, not an accession.
Pratt & Whitney Canada Leasing Inc. v. Ellis Air Inc. [2002, BCSC]
Facts
Creditor sells helicopter to the debtor, taking SI in the helicopter
P&W leased H engine to debtors. Definitely an accession – could be removed, etc.
P&W didn’t perfect its SI – didn’t register FS (though turns out this didn’t matter)
Debtor went into creditor protection, ultimately went bankrupt
The party who had sold the helicopter basically got permission by court order to come and take the helicopter and terminate their interest in it.
P&W discover their engine is missing, and in the hands of the creditor who has repossessed the helicopter.
Issue: P&W claim priority w/ respect to the engine, saying that it was an accession and under s. 38 they had priority
Analysis
Looked at limits of provision
If you acquired it w/o knowledge of the SI
So creditor said court order gave them right to take the helicopter. P&W hadn’t filed FS, and once they got their court order w/o knowledge of SI then they fall under s. 38(3)(b)(ii).
But, court said the order doesn’t talk about the rights over the engine – doesn’t specify whether you get the helicopters absolutely or not. Be careful about the wording of your orders! Can repossess lots of things that you may later be forced to cough up amounts of to other creditors. So, creditor’s order just says they can go get the helicopters, nothing about other potential creditors. No right under than order to acquire the whole.
So, we fall back to general provision: 38(2)
If someone has SI in accession affixed to an item over which someone has SI in the whole, the SI in the accession takes priority over the person who has SI in the whole.
So, P&W took the engine, their SI having priority
Note: registration is irrelevant in this section – so we’re not worried that P&W created the problem
Similar to LTA registries for fixtures, you don’t have to register as long as nothing else happens.
Clearly, the original court that wrote the order could have cleared this all up by allowing for vesting in the creditor when they took possession.
Problem: there was some usability left in the engine.
The creditor gave credit to debtor for the unused life of the engine, which clearly they wouldn’t have done if they’d known P&W were going to take it.
Could they have argued that as an advance under the agreement, made after SI of accession attached didn’t argue this, but it might have been possible to reduce the loan by the useful life of the engine, and P&W might have had to pay up the value of the useful life of the engine.
Also: not sure why TiB wasn’t taking the engine if it was usable (?) – but creditor was perfected, so they would be able to fend off TiB.
Commingled Goods
Don’t confuse accession with commingled goods.
S. 39(8): this section doesn’t apply to accessions covered under s. 38
Example: SI in sugar that gets cooked into candy with cocoa.
The cocoa and sugar have commingled.
S. 39 tells us that the SIs continue in the commingled goods, as long as they were perfected before the commingling.
If there was SI in both the sugar and the cocoa, then the SPs will take the value of the candy proportionately, according to the ratio of their debt.
If you have a PMSI in the components, you basically get PMSI in the whole take priority over other non-PMSI holders.
Special Rights of Particular Parties
Repairer’s Lien
At CL, a repairer always had the right (a CL lien, basically) to hold onto the thing until payment.
Now: can give item back to party and register in PPR
See s. 32: a lien on goods that arises as result of OCB provision of materials or services in respect of the goods = priority over perfected or unperfected SIs, (unless lien arises under an enactment that gives priority to the SI)
Distrain
Recall the Rent Distress Act
Commercial landlords have always had (and still do) the right to distrain for rent. Go in and seize property of tenant and sell it to collect rent.
Landlord’s right of distress takes priority over SP, unless SP has PMSI (in which case PMSI takes priority – which is what wound up happening in Marathon, though that’s not what we focused on. But, had landlord successfully convinced court that creditor didn’t have PMSI, they could have seized the inventory and kept it per right to distrain.)
On the Event of Default – Part 5
Note: these rights & remedies apply only to true SIs, not the deemed SIs
Roadmap of Part 5
s. 60 provides order of distribution
s. 61: alternate remedy voluntary foreclosure
s. 62: debtors’ rights to redeem the collateral, or sometimes to reinstate the loan.
S. 63: court’s supervisory jurisdiction
Ss. 64, 65, 66: receivers and receiver-managers
S. 67: limits on remedies for consumer goods (the “seize or sue” provisions
Realization
Two scenarios:
1. Scheduled payments
2. Loan repayable on demand
Some possible acts of default (will be set out in loan agreement)
Failure to pay on the loan (of course)
Failure to maintain insurance
Failure to do maintenance on item
Process of realization example:
$20k truck, A defaults
Bank notifies A
Bank Picks up truck
Then arranges to sell the truck to recoup their losses
Sells the truck – $5000 on the sale.
A bit more than $20k overall owing at this point (due to fees etc.).
Say $7k debt remaining, bank will sue A for the amount owing, take judgment and proceed using creditors’ remedies
May get bailiff to seize other pieces of property, take collection proceedings on that
Note: if this were a consumer transaction, bank wouldn’t have ability to both seize truck and sue A for deficiency. In the commercial world (which is where most lending transactions take place), the process would be to seize the collateral, sell it for what you could get, and then take other proceedings to get the rest of the debt.
Part 5 balances rights of debtors with obligations of the creditor
Creditors have responsibilities in the realization process
Must take care of the goods they seize; will be liable for any damage while in their possession.
When they proceed with the sale, required to behave in a commercially reasonable manner.
Make a genuine effort to get FMV for the item
Debtor has rights under the Act, many of which cannot be waived.
Overarching it all, there is a general supervisory jurisdiction of the court, to intervene when things go off the rails.
Marshalling
Requires senior creditor to act in a way that will best preserve the junior creditor’s rights.
Not required to act in a way that prejudices their own rights – no self-sacrifice required.
But if they have options as to how to protect and pursue their rights, they’re supposed to choose the option that also protects junior creditors.
Some background to Waldron:
Note: when a debtor defaults, under a typical agreement the creditor has the option to accelerate the loan.
So it becomes due and payable in its entirety.
Process before 1982:
Lender would write a letter demanding immediate payment of the loan.
Letter would be given to an agent for the lender (usually another part of the bank, actually).
Cashier (agent) would look in the debtor’s account and say the amount couldn’t be paid.
Then they’d go down the hall to the receiver, who would go lock the doors and the borrower would be out in the street.
This happened in a famous case, Lister v. Dunlop, which is referred to in Waldron.
In Lister, D said they should have given him some time to find some other financing, but none was given, and thus it was a wrongful seizure.
Because the seizure of assets is such a catastrophic event, if it’s done improperly the damages can be huge.
This went up to the SCC, who said the debtor was right must have a reasonable time to pay; can’t just present letter to cashier then receiver and have them walking in the door thirty seconds later.
The scope of the cases on this kept expanding. That’s what Waldron is about.
Waldron v. Royal Bank of Canada [1991, BCCA]
Lambert J a senior, experienced commercial judge. Previously acted in big realization procedures, so he knows what’s happening here.
Issue: does the principle of reasonable notice established in Lister v. Dunlop apply to all areas of SI?
