Secured Transactions OUTLINE – SPRING 2010 Professor Heather Raven

Important Definitions:Collateral “personal property that is subject to a security interest” If no SI, just personal property To do this, there must be an obligation for payment/performance, and the debtor has to agree

to convey an interest in their personal property to the creditor (chattel mortgage), OR agree that the creditor can keep the title until such time as the entire obligation is discharged (conditional sales agreement)

Any personal property can become collateral – personal property is all that which is not real property

The possessor of the personal property grants the SI, as soon as SI attaches it becomes collateral7 types of personal property can become collateral

1. Money (actual, not credit or cheques)2. Chattel Paper “means one or more writings that evidence both a monetary obligation and

a security interest in, or a lease of, specific goods or specific goods and accessions”3. Instrument – cheques, bill of exchange, letter of credit4. Security – a share, stock, warrant, bond, debenture or similar record5. Document of Title – writing covering identified goods, stating they will be delivered to a

named person6. Intangibles – tend to be accounts, can be IP7. Goods – always tangible – 3 types – the use of the good at the material time determines

the category it will fit into (material time s. 1(4) = attachment of SI)a. Consumer Goods – primarily for personal, family or household purposes

i. S. 67 – if a debtor defaults and have a SI in CG’s, you can either seize the CG’s in full satisfaction of debt or leave them with the debtor and sue for debt

ii. Other kinds of collateral allow you to seize, sell AND sue, so CG’s not often used as SI’s

b. Inventory – raw materials, work in progress, held for sale or lease, materials used or consumed in business

c. Equipment

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

(a) an interest in goods, chattel paper, a security, a document of title, an instrument, money or an intangible that secures payment or performance of an obligation BUT DOES NOT INCLUDE the interest of a seller who has shipped goods to a buyer under a negotiable bill of lading [represents title to the goods] or its equivalent to the order of the seller or to the order of an agent of the seller, unless the parties have otherwise evidenced an intention to create or provide for a security interest in the goods, and(b) the interest of (certain transactions)

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

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(ii) a person who delivers goods to another person under a commercial consignment, and(iii) a lessor under a lease for a term of more than a year,whether or not the interest secures payment or performance of an obligation

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

PPSA/Scope of the Act

2-3-4-9-19-12

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

Overarching question – is the transaction in a debtor/creditor context? (Skybridge)NO: PPSA doesn’t applyYES: s. 2 – does it in substance create an SI?

YES: is it explicitly excluded by s. 4?YES: Not covered by PPSANO: Covered by PPSA

NO: is it deemed included in s. 3?YES: Covered by PPSA, except for Part 5 RemediesNO: Not covered by PPSA

Section 2 – Scope of the PPSA(a) applies to every transaction that in substance creates a SI (secures payment or

performance of an obligation), regardless of form and w/o regard to the person who has title of the collateral AND

(b) Includes: (IF they secure payment or performance of an obligation)a. Chattel mortgageb. Conditional salec. Floating charged. Pledgee. Trust indenturef. Trust receiptg. Assignmenth. Consignmenti. Leasej. Trustk. Transfer of chattel paper

o When looking at a transaction to determine whether PPSA applies, look at substance not form.

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o Parties can call it anything they want. But even if there is a clause that says “no PPSA application”, the act can still apply

Section 3 – Deemed inclusions into PPSA (subject to s. 4 exclusions)Security interests that do not secure payment or performance (NOTE – Part 5 Remedies don’t apply)

(a) Transfer of an account or chattel paper (b) Commercial Consignments

- Do both consignor & consignee deal w/ good of this kind in OCB?- If so, does the consignor reserve and interest in the goods after delivery?- EXCLUSIONS

1. Consignment to auctioneer, or2. Commercial consignee generally known in the area to be selling

goods of othersa. Based on general knowledge, not that of specific creditor,

but classes of creditor – objective test Furmanek(c) Lease for a term of more than one year – includes: s. 1(1)

- Leases for an indefinite term- Leases w/ potential to extend beyond one year

1. Lessee keeps goods over year w/ consent of lessor2. Renewable option of one of the parties

- EXCLUSIONS1. Lease where lessor not regularly engaged in business of leasing

goods2. Leases of household furnishings as part of a land lease IF they are

incidental

Does transaction “in substance create a SI?” – Skybridge- look at facts of the case & consider these factors:

1. Context of transaction 2. Relationship of parties

- Can we analogize and make the relationship D-C (in this case, No)3. Practical and commercial reality

- Was it practical for every single consumer as they came in and made a payment - for them to register and perfect. Judge says no not practical for every consumer to ID themselves as creditors. They're just making deposits on a holiday

4. Intention of parties wrt specific transaction- Parties in this case are consumers, not creditors, became creditors unintentionally

through bankruptcy of Skybridge

True Lease or Security Lease? - Newcourt1. Intent of parties

- secure payment, or payments for use2. Deposit/down payment

- refundable and under what circumstances?3. Ownership @ end of lease & purchase options - found to be determinative

- If @ end automatically passes to lessee or option to purchase < FMV- probably support finding of security agreement (debtor has some equity)

- Since P seeks TL, onus is on P to prove cost would be equal to or greater than market4. Indicia of ownership

- who bears burden of insuring, repairing, unusual depreciation - if lessee bears, could support characterization of SA

- D is responsible for all costs - R&M Insurance - True lease**if true lease > 1 yr must be registered**

- Lease of more than one year doesn’t become so until lessee’s possession extends for more than one year – 1(3)

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3. Lease of a prescribed good

Section 4 – Deemed exclusions from PPSA, even if SI created A lien, charge, or other interest given by statute or rule of law Excludes non-consensual Sis

Four themes: Non-consensual interests

o PPSA founded on idea that transactions involving debtors and creditors are consensual transactions

Transaction falls w/in federal jurisdiction Transactions dealt with in LTA or other legislations

o If no other legislation, PPSA will apply (NOTE: very unlikely to find an interest in land not covered)

Specific exclusions dealing with accounts

True Consignment or Security Consignment – Toyerama

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

3 kinds for PPSA purposes

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True Consignment Security Consignment (If secures pymt s. 2(b))-Automatic right of return***KEY-No obligation to pay until sold or shopped-Purpose of the transaction- Ability to take goods back (not as seizure)

Suggest Sec Con:-Consignee can set price (& keep profits)-Consignee bears risk of loss or damage-Consignee has right to buy goods and then sell them on his own account- Obligation to buy

o 1. True Consignments (aka common law consignments)o 2. Security Consignmentso 3. Commercial Consignments

Characterization very important Used a lot, particularly by small businesses – for people who don’t want huge amounts of

debt from the bank or vendors – but want enough inventory to sello Jewelry example (Furmanek v. Community Development) – the consignor

maintains title but owner of store has possession for purpose of selling Every time piece is sold, money goes into separate account for the person

who consigned the jewelry Trusts often used in consignments – beneficiary is party who consigned

that piece of sold jewelryo Possession often looks like ownership

Can only consign goods (no other types of personal property) for PPSA purposes – not investment property or money

True Consignments (Common Law) NOTE – PPSA doesn’t apply

Three important distinctionso 1. Consignee has no legal obligation to buy the goodso 2. Consignee has no legal obligation to pay until goods are soldo 3. Consignee can return goods with no service charges (unrestricted right to

return) The consignor delivers goods to the consignee and gives the consignee permission to do

stuff with it - usually, to sell it In a C/L consignment, the consignor must always maintain title There will be a clause in the consignment contract it will say, I have title, you have

possession Usually a clause in K that says, as soon as a piece of consigned goods sold to buyer, title

passes from consignor to the buyer A consignee CAN voluntarily agree to purchase and therefore get title, but not likely If it’s a true or C/L consignment, the PPSA does not apply This is situation in Furmanek

o All the different creditors are trying to boot out each other claiming that they are c/l relationships

o The return response was NO, I have a security consignmento So knowing the type of consignment is very important

Security Consignments/Lease – PPSA does apply Same set up – consignor delivers goods for the consignee to use Buyer comes in, makes a purchase, title transfers If there’s a tousle over security vs. true consignment then it usually comes down to

contract interpretation Markers of security consignment vs. other

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o 1. Express or implied obligation on part of consignee to buy some or all the consigned goods. If there’s an obligation to buy at some point, this is termed a FORCED PURCHASE

o 2. There may be no right of return or a restrictive right of return of the goods (for example, only 25% of unsold goods)

o 3. Or there may be a requirement for the consignee to pay a predetermined amount of money at a predetermined time – regardless of whether goods have been sold

This is a disguised loan transaction – not loaning money to debtor but forcing them to keep it or pay you a particular amount of money it’s a forced sale

So, this is a transaction that secures money or performance – and therefore falls under the PPSA s. 2

Commercial Consignments – PPSA applies“A consignment under which goods are delivered for sale, lease or other disposition to a consignee who, in the ordinary course of the consignee’s business, deals in goods of that description, by a consignor who,

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

(b) reserves an interest in the goods after they have been delivered,BUT does not include an agreement under which goods are delivered

(c) to an auctioneer for sale, OR(d) to a consignee other than an auctioneer for sale, lease or other disposition if it is generally

known to the creditors of the consignee that the consignee is in the business of selling or leasing goods of others (ie pawn shops)”

Note that this definition of commercial consignment is unique to the PPSA Consignments that in substance do not secure payment or performance, fall under s. 3

o Use looks like possession Rationale: No need to provide notice to creditors because its already general knowledge Two important differences that move CC away from a security consignment First - Definition – consignment where both consignor and consignee deal with goods

of that description – when look at Toyerama, both Regal and Toyerama dealt with toyso When defining goods, toys are toys, we aren’t looking at different kinds of goods

The consignor must retain an interest in the goods (usually, title but it is possible that it’s use or other type of interest)

Second difference – the types of commercial consignment transactions are more broad than other consignments

o The definition – a consignment under which goods delivered for sale/lease or ANY OTHER KIND of disposition

o True consignments – delivery for saleo Security consignments – secures payment or performance

Exceptions: IF it is generally known to creditors in that business that the consignee deals with goods belonging to others then it is not a commercial consignment

o It could be security but not commercial Lots of things are not commercial consignments

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o If either consignor or consignee don’t ordinarily deal in goods of that description, cant be a CC

o Ex. Have a furniture store – have a dining room table that is set up with linens and dishes that they use as props to sell furniture

They decide they don’t want props anymore so send them to someone else to sell for them

This is NOT a commercial consignment – the furniture store doesn’t normally deal in goods of that type – they sell furniture, not the props

IMPORTANT – definition part d

Conditional Sales Agreements PPSA s. 2 applies Vendor finances purchase to buyer, Vendor = Creditor; Buyer = Debtor (only 2 parties) More cost offloaded onto debtor/buyer, but the creditor/vendor takes on more rise The D/B gets possession and use, but the C/V retains title until full price (plus interest

and surcharges) is paid If deault, the Creditor has right to seize and sell (no need for court order)

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

Lessor retains title1. True Lease for less than 1 year PPSA doesn’t apply Payments made by leasee are only for use of item, at end of term required to return to

lessor2. Lease for More than a Year PPSA s. 3(b) applies, s. 1(3) possession requirement Policy – possession looks like ownership, registration prevents fraud3. Disguised Sale/Hire Purchase Agreements PPSA s. 2 applies, creates SI Express or implied obligation for leasee to buy (during or at end of term) is really a

disguised conditional sales agreement Look at

o 1. Intentiono 2. Deposito 3. Whether option to buy at end is less than market valueo 4. Indicia of ownership (Newcourt Financial)

Skybridge Holdings (1999, BCCA)TEST to determine if trust covered by PPSA: objective, look at (1) purpose/context of transaction; (2) the relationship of the parties; (3) the practicality/commercial reality of transaction; (4) intention of the parties

Re Ontario Equipment Ltd (1981)

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

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

Decision Essential component of lease intended as security in the PPSA is that the property is

ultimately to pass to the lessee, who is obliged to pay the lessor a reasonable purchase price Test to determine if an agreement is a true lease or conditional sale is whether the option to

purchase at end is for a substantial sum or a nominal amount Critical issue of every case is intention of the parties Here, no obligation to take title at end of lease term – may elect to or not Lease is nothing more than straight forward leasing arrangement, trustee’s action dismissed

Newcourt Financial Ltd v. Frizzell (2000, BCSC)Test for distinguishing true lease from security leaseFacts: Chrysler leases Jeep to F, then Chrysler assigns lease to NCF who is therefore the lessor. F misses payments, NCF tries to repossess and asks for court order compelling surrender of jeep and reimbursement for unpaid payments and interest. F claims lease was SI, not true lease (wants it to fall under s. 2 b/c wants Part 5 remedies, including ability to pay back the arrears, keep the jeep, and keep good financial standing). NCF claims it is a lease under s.3 because they want the jeep back.