In Lister, it was the legislation that came before PPSA, and in Waldron it’s the Bank Act
Held: it’s a general principle of fairness, not tied to particular legislation. The debtor must be given a reasonable time to pay.
So How Much Time is “Reasonable”?
Consider the following factors:
1. Is this a situation where the value of assets is falling, or where the asset is perishable and the creditor thus has to move quickly?
Basically, ask: what is the risk to the creditor?
2. Does the debtor have any prospect of refinancing? How realistic is it that they could find other sources of funding?
3. Has the debtor been dishonest in any way? Does creditor have reasonable belief that if they don’t act fast, the debtor will be selling the inventory out from under them or something?
There is still some uncertainty. But at least a few days or a couple of weeks.
1990s developments:
Passed federal Bankruptcy and Insolvency Act, which says (ss 243 & 244): if the debtor is insolvent, a creditor must give a debtor a min of 10 days notice before creditor seizes collateral.
There are two generally accepted definitions of insolvency
1) Where debtor’s liabilities exceed assets
2) Where debtor is unable to meet its obligations as they fall due
At the point of a major creditor calling in a loan after a default, it’s really quite likely that the debtor is insolvent.
Might have to give more notice than this, since Lister v. Dunlop, but definitely can’t give less – under this Act, at least.
PPSA does not talk at all about pre-seizure notice.
There has been some argument that PPSA should displace the CL
Can’t displace the B&I Act, but could overrule the CL. But s. 68 says that CL etc. continues unless expressly changed.
So, if you have a creditor about to realize, and debtor is not insolvent, then you pay attention to the possibility of a notice period.
Receivers & Receiver-Managers
Job: to effect an orderly realization of the security.
Source
Arose out of equity
Inherent jurisdiction of the court to appoint receiver (still exists under Law and Equity Act – “when it is just and equitable”)
Also, parties put this into their agreements.
So, now we have court-appointed receivers and receivers operating under K at behest of SP.
Difference: court receivers act as officers of the court; don’t visit liability on the party for whose benefit they might be acting. If it was appointed under K, might be agent and anything they did could be your problem.
Historically, courts were unwilling to give directions where receiver appointed under K
Receivers powers to borrow:
To preserve collateral, receiver may need to borrow money.
Courts (or was it SPs?) weren’t really thrilled about this idea, so sometimes the rules would be quite stringent, So, receivers might go to court and become court-appointed to get the full scope of powers necessary
Receivers issue “receiver-certificates” which allow them to get more credit, etc.
PPSA tries to codify the basic obligations of receivers
Doesn’t distinguish b/w court-appointed and K-appointed receivers.
When you see the term “receiver” in the Act, you can apply it to both of these categories.
Difference b/w R and R-M:
R is supposed to go into the business and start selling it off.
A Receiver-Manager is allowed to take over the business and keep operating it to recoup.
S. 65(1)(b): unless you’re a receiver-mgr, you can’t carry on the business of the debtor for more than 14 days.
S. 64:
(1) you can have a SA providing for appointment of a receiver but the receiver has to be a licensed trustee under the Bankruptcy Act
(2) List of ppl ≠ qualified
under 18
incapacity
undischarged bankrupt
etc.
Receivers are typically chartered accountants. License trustees – can act as trustees in bankruptcy
S. 65: obligations of receiver
Give notice; take control; open bank account; keep records; always indicate that they are acting as the receiver of the business
66: general court supervision of receivers
(1) (a) court can appoint anyone who’s not disqualified (though usually it will be licensed trustees in bankruptcy too
(b) even if appt’d under SA, court can remove/discharge
(c), (d) can approve accounts, give directions,
RBC v. White Cross Properties [1984, SKQB]
Facts: Bank wanted court to appoint a receiver, but they had the power under their own agreement.
Held: Court said no.
Reasons: there’s no reason to get the court to do it if you have the power already.
There was no deficiency or serious priority squabble to put them at risk
But note that the court can step in and act on behalf of the receiver/party, regardless of how they were appointed. [per a section of PPSA]
Summary
Efforts by PPSA to collapse the two categories of receivers and receiver-managers
There isn’t a ton of case law on this area yet, so there are some distinctions that may exist but haven’t been dealt with yet.
It does appear that a receiver, even if appointed by a private document, has the right to apply to court to get directions, etc., to do the things they couldn’t do historically.
Receivers have time limit, but R-M can run forever.
Collection of Payments for Accounts or Chattel Paper
Example: a bank has SI in accounts receivable of XYZ firm. XYZ defaults, bank moves to realize.
XYZ is continuously taking payments on accounts and creating new ones – SA will allow that.
The bank just comes in and tells customers to pay them directly, not XYZ.
An account debtor can keep paying their original creditor and their obligation is reduced until they get notice of the assignment
Bank is permitted to give notice under PPSA.
Process of Seizure of Collateral
S. 58
What if collateral is too big or otherwise impractical to move?
You can take possession without removing change the locks, post notice on machine, etc.
S. 58 rules are pretty simple
Note the difference for consumer goods: (3) the 2/3 Rule
Limits right to seize consumer goods if you’ve paid at least 2/3 of value, creditor can’t seize consumer goods.
Right to reinstate: s. 62
(2) Gives consumer an automatic right to reinstate; basically not more than two times in a year.
(3) commercial can apply to court to get right to reinstate
Courts are pretty reticent to grant reinstatement in the commercial context.
Disposition of Collateral
Generally speaking, it’s the senior creditor who sells the collateral
Must give notice per s. 59 to debtors and junior creditors.
When they do sell, proceeds are distributed in accordance with s. 60
60(5): if there isn’t enough to cover the debts, debtor is liable for deficiency
The “Commercially Reasonable” Requirement
Historically: prohibited from acting in bad faith, but otw no problems.
Now, you can’t just turn a blind eye to circumstances you should be looking at to get the best value etc.
If you have to incur expenses to do that, you’re entitled to collect those out of the collateral.
E.g. do you have to repair a chattel in order to sell it? If it will increase the value, etc
Copp v. Medi-Dent Service [1991, ON Gen. Div.]
Facts: feuding dentists
Partners paying into loan. Default, creditor served notice.
One of the dentists went to the creditor and said they would buy it outright. Creditor agreed to sell it to one partner for the outstanding debt.
So, now one partner has ownership of the whole thing, even though the other partner had paid in a bunch already toward paying down the debt.
Creditor delivered title clear of all subordinate interests (including that of the other partner). So, the other partner just got screwed out of all his contributions.
Second partner failed to intervene before the sale was made, and the conniving partner gets the property outright.
Held: no, you can’t do that.
Reasons: not a commercially reasonable sale
No attempt to advertise
Private sale to a party clearly adverse in interest to the (second) debtor
No attempt to obtain valuation of the security
The value was actually more than twice the amount of the sale price that’s not a commercially reasonable price.
Donnelly v. International Harvester Credit Corporation of Canada [1983, ON County Ct.]
Facts:
Heavy equipment, seized and sold w/o any efforts to recondition or repair the vehicle; sale was made b/w related companies, and just as in Copps, the price seems to have been set just as a matter of convenience.
There was a sale to a 3rd pty eventually, but the records were ‘lost’ (though that seems pretty convenient, since they likely showed the sale b/w the companies at a substantial undervalue)
Held: not commercially reasonable
Consider:
Was there a sufficient effort to obtain the best price?
Did the creditor assess the best means of selling?
Did they consider what was most likely to produce the best result?
Would advertising help, and would it be cost-effective?
Would cleaning, maintenance or repair help, and would the increased value justify the cost?
See s. 17: imposes reasonable care requirement on SP, and allows SP to collect expenses of taking care of collateral when it’s in SP’s possession.
Note: this might go differently under the current BC PPSA:
S. 69 sets out consequences of non-compliance with the Act
one party can sue for damages that are “reasonably foreseeable” that was caused by the breach
if you cannot prove (establish) your damages, then there is statutory damages available
(7) – debtor may raise as defence, failure of SP to comply with certain sections:
17 – care of collateral
18 – requirement to give information to certain parties
59 – process of sale
60 – proper order of distribution
BUT – non-compliance limits the right to the deficiency only if it caused a problem
Prof – often, the failure does not actually cause a loss to debtor
Eg: shorter notice period, but didn’t really affect things
Donnelly was still probably decided correctly since they didn’t have proper evidence of what they have already recovered (the true price they got from the sale of the collateral)
Foreclosure
SP just takes property in satisfaction – no sale.
Can’t claim any deficiency.
S. 61 sets out the requirements for voluntary foreclosure.
Must notify debtor and any perfected subordinate SPs
If they object, then SP must instead dispose of the collateral.
If there’s no successful opposition to foreclosure, SP takes free of debtor and subordinate interests.
Note: SP can apply to court to find the objection ineffective. Reasons:
1. The objector doesn’t have any interest in the collateral.
2. The FMV of the collateral is less than the value of the debt.
Situations where VF can work:
1. Where value of collateral is close to value of debt
2. Where collateral has some special interest to SP
3. Where debtor is judgment-proof, and unlikely to gain in the future
VF is uncommon:
SP will likely only be free of objections if value is less than debt, in which case SP will be losing money.
Criticism: the notice period is too short.
Angelkovski v. Trans-Canada Foods Ltd. [1986, MBQB]
Facts
∆ sold restaurant to π, with balance of purchase price secured by chattel mortgage
January (82): after π defaulted on chattel mortgage, ∆ seized by having bailiff lock the premises.
March: sale attempted, not completed. No other effort was made to sell until the following July. Following the abortive sale attempt, ∆ took control of premises and restarted the restaurant business in ∆ name. Had to make some repairs etc.
August: letter sent to π stating costs of repair
πs issued statement of claim dated August 17, served Sept 1.
Alleged that ∆ had elected to receive the chattels in full satisfaction of the debt, and therefore π had no further obligation to ∆.
January (83): fire on the premises, chattels destroyed.
Issue: did ∆ lose the right to claim deficiency by the manner in which they took possession?
Held: foreclosed, not entitled to claim deficiency (in BC).
Reasons
Court characterized ∆ behaviour as reopening the restaurant with the purpose of operating it himself, with no intention of accounting to π for any surplus.
Based on this characterization, the chattels were appropriated in full satisfaction of the debt.
The court characterized it as a foreclosure (as opposed to ∆ just trying to improve sale value/primary purpose being to recover amt owing) because:
1. ∆ didn’t make serious attempt to sell
2. No evidence of discussion or negotiation w/ re a plan to reopen restaurant solely for purpose of selling the chattels; ∆ never indicated to that the intention was to improve the selling price, nor sought aid toward that objective. ∆ treated restaurant & assets as ∆ irrevocable property.
3. No adequate appraisal of chattels after seizure
4. In March 82, ∆ gave equipment an insurance value of $150k; debt was then worth max $112k.
So, at CL, would be entitled to declaration that they had no further obligation to ∆ in rel’n to the debt.
However, due to MB PPSA, SP can pursue the deficiency.
Debtor retains right to redeem until 15 days’ notice is given that SP intends to retain collateral in satisfaction of the debt.
Basically, until the appropriate sections have been complied with, SP can pursue the deficiency because debtor still has the right to redeem.
Since SP didn’t give notice that they were treating it as VF, debtor always had the right to redeem and SP maintained the right to sue for deficiency.
Note, though, that SP may have to account for the chattels, and may thus be open to a damages claim by the debtor on that basis.
Note: this decision has been not followed by some other cases.
So, does CL presumption of VF (where SP treated collateral as its own) still apply, with s. 69 merely as a supplement with clearer procedure?
Later courts have said they stand side by side.
Recall, s. 68 allows CL rules to apply.
Waldron supports this view: it would be weird if a SP could do what was done in this case and then also sue.
Inland Kenworth Ltd. v. Laboucane [2004, BCSC]
Facts:
Sale of equipment, SI to vendor. D defaulted.
V picked up the equipment. V is a dealer in this type of equipment.
Got equipment appraised, returned to their stock, and sold. Then sued for deficiency.
Issue: D argued that when they took the equipment they took it for themselves, as VF.
So, what determines whether SP has appropriated the collateral for themselves?
Held: this was not a VF.
Reasons
The intent was always to sell. Not foreclosure, it was just a method of sale.
Under PPSA, you can sell by various methods. This just happened to be a convenient method.
Special Treatment of Consumer Goods under PPSA
Taking SI in consumer goods, and seizing consumer goods, will limit rights of SP
Things to remember about CG:
must describe by item or kind
if serial, then you must describe by serial number (e.g. motor vehicle)
error in registration or debtor name or description of collateral – more stringent test
not covered by apaap clause
automatic right of reinstatement – 2 times per year – more generous than previous PPSA law
can’t seize if more than two-thirds of the debt has been paid
special protection for discharge – s.50(2)
requires an SI in CG to be discharged within a month after obligations in SI have expired
i.e. if you have paid the debt, the SP must discharge more quickly than regular commercial txns
Note: the most significant consumer right added in PPSA is the right to reinstate twice a year
Because of limitations on seize and sue, many creditors are going to allow for reinstatement
Sometimes, creditor gets tired of this process, and want to just call the loan and be done
However, now, the debtor has the right to reinstate, so things are different
s.67 – Rights and Remedies: consumer goods
(1) - You can still seize and sell, VF, sue, etc.
(2) – if you do any of the things:
seize (1)(a)
take VF (1)(b)
or accept surrender of the goods (1)(c)
then, the obligations under SI are extinguished
(3) – SP has 20 days to return CS and proceed against only the non-CS items
(4) – mortgage foreclosures – if you foreclose under LTA procedures, you are not at risk of losing your deficiency
(5) – you have a PMSI and you seize only some of the goods – part of them
Proportionate part of the obligation gets extinguished
(6) & (7) – plugs potential loophole
(6) - if you sue, and then collect on your judgment, then you are limited to collect on the amount you can collect from the goods.