The Jeep is a GOOD Recall the 3 types of goods – here, we have a consumer good b/c F was using the Jeep for

personal purposeso Essential to know the type of good to know how to properly perfect your security

interest, and if there’s a default, consumer goods are treated much more generously – creditor can only come, take and sell – can’t seize and sue

o W/ equipment and inventory, the creditor can come and take, sell and then sue the debtor for the difference in money owed from the amount they get from the sale

Issue: Is the lease a true lease (common law applies) or security interest (s.2)?Decision: Gives 4 factors to consider in a determination of true lease vs. security interestDOESN’T matter what the parties call it – not determinative

1. Intent (was it to secure payments or provide payments for use?)2. Purpose/Existence of Deposit (was a deposit required? Was it refundable?)3. What will happen at end of lease – forced buyout or option to buy at less than market

value Crucial factor Looks to clause 25 of the lease – at the end, F had option to purchase the Jeep or

return it She could pay a particular price (not set out in dollars and cents) “genuine

pre-estimate of the vehicle’s fair market value on the day the lease was scheduled to end”

Court decides automatically section 3 applied b/c was lease for more than 1 year

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But Part 5 doesn’t apply so F can’t reinstate the payments and keep the Jeep

IF she had to purchase, that clearly would have been a security lease and would have fallen into s. 2

4. Indicia of Ownership (who pays for insurance, mechanical upkeep) If there is an unfettered right/option to purchase for less than the market price, the courts

will always find a SI b/c courts will say you have equity in the item Ending: F had to forfeit the Jeep

Re Toyerama v. Regal (1980, ONT SC)Facts: R consigns toys to T, which was a discount toy store. Clause in the contract stated that when T sells/delivers to a third party, money will be paid per unit to R. The contract did not address what would happen at the end of the agreement with regards to ownership. T goes bankrupt, still has lots of R’s property. Toyerama’s trustee in bankruptcy wants the property to pay secured creditors, but R says the property is theirs under a commercial consignment and we want them back.Regal’s argument: Ont PPSA doesn’t apply b/c its either a true or commercial consignment, and under c/l rules they would get the dolls back In ONT, only security consignments covered by the act Toyerama trying to characterize it therefore as a security consignmentIssue: Was it a commercial consignment or creation of a SI?NOTE: This case from Ontario – PPSA different, commercial consignments not coveredDecision: Toys in Toyerama’s inventory at time of bankruptcy belong to R Dolls already shipped out and T either has the money for or is owed money for belong to T

o Because the obligation to pay has arisen (payment or performance) and therefore they fall under the PPSA

o R didn’t register it’s interest, and so they fall after the secured creditorsWhat would have happened in BC?S.2 – Did it secure payment or performance? No, no obligation to pay until after sold, so this would not be classified as a security consignment But don’t stop there! Go to s. 3 deemed inclusions….

S. 3 – was it a commercial consignment? Need both (a) and (b) and neither of (c) or (d) Do the parties ordinarily deal with these types of goods? YES Did R retain interest in the toys? Yes – had title until soldExceptions…. Was T an auctioneer? No Was it generally known to T’s creditors that T deals with other people’s goods? This would

have been the key question in BCo Difficult to get around this general knowledgeo Likely would have been found they did have the knowledge and so it was not a

commercial consignmento The PPSA wouldn’t have applied and the parties would have gone to C/Lo This would have put us in the same place as in Ontario where they found a

common law consignment for the inventory still in the store

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Policy Rationale of s. 3(d) Consumer Protection – for example, take your clothes to local consignment store, this

protects you so you don’t have to register – wouldn’t be known to your creditors that you sell your used clothes to a consignment store

Furmanek v. Community Futures Development (2000, BCSC)Issue: “General Knowledge” of s. 3(d)Facts: F partially finances sale of store to S. S gets loan from CF (lending institution) – and therefore S owed both F and CF. S takes jewelry on consignment from SC, becomes inventory. SC does NOT register an interest in the jewelry under the PPSA. S defaults, tells SC and they come to retrieve the jewelry. But F and CF want a SI in the jewelry as inventory (commercial consignment that wasn’t registered). SC claims it for itself, argues 3(d) that F and CF would have had general knowledge that S was selling other people’s goods and so it was not a commercial consignment and so the PPSA doesn’t apply (under the C/L would get it back). Court finds it was a commercial consignment… so next argument:Issue 1: Did the creditors have knowledge? SC argued Furmanek owned the jewelry store before and so he MUST have had knowledge

and so he would be knocked out of the list of secured creditors by that knowledge Court defeats this argument - Test is general knowledge, not actual – not based on a creditor

to creditor basis, but rather based on classes of persons who would likely or be expected to be creditors of the consignment

Since SC did not register/file financial statement, it lost its case and had to return it for use by the other creditors

Issue 2: Furmanek vs. CF CF gets paid first b/c F ought to have known Then F, then SC

Security Agreement

The Security AgreementCreates or provides for a security interest.Between a D and C, enforceable against each other if valid

Contents: Usually, a SA will set out:

o The amount owing by the debtor to the secured party and how it will be repaido Description of the collateralo How it will be repaid

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o Obligations of the parties in terms of treatment of the collateralo Events that constitute a default by the debtoro What the secured party is entitled to do in such an event

If the arrangement between the C and the D involves security, then there must exist a contract between them. SI’s are created by consensus. When entering into a SA, you want to:

1. Be shielded from losing interest to judgment creditors, TiBc, and bona fide purchasers for value;

2. Win against other creditors – i.e. priority

Can shield yourself from s. 20 people and best position yourself in priority fight by getting your SI perfected.

s. 9Security agreement is effective according to its terms – form doesn’t matter. Most PPSA provisions are mandatory, can’t K for a higher position

All SA’s don’t have to be in writing and still fit under s. 9 Preserves a limited freedom of K

s. 10 Writing Requirements

Purpose – provide evidence of the existence of a SI in “kinds” of collateral

Two ways to enforce SA against 3Ps: By possession By writing

(1) Subject to subsection (2) a SI is only enforceable against a third party ifa. If collateral in possession of SP (must have actual control), don’t need a written

SA OR1. Must be voluntary surrender, not seizure2. Can be held by agent of SP (as long as not in poss of D or D’s

agent)b. Debtor has signed a SA that contains (to be enforecable against a 3rd P)

i. Charging Clause – where D acknowledges debtii. Description of collateral

1. By item (individually, do so if unique) or kind (grey metal chairs) or type of collateral (goods, etc)

2. APAAP (by operation of s. 13)3. APAAP w/ exceptions4. CAN’T DESCRIBE only as consumer goods or equipment

(10(3)) but can exclude consumer goods (10(6)) WHY? Name depends on D’s use, not useful for identifying goods – may have changed

since it was originally described as that

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c. Debtor’s signature – for PPSA purposes can’t be oral agreement (so wouldn’t be unenforceable against another SP, but would be enforceable against debtor)

If corp/commercial entity, signor must have actual or ostensible authority Signature of owner, if owner is putting up collateral for debtor

s. 18 allows specified outside parties to find out what the SA says

Attachment

In order for a creditor to obtain the most secure position, must obtain an interest in the property that gives preferential entitlement. Two steps – attachment and perfectionAttachment Forms the basis of the security. Protects the SI between the creditor and debtorPerfection Needed to protect your SI from other creditors of the same collateral. Perfection gives the creditor the best claim available to him to the property

Creation of Security Interest: Attachment s. 12

Collateral only becomes collateral once it’s subject to a security interest. Personal property becomes collateral once attachment occurs. The creditor has no rights against the debtor before attachment.

SI comes into existence at the point that it attaches to collateral Attachment gives the creditor legal interest in the collateral Can’t have perfection if no attachment, although you can have attachment without

perfectionAttachment becomes important when there are competing creditors that are unperfected – it is the time of attachment that will determine who is first in line

o Arguments: improper attachment, improper perfection – particularly by arguing no perfection because attachment was wrong, subrogation

Nemo Dat rule – creditor can only get a security interest to the extent of the debtor’s interest (can’t give what you don’t have)

REQUIREMENTS(a) Value given (SP gives up goods or advances funds) Value (s.1) – “any consideration sufficient to support a K, including antecedent debt or

liability”o Broader than the common law, past consideration is valid as valueo Ie. can have an unsecured loan @ T1 and later enter SA (secure w/collateral)

Includes a binding commitment to give credit at some later date or an inducement to incur an obligation to a third party – Pettyjohn

Forebearance of legal right (not going after debt) – Nova Entertainment

(b) Debtor has Rights in Collateral PPSA doesn’t set out rights

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Clearest where D has full ownership, BUT any legal or equitable right suffices D doesn’t have to own property, can be just possession – Halibeck Possession AND right to use goods and get paid (even if don’t own) is enough

according to the court in Kinetics 12(2) – D has rights in goods leased or consigned to him when obtains possession ** can have sufficient rights in collateral via a lease of less than a year, BUT the true

owner has priority over SP@ THIS POINT HAVE RIGHTS B/W DEBTOR-CREDITOR Re: Part 5 (not against 3Ps)

(c) SI becomes enforceable against 3 rd parties – writing (s.10) or possession Can alter time of attachment by providing for it in the SA

Re Huxley Catering Limited (1982, Ont SC)Attachment in the context of a floating chargeFacts: H gave security interest to bank in all debts/accounts, and the SI was registered properly.He entered into an agreement to sell land/premises to another company – no money collected, as they agreed to pay on closing. H then made voluntary assignment into bankruptcy.

H had a right to payment for sale – so we have an account. H defaulted on loan from bank and therefore the debt owed to H became security to the creditor bank.

The trustee in bankruptcy argued that crystallization occurred after assignment into bankruptcy and he was appointed. He then argued that crystallization = attachment and therefore the bank is unsecured so money should go to other creditors first.

The trustee also argued that as soon as the decision to go into bankruptcy was made, interest vested in the trustee and THEN crystallization occurred and scooped the rest of the accounts up.

Issue: Who gets the proceeds from the sale – the bank or the trustee in bankruptcy? Who is entitled to priority? Can a voluntary assignment into bankruptcy be a crystallizing event? (Court decided yes for this)

Decision: Only if the SI is perfected (ie met s. 12 attachment requirements) prior to bankruptcy will the

secured party gets property over trustee in bankruptcy The assignment of debts gave the bank priority over the trustee The bank’s security interest attached before bankruptcy occurred

Significance of Time of Attachment (*not impt in determining priority under s. 35)1. If no attachment, creditor won’t have a SI, so can’t exercise part 5 remedies2. May be significant in determining rts of 3rd parties – if not attachment, debtor can transfer

interest to 3rd party3. Determining law applicable to the validity and perfection of a SI under ss. 5 (location of

goods at time of attachment), 7 (location of debtor at time of attachment)

FLOATING CHARGE-charge does not have to be fixed/specific before a security interest attaches. –Huxley Catering

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From moment the contract for sale was made, the right to the purchase money was capable of being assigned – the bankruptcy is not the event

Attachment for the floating charge is NOT at crystallization, but occurs as soon as debt came into being

Attachment means when the charge is coming into being and then it is perfected by registration. There has been a value given (loan from the bank) and the debtor has rights in the collateral, and there is some written agreement. Thus, the charge does not have to be fixed/specific before a SI attaches

This decision gives creditors significant rights – the money owed did not exist at the time the bank got an SI in accounts – but they still get it

AS SOON AS a new piece of inventory/account comes in, the SI that the creditor has is AUTOMATICALLY attached

For the sake of argument: If the money had already been paid… there would be no account and H could have used

the money for other purposes If the land had not been sold…. There would be no account and the trustee could have

sold it to pay off creditors

Note: “Crystallizes” = when event of bankruptcy occurs, the floating charge is attached to whatever items there are (becomes a specific fixed charge). Simply calling something a floating charge does not mean that parties intend to postpone attachment.

Crystallize always involves a default Doesn’t just mean failure to pay, but that’s usually what it is

TD Bank v. Nova-Entertainment (1992, Al. QB)Past consideration is good “value”Facts: N granted a security agreement (PAAP) in favor of B (“secured creditor”). The security was registered/perfected in accordance with the PPSA. Concurrently with the granting of the security, N entered into a loan agreement with B and V, where B would forbear taking any steps to try to recover its indebtedness from N, in return for an injection of capital from V. B and V enter a subrogation agreement (goes to B and says, we will give N a loan to pay you off if you agree to subrogate your priority). Essentially, this means that V buys the perfected SI (the number one position of secured creditor).

A provides goods to N. A doesn’t get paid and N goes into receivership. V gets paid out, because it’s first in priority. All the other creditors are fighting for the surplus. But there’s not enough money to go around so….

An ordinary creditor (TD Bank) of N challenged the arrangement: in order to have a SI attached, value has to be given. It argues that past consideration is no consideration.

Issue: Was any consideration given for the security in question?

Decision: TD’s case lost. The security granted to B constituted good and valid security as against all parties, including ordinary creditors. Thus, B entitled to the surplus proceeds.

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PPSA defines value as any consideration sufficient to support a simple contract and INCLUDES an antecedent debt or liability

Can get a SI after you have provided value Forbearance to sue may constitute consideration or the entering into an agreement for some

form of security

Rights in Collateral A requirement for attachment is that the debtor have “rights in the collateral” Needs to be more than mere possession, but does not have to be full ownership – can be

significantly less than title Rights to possession and use are sufficient (Kinetics Technology; Haibeck) Title is irrelevant (Haibeck) If the debtor has leased or consigned goods, they have sufficient rights in collateral

Places to look to see what rights the debtor has in the collateral Security agreement – who has the right to use? Course of conduct – if SA is silent, look to what parties actually doing

Kinetics Technology v. Fourth National Bank of Tulsa (1983, USA)Possession and use is sufficient rights to the collateral for the attachment requirementFacts: KT entered into a contract with the debtor (OHT) under which OHT was to build furnace economizers in part from materials supplied by KT (retained of goods delivered to debtor). KTI retained title to the goods under it’s contract with the debtor

D sought financing from the bank, which made a loan to the debtor, secured by accounts receivable and the progress payments specified in the KT-debtor contract.