(7) – the debt is extinguished
So you can sue, then seize all the other collateral
(8) – accession – has been removed – preserves your right to accession
(9) – gives court power to relieve against this section where the goods have been substantial damaged or deteriorated
Rationale: prevents debtor from damaging their own consumer goods
(10) – if you sue (1)(d), then your SI in the goods is extinguished
So, you can sue and then look to their other stuff – but their other consumer might not be worth anything and there consumer goods might already be governed by another creditors S
Whitewater of Motors v Amatto
Facts
D bought truck from Vendor
Truck was being used partly for commercial purposes – snow plowing
V was going to allow D to pay back debt partly on proceeds of snow plowing
Issue 1: Mixed goods?
Court found that with this truck, personal use was dominant so it is consumer goods
D tries to return truck to V: parks truck on lot and gives V the keys.
V’s lawyers writes a letter saying they will not accept it in satisfaction, and they’re going to sue for payment.
D said that he surrendered the truck and their right to sue him is gone.
Ultimately, the truck gets sold in the course of litigation they all agree to dispose of the truck and hold the money.
Issue: was the surrender an extinguishment of the debt?
Held: no. there was no acceptance of surrender by creditor.
The truck was sold by agreement.
V wins and can sue D for full amount, then take judgment and proceed against whatever assets they choose.
Supervisory Role of the Court
S. 63:
(1) – SP includes receiver
(2) – court can make 1 or more of the following orders:
(a) – order to ensure compliance with this section, s.17 (preservation of collateral), 36, 36, 38
(36-37-38 – fixtures, crops and accessions)
(b) - also directions
(c) – relieve compliance, but only on terms that are just and reasonable to all parties affect
(d) – staying enforcement of rights – we will talk more about
(e) – order necessary to ensure protection of any person with interest in collateral
Andrews and Trochie v. Mack Financial
Facts
Truck sold to A, SI to MF to finance the purchase.
In violation of SA, A sold truck to T without MF’s consent.
T got into an accident, truck was badly damaged.
Payment is in arrears, but the truck can’t be used T needs truck to pay A to pay MF.
That’s when MF finds out the truck has been sold.
A & T ask for money to repair the truck; MF agrees but demands the arrears be paid first.
Then T hides the truck, threatens to strip it and just give back the frame.
So MF goes to court to get an ex parte order to get truck returned.
T still won’t return the truck.
A contempt hearing is set, and at that point T returns the truck.
T then applies to court under s. 63, asking for order setting aside seizure.
Proposed order: SI is extended money for repairs is advanced, then T gets to operate the truck and pay the loan off from operating the truck
Shockingly, the (lower) court granted this order.
Held: Court of Appeal overturned.
Court of Appeal lays down some principles:
Can’t use the provisions of PPSA to re-write the agreement
Only excuse to interfere with creditors is when there has been some problem with the creditor’s execution.
S. 63 is intended to allow the court to produce a commercially reasonable result – not just go nuts.
In this case:
TJ rewrote the SI not allowed
The problem is the debtor, not the creditor. Don’t mess with them.
Also, the court refused to grant the order that arrears could be brought up and reinstatement given.
Comment:
The provisions may look broad, but you always have to consider the commercially reasonable requirement – it plays into everything in this Part.
s. 69:
(8) reverses the onus of proof in certain limited situations.
Failure to comply with s. 17, 17, 59, 60 results in a reverse onus must argue that failure didn’t matter.
E.g. even though we didn’t give sufficient notice, you didn’t have right to redeem anyway
Onus is on SP now.
(9) Parties cannot contract out of obligations unless PPSA allows it.
Surviving Common Law Remedies
Implied warranty of title
If you bought an item in good faith and it is seized from you, can sue vendor for breach of warranty of title.
Nothing in PPSA extinguishes this [Ferror]
Rules for voluntary foreclosure
As noted above, these continue
Slander of Title: [see Osborne]
When you know you don’t have title to the property but you register a claim anyway
There’s no indication that this CL action wouldn’t survive PPSA.
Bank Act Securities
The issue: when does the PPSA supersede the Bank Act, and what is the relationship between the two?
Background
Origins of Provisions: right at confederation.
At that time, provinces had various financial institutions operating, w/ varied rules on things like interest.
E.g. maritimes had usury laws, ON didn’t.
Options:
You could take a chattel mtge over personal property
Security to lender for transfer of title.
Right: to redeem title by paying off the loan. Or if you didn’t, lender could come in and take your property
Cond’l Sale Agreement
Reserve title. Right to redeem.
Again, if ≠ redeem, lender would take and sell to cover their loss
Floating Charge
Purely equitable – ≠ transfer of title
Covered a shifting body of goods.
The only way to cover a floating body of goods, like inventory, props, products of mine/sea etc.
Until it became fixed and floating charge crystallized over whatever items of collateral, it could be displaced by a legal interest (like chattel mtge or CSA)
ON had another system to deal with lending:
Documents of title old idea, could use to secure title.
Took deed to estate, brought it to lender and gave it to them in security for a loan. Idea that they would redeem the deed by paying off the loan. Basically pledging docs of title for the loan.
Came to be thought of as handing over actual title.
Bill of lading
Shipper would deliver bill of lading, evidence that that party had title to the goods
Warehouse receipts
Someone who owned the goods in the whouse could authorize issuance of warehouse receipt, which could be transferred to someone else and meant transf of title
Only ppl who could do these were bailees, of course
So, ON said: certain categories of ppl/industries can issue warehouse receipts or bills of lading for goods they actually own (i.e. don’t have to ship them), and can then pledge it to a lender, just like pledging a doc of title.
Then get loan, right to redeem by paying off the loan
Basically you avoided a lot of the problems w/ floating charges
But then all the provinces combined! Confederation!
Established a Bank Act under which Federal Banks are incorporated.
Categories of borrowers have broadened further
It’s apparent in Bank Act – there’s a whole list.
Farmers were added in 1913. Classic case for application of the Bank Act v difficult to get loans b/c of the rotating seasonal nature of having collateral, and problems of floating charges.
There were still small loan companies operating in provinces.
People were paying maybe 25-30% interest, given all the small charges etc.
Farmers would borrow from these small loan companies b/c they couldn’t get loans from bigger banks, and then the small cos would borrow at lower rate from bigger banks
Important: although categories are broader, not all industries are covered by Bank Act, even today.
E.g. hospitality industry
Eventually, as the Bank Act evolved, the warehouse receipt/bill of lading thing was replaced with a Notice of Intention to Give Security.
The effect is the same as if you gave a bill of lading – transfer of title.
Also gradually added: categories of loans
Notice of Intention to Give Security:
Not merely equitable – fixed charge.
Gradually, came to cover after-acquired property so you didn’t have to issue a new Notice every time you caught a bunch of fish, e.g.
Registration system: like PPSA
Notice of Intention was a notice registration still need SI, but don’t reg that. You reg the Notice of Intention.
Note: only banks est’d under the Bank Act can take Bank Act Security.
So, credit unions can’t.
Basic Priority Scheme
Starting point: nemo dat.
Once you’ve transferred title, you don’t have it anymore, so you can’t transfer it again.
What happens when you purport to do it again? You don’t transfer legal title.
You can, however, transfer the right to redeem the legal title. And then you immediately have a right to redeem that right to redeem. Which you can then transfer.
So, every transfer gives rise to a new right to redeem, which can be transferred, giving rise to a new...etc. basically it can go on forever, as long as you have ppl willing to lend.
So you can have multiple bank act securities reg’d. Priority among them is determined by a system that builds on arguments from long ago.
There are certain specific priority rules that alter that:
S. 427(7) important rule.
Unlike PPSA, Bank Act provides that if a debtor goes bankrupt, there are two claims that take priority over a Bank Act SI:
1. 3 months’ wages for employees
2. Producers of agricultural products who have supplied them to manufacturers w/in 6 months of the bankruptcy
Some jurisdictions force you to choose b/w PPSA and Bank Act, but BC doesn’t.
In some cases, PPSA is better for a lender than Bank Act – e.g. where you’ll lose out to the employees who need wages
Outline of Relevant Bank Act Sections
It’s a bit of a hodge podge of things that have been added onto one another for many years.
S. 425: fish incl shellfish, crustaceans and marine animals.
Other things defined: forest, forestry, hydrocarbons, etc.
S. 426: dedicated to issues of hydrocarbons and minerals.
Tells you when/how you can give security
Rights: to take possession of, seize and ultimately sell the hydrocarbons/minerals
S. 427: the big section. More general lending provisions
Will see references in case law to s. 88 and s. 178 SI those are predecessors to s. 427. What we now call either “Bank Act Security” or “ s. 427 Security” used to be called s. 88/178 security.
(1) What kind of loans and who can take on the loans.
(a) wholesalers etc. of certain products, on security of those products
(b) mftcers, on security of things theyre mftring
(c) aquaculturalists
(g), (j) and (m) also deal w/ aquaculturalists
(d) loans to farmers
(c) used to be loans to farmers, but it got bumped down
(h), (l), (n), all read slightly differently, but basically they’ve been interpreted to mean any loans to farmers. All overlapping categories.
(o) fishers
(p) forestry producers
(2) What rights the holder of security has on the items
sort of divided into two parts
(c) deals w/ S taken on certain types under (1) treats as if rec’d warehouse receipt or bill of lading. That means a transfer of title
(d) lists other subs of (1), which give bank a first and preferential lien and claim
(3) gives rights and power to take possession (seize the property) on a number of bases
under agreement, but also a right to seizure given under the statute
(4) and (5) req’mts to file notice of intention
how you file and how you search
some definitions attached
Basically, where you file and search: offices of the Bank of Canada.
No PPR. File and search in BoC office or agent offices.
(6) regs of how you operate the registry system
Fees, how much to inspect records, etc.
(7) priority of em’ees wages and producers of products (see above)
428
Hits a number of topics, but primarily focused on priority and realization
Basically you have the rights as if you have bill of lading etc.
All rights subs acquired in/on the property, and over claim of any unpaid vendor
Note: doesn’t necessarily mean a cond’l sales vendor, but we’ll get into that in a bit
(2) and (3) Parellels w/ PPSA: limited fixtures right
limited right to SI in fixtures, particularly electric systems and forestry equip that’s become part of real property
(8)
(9) gives good title to purchaser
(10) different from PPSA: req’s seller to act honestly, in good faith, etc. but no req’mt of commercial reasonableness.
(11)
(12)
You get security in goods mftred from goods over which you have security.
S. 429 deals w/ timing of the loan
BMO v. Hall
Bank Act has made itself compliant w/ some provincial legislation – compromise w/ prov limits on rights to seize
Anyway, in the 1990s SK had a Limitation of Civil Rights Act, req’ing all creditors to give notice before they could seize
Penalties: SI was cancelled, and any $ debtor had paid was returned
Bank seized, Hall argued they were limited by the Act. Took it all the way up to the SCC, because it was a big deal.
SCC Held:
1. The Act was valid provincial legislation.
2. Bank Act Sy provs were valid fed Sy.
3. On interaction: prov leg does apply to some parts of banks and property they hold
4. Valid fed leg, prov is inoperative insofar as it interferes w/ fed.
Timing Issues
Key dates
(1) Date of filing of Notice of Intention
(2) Date of agreement to give security
(3) Date of advance for the loan
Two operative sections
S. 427(4)
(a) the rights and powers of the bank in respect of property covered by the security are void as against creditors of the person giving the security and as against subsequent purchasers or mortgagees in good faith of the property covered by the security unless a notice of intention signed by or on behalf of the person giving the security was registered in the appropriate agency not more than three years immediately before the security was given;
s. 429(2):
T1 and T2 have to be contemporaneous, or the advance has to be made on a promise to give the security.
Don’t have to actually sign the agreement, but have to have promised to give that Security.
Can’t use Bank Act Security to shore up antecedent debt.
In PPSA, value includes antecedent debt, but that’s not the case in Bank Act
Elgin
Farmer borrowed for revolving line of Sy
Gave Sy on crops, incl soybean crops
Then sold soybean crops to co-op.
Bank then sued co-op for conversion, claiming Bank Act Sy gave them title, which co-op purported to take.
One Argument: no advances made for purchase of seed/growing of crop in that year.
Co-op said look at what’s now (f) – $ not used in that year for that purpose, so not eligible
Bank said some loans are only secured over particular crop, but also avail for implements etc., and don’t have to interpret those as mutually exclusive.
General security over goods. This was a general purpose loan secured over crops.
You can take security under more than one heading.
A Case
Loan made to purchase tractor, used to grow crops
427(j) can loan to any farmer for purch of agri implements.
Doesn’t say anything about taking Sy in crops to secure the tractor. Court says not allowing that would be an enormous hindrance to lending, since no one wants to give $ f they can only get Si over depreciating asset.
So, they had SI in tractor, and also used general purpose provision to take security in the crops
RBC v. BMO [1976, SKCA] [Dietz]
T1: D loan from bank. BA Sy over tractor and grain (will cover future grain)
T2: general purpose loan (from same bank), general purpose loan, BA sy over grain.
T3: Loan from Bank 2, BA sy.
T3: at the same time, another loan to D from Bank 1
Then, D defaults, banks fight over who gets the proceeds to grain/grapeseed that he has sitting in accounts.