KT made 2 payments directly to the bank. When the debtor shut down, the bank took possession and control of the plant where KTI goods were located and took KTI goods on the rationale that they had a perfected security interest.

Issue: In order for the Bank’s security interest to include the goods and it enforceable, it must have attached to the goods. Did the debtor have sufficient rights in the collateral to meet the requirement of attachment?

Decision: The bank’s perfected security interest in OHT’s collateral attached to the KT goods b/c the debtor had acquired sufficient rights to support the attachment Bank gave value, writing, and debtor D had rights in that collateral

o Even though they didn’t own the goods, they had possession and right to use them in return for being paid

Bare possession not enough for policy reasons – would hinder business transactions such as leaving a car to be fixed at a garage over night – would have to register in order to protect yourself in case the garage went bankrupt

o Must have some control or authority over the collateral KT was financing OHT’s operation by supplying materials and therefore was in a security

situation should have protected itself by registeringo Could have notified bank as previous creditor, and any potential third creditors

that they have a security interest in those parts

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BUT in the end, the court went on to consider the issue of sale of goods and found that there was a sale from OHT to KTI. This allowed KTI to take the goods free of the bank’s interest

o PPSA s. 30(2) – cut off rules - a creditor loses her SI in an item to a purchaser if it is sold in the ordinary course of its business

o The bank gets the money but doesn’t get to keep the furnacesPolicy Comments: Rationale: Need for certainty in commercial loan transactions Appearance of ownership – looked to outsider bank like OHT owned the goods, as they had

both use and possession, and legitimate for bank to think OHT was the owner KT did not register its interest, so bank had no opportunity for notice Bizarre side point – strange to ask KT to register when it was the owner

o On the other hand, it gave OHT the parts – isn’t that in substance an obligation to pay or perform that should have followed the PPSA and registered

o Registering is cheap – $25 to register, then $5/yr to maintain

If KTI had registered, they would have argued they had a PMSI and stood ahead of the bank for the furnaces and the money.

Important take away points:1. No need to have full ownership to have attachment – something more than bare

possession is sufficient2. Even if you have perfected security, does not mean you will win – must ask who the

secured creditor is competing with to determine which rules govern3. If the secured creditor is competing with the owner of the goods, the general low of

property would govern such that the owner gets the goods. A secured interest is not effective against the true owner, who enjoys priority over the former

Haibeck v. No. 40 Taurus Ventures Ltd (1991, BCSC)Perfected Interest Doesn’t guarantee you win, Title is irrelevant to rights to collateralFacts:

No. 40 issued $4 million debenture to RoyNat, filed with Registrar PPSA then came into force. The debenture took effect as though registered under PPSA Sales contract for appliances (CSC) entered into b/w builders and No. 40 (buyer). The

CSC reserves title for the vendor. Appliances are delivered to No. 40 No. 40 defaults on payments due under CSC. One month after delivery of last item, the Builders register pursuant to the PPSA So there are 2 perfected SI’s, RoyNat for the debenture, and Builders for the CSC

This all results in a fight b/w the debenture holder RoyNat and Builders over the appliances.

Issues: 1. Question of rights – No. 40 has no ownership over the goods just possession – is this enough for the debenture to attach?2. How is priority under the PPSA determined?

Decision:

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The delivery of appliances by the builders to No. 40 provided No. 40 with “rights in the collateral” within the meaning of the PPSA (s. 12(1)(b)) Both the debenture and the CSC were loans, and so the PPSA applies to both the debenture

and the CSC Priority is given to RoyNat

o S. 35(1) Residual Priority Rule – competing interests in the same collateral mean that the first to register wins, and in this situation RoyNat did

o Builders tried to argue that RN’s SI couldn’t attach (ie no valid attachment occurred and therefore no valid SI) because No. 40 had no rights in appliances (builders retained title)

o Court defeated this argument – title means nothing. As soon as No. 40 received the appliances, they had right to use them, so more than just possession

No such thing as a “better” right to property – title not better than possession or use

The Builders could have protected itself but didn’t o Could have taken a PMSI which protects those who expand the asset base – the

unpaid vendor of goods would have to register w/in 15 days (which they didn’t)o So they were a perfected, but not PMSI perfected

Ratio: For a security interest to attach, the debtor must have rights in the collateral. These rights may be derived from ownership or they may be possessory in origin. The fact that nothing has been paid on account of the purchase price (i.e. no title) is irrelevant.

Policy: This case features competition b/n two SI holders – no ownership issue.

Crt says that equity tends to favor Builders b/c almost all start up businesses have a APAAP debenture holder and this decision makes it difficult for these businesses to purchase necessary business items. Further, priority rules are designed to protect unpaid vendors.

HOWEVER – s. 34 PMSI – unpaid vendors get a super priority if they register their financing statements within 15 days of delivering their equipment/property. Builders could have protected itself.

Perfection

s. 19 A security interest is perfected when (in competition w/ other interests in the collateral)a) It has attachedb) All steps required for perfection of this Act have been completed

Regardless of the order of occurrence

Policy: requires existence of SI in personal property to be openly disclosed. Gives 3rd parties ability to take necessary measures when dealing with debtors to avoid loss.

Unperfected SI’s susceptible to subordination – s. 201. Other SI’s

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2. Interests of creditors who cause collateral to be seized under legal process

3. Buyers w/o notice4. Debtor’s TiB

Financing Statement Form as specified in the regulations – bare bones (can get more info via s. 18) Names of D and C, description of collateral, period registration will last

PURPOSE of PPR – alert individuals to the existence of SI’s in personal property to allow them to make further inquiries (not to give complete information)

Must be correctly filled outo Errors improper perfection? (seriously misleading)o Errors usually occur in the description of collateral

PPR operates as a “notice system” – and the FS serves a notice function It’s always the responsibility of the C to file it

PERFECTION GIVES YOU THE BEST POSITION YOU CAN GET

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Perfection Options1. Registration of FS in PPR (when debtor needs to keep collateral - s. 25) – ALL TYPES

- don’t need a SI @ time of filing- First to register/possess/temporarily perfect has priority – s. 35

2. Possession by SP or on his behalf(s.24 certain types of collateral) 24(1) Chattel paper, goods, instrument, security, negotiable DOT, money

(NOT intangibles, non-negotiable docs i.e A/R, term deposit, etc)- Best for money, negotiables, securities, DOT, chattel paper- Not perfected by poss. if :

i. Seizure or repo – 24(1) – b/c m/b held as collateral – Re Bank of NS v. RBC- If repo, no perfection under s. 24 UNLESS FS filed – Juckes

ii. Collateral is in actual or apparent possession/control of debtor or his agent – 24(2)- SI becomes unperfected when debtor regains poss.

- If collateral is security w/ clearing agency, SP deemed to take possession when entries made

Rights & Obligations of SP in Possession of Collateral – s. 17 (includes receiver 17(1)) Duty of reasonable care – 17(2), & act in commercially reasonably manner – 68(2)

- Can’t k out of these duties (56(3)), can’t exempt from negligence - Precise std of care depends on trade custom, character of property

Unless parties otherwise agree for instrument, security, & chattel paper, RC includes taking necessary steps to preserve rts against 3rd parties- May be displaced/modified by agmt- But, can’t k out of general obligation to take reasonable care & act in a commercially

reasonable manner – 68(2) Implied terms – 17(3)

a) Reasonable expenses (insurance, taxes, etc) can charge to debtor – 17(3)(a)b) Risk of loss from accidental causes borne by debtor (but ins first) – 17(3)(b)c) Increase in value (& profits) may be held as additional security – 17(3)(c)d) Separation of collateral – SP must keep collateral identifiable, except fungible

Use of collateral – 17(4)- SP may use to extent provided in SA (provided use RC)- May use where it’s necessary to preserve its value or under ct order (s. 63)- Use must be consistent w/ it being collateral

3. Temporary perfection – s. 26 (automatic) Conditional – if perfection step taken prior to grace period expiry – ss. 5(3); 7(3)Absolute – not dependent on perfection step being taken – ss. 26, 28(3), 29(4), 51Requirements:

i) Originally perfected by possession (s.24) (can’t cure invalid)ii) Only allows for specified items – see belowiii) Commercial necessity dictates it must be released

- Instrument or Security SP delivers to debtor for sale or exchange, presentation, collection or renewal or registration of transfer remains perfected for 15 days after debtor gets control – 26(1)(a)

- Negotiable DOT or goods held by bailee SP makes available to debtor for sale or exchange, loading/shipping/storing, or manufacturing/processing/packaging remains perfected for 15 days after debtor gets control – 26(1)(b)

After 15 day grace period expires, SI subject to provisions of act relating to perfection of a SI – 26(2)Policy – commercial necessity dictates SP must surrender possession (of perf by poss under s. 24) collateral to debtor.- If returned within grace period, remains continuously perfected from date of 1st perf by poss

***WHEN MIGHT TEMPORARY PERFECTION BE INSUFFICIENT***- SI in goods that debtor transfers to a 3rd party – s. 30(5) takes free of temporarily perfected SIs- SI in security, instrument, or negotiable DOT IF transferred in circs in s. 31

**To avoid, in these cases should file a FS before giving up possession to debtor even for temp period, OR include an agency clause – as such debtor would be acting as agent & SP would never actually give up poss.**

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Describing Collateral

Goods Goods are any tangible item of personal property Three classifications – consumer goods, equipment, inventory The class the good falls into is determined at a particular time

o S.1(4) – WHEN ATTACHMENT OCCURS***o Determined by what its “primary”**** use is (doesn’t have to be exclusive use)

When giving the description of collateral, the following sections require specificity

Describing Collateral – Regulations9(1) Collateral Description (subject to s. 12 & 9(2)

a) Consumer goods w/ serial numbers MUST be described by serial numberb) Equipment with serial number MUST be described

a. By serial # orb. In accordance with s. 11 (item, kind, APAAP, APAAP w/ exceptions)

c) Collateral MUST be described in accordance w/ s. 11 if it isa. Non-serial # CGb. Non-serial # equipmentc. Inventory whether serial # or otherwise

9(2) Collateral that is proceeds to which s. 28(2) or (3) applies must be described asa) Consumer goods w/ serial # must be described by serial #b) Equipment w/ serial # must be described

a. By serial # orb. By entering the word “proceeds” followed by a description of proceeds in

accordance w/ s. 11c. Collateral that is

i. Inventory or goods other than serial # goodsii. Collateral or other goods

Must be described by entering the word “proceeds” followed by a description of the proceeds in accordance with s. 11

11 – Other Collateral (non-serial #-ed) – whichever applies:

"serial numbered goods" means, for the purposes of: (s.1(1) Regs)a) Repairers lien – motor vehicle, aircraft, boat, or outboard motorb) Other registrations:

- Motor vehicle- Manufactured home- Boat - Outboard motor- Trailer - Aircraft

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a) Item or kindb) APAAPc) APAAP with exceptions

(2) Can describe collateral as inventory BUT only while it is held by the D as inventory

FRAMEWORKDescription of Rules re: the Registration of Financing Statement

Is the item serial numbered goods?YES NO

Must provide a general description of the item by: a) item, kind regs 11, 13, b) APAAP, c) APAAP which excludes or d) inventory

Is the item inventory?YES NO

Must provide a general description of the item by: a) item, kind regs 11, 13, b) APAAP, c) APAAP which excludes or d) inventory

Must determine if the item is a I) consumer good or II) equipment.

Consumer good, must register it by serial #

Equipment, can register it by serial number OR by general description as per above.

Note: if you choose not to register by SN you put yourself at some risk b/c s. 30(6+7) of Act states that you are not perfected against BF purchaser or other competing secured parties. You are however perfected against Execution creditors and Trustees in Bankruptcy. Therefore, if your debtor goes bankrupt and there are not competing secured parties, you are safe.

Note: to determine category of the good, consider it from the perspective of the debtor.

PPSA Regulations (instructions for filling out the statement)1. D(s)’s Names (ss.7-8)

If more than one D, need all D’s names and addresses. Not so with creditors Individual: s. 7

o Need D’s surname, or first 25 letterso Need D’s first name, or first 15 letters (if no 1st name, use ‘-‘, s. 7(2)(b))o If D has middle name, need it or fist 15 letters

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Business: s. 8o Lists rules for different entitieso Ex. Must have accurate corporate name, ie. if official corporation name is a # but

goes by another name, need the # name2. Collateral Description (ss. 9-12)

Remember, more detail than the SA 3 sets of rules:

o 1. Serial Numbered Goods NOT EVERYTHING THAT HAS A SERIAL # is a serial numbered good

for PPSA purposes, so first you must check if your item fits under the definition

Big ticket items: motor vehicle, manufactured home, boat, outboard motor trailer or aircraft

Whether to describe it by serial # is balancing costs/convenience with protection of the SI

1. Equipment: s. 9(1)(b) can describe by either… Serial # as per s. 10 As per s. 11(1)(a-c) general rules: item or kind; APAAP; APAAP

with exclusions * s. 35(4): if not be serial #, lose priority to other secured creditors ***s. 30(6), (7): if not be serial #, SI cutoff by buyer/lessee

without knowledge 2. Inventory: s. 9(1)(c)(iii) can describe by either…

As per s. 11(1)(a-c) general rules: item or kind; APAAP; APAAP with exclusions

By s. 11(1)(d) and (2): “inventory” but only valid so long as those goods remain as inventory (as soon as the collateral changes character, the SI goes back to being unperfected)

3. Consumer Goods: s. 9(1)(a) Can ONLY describe by serial # as per s. 10

o 2. Non-Serial Numbered Goods 1. Inventory: 2 options under s. 9(1)(c)(iii)

By s. 11(1)(d) and (2): “inventory” but only valid so long as those goods remain as inventory (as soon as the collateral changes character, the SI goes back to being unperfected)

Under s. 11(1)(a-c) general rules: item or kind; APAAP; APAAP with exclusions

2. Equipment: s. 9(1)(c)(ii) as per s. 11 11(3): Cannot say just equipment Under s. 11(1)(a-c) general rules: item or kind; APAAP; APAAP

with exclusions 3. Consumer Goods: s. 9(1)(c)(i) as per s. 11

11(3): Cannot say just consumer goods Under s. 11(1)(a-c) general rules: item or kind; APAAP; APAAP

with exclusions

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Registration of Financing StatementsHow?

Submit the statement at an office of the registry – s. 43(1)Effective When?

From the time assigned to it in the office of the registry – s. 43(2) If 2 FSs assigned at the same time, the order of registration is determined by registration

numbers assigned CAN’T register until fees paid – s. 43(3) Upon entry of data – from FS or Financing Change Statement into registry DB,

verification statement is automatically produced and sent to the registering party When registration is totally discharged , discharge verification statements is sent to the

person who registered the discharge and each SP of record

s. 43(4) FS may be registered before SA is made and before SI attaches This is the authority section for the statement that variation in order doesn’t matter

Policy – allows SP to find out priority status before completing SA, thus allowing them to advance $ as soon as the SA is executed

s. 43(5) A Single FS can relate to multiple transactions (more than one SA) between the creditor and debtor

Don’t have to keep re-registering when you agreement changes or there is a new agreement

*** priority position under s. 35(1) is based on FS registration, so any SAs executed under that FS has priority position***

s. 18 Allows persons to get more information than they would find on the FS (like, a copy of the FS or a statement showing amount of indebtedness)

Registration Errors

s. 43(6): An error will not make registration of a FS invalid unless it is “seriously misleading”

Seriously misleading (objective test) means that a reasonable person of the class of persons using the registry who use proper search methodology would not find registration

o Proper search methodology requires searching with multiple easily available search terms (Re Munro)

There must be an error in both the D’s name and serial #, not one or the other, to be seriously misleading, otherwise there is potential to find the FS using another search

There is an obligation on the part of the searching party to investigate Omission of D’s middle initial/name not seriously misleading (Re Munro)

Policy for objective test: Role of the TiB – who does not search or rely on the Registry – why should the trustee

get the advantage when someone makes a mistake? After all, it cannot claim that it has been misled

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Under PPSA, secured creditor has enormous power – allowed to register properly, which may catch everything. This, in itself, prejudices others. Unsecured C’s are not in a

position to bargain at all. Thus, protection is given under PPSA to these creditors – whereby the TiB is permitted to take assets for the benefit of unsecured C’s

43 (7) If there is a requirement to disclose the D’s name and/or the serial #ed consumer goods, if there is a seriously misleading error in either the name or the serial number, then registration is invalid* NOTE: the courts have read “or” to be “and” so both must occur to be invalid (Gold Key)

(8) Seriously misleading is an objective test, not necessary to prove anyone was actually misled(To persons most likely to be using the registry service – “the reasonable searcher”)

(9) If some collateral is correctly described, but not all, those that are correctly described are still protected – quasi-saving provision

Once a FS is properly perfected, stop calling the creditor “creditor” and they become the “secured party” for PPSA purposes

Re Munro (1992, BCSC)The Creditor must search multiple criteria and not find the SI in order for errors to be seriously misleading.Facts: The D has 2 vehicles, granted a SI to credit union. The D goes bankrupt and there is a dispute over the cars. The financing statement omitted the D’s middle initial and incorrectly set out the serial numbers of both vehicles. Searches using the first and last name and birth date led to the correct SI registration.

Objective Test – (don’t need actual misled, don’t need to have done search)– Coates v. GMAC, Gold KeyWill the registry search reveal the incorrect registration

1. Don’t need total accuracy b/c search produces near matches. - Coates2. Test - would a reasonable person of the class contemplated (pot. Purchaser/lender taking it as

collateral, not general credit inquirer), if they conducted a proper and reasonable search would they find the registration (or would they be seriously misled)

Reasonable Person - Would obtain the serial # (b/c allow them to search for prior encumbrances on vehicle,

under prior owner’s name) & search by it – Gold KeyRe-registration of FS – Re UF Media Inc.- Don’t have to include description of collateral- The fact that it’s a re-registration would make a reasonable searcher to make further inquiries

including searching the original number (which may well not reveal anything) and also going on to ask the borrower

(don’t look at reasonableness of registry system itself)

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Issues: 1. Is the omission of the debtor’s middle name or initial seriously misleading? NO2. Were the errors in the serial #s misleading? NO(Note, at this time there was no requirement for the middle name to be there)Decision:

The correct birth date together with the debtor’s correct first and last name is sufficient to avoid the omission of the middle name

The errors in # were “a serious error” but not seriously misleading b/c proper search found the SI

The search of the name still yielded the registration Which means that the creditor had notice he should have been asking more questions

Coates v. General Motors Acceptance Corporation of Canada (1999, BCSC)There is an obligation on the creditor to conduct a proper, reasonable searchFacts: GMAC finances the sale of a vehicle to D. The FS correctly states the D’s name, but there are 2 incorrect numbers in the serial #. D then gets a private loan from Coates, who searches the registrar by serial # and finds nothing. He then registers his SI in the vehicle. D defaults on his loan. Coates again searches with the serial # and finds nothing but his own registration, so transfers the vehicle to himself. GMAC is PISSED!

Issue: The validity of the registration of a FS filed under an incorrect vehicle serial # - was the error in serial # seriously misleading? NO

Decision: The error was not seriously misleading because if Coates had done a proper search (using

both name and serial number), he would have known that there was already an SI taken in the vehicle

o The serial numbers were close, and the PPSA brings up near searches The creditor has a duty to conduct a REASONABLE search, not just any search

o Don’t have to take extraordinary measures, but have to go beyond single search The C has an obligation to review similar registrations If a proper registry search will review the registration, then the error is not seriously

misleading Principles to apply in respect of the registration of serial numbered goods

o 1. The test of whether a registration is seriously misleading is an objective one, independent of whether anyone was actually misled

o 2. Total accuracy in registration by name or serial # is not necessaryo 3. A seriously misleading description of either the name of the serial # in the

registration will defeat the registrationo 4. A seriously misleading registration is one that

a. Would prevent a reasonable search from disclosing the registration b. Would cause a reasonable person to conclude that the search was not

revealing the same chattel or the same debtor The obligation is on the searcher to review similar registrations

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o 5. Whether a registry filing and search program is reasonable will not be assessed in determining if a reasonable search would disclose registration. The ONLY question is whether a registry search will reveal the incorrect registration

NOTES: Coates had the name but didn’t use it in the searches The court is reading “and” in s.43(7)(c-d) instead of “or”

Gold Key Pontiac v. 464750 BC Ltd (2000, BCCA)The main case for determining what “seriously misleading” means. BUT application of this case is routinely distinguished and has never been accepted by another court of appeal.

Facts: 464 carried on business under the name Pinecraft. It leased a total of 5 vehicles from Gold Key. Gold Key registered FS’s under the PPSA to protect its SI. The FS’s correctly stated the serial #s of the vehicles, but they named the debtor as Pinecraft instead of it’s corporate #. 464 filed an assignment into bankruptcy. Gold Key wanted the 5 vehicles, but the trustee disallowed the claim on the basis that the erroneous recording of the debtor’s name was seriously misleading (ie, the interest was not properly perfected). If Gold Key didn’t get the vehicles, would only get some money from the main pool of assets the trustee is using to pay off all the creditors. So the trustee really wants Gold Key to be an unsecured creditor.

Issue: Would a reasonable person have undertaken 2 searches, one of the name and one of the serial #? Was the wrong name seriously misleading? NO

Decision: The incorrect name in the FS is a serious error, as there is no similarity between Pinecraft

and the #ed name BUT this was not seriously misleading – a search using the serial #s would have found

the FS The creditors were sophisticated enough to know that they ought to search both A reasonable creditor doing a search would have used serial numbers – why? BECAUSE

THEY ARE SERIAL NUMBERED GOODS “A creditor’s SI should not fail as against third parties by virtue of an error in the FS, if

that error would not preclude retrieval of the FS by a prospective purchaser or lender taking reasonable steps to protect his or her interest and making reasonable use of the search facilities provided by the registration system”

Test: Would a reasonable person of class using the PPR for its intended purpose have been misled?

o Purpose – to see if there’s already a security interestNote: The court here is reading “and” into s.43(7)(c-d)

Re UF Media Inc, 2003 BCSCObligation to Further investigate – to what extent is a person using the registry required to ask further questions that would clarify an otherwise misleading registration?Facts:

First UF Media is the Creditor (under the name Vast Capital Pool)

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Second UF Media is the Debtor D grants general SI to the creditor, creditor registers a FS for a two year term, and the

collateral is correctly described as an APAAP Just before FS expired, solicitors for the creditor re-registered There were problems trying to re-register, but the person called the Help Desk to make

sure it had done properly and they assured her it was The new FS doesn’t describe the collateral, but refers to it as re-registration of previous

FS and has base registry number o Search doesn’t turn up expired FS

D goes bankrupt, and the TiB argues that the new FS is seriously misleading because it doesn’t contain a proper collateral description

Paragraph 10 - The collateral description used did not meet ANY of the requirements as set out in the Regulations

Issue: Is omission of collateral description a “seriously misleading” error? NO All serious errors are not necessarily seriously misleading errors A reasonable person/creditor, upon finding that collateral description and finding that FS

that refers to another document would have made further inquirieso Which would have been easy

The statement GAVE the searcher direction on where to find the encumbrance information which was being sought (ie. the original FS)

The error did not preclude retrieval of the original or a verification statement Paras 44-47 – the court adopts the creditors submissions on how a proper search should

be made

More on Perfection by Possession

Rights & Obligations of Creditors in Possession of Collateral – s.17(1) SP must use reasonable care in the custody and preservation of collateral in their

possession and unless otherwise agreed, in the case of an instrument, security or CP, a reasonable care includes taking steps to preserve rights against other persons

This provision imposes a standard of reasonable care Can be contracted out of (“unless otherwise agreed”) Cannot download risks of SP’s negligence onto the debtor S. 56(3) Unless expressly allowed, cannot contract out of duty of reasonable care in s. 17

(2) Unless otherwise agreed (can K out), if collateral is in SP’s possession,(a) Can charge reasonable expenses to D for maintaining and preserving, tacked onto

debt(b) So long as not caused by SP’s negligence, then risk of loss or damage to collateral is

on the D to the extent of deficiency in insurance coverage(c) If collateral is not money, increase in value of collateral can be held as extra security

(for the same debt), but if money then can choose whether to return to the D or apply it against the debt

(d) Unless fungible (all the same, easily replaced) collateral has to be held separately from other collateral.

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(3) Sometimes SP can use collateral, but only(a) as provided in the SA(b) for purposes of preserving collateral(c) as per court order

Re Bank of Nova Scotia and Royal Bank of Canada (1987, Sask CA)The SP MUST be in ACUTAL possession of the property as collateral

Facts: D grants APAAP to RBC and RBC perfects. D then buys 2 vehicles on CSA’s – SI in trucks as collateral (serial numbered goods). The D assigns the SI in trucks to the Bank of NS, who does not perfect. RBC receiver manager appointed for D (supposed to run things and hopefully w/ better management can save the business). BANK of NS registers a FS by serial number. The trucks were then seized and sold to 3P’s by RBC’s RM. Bank of NS argues that it had priority

Issue: Did RBC perfect by possession when its RM seized the trucks? NO

Decision: PPSA dictates that the first to perfect gets priority Possession means actual possession, and RBC was NOT in actual possession when the

Bank of NS filed its FSo Merely appointing a RM is not actual possession

When seizing trucks was re-possession & enforcing SI, going beyond holding trucks as collateral

o Recall underlying rational for PPSA as voluntarinessComments:

Bank of NS was only party who met the Sask requirement of filing using a serial #o EVEN though actually registered 2nd

RBC was unperfected vis a vis trucks only, the rest of the APAAP was ok Stands for general proposition that you can’t better your position by seizing collateral

o One exception – s. 29(4) repossessed goods

Royal Trust Corp of Canada v. Number 7 Honda Sales (1988, Ont)What constitutes possession?Facts:

Otto entered agreement to buy car from Number 7 As payment, Otto gave him a cheque, and 7 delivered the car and transferred title to Otto The cheque was returned NSF as were 2 further cheques Otto brought the car back to 7, but said it was still his and he would return for it Title was still in Otto’s name Royal Trust lent Otto 10,000 to buy the car

o Loan secured by promissory note, chattel mortgage, and an assignment of insurance proceeds

o Royal perfected its SI by registering a FS Otto defaulted, the vehicle was returned and sld

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Issue: Who gets the proceeds of the car?Decision: RT, Honda did not perfect by possession

There was never any attachment of the SI as between Honda and Otta because Honda transferred title to O before taking any steps to claim a SI

O made it clear he was retaining title when he parked it, therefore Honda did not have perfection via possession because it was only bailment

When parked it wasn’t collateral anymore, it was repossession According to s. 31(1), perfected SI has priority over an unperfected, and so RT wins

Temporary Perfection

Two methods – Grade periods and Temporary Period of Automatic Perfection1. Grace Periods

a. Ex. Multiple jurisdictions2. Temporary Automatic Perfection – governed by s. 26 s. 26(1): SI given back to D will remain perfected for 15 days (from the time it comes

under control of D – broadly interpreted by the courts) s. 26(2): If not perfected within 15 days, will become unperfected and the SP can lose

priorityo If perfect by another method (FS) within 15 days, it is continuously perfected (s.