Arguments:
1. B2 argues loan 1 is for agricultural implements, can’t be used to cover grain, because BA says you can give loan to buy agri implements in exch for Sy over the implements. Court says it would be ridiculous not to read all the sections in conjunction; they don’t limit each other, they can overlap. first loan is properly secured.
2. B2 says loan 2 only specifies a set amount of grain, but that’s fine.
3. ...?
4. Third loan from Bank 1: loan from second bank was all good BA was given notice of intention, properly filed, and thus loan 3 from B1 goes after B2.
So, not really much in the way of tacking under the Bank Act
If this had been PPSA, there would be a first F/S reg’d for the initial loan, which would cover future advances.
Another argument to be generally aware of: Allocation of payments
D had been making payments to B1.
B2 said if the bank had allocated the payments to the earliest loans (i.e. first to loan 1, then to loan 2 once paid off), then the first two would have been paid off.
But they didn’t do that. There is kind of a presumption that you do that (pay off the earliest loan). However, the SA had a clause saying the bank could allocate it however they wanted. Presumption only operates if ≠ agreement to the contrary
Proceeds Rights
S. 428(12) proceeds right to a bank who takes BA sy over items that are later used to mftr other items i.e. you get rights in the mftred items.
Courts have sometimes interpreted this as giving a “natural right” to proceeds
Re DeVries et al and Royal Bank of Canad [1975 OntHC]
Facts
Debtor gave Sy over cows. Barn burned down, cows destroyed.
Rec’d insurance proceeds.
Used those to buy replacement cows, which he took to another place, and he then sold those cows to an innocent purchaser.
Issue: does the bank get the cows, or does the BFP?
Held: Bank.
Analysis:
By taking BA sy in original cows, bank had title to those cows.
When destroyed and ins proceeds came back, they had title to those ins proceeds.
When ins proceeds used to buy new cows, bank had title to the new cows
Therefore, unfortunately for the BFP, the bank keeps
Priority Claims under the Bank Act
First, look at wording of section.
There are some priority rules in the BA
If those don’t get you anywhere, consider the consequences of the title analysis
CIBC v. 281787 Alberta Ltd. (Crockets) [1984, ABCA]
Requirement: “not more than three years prior” or is that a requirement?
Contrast w/ Davanti, below
Facts:
Sy taken, loan made, notice of intention to take Sy was filed a few days after.
Then, landlord (Richfield) ≠ paid. Tries to distrain
Bank comes in and says he can’t have the assets b/c they have Sy covering them.
Issue: turns on priority rules in the Act and the effect of the bank having filed their notice of intention some days after taking Sy
Analysis
Priority section: S. 428(1)
All rights and powers of Bank mentioned in warehouse receipt/bill of lading are held by bank the same as if had acquired the warehouse receipt/bill of lading.
So bank says they have priority over landlord.
Landlord says you have to also look at the section dealing w/ filing of notice of intention.
That takes us back to s. 427(4)
This says: rights/pwrs of bank are void as against creditors giving sy/subs BFPs, unless notice reg’d “not more than three years” before Sy given.
LL says it had to be filed prior to giving Sy.
Or does it simply mean you can’t do it more that 3 years before?
Held: court says you have to file before. So Sy void against this creditor. Landlord wins.
Re Davanti Contemporary Interiors Ltd. [1992, ABQB]
Facts
Bk files SoI twenty days after assignment is given
Davanti defaults
Bk demands payment – bailiff goes and seizes property – did not remove it
Made arrangement where Davanti would agree to sell the property on their behalf – this is common, debtor will get better price through their regular business channels
Davanti goes bankrupt
TiB goes through proof of claims
TiB finds that NoI was filed late! You are void against other creditors!
Court:
BA gave bank title to the goods, subject to the debtor’s right to redeem them.
But, if debtor fails to redeem, the right of the bank is to exercise their right to title, and take absolute title to the property.
At that point, no longer a BA Sy, the bank is just the complete and total owner of the items. Right to redeem is gone – not Sy anymore, they just own the stuff.
Bank enforced it against the debtor, got absolute title, creditor can’t say it’s void against them because it doesn’t exist anymore converted into absolute title.
Note: You CAN Perfect as a Result of Forced Seizure Under Bank Act
PPSA doesn’t allow it.
We don’t want a race to seize – can be seriously detrimental to debtor if we encourage creditors to seize
This doesn’t track in the Bank Act – a bank who seizes can indeed improve their situation as against creditors.
Very strict title analysis of these BA provisions.
Also, adds to the timing assessment has to be before the security is given.
Realization
Recall Davanti.
Per s. 428(7)-(11), the default method of disposition is a public auction, but you can agree otherwise
Also there is a provision for perishables
Distribution is set: give to creditors in order of priority
Lasquetie
Southin J
Facts
BA Security in fish
Debtor: Cassiar, fish processing plant. Arrangement with Lasquetie (fisher) to sell fish to Cassiar.
C occasionally loaned $ to L, who would then sell the fish to C sometimes for credit, sometimes for writing down the loan (if one was in existence at the time)
At one point, C had a bunch of L’s fish on hand, purch’d but not paid for.
C defaulted.
Bank came in and took the fish. L said no, unpaid vendor.
Issue: s. 428(1) priority provision bank has priority over all rights subs acquired in re property, and over claim of any unpaid vendor.
Seems straightforward, but L argues that this was all a conspiracy on the part of the bank. Knew C didn’t have much to seize, so waited until they had the fish in and hadn’t paid, to push L out and get the fish – dishonest.
L asked for declaration of resulting trust. Hold proceeds on trust for unpaid vendor.
Held: Bank takes.
Southin says if there was dishonesty, they could probably figure out something for them.
Though she doesn’t specify how they would have handled it/what they would have found.
But the TJ didn’t find dishonesty – luck of the draw, bank was in pos’n to seize and they did so.
Note: seems harsh on L, but recall PPSA:
If SC had SI in apaap, claim of SC would have priority, if properly protected.
Bank Act & PPSA Interaction
What happens if you have BA security and then a vendor takes CSA?
Here, vendor is reserving their title until fully paid off.
Issue: does s. 421 apply to give the bank security?\
Kawai Canada Music Ltd. v. Encore Music Ltd. [1993, ABCA]
Cites Rogerson Lumber Co – Bk that chooses to live by the title will die by the title
Bk Act security gives all the debtors title in its goods subject to right to redemption
If someone supplies an item to the debtor reserving title, then debtor does not have title
Therefore, you can’t give what you don’t have
Facts:
K supplied to debtor encore, piano, organs and miscellaneous stuff under CSA
Held: Bank does not get priority over K
Take away:
Although the classic CSA is ignored by PPSA, it will become important under BA
This is why we see people still using the CSA even though PPSA does not care
Again – under BA we will use a title analysis! We will not play by the rules of PPSA.