35(2))

3 REQUIREMENTS for temporary perfection:1. Original method of perfection by possession2. The collateral can only be of a certain type (26(1)(a-b))

Instrument Security Negotiable document of title Goods held by bailee

3. Commercial Necessity It must be commercially necessary for the creditor to release the collateral for the debtor

to deal with it The situations are spelled out in s. 26(1)(a)(i-iii) and 26(1)(b)(i-iii) For example, have to give share certificates back to debtor because issuing company

requires them to be exchanged for new ones These provisions are broadly worded, cover most situations

If a party wants to remain secured, the smart move is to perfect by possession and at the same time file a FS so that the 15 day grace period doesn’t screw them

Comments on Section 26: The section is problematic b/c limited by 15 days – would be best not to use it A prudent party will perfect by both possession and a FS DON’T bank on s. 26 – before giving up possession back to the debtor make sure there is

no other SI covering the same collateral

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o If there isn’t, then be prudent and file a FS so that priority becomes your date of registration

o If there is another, insist that D appoint the creditor as their agent so that the creditor doesn’t give up possession and can deal with the collateral themselves

Goods are more problematic than instrumentso The D may be tempted to deal with goods in his possession and some transferees

may be able to take the goods free of existing interests (WATCH OUT for s. 30(5) and s. 31)

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Multiple Jurisdiction Transactions

Collateral is easily portable, often moved between jurisdictions Issue in Canada: no central registration, personal property governed by the provinces Ss. 5-8 of the PPSA deals with MJT’s, and all PPSA in Canada have similar provisions

Summary of Steps:1. is collateral any of… intangibles mobile goods: equipment or leased inventory (not CGs!!!) that is normally used in more

than 1 jurisdiction security interest in an instrument, negotiable doc, money or chattel paper that has NOT

been perfected by possessiona. IF YES s. 7b. IF NOT is collateral: 1) goods; and 2) that parties knew would be leaving

jurisdiction within 30 days of attachment?i. IF YES s. 6

ii. IF NO s. 5

s.7 – security interests in mobile goods that are 1) equipment or 2) are inventory leased or held for lease by the debtor to other, 3) intangibles, and non-possessory SI in documentary collateral

s.6 – goods to be removed from the jurisdiction

s.5 – goods and documentary collateral in possession of secured party

START HERE – Section 7 – debtor location (tends to govern commercial transactions)Policy – 3rd Ps only have the location of the D to go on when looking for records of prior SI’s“ The validity, perfection etc is governed by the law of the jurisdiction where D is located when attachment occurs”

What types of Collateral SI’s does s. 7(2) refer to? Intangibles Equipment , or leased inventory/held for lease, of a type normally used in more than 1

jurisdictiono NO mention of CG’s – this tends to govern commercial transactions, not

consumer Non-possessory SI in instrument, neg doc of title, money or chattel paper

o BUT going to take it into possession unless you’re crazy

TEST: focus on the general use of goods of that kind, not on the use particular debtor intends to put those particular goods to (“normally used”)

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Debtor Locations. 7(1) – for the purposes of this section, a D is located (in order of relevance)a) Place of business of the D – if none, then b)b) Chief Executive office of the D – if none, then c)c) Place of the principles residence of the D, if no place of business** Must register in jurisdiction were D is located/resides if collateral falls under s. 7(2)

s. 7(3): D moves or Transfers Interest out of province**** If the original jurisdiction doesn’t require or can’t register, go to s. 7(4)Threshold – must have been perfected in prior jurisdiction

“The SI perfected in the original jurisdiction remains continuously perfected if perfected in new at the earliest of : (a) 60 days after D relocates or transfers interest to person out of jurisdiction(b) 15 days after SP has knowledge of the move

see s. 1(2) for “knowledge” = constructive, not actual(c) Before date that perfection in original jurisdiction expires”

Effect - This section provides for conditional grace periods, gives the creditor in the original jurisdiction time to register in the new

During the grace period, the new jurisdiction recognizes the SI from the old jurisdiction as applying

This means that new creditors who register during the period get lower priority

NOTE: the collateral itself doesn’t have to move (can just be the D)o Advance Diamond Drilling

The risk of D’s location is on the creditor – it is crucial that they monitor their D’s and don’t be willfully blind

**If item is moved (but not transferred, nor D moved) law from jurisdiction of attachment continues to apply – Advance Diamond Drilling

s. 7(4) Special Priority Rule – Debtor in Location w/ No registry system – NO GRACE PERIOD(Previous Jurisdiction has no registration or doesn’t require it)Problem: If law applicable is from jurisdiction that doesn’t require public disclosure (ie. PPR) as an element of perfection, 3rd parties including those who want to acquire an interest in personal property in BC couldn’t determine if it was subject to prior perfected SI

NOTE: Existence of facilities for registration of some types of Sis under the law of jurisdiction where D is located is not sufficient, must be facilities for registration of the particular type of SI to which s. 7 applies

Remedy:IF….

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The SP is located in a non-registering jurisdiction, and the D or interest in collateral moves to new (BC) jurisdiction which requires registration,

The SP doesn’t have possession of the collateral, AND The collateral is either

o Interest in accounts payable in BCo Interest in goods (note – all goods! CG’s not excluded), instruments, neg doc of

title, money or CP acquired when the collateral was in … then the SI from the original jurisdiction is subordinate to new SI registered in BC,

unless the SP perfects in BC before new interests arisePractical Effect – if at the time SI attached, D was located in jurisdiction without public disclosure of SI’s, the person taking SI in collateral from s. 7(2) must register SI in BC

NO grace period – priority in new jurisdiction is merely based on time of registration HOW CAN A CREDITOR IN A NON-REGISTERING JURISDICTION

PROTECT HIMSELF? o An express clause in the SA preventing the collateral from moving jurisdiction

w/o permission

7(5) Enabling/Saving clause for SP in non-registering jurisdiction EVEN IF collateral doesn’t have to be registered in original jurisdiction, you are

permitted to register in other jurisdictions (save yourself!)

Section 6: Goods Intended to be Removed from Jurisdiction “Cross Border Shopping” The Law of Ultimate JurisdictionNOTE: only applies to goods not covered by s. 7 (usually consumer goods)

6(1) Subject to s. 7, if parties understand at time of attachment that goods will leave the jurisdiction, and these do leave within 30 days of time of attachment, then laws of other jurisdiction apply (the destination jurisdiction)

Debtor location is irrelevant – law of other jurisdiction is the law

“understand”: can be determined by parole evidence, surrounding circumstances, parties conduct

6(2) If goods are removed from BC but later returned, SI has to be perfected according to s. 5(3)

Example: Goods are bought in BC and move to AB. The creditor perfects in AB. The goods are then moved back to BC. The SP needs to register in the new jurisdiction (BC) in accordance with s. 5(3) which sets out grace periods.

Section 5: Residual Rules – collateral location when SI attaches

s. 5 states the rule for both validity and perfection of Sis in goods not falling within ss. 6 or 7. S. 5 is the catch all section, and remember that goods can only be in one category.

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s. 5(1) Governing JurisdictionIf have a SI in either…

(a) goods, or(b) possessory SI in an instrument, neg doc of title, money or CP

…. Then the validity, perfection and effect of perfection is governed by the law of jurisdiction where the collateral is when it attaches

Note: Debtor location is irrelevant in this case

s. 5(3) SI in goods perfected in original jurisdiction remains continuously perfected if perfected in BC by earlier of…

(a) 60 days after goods brought into BC(b) 15 days after date SP has “knowledge” of goods being in BC(c) before date perfection of original SI expires

BUT the SI is subordinate to the interest of a buyer or lessee of the goods who acquires interest without knowledge of the SI and before it is perfected in BC in short, s. 5(3) protects the buyer without knowledge who acts bfore the re-perfection of the security interest but are perfected against subsequent creditors

Policy: This provision, unlike s. 7, favors bf purchasers because s. 5 is dependent upon location of the good, which is unstable, while s. 7 you’re looking at where the D is and this requires more inquiries to protect yourself. Further, the type of collateral under s. 7 is sophisticated type of collateral (ie. business type of loans) whereas s. 5 involves consumer type goods where one doesn’t expect a buyer to be aware because of less buyer sophistication.

5(4) Even if the SI becomes unperfected, can still register but then the collateral is only perfected as of new date (no continuity)

5(5) If didn’t perfect or improperly perfected in original jurisdiction, can perfect in the new jurisdiction but will only get priority as of new date

Juckes v. Holiday Chevrolet Oldsmobile (1990, Sask QB)

Re Searcy (1991, BCSC)

Advance Diamond Drilling v. National Bank Leasing Inc (1992, BCSC)

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Priorities

Matter because when D defaults there is never enough money for all the creditorsThis section is about prioritizing competing claims – the primary purpose of the PPSAFor the most part, the PPSA is unconcerned with title

Attempts to balance secured and unsecured C’s and marketplace efficiency

Threshold for s. 35: Must be competing SI’s in the same collateral

s. 35(1): “Residual Priority Rules” or “5 General Priority Rules”

Absent fraud, knowledge is irrelevant NOTE: all serial numbered equipment is subject to s. 35(4)

1. First in time rule – If both SI’s are registered, priority is determined by order of registration

2. If one SI is registered and the other is perfected by possession, priority is determined by the order of perfection

3. If both SI’s are perfected by possession, priority determined by order of possession4. Perfected over unperfected – If one SI is perfected and the other is not, perfection takes

priority5. If neither are perfected, priority is determined by order of attachment

s. 43(4): Allows a FS to be filed even before parties have entered into a SA (registration before attachment) – to help priority, because perfection will occur as soon as attachment occurs

If 2 APAAPs, which attach automatically, can have two SI’s attach at same time – share pro rata – Ontario Dairy Cow

Threshold: Does the PPSA apply (s. 4 exclusions, s. 3 deemed inclusions)1. Is there a special priority rule that applies?2. Has there been proper perfection?

If not, = unsecured creditor – back of line w/ other unsecured3. If no special priority rule, look to residual priority rules in s. 35 (*residual, but governs must transactions)

Approach1) Look at the SI and ask which one is perfected. – 35(1)(b) perfected over unperfected2) Is there any other perfected security interest?3) If no, then look at s.35(1)(c).- Unperfected by order of attachment4) If you have two or more perfected SI then priority goes to those who have first: - 35(1)(a)

a) filed a f/s, (s. 25)b) first to have possession (s. 24) or c) first to have temporary perfection (s. 25)

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35(2) Changing the Method of perfection If change method of perfection, SI will be continuously perfected (ie don’t lose priority)

so long as there is no gap Priority will date back to 1st method of perfection

s. 35(3) Date of Perfection of Proceeds Subject to s. 28 [must be identifiable and traceable], time of perfection of underlying

collateral is also time of perfection of proceeds Ie. Proceeds’ perfection back-dates

s. 35(4) Serial Numbered Equipment A security interest in equipment that is serial numbered goods is not perfected by

registration for the purposes of 35(1), (7) or (8) unless the financing statement contains a description by serial #

But remember, S. 9(1)(b): can describe by either serial #, item/kind, or APAAP If want maximum protection with serial # goods, NEED to describe by # Creditors often struggle with this balance – ease of description vs. maximum protection

FS includes serial # No serial # (described in general terms)Priority over:1. Subsequent buyer out of OCB of debtor2. SP w/ other subsequently perfected SI3. Seizing creditor or debtor’s trustee in

bankruptcy

*protection in event of insolvency AND dealing

Priority over:1. Seizing creditor and trustee in bankruptcySubordinate to:1. Buyer who acquired for value w/o knowledge

of Si – 30(6), (7)*gives protection in event of insolvency

Knowledge of the existence of a prior (perfected or unperfected) SI in collateral doesn’t affect priorities under the act UNLESS accompanied by conduct that amounts to actions taken in bad faith (good faith & commercially reasonable manner req’t 68(2))

Acting with knowledge of interest of another person doesn’t alone = bad faith, so doesn’t defeat a claim to priority under s. 35 (Shadlock)

Ex. Of bad faith – knowing that prior interest prevented granting SI to anyone else

Robert Simpson Co v. Shadlock (1981, Ont HCJ)

Ontario Dairy Cow Leasing v. Ontario Milk Marketing Board (1993, Ont CA)

Facts: The cows are equipment. The debtor has a milk quota (very valuable; the right to produce a certain amount of milk that the milk board has a legal obligation to buy). The quota is valuable, but only if he sells the milk. The creditors care about proceeds. The debtor uses future sales proceeds as collateral for a loan from C1. Then, assigns proceeds from future sales to C2 for a 2nd

loan. When the debtor defaults, who wins? Both are unperfected SI’s. Issue 1: Were these valid SIs? YES

As soon as sold milk to the board had automatic right to payment (an account payable)

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Future right to payment created a valid SI Neither SI was perfected (defective registration), so priority between unperfected Sis to

be determined by time of attachment (s. 35(1)(c))Issue 2: When was time of attachment?