Royal Bank of Canada v Agricultural Credit Corp of Sask [1994 SKCA]
Facts:
Debtor paid for truck with money from Moosomin – gave PMSI
Here, we have a lender who advanced money to help buy truck
Law
PPSA treats PMSI vendor and lender as PMSI – both can get super-priority
Bank Act (at CL) CSA are different from Chattel Mortgage (where you borrow money to buy something)
In the former, debtor does not get title, in the latter, debtor gets title then transfer to third party lender
Argument:
Moosomin argued that this is just the same thing as CSA, we should get priority over Bk with BA security
Held:
Bk wins. When debtor got the truck, they got title, Bk gets the truck.
Title analysis.
They no longer have title to give.
Court realizes that this puts limitation on a debtor that is trying to broaden it’s asset base
Comment: so in practice, the debtor can make a deal – ask their lender to give priority to Moosomin
Bank might have agreed – it is to their benefit to let their asset base to be expanded
Notes:
BA imposes its own priority rules on provincial scheme – this can be to its advantage
Bank Act security is explicitly excluded from PPSA (and it would be anyway due to paramountcy)
Banks in BC usually doubt they are secure, and take security under both Acts
Some other jurisdictions (e.g. Saskatchewan) try to stop Bks from double securing
Effect: squeeze Bks into province
Bank of Montreal v Innovation Canada [2010, SCC]
One of two recent cases where the SCC pushed BA security to be more risky?
In these cases, Bk had taken Bk security, then came to realize on their security
Unknown to Bk, CU had already taken SI over debtors property but had not registered a F/s in PPR
CU argument why they should get priority:
Bank Act priority only apply to subsequently taken SI and purchasing – things that happen after
Also, when Bk purported to take the title, it was already encumbered with our interest – it was not perfected, but it was enforceable
Held: CU gets priority!!
PPSA priority rules have no relevance, but PPSA generally does still have relevance
It is valid provincial legislation that can affect property
PPSA does not say it gives a propriety interest, but it does give a correlative interest to common law priority interest
Bk – well then how can we ever take security and be sure that there is no prior interest that effects our security?!
Court – yes, that sucks, this is a consequence of the federal scheme being out-dated
Comment: so Bank Act has become just a clunky old relic – still doesn’t seem to go anywhere
Bks will not often just rely on Bank Act
They will double security if they can
If not, then they will choose PPSA
Negotiable Instruments and Bills of Exchange
Basics
The Bills of Exchange Act
Came out of codification of lex mercatoria – law/customs of merchants.
Deals primarily with three types of documents:
1. Bills of Exchange
2. Cheques
3. Promissory Notes
Definitions
Definition of Bill of Exchange – s. 16 of Bills of Exchange Act
An unconditional order in writing
If there’s a condition attached, it cannot be a Bill of Exchange
Addressed by one person to another, signed by the person giving it
Must be signed
Must require the person to whom it is addressed to pay, on demand or at a fixed or determinable future time,
Bill is due on the date it is to be paid – if payable on demand, it’s due when demand is made.
Alternative: fixed future time – specific future date on which the bill will be presented for payment. That’s the date on which the bill is due.
Or: determinable future time. Two ways to do this:
1. Make it payable a certain # of days after an event that is certain to occur
e.g. ten days after Christmas in x year
can’t make it ten days after the NHL strike is settled, because it’s not certain that will occur.
2. Make it payable on sight
when C takes it to B and shows it to them, then the bill is due.
Difference from payment on demand:
Bills of Exchange provides for the addition of days of grace to a bill before it will be overdue.
Basically, you have three days added to the date for presentment of payment before the bill actually has to be paid.
BUT, days of grace are not added to bills payable on demand. So payable on sight gives you three extra days, but demand doesn’t.
See s. 41 for details.
A sum certain in money
Note: bills of exchange don’t transfer anything but money, and it has to be a “sum certain”.
Interest? as long as it can be computed w/ certainty, it’s still a sum certain.
E.g. “the sum of $100, plus interest” not uncertain, because Canada Interest Act (s. 2, maybe) provides a default rate of interest (i.e. if not specified 5% simple interest)
It’s fine even if it’s payable in installments, or even w/ an acceleration clause.
Also ok: if you have an indicated or ascertainable rate of exchange
E.g. payable at x US dollars, computed as of exchange rate existing on x date.
To, or to order of, a specified person, or to bearer
E.g. Pay C or order expressly allows C to transfer the bill to someone else (D).
If you name a specified person and don’t give any indication to the contrary, we imply (per Bills Act) that it includes to the order of.
E.g. To C can transfer
E.g. To C only can’t transfer
To bearer:
Pay the person who has physical possession of the bill.
Two ways to make a bill payable to bearer:
1. Expressly state that it’s payable to bearer
2. Payable to C, C endorses it but doesn’t list a specific payee
Definition of a Cheque
Almost the same as Bill of Exchange, just a couple of additional specifics
s. 365(1) a bill drawn on a bank, payable on demand
if you don’t specify, there’s a presumption that a bill is payable on demand.
Cheques have name of bank, a date, a place for you to write the sum in words & numbers, and a place for you to sign it. To complete a cheque properly, that’s what you have to do.
Promissory Notes – defined in s. 176
An unconditional promise in writing
Made by one person to another
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
A bill of exchange is not the same thing as an assignment of a debt.
One of the major differences b/w an assignment and a bill of exchange:
If it were a straight assignment, B would be required to pay C and if they failed B would be liable.
In Bill of exchange, though, the drawee is not, in fact, liable to pay the bill just because they’re the drawee.
Generally speaking the liability of parties is that any person who signs a bill or a note is liable to the party to whom they have given if, if the note is ultimately not paid.
You sue one signer back if endorsed through multiple parties
X could sue D, who could sue C, who could sue A, but no one could sue B solely on the basis of the bill/note.
If you present a bill for payment and it’s refused, that’s known as dishonouring the bill.
If the bank dishonours the bill, can’t sue them as holder of the cheque – you go sue the drawer of the cheque.
The drawer may have rights against the bank, because they have a K.
Bank Ks generally say they promise to pay cheques drawn on the account under certain circumstances (i.e. enough money in the account, etc.)
But it’s not because bank is the drawee.
S. 26 of Bills Act tells you some things that do NOT make a bill invalid
Failure to date it doesn’t make it invalid
But, if it’s a cheque on a bank they won’t pay it if it’s not dated.
Failure to specify value given in exchange doesn’t make it invalid
Don’t have to have value given to make a bill, though it will impact parties’ rights
Doesn’t have to say the place where it’s drawn or payable
Doesn’t matter if it’s drawn on a Sunday or non-juridical day
Not invalid if it’s ante-dated or post-dated.
Bill vs. Demand Bill
Bill: presented for payment on due date, three days grace (where applicable)
Demand bill: presumption that demand must be made w/in reasonable time
Must have date on bill so you can tell whether it’s been presented for payment w/in reasonable time
If not, then overdue.
If you don’t present w/in reasonable time (most banks say 6 months), bank has no liability to pay the cheque.
Two Steps to Negotiation:
1. Endorsement
2. Delivery
Why Do We Have These?
Example: Assignment.
A (drawer) to C (payee), C to D, but C fraudulent.
C can’t convey to D any right they don’t have.
This type of situation became difficult when these bills were used as constant element of commerce, and frequently negotiated through a long chain of ppl taking the endorsement and transferring.
Law developed to protect remote transferees of these bills: concept of a holder in due course.
Holder: someone w/ physical possession.
Holder in due course: holder who took a bill that on its face is complete and regular.
Conditions:
1. Must become holder before bill is overdue
2. Must take w/o any notice that it has been previously dishonoured
3. Must be value given
4. At the time the bill was negotiated to him, ≠ notice of any defect in title of the person who negotiated it.
So, can’t be a holder in due course unless you take the bill through negotiation – has to be endorsed and transferred to you. Means you can’t be the original payee.
So, D in our example above might be protected as a holder in due course.
S. 73(b) if you are a holder in due course, you take the bill w/o any effect of any previous defects in title or personal defences.
Effect of becoming holder of due course
And, may enforce payment against all parties liable on the bill.
Also, parties who take after D count as holders in due course as well, even if they don’t give value, e.g. So, x can take the bill from D and doesn’t have to worry about whether there are personal defences arising earlier in the chain. Protected, and can sue.
Forgery
Basics
Creation of “holder in due course” protects payee from many problems in the bill’s history.
Basically meant that issuing a bill of exchange was a big liability, because you could be held liable way down the road.
S. 48(1): Where signature on bill ifs forged, the signature is wholly inoperative and no right to retain the bill or.... ... can be acquired through or under than bill.
Example:
C has forged a bill of exchange and forged A’s signature.
Forgery is inoperative, and C’s endorsement to D doesn’t mean anything/doesn’t convey any rights. So X can’t take from D and get rights.
Biggest losers: banks.
A bank that pays out on a forged signature is liable to repay the funds. Don’t let them dick you around.
Non-Existent and Fictitious Payees
Payroll Fraud A number of high-profile cases have gone to the SCC
Boma Manufacturing v. CIBC
Basic scheme:
Corporation, some dishonest employee in charge of payroll starts issuing cheques to people who aren’t entitled to receive money.
Sometimes they just make up names to put on the cheques, and the signers just trust that it’s properly prepared etc.
Sometimes they’re made to actual employees, who just aren’t owed any money.
In many cases, the dishonest party will take these cheques, forge an endorsement, and get the bank to pay them.
Now, if a bank pays under a forged endorsement, they are strictly liable to replace the money.
BUT: s. 20 of the Bills of Exchange Act
Deals w/ issues of negotiation and the payee of a bill; and other things
(5) where payee is fictitious or non-existent, the bill may be treated as payable to bearer
In that case, bank is entitled to pay whoever hands them the cheque.
So, when can we say a bill is payable to a fictitious or non-existent person? (when does s. 20(5) apply?)
SCC has consistently said it’s the intention of the drawer the corporation/corporate signatories that matters.
If they believe it’s a legitimate payment to someone who deserves to be paid, then it’s not a fictitious/non-existent party
Strong dissents in both SCC cases:
For policy reasons, we should hold that the intention is that of the party preparing the cheque, not the drawer (corporate signatory)
Corporations are the ones with the best position to catch forgeries
Majority says no, there’s a strong public policy in favour of making banks liable.
If corp signatory intended this person, who is a real person, to receive the money, then it’s not fictitious and the bank can’t treat it as payable to bearer.
Rules re Fictitious vs. Non-Existing Payees:
(per Boma Manufacturing v. CIBC)
1. If drawer inserts the name of someone who’s definitely made up, e.g. the Tooth Fairy definitely fictitious, possibly non-existent
If drawer makes up a random name fictitious, but may exist.
2. If drawer inserts the name of someone they know to be dead non-existing, but not fictitious.
3. If drawer inserts name of a real person, never expecting the person to be made fictitious
4. If drawer inserts the name of a real person, and intends to pay out to them, even if the drawer has been deceived about this, then it’s not fictitious/non-existent, and bank can’t pay out as if payable to bearer.
Consumer Notes
Problems and revision (addition of a part to Bills of Exchange Act) dealing w/ consumer bills and notes.
Background
In the 70s and onward: people buying things in installments (e.g. freezer)
More recently: things like loan agreements an dpromissory notes used by private consumers
Issue arose: were these actually promissory notes?
Promise to pay was attached to a sale K, clearly could be set aside for some reasons (e.g. if freezer didn’t work) so, clearly had conditions.
SCC originally said it didn’t fall w/in the definition, and therefore couldn’t be negotiated per the Bills of Exchange Act
But, later, SCC said you could make the note separable from the K, e.g. by putting it on a detachable piece of paper.
You could detach it and treat it as a promissory note separate from the sales K.
Shady lenders got the idea that they could protect themselves by taking advantage of the provisions for holders in due course.
Example:
A signs promissory note for Appliance Sales, re a freezer (financed by AS)
Then, AS would negotiate the promissory note to a FinCo, which was in many cases closely related to AS. FinCo would give money (take for value), and claim to be a holder in due course
So now, A’s freezer turns out to be a dud and he goes back to AS saying he won’t pay (has been defrauded).
FinCo comes along and says that’s unfortunate, but we’re holders in due course so you still have to pay us for the freezer.
If you want to sue, sue AS. But that was typically useless.
Courts tried to fix this issue:
If we can show that FinCo was sufficiently closely connected to AS, then we’ll make the assumption that they didn’t take it in good faith.
But you weren’t always able to show the close rel’ship
And, it was a bit of a stretch on the wording of the statute.
So, the government decided to amend the statute, and added part V to the Act
Special rules for consumer bills and notes.
Part V
Definition of consumer purchase
Slightly different from PPSA definitions of consumer goods
Definition of consumer bill [189(1)]
A bill issued in respect of a consumer purchase
Doesn’t include most cheques.
If you give a cheque in return to AS, bank will be able to act on that cheque if it comes into the hands of a holder in due course.
In most cases, consumer bills would be cheques, which are excluded.
Definition of consumer notes [more important definition] 189(2)
Promissory note issued in respect of a consumer purchase, on which purchaser or anyone signing to accommodate him is liable as a party
Requirements:
S. 190: Bill has to be marked as being in respect of a consumer purchase. If ≠ marked, then it’s void.
But it’s not void in the hands of an innocent holder in due course
If they don’t know it’s a consumer bill/note
Rights of holder of note are subject to any defences or rights of sell-off that the purchaser would have had against the seller.
In our freezer example, A would have had right against AS for refund, then that right is also enforceable against FinCo
There is a penalty for failure to mark a consumer note
Also a penalty for transferring an unmarked note
Source: http://uviclss.ca/outlines/Cynader%20-%20LAW%20316%20-%20Final.doc
Web site to visit: http://uviclss.ca/
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