Attachment occurred when right to payment materialized (when milk quota was sold and cash was generated)

THEREFORE, both SI’s attachment at the same time Both were in existence when D got rights to proceeds Therefore, pro rata distribution

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Tacking and Advances

s. 14: Allows advances & general ruless. 35(5): Priorities with regards to advances

Advances“advance”: payment of money, provision of credit, giving of value. Also includes D’s liability of paying loan costs (interest, credit costs) (made contemporaneously with the SA)“future advance”: includes costs and expenditures made for the protection/preservation of collateral (made anytime after the SA)** Kind of same thing – but future advances takes it further, extends to costs

Allows SP to keep advancing money to debtor on the basis of a pre-existing SA and to get the priority of that pre-existing SI for all amounts advanced

If a new SP insists on having already encumbered property as his collateral too, the new SP can only avoid the potential calamity for himself by entering into a K with the existing SP that would alter the effect of tacking

Policy for protection advances: Creditors are free to negotiate amongst themselves for priority Most businesses have 1 major lender Reduces transaction costs – more efficient

s. 14: Deals with Future Advances 14(1): Enabling provision – SA can provide for future advances

o This section doesn’t permit a SP to tack future advances if the SA secures only one obligation – it merely validates the use of future advance clauses

14(2): Future advances when D is defaultingo Unless otherwise agree (limited power to contract between themselves),

obligation to make future advances is NOT binding on SP if… The collateral has been seized, attached, charged or made subject to

execution order under ss. 20(a)(i) or (ii) AND SP has knowledge of above (usually easy to know this – to get order to

seize & sell have to notify secured Cs)o ***NOTE: if the SP knows and makes advance anyway, that advance takes on

separate priorityo This section applies even if the lender has an obligation to make a future advance

– thus, even contractual obligations cease

TackingNot defined in PPSA. What we want to do is look in the SA for a provision that allows for advances and future advances

Can claim for future advances (cost of protection and preservation of collateral) even if the SA doesn’t include it

But CAN’T claim tacking for any other advances unless there is a clause

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EX:Day 1 - $100,000 – SP1 advances fundsDay 2 - $100,000 – SP2 advances fundsDay 3 - $100,000 – SP1 advances more funds.You now have 2 secured parties and SP1 registered before SP2. Therefore, SP1 has priority. But, does it also have priority for the second cash advance?YES – the lender can tack the last $100,000

S. 35(5) – subsequent loans take on priority of 1st registered financing statements – VERY POWERFUL!!!

o Standard form K’s often automatically include clauses to permit future advances/tacking

o You MUST still have valid attachment and perfection

Royal Bank v. Agricultural Credit Corp (1994, Sask CA)

Facts: RB and Agri both have security interests in personal property belonging to the Yaddofs. The Yaddof’s borrow $90K from Agri which takes an APAAP, files FS. The SA didn’t specifically include future advance clause. RBC makes a series of operating loans to the Yaddofs, gets SI in accounts and registers FS (Note – RBC knew about Agri’s SI). Agri grants more loans to the Yaddofs, and RBC keeps increasing their line of credit. Agri starts to get nervous; gets chattel M covering all indebtedness (2nd SI covering same collateral). RBS takes a second security as well. The Yaddofs then default. RBC concedes that Agri has priority for loans

TACKING35(5) – allows for unrestricted tacking, subject to 35(6) – priority applies to all future advances (whether or not obligated to make advances)Policy: It does hamper the ability of debtor to get other creditors. SP2 can get a subordination agreement (i.e. Royal Bank of Cda case) from SP1 allowing SP2 to get priority over its loan.

Limitations - 35(6) – Perfected SI has priority over interests of persons in 20(a) (causing seizure, judgment creds) only to extent of

a) Advances made before interests of persons arise, or pre-seizureb) Advances made before SI acquires knowledge (1(2))of: i) interests of the persons,

ii) seizure, iii) order c) Advances made in accord w/ i) stat requirement, or ii) legally binding obligation owed

to someone other than debtor entered into before SP acquired knowledge (from b)d) Reasonable costs/expenses incurred by SP for preservation of collaterale) Taxes paid by SP

s. 20(a) folks (execution creditors) can stop the tacking unless the lender fits in one of the categories above. If SP doesn’t fall under any of these categories, then they cannot tack future advance against an execution creditor.

1 FS can perfect multiple SIs even when subsequent loans constitute separate and distinct transactions – RBC v. Agriculture Credit

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made before it files a FS, but claims priority over everything that came after. Agri claims it has priority for everything dating back to the original FS.Issue: Does the registration of a single FS perfect SI’s arising in connection with distinct loan transactions? Ie, can 1 FS cover multiple transactions?Decision: YES

FS can cover future transactions in the same collateralo Here, there was an APAAP

Adopts American authority: do not have to have a FS for every transaction, one can cover multiple transactions

o Where original SA is executed and indebtedness created and a FS describing the collateral is filed, followed at a later date by another advance made pursuant to a subsequent SA made wrt to the same collateral, the SP has a SI for both debts – the original and the later advance

1 FS is sufficient for subsequent loans even where original SA does not provide for future advances

o This is a difference by jurisdiction – BC will read in a future advances clause, but Ontario and MB will never

o AB is fact orientedComments

RBC knew Agri had pre-existing APAAP – could have negotiated to exclude accounts from that

RBC is a big sophisticated party vs. smaller provincial lending institution Most lenders protect themselves by including future advance clauses anyways

s. 35(6) Exceptions to General RuleExceptions to unlimited tacking rights when you have unsecured creditors who start execution proceedingsProtects creditors who advance: 5 situations where SPs who make advances have priority over s. 20(a) Cs (otherwise s. 20(a) Cs trump)

Once SP1 has knowledge of the existence of unsecured creditors commencing execution proceedings, the SP1’s rights to tack are gone

Execution creditors (ie. s. 20 people who have rights to get sheriff to seize their property, but are second to perfected SI holders) who have seized the collateral can STOP this tacking, UNLESS lender 1 can get the money/advance to fit into one of the categories under s. 35(6)

Situations:1. Advances made before rights of s. 20(a) Cs arose (arise when get judgment)2. Advances made after if made advance before knew of the interest, seizure or order of s.

20(a) C (unusual – they need to notify secured Cs)3. Advances that had to be made pursuant to stat requirements (ex. Could be required to

make advance made on behalf of D to someone else)4. Money spent by SP in reasonable cost and expense for preservation of collateral (SP pays

and charges back to D, not a true advance)5. Taxes paid by SP under Manufactured Home Act

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Lapses and Discharges

s. 35(7): Limited protection to SP’s where there is an inadvertent, fraudulent or unauthorized discharge, or are careless and let it lapse: 30 day grace period after lapse/discharge to renew, keep priority over existing SI’s except with regard to advances made or contracted for during the gap (ie. after laps/discharge and before re-registration)

“lapse” = FS expires, no notice of this“discharge” = when D repays loan and SI is removed, computer automatically generates a form which is sent to the C and D (to their last listed addresses) notifying them that this has occurred (s. 49(2) of regs). The form starts a 30 day clock

Effective against – SI’s that immediately before lapse had a subordinate priority positionNOT effective against – SI’s that were registered or perfected during the hiatus or against advances (secured by pre-existing SI’s) made during the hiatus

NOTE: serial numbered equipment is subject to s. 35(4) [need to be registered by serial # for perfection]

Can create a circularity priority problem: doesn’t address issue of new SP who perfects w/in the gap

o Could have priority over the original SP because had no notice of SI, and circularity problem will happen as soon as we have more than 2 SPs

o Left to the court to figure out priority If there is an inadvertent or fraudulent discharge, then the 30 day grace period allows for

chance of correction If it lapses, there is no notice – SPs are expected to just watch

35(7) ExampleT1 - SP registers SS = APAAPT2 – SP2 Registers SS = APAAPT3 – SP1 registration lapses/discharges, grace period beginsT4 – SP2 makes an advance of $10,000 (s. 35(5) and 35(6), during the grace periodT5 – SP3 registers SS = APAAP, in grace period

Will only find SP2’s APAAP SP1’s not there because has lapsed/discharged And makes a decision on that basis to make the loan/finance the purchase

T6 – SP1 registers, in grace period

Because SP1 re-registered in grace period, retain priority over SP2 in the collateral Problem – SP2 made an advance during the lapse period

o We want to encourage SPs to make an advanceo So what we do is give priority to SP2 for the advanceo If there was a default at this point, order would be: SP2 for advance, SP1 for

collateral, SP2 for collateralo We ALWAYS pay out secured advances first

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Now we need to factor in SP3o When they check the PPR, only find SP2’s interest in the collateralo In this situation, we prefer SP3’s claim, but it creates an interesting situation,

called a circular priorityo ALWAYS give priority for advances:o If default were to occur: SP2 for advance (its the only advance)

THEN have to deal with circular priority: SP1 has priority over SP2 for collateral (maintain original priority because

re-registered in the grace period) SP2 has priority over SP3 for collateral (because SP3 knew of the

existence of SP2 so can’t have priority over them) Then SP3 has priority over SP1 for collateral b/c they had no notice

o So who actually gets paid first? PPSA says nothing – its up to the court

CIRCULAR PRIORITY PROBLEMExample:

Time 1: SP1 registers financing statement in PPR.Time 2: SP2 registers financing statement in PPR.Time 3: SP1’s interest lapses inadvertently.Time 4: SP1 realizes the lapse.Time 5: Less than 30 days of lapse, SP1 re-registers SI.- SP2 is still in a subordinate security position – because SP1 re-registers not later than 30 days of the lapse

or discharge.Consider: if at time 2(a): After lapse and before re-registration, SP3 registers SI.- This subsection does not promote the interest of SP1 over SP3 – we only have a circular priority. SP2 will

have priority over SP3, though.

Solutions to Circular Priority ProblemOne approach: look at the risk each party is prepared to bear at the time of registration1 st scenario The value of collateral =$1000SP1 = $500 – gets $0SP2 = $500 – gets $500SP3 = $500 – gets $500

2 nd scenario Collateral =$1000SP1 = $700SP2 = $500SP3 = $500- When SP2 registers, it knew that it was over mortgaged by $200 – SP will not be unfairly treated if it gets.- SP3 thought it was not over-secured. Thus, it should get its full $500.- SP1 will get $200 back.

3 rd scenario Collateral =$1000SP1 =$1000 – gets the remaining $500SP2 =$500 – gets $0SP3=$500 – gets $500 (no risk borne)

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Two Debtors Situations. 35(8): If a D transfers an interest in collateral, which at the time of the transfer, is subject to a perfected SI, that SI has priority over any other SI granted by the transferee (recipient) before the transfer, except to the extent that the SI granted by the transferee secures advances made, or contracted for,(a) after the expiry of 15 days from the day that the SP who holds the SI in the transferred collateral has knowledge of the information required to register a FS disclosing the transferee as the new D, and(b) Before the SP amends the registration to disclose the name of the transferee as the new D or takes possession of the collateral** serial numbered equipment subject to s. 35(4) [must describe by serial #]

Once the SP2 whose D2 has transferred the collateral (subject to SP2’s SI) to another D1 (w/ their own SP1) has knowledge of the transfer, they have 15 days to amend/file a FS changing D’s name from D2 to D1

If an advance is made during the grace period, ando 1. SP2 amends the FS during the grace period, then the advance does NOT get

priorityo 2. SP2 does not amend w/I the grace period, then advance will get priority over

SP2’s SIs. 35(9) Subsection (8) doesn’t apply if the transferee acquires the D’s interest free from the SI granted by the D.

Cut off rule – ie. cut off SI when it gets transferred OCB sale – 30(2) or authorized by SP2 (28(1)(a))

EXAMPLE ONE - NO ADVANCE- T1 - Secured Party 1 takes an APAAP Security Interest over Debtor 1- T2 - SP1 properly registers a Financing Statement- T3 - SP2 takes SI over a boiler purchased by D2

-this is a different SP, D and transaction than at T1-boilers are non-serial numbered goods

- T4 - SP2 properly registers FS- T5 - D2 transfers boiler to D1- T6 - SP2 amends FS to change debtor name from D2 to D1 w/i 15 days- T7 - D1 and D2 default- T8 - SP1 and SP2 claim boiler

My Wording Using Example OneIf Debtor 2 transfers an interest in collateral, which at the time of the transfer, is subject to Secured Party 2’s perfected security interest, SP2’s security interest has priority over SP1’s security interest granted by D1 before the transfer from D2 to D1,

EXAMPLE TWO - WITH AN ADVANCE- T1 - Secured Party 1 takes an APAAP Security Interest over Debtor 1- T2 - SP1 properly registers a Financing Statement- T3 - SP2 takes SI over a boiler purchased by D2

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-this is a different SP, D and transaction than at T1-boilers are non-serial numbered goods

- T4 - SP2 properly registers FS- T5 - D2 transfers boiler to D1- T6 - SP2 knows that D2 has transferred the boiler to D1

-35(8)(a)15 day grace period begins- T7 - SP1 makes a $10,000.00 advance to D1 in the grace period- T8 - SP2 amends FS to change debtor name from D2 to D1

[Note: the priorities will be different if the amendment is made -(i) - before expiry of grace period - or --(ii) - after expiry of grace period]

- T9 - D1 and D2 default- T10 - SP1 and SP2 claim boiler

My Wording Using Example TwoIf Debtor 2 transfers an interest in collateral, which at the time of the transfer, is subject to Secured Party 2’s perfected security interest, SP2’s security interest has priority over SP1’s security interest granted by D1 before the transfer from D2 to D1, except to the extent that the security interest granted by D1 secures advances made, or contracted for,

(a) after the expiry of 15 days from the day SP2 (who holds the security interest in the transferred collateral) has knowledge of the information required to register a financing statement disclosing D1 as the new debtor, and- - (b) before SP2 amends the registration to disclose the name of D1 as the new debtor or takes

possession of the collateral

Unsecured Creditors and the Trustee in Bankruptcys. 20 – This is only relevant when you have an unperfected SI followed by the creation of a 3rd party interest in the collateral

A TiB OR a liquidator will have priority over unperfected SI’s, but timing is importanto Only have priority if the SI is unperfected at the time the order for bankruptcy

or liquidation is ordered by the court When someone is being petitioned into bankruptcy, or assigning into, the creditors of the

potential bankrupt should be notifiedo And perfect ASAP, because valid even if you perfect 1 second before court order

into bankruptcyA secured party should always perfect his SI as soon as possible.

s. 20(a) If you have an unperfected SI, your SI is subordinate to interests of (i) Unsecured C’s with judgments against D(ii) Sheriffs seizing collateral(iii) Judgment S’c(iv) Representatives of Cs w/ judgments against Ds. 20(b) TiB’s and liquidators have priority over SI’s that are unperfected at the time of bankruptcy

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** 20(b) can render a lessor’s unperfected SI in personal property ineffective against the rights acquired in the property by the TiB. The TiB can sell the leased car (lessee had use and possession = property right) and confer good title – Re Giffen

Re Giffen (1988, SCC)Act trumps Nemo Dat: TiB > Unsecured CFacts:

Tele leased a car to BC Tel which in turn leased it to EE Giffeno This case - Lease for more than 1 yr = a security interest, so covered by PPSAo General lease info reminder:

If it secured payment or performance, covered by s. 2(b) and Part 5 applies If its not for payment or performance, but still for more than a year, part 3

applies, but on default only common law applies If lease for only 6 months, PPSA doesn’t apply unless it’s a lease that

secures payment or performance Neither BC Tel nor Tele registered SI Tele retained title Giffen went bankrupt

Issue: Can TiB get a better interest in the collateral than Giffen had? (ie. wants title so can sell the car and divide the proceeds among her other creditors)Decision:

Federal Bankruptcy Act dictates that unsecured creditors have no remedies against a dector as soon as TiB is appointed

All unsecured must make claims through the TiBo As soon as becomes bankrupt, any rights unsecured C’s had to enforce under

provincial law are terminated Tele was arguing that the TiB shouldn’t get the proceeds of the car because the bankrupt

never owned it, and the TiB could not have a better claim to the car than the bankrupt had TiB was arguing under s. 20(b)(i) that he was entitled to the proceeds because Tele never

perfected it’s SI TiB definitely gets the rights that Giffen had in the property – she had use and possession Prior to bankruptcy, unsecured C’s can get judgment (s. 20(a)), can get backdoor

perfection and jump up priority position – BUT this process must be completed before TiB is appointed

S. 20(b)(i) modifies the nemo dat rule of bankruptcy (at CL: cannot get better interest in property than bankrupt had)

o Operates to defeat the unperfected SI of the lessor The trustee can therefore have title and sell the car Section is a policy choice in face of competing interests – result is that the true owner

must forfeit, title does not matter

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Proceeds

Debtor has to acquire an interest in proceeds (flows from s. 12)Can be gaps in proceeds, but @ moment of default, D has to have some right in sale of proceeds.

Unless one of the cut off rules applies (20(c), 30(2), 28(1)), collateral extends to the proceeds But the creditor is limited to collecting the market value of the collateral (28(1)).

Step 1: Is it “proceeds” (definition: identifiable & traceable)? Apply applicable tracing rulesStep 2: If yes, did you describe it correctly so as to still have claim (s. 28)?Step 3: If yes, and there are competing claims then go to priorities

A debtor may not keep his interest in the collateral Whether or not SP knows, D may deal with it Whatever D receives from dealing = proceeds

A. General Rules:Definition: s. 1(1) “proceeds” means one of 3 things:

1. (a) Collateral that is: (need all these elements)a. Identifiable OR traceable

i. Identifiable: can point to particular property as proceedsii. Traceable: proceeds often get mixed up with other property, if traceable

then can follow path from original collateral to proceeds1. Works better for accounts b/c they are intangible

b. Personal property (8 types of collateral) OR fixtures OR cropsc. Derived directly OR indirectly from any dealing with collateral or proceeds of

collaterali. Indirectly = step removed, allows SP to trace proceeds through several

generations (Re CIBC)d. In which D acquires an interest

i. An interest – doesn’t have to be title – can be use or possession2. (b) Right to insurance payment for compensation for loss of, or damage to, collateral

a. Insurance payment is proceeds for SP for full amount owing3. (c) Payment made in total or partial discharge/redemption of an intangible, instrument,

security, or CP

s. 28: Security Interest in ProceedsS. 28(1) Automatic SI in both proceeds and collateral:“If collateral is dealt with or otherwise gives rise to proceeds, the SI

(a) Continues in the collateral unless the SP expressly/impliedly authorizes the dealing, and…

inventory: courts will find implied authority to deal with inventory (why else have it), only allowed to follow proceeds (Re CIBC)

sometimes courts will find implied if in past D has dealt with collateral and SP didn’t object

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(b) Extends to the proceeds (need requirements for proceeds above, subject to some cut off rules – and remember, this only attaches, see below for perfection)

BUT if enforce against both, then amount you can claim is limited to the market value of the collateral at the time of the dealing

So technically, a dealing results in the SI being split into 2 possible SI’so One in the collateral and one in the proceeds

Usually what happens is the SI in the collateral ends because of a cut off rule (s. 28/30)

SP’s will often protect their interests by saying in the SA that the D isn’t allowed to deal with collateral unless the SP authorizes it

Default occurs if deal w/o permission If dealing occurs, SP needs to perfect SI in proceeds to prevent 3P’s from claiming them

Problem – Notice – new C looks at the registry and sees SI listed as “boats” and does not get notice tht the proceeds (traded for) car, so doesn’t know car is encumbered.SOLUTION – 28(2), (3)

s. 28(2) Perfection & Priority with respect to Proceeds There is an automatic right as between the C and D This section is for between different C’s Also keep in mind s. 35(3), time of perfection of original collateral is also time of

perfection of proceeds

** cheques, under 31(3), may be taken free of SP’s interest in proceeds IF purchaser for value (see Flexi-coil, where value = pay down line of credit)

Proceeds that are1. Money, cheques, deposit account – always get IF perfected by registering FS – 28(2)(c)2. Similar to original collateral in that they would be covered by that description – 28(2)(b)3. If neither of the above apply to the proceeds, proceeds MUST be described in FS

- If it were a serial numbered good, would have to be described by serial number in FS, so if car was traded in on another car, would have to amend FS (b/c original description by old serial # insufficient)

IF DOESN’T FALL W/I 28(2), look to 28(3) grace period

28(2) SI in proceeds is continuously perfected extension of SI in original collateral if perfected by registration of FS that

a) Contains a description of proceeds that would be sufficient to perfect a SI original collateral of the same kind, (ex. All bicycles and proceeds thereof including fridges….)

b) Covers original collateral, if proceeds are of a kind that are w/I description of original collateral

c) Covers original collateral, if proceeds consist of money, cheques, deposit accounts

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s. 28(3) Grace Period“If SI in original collateral is properly perfected other than in a manner in (2), then SI in proceeds is continuously perfected for 15 days

If then perfect SI in the proceeds (as you would any original collateral) within the grace period, then priority dates back to original perfection (amend FS, poss, temp perf)

Grace period starts as soon as D deals w/ it and proceeds are generated IF not, then SI in proceeds becomes unperfected”

Re CIBC and Marathon Realty (1987, Sask CA)Facts:

CIBC loaned “Kiddies” money to purchase original inventory Took an SI in inventory and proceeds Agreement was that when Kiddies sold inventory, it would remit $ back to the bank to

pay down the loan But instead of depositing, it kept going and buying new inventory

o Bank knew, but didn’t stop them They default on the loan Also fail to pay rent – landlord Marathon swoops in and takes all the inventory None of the original inventory the bank had financed was still around, but inventory

bought with inventory proceeds wasIssue: Who gets proceeds from the inventory sale? BANKDecision:

Even though the original inventory had been replaced many time, was still proceeds flowing from original collateral

Even though bank didn’t strictly enforce the K, was still entitled to proceeds – nothing in PPSA says much strictly enforce SA, no need to police D’s daily activites

Flexi-Coil Ltd. v. Kindersley District Credit Union (1993, Sask CA)Facts:

Credit Union lent money to D as a revolving line of credit (ie. when negative balance, then the customer is the D and the bank is the C, when positive then the customer is the C and the bank is the D)

o Churchill, the D, was always in the negativeo When Churchill deposited money into account, the bank would apply it to the line

of credit and increase the credit available Flexi financed inventory to Churchill (PMSI holder) which Churchill sold

o Had an SA that covered the inventory plus any proceeds generated from its sale Churchill deposited proceeds from inventory sales directly into the line of credit account

o Cheques into account = proceeds from the inventory Flexi knew about the line of credit, Credit Union did not know that Churchill had an

inventory financier Churchill goes bankrupt, and Flexi sues Credit Union for money it claims represents the

amounts deposited to the Credit Union that belongs to Flexio Says that they are identifiable or traceable proceeds and claims priority by nature

of s. 28(1)(b) – able to extend SI to proceedsIssue: Did Flexi have an SI in the account at Credit Union? NO

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Decision: The court finds that the account came into existence as soon as $ was deposited, because

Credit Union had a right to repayment Court views Credit Union as a purchaser of each cheque for the purpose of s. 31(3)

Were second-generation proceeds created that Flexi’s SI attached to? NO Because the balance of the account was always negative, then once $ went into the

account, it was no longer proceedso To be proceeds, the D needs to have interest in it – and Churchill doesn’t have

interest when the account is a negative balanceo Because it wasn’t proceeds, it was accounts, and FC’s SI did not extend to bank

accounts The Credit Union’s obligation to credit the account is not an untangible to which a SI

could attach and permit recovery by FlexiComments:

Flexi wasn’t protecting it’s PMSI interest Should have opened separate account for money from selling their inventory Everytime a PMSI debtor sells a piece of inventory, the cehque should be endorsed to the

PMSI lender to protect them – didn’t do that here

Tracing

PPSA doesn’t have tracing rules, so they are from equity and C/Lo Policy: originally designed to prevent defaulting trustee from enriching himself at

trust beneficiary’s expense Having an SI in proceeds is one thing – locating it is another Difficult when it comes to money which the D may have put into a mixed account

o Like in Flexi S. 28 creates the statutory right of tracing by it’s wording because it says an SI in original

collateral can move into proceeds after a dealing Tracing CEASES when the property held by the D can no longer be reasonable seen as

property replacing the original collateral Tracing has nothing to do with fairness b/w Ds and Cs, only between competing Cs

TEST (Pettyjohn): Have to establish a close and substantial connection between the original and replacement collateral. IF you can, then SP’s right flow through to replacement.Can the property reasonably be seen as having the character of replacement for the original?

Identifiable = the ability to point to the particular property obtained by the debtor as a result of the dealing with the collateral.

Traceable (capable of being followed similar to equitable trust rules) = refers to the situation where the collateral is commingled with the other property such that its identity is lost.

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1(5) Proceeds are traceable whether or not there is a fiduciary relationship between the person who has a SI in the proceeds (as provided in s. 28) and ther person who has rights in or has dealt w/ the proceeds

- Exception to equity rule which requires fiduciary relationship

Purpose of Tracing Rules: to establish a close and substantial connection between the original property and new property. Also to sort out the claim of debtor, secured parties and unsecured creditors.

Tracing remedy under PPSA has focused on the substance of a serious of transactions through which one set of chattels replaces another of like function.By contrast, in establishing close and substantial connection, equity has focused upon the form of the various transactions.This approach runs into problems when the proceeds of a transaction are mixed with other proceeds (e.g. in the case of money and bank accounts).

Approach1. Apply applicable tracing rules – close and substantial connection?2. If there are competing claims then go to priorities

RULES Onus is on the SP to establish claim to proceeds Statutory tracing applies mechanical approach that does not depend on an assessment of

fault or intention (unlike CL) Depending on the situation, apply the applicable rule(s)

1. Where money proceeds are deposited into an account and mixed with D’s own funds, the whole of the account is subject to an SI but only to the extent of the proceeds claim

2. When money is taken from the common fund, the D is presumed to spend his own money first, unless the nature of the withdrawals are such that they must of necessity be withdrawals of proceeds (fact-based inquiry)

3. Lowest Intermediate Balance Rule – (only applies when account balance is insufficient to cover all proceeds claims - this rule is used by a SP to determine what portion of the funds in a co-mingled account belong to her)

a. Called intermediate balance rule because the balance usually falls between the actual amount of the proceeds deposited and the total amount in the account

b. IF, after applying the presumption that D withdraws own money frist, the account balance dips below the total amount of traceable proceeds, the SI must be adjusted downwards

i. Subsequent non-proceeds deposits do not increase the SI again4. If D’s accounting records make it impossible or impractical to apply this rule, the court

may determine there is no longer a close or substantial connection, and the SI in proceeds is cut off (high standard to meet, has to be really bad and court will use it as a last resort)

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5. IF D withdraws money from mixed fund to purchase inventory: SP allowed to trace claim into inventory but only to the extent that proceeds in the account have been exhausted (ie. take from proceeds first, then shortfall can come from inventory)

a. If property other than inventory purchased, see rule 7

6. Functional Equivalence Test – Even if the mixed fund makes it impossible or impractical to trace the proceeds into the new property purchased by the D, if the property purchased from the mixed fund is functionally equivalent to the original collateral, it is open to the court to find that the proceeds were used to acquire the new property without regard to the formalities of the transaction

a. This test should be limited to cases where there is a rational basis for assuming that the cash proceeds of the original collateral may have been used to acquire the property in question

7. If D withdraws money from mixed funds to purchase property that’s not inventory, the holder of the money will usually have priority over the SP by virtue of s. 31(1) – [holders of money w/o knowledge of prior SI]

a. Once the seller gets the money (which is at least part proceeds), they are termed a “holder of money”

b. However, the SI in the proceeds will carry over into any property acquired by the D by virtue of this payment to the extent that the money paid was attributable to proceeds

i. This is called “tracing by subrogation”

Re River Industries Ltd. (1992, BCSC)Tracing in BC – “close and substantial connection”, applies Pettyjohn principleFacts:

Acklands supplies inventory to Power Tools, registers a FS. PT not doing well – restructuring – continues to get financing and purchasing inventory. Eventually, its able to sell its business “in bulk” (sale of all operating assets of company

to 1 buyer), EXCEPT for the inventory on the premises that was financed by Acklands. Acklands takes its inventory back, but PT still owes them $30K Now, it’s claiming proceeds from the “sale in bulk” to make up the rest of the money

owedo Claim is that new inventory was bought using money from selling Acklands’

inventory which was subject to its SIIssue: Does the SI of Acklands extend to the proceeds of the sale in bulk? YESDecision:

The connection between the new inventory and the replaced inventory is close and substantial

o Ie. the sale of A’s inventory was used to purchase other inventory subsequently sold in the bulk asset sale

The inventories disposed of constituted traceable personal property derived from dealing with the collateral of proceeds of A’s collateral and therefore are “proceeds” for the purposes of s. 28

How much money did A get? The court figured it out by propertion

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o Court chose point in time where it looked at a picture of the company and decided, at that point, if A’s inventory was 50% of the inventory owned by PT, then they get 50% of the available proceeds

o Pro rata distributiono So – claim is proportionate to the ratio which inventory supplied by A bore to the

total inventory

Royal Bank v. United Used Auto and Truck Parts (2002, BCSC)To what extent are proceeds subject to the same PMSI as the original collateral?IF it’s not identifiable, the party MUST introduce evidence of traceability, and if you can’t do that, no proceeds claimFacts:

United granted SI’s to 3 creditors, all as APAAP’s, all properly perfect United has money problems, and commenced CCAA Proceedings (Companies’ Creditors

Arrangement Act) where by it couldn’t dispose of substantial assets or take on more liability w/o court permission

Court then authorized another 300K loan from Motto Creates a PMSI – SI in inventory as collateral & proceedso He files a FS – BUT FORGETS TO SAY HIS PMSI COVERS PROCEEDS

Court says that any inventory purchased using this money has to be physically separated and financially separated ($ in separated trust account)

United doesn’t follow instructions - $ put in co-mingled acc, then after the fact try to separate it out but not based on actual calculations, just guesses

o IMPOSSIBLE to trace funds United goes bankrupt, Mott brings an action

Issue: Did Mott have a valid PMSI interest in inventory or proceeds from inventory? NO Co-mingling of accounts made PMSI $ unidentifiable and b/c of bad accounting, was

untraceableo Money used to buy inventory was not exclusively PMSI money, nor exclusively

proceeds from PMSI funded inventory Because of s. 28(1)(b), Mott had SI in proceeds, but according to s. 28(2) was not

perfectedo SA between them said he got proceeds, but FS did noto Failed to amend the FS w/in the 15 day grace period

Mott has an unperfected SI in proceeds Mott ends up with the lowest priority of all the creditors by virtue of s. 35(1)(b) General

Priority Rules

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Special Situations – Purchase Money Priority (PMSI)

Special rules oust general rules PMSI = super priority Overrides operation of s. 35 (still must meet attachment, perfection, proceeds

requirements) If a SP’s interest is in collateral that his money or credit has allowed the D to get rights

in, then the security interest in that collateral = PMSIo PMSI’s allow D’s to expand their collateral base serves an important functiono Without super priority, C’s would be largley unwilling to loan D’s more money to

buy more collateral Created to be a very NARROW mechanism for additional funding options

Sale and Lease Back Exclusion WHY? There is no actual increase in the rights of the D, so doesn’t meat the PMSI

definition T1: D owns boiler (category = equipment) T2: D sells boiler to buyer. While it may be removed from the premises, it may be left

in situ as a sale and lease back item T3: Buyer LEASES the boiler back to the debtor

o Why? The D probably needs some quick cash, easy way to raise funds At this point, the lease is NOT a PMSI (no increase to D’s asset base)

To be a PMSI, must fit in definition of s. 34 Usually, PMSI super priority extends to the proceeds of the collateral that is the subject

of a PMSI *** when PMSI is in inventory, s. 34(2) sets out several steps the SP has to take, in the

RIGHT ORDER, to get super priority The extent of PMSI SI is limited to the additional value given by the PMSI – so as D

pays down the loan, the PMSI decreases

Must Show - Pettyjohn1. Lender has taken a SI in the property2. Value given for purpose of enabling debtor to gain rts in collateral

Should state in SA (better) OR Can use other evidence of the parties “value” any consideration sufficient to support simple k & incl antecedent debt

liability – 1(1)o Loan approval letter (binding commitment to advance credit) was value -

Pettyjohn3. Loan to debtor was actually used to acquire rts in collateral

SP make pymt directly to seller (best), OR instrument payable to debtor & seller jointly

In some cases courts may take pragmatic approach - Pettyjohn

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s. 1(1): PMSI DefinitionTEST: Did the transaction enhance D’s asset pool? (Unisource Canada)*** No special words required – substance over form, & can be indirect (Pettyjohn)

(a) PMSI Vendors – SP’s who obtain a SI in the collateral to the extent their loan secures all/part of the purchase price

(b) PMSI Lenders – SP’s who obtain a SI in the collateral after providing value that enables D to acquire rights in collateral to the extent of the value provided

(c) And (d) – deemed PMSI inclusions in +1 year leases and commercial consignments On these 2 items, and these 2 ONLY, the value of the PMSI does NOT DECLINE as the

D makes payments Rationale – the consignor/lessor supplies the ENTIRE value of the items Remember, ss. 2 and 3 of PPSA still apply

With PMSI Lenders, look for 3 parties – a lender (bank/institution/private lender), a debtor, and then the person that D GETS the collateral from

Ex. D wants to buy a bike. Borrows $100 from bank. Goes to bike dealer, spends 100 to buy a bike. The bank has a PMSI in the bike to a max of 100. If D makes a $20 payment, PMSI now worth $80.

LENDERS NEED TO BE VERY CAREFUL THE MONEY LENT IS ACTUALLY USED TO ACQUIRE RIGHTS IN COLLATERAL

o If instead of spending all $100 on the bike, you spend $25 on lunch, the PMSI is only worth the $75 you spend on the bike because the other money wasn’t used to acquire rights in collateral

Possible to have a PMSI SI and non-PMSI SI in the same collateralT1: D grants APAAP to SP1T2: D borrows $100 from SP2 in order to purchase a new item (or purchase rights)T3: D uses $100 for new itemPriorities at this point:

SP2 for extent of unpaid $100 SP1 for everything else through APAAP

s. 34: Main PMSI SectionStep 1: is it covered by s. 34 (PMSI vs. non-PMSI; PMSI vs. PMSI; PMSI vs. s. 20)Step 2: If not, go to s. 35*** With respect to grace periods, until the parties actually agree to the transaction and the D becomes the D, time does not start running. The D has to have possession as a debtor, anything that happens before doesn’t matter (McLeod)

1. PMSI vs. non-PMSI Priorities34 (1) General PMSI Priority, applies to everything but inventory: PMSIs have priority over non-PMSIs given by same D over same collateral if PMSI is properly perfected (usually rules apply re: FS perfection)

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SP2 gets priority if perfects SI in property not later than 15 days after D obtains possession (SI attaches if intangible)

SP2 interest extends to proceeds ot the original collateral (if attach, perfect, decribed)o EXCEPT

1. If proceeds is chattel paper (go to s. 31(6)) 2. Proceeds is Accounts (go to s. 34(5)

If don’t properly perfect, do not lose SI (still have perfected SI) but do lose PMSI status

NOTE: Serial numbered goods & PMSIs – don’t have to use serial # when perfecting non-CG’s – have options – item, kind, etc. BUT if we have 2 competing PMSIs in the SAME serial numbered equipment/inventory, there’s no provision in s. 34 to deal with it, so go to s. 35 to resolve which gives priority to the party that describes by serial #

34(2) General PMSI priority for inventory and its proceeds (stricter requirement)General Rule: s. 34(2) – PMSI in inventory and its proceeds (see below) has priority over non-PMSI, but there are special perfection steps that must be complied with

(a) Must be perfected before of on date D/designated person takes possession (no 15 day grace period)

(b) Must first give notice to all SPs who have registered SI’s in the same collateral before PMSI can become valid

(c) Transitional provision, not used(d) Gives us the requirements for content of notice & how to describe inventory(e) Notice must go out before D/designated person takes possession of PMSI If don’t do this, don’t lose SI but lose PMSI status ** s. 43(5) – single FS perfecting multiple SI’s, same for PMSI’s – if with same collateral

and same D, then don’t need a bunch of FSs, taken to apply to notice as well, don’t have to give notice every time if same D/collateral

34(4) Special PMSI priority Rule – PMSI Vendor over PMSI Lender(a) Inventory and its proceeds requires Vendor to perfect before D/D gets possession of

collateral, and(b) All other collateral and its proceeds requires Vendor to perfect w/in 15 days of D/D

possessionExample:T1: D wants to purchase a vehicle for a business (serial #ed goods)T2: D goes to bank lends 50% of value of the car (making bank a PMSI lender)T3: D goes to car dealer sells them car, provides financing for other 50% (we have a PMSI Vendor)

Even though Vendor is 2nd in time, will be first in priority to a maximum of 50% of the value of the car (PMSI limited to the amount of value given to debtor)

What happens with PMSI Lender vs. PMSI Lender? S. 34 has no provision dealing with it Go to s. 35 – time dependent, first in time is first in line

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35(5) Special PMSI Priority Rule – Non-PMSI SI in accounts over PMSI in Accounts as ProceedsAn original SI in accounts for new value has priority over a PMSI in the same accounts as proceeds of inventory if a FS relating to the original SI in accounts for new value is registered before the PMSI is perfected or a financing statement relating to it is registered.

Example: Accounts and ProceedsT1: SP finances inventoryT2: SP gets an SI in the inventory = original/first generation collateralT3: D sells inventory, gets promise to pay = accounts = proceeds

Example: Accounts and Original CollateralT1: SP finances inventoryT2: SP takes an SI in accounts = original collateral

Just because you finance inventory doesn’t mean you have to take an SI in that Nothing in act prevents SP from taking an SI in something difference from what they

finance

The Rule Explained: Non-proceeds SI in accounts (so the second example, where the accounts = original

collateral) given for new value have priority over PMSI Sis in accounts as proceedso New value vs. value – new value doesn’t include antecedent debt or liability

This rule is opposite to s. 34(1) and (2) whereby there’s no super PMSI priority Rationale: Because an account in proceeds in one step removed from the original

collateral, and has a potential SI in 2 things – non-sold inventory AND proceeds, while an SI in accounts as original collateral in the ONLY thing the non-PMSI holder has an interest in

35(6) Special PMSI Priority Rule – A non-Proceeds PMSI over Proceeds PMSI in the same collateral when:

(a) For inventory, the non-proceeds PMSI is perfected before D/D obtains possession of the collateral and,

(b) For all other collateral, the non-Proceeds PMSI is perfected w/in 15 days of D/D taking possession of the collateral

What about PMSI vs. PMSI – PMSI in original collateral vs. PMSI in proceeds? Priority to PMSI in original

Other PMSI-related Sections36(7) Special Priority Rule – a PMSI holder has priority in the fixture over a 36(6) creditor if

she files a Fixture Notice within 15 days of affixation. If a Fixtures Notice is not filed within 15 days of affixation, the 36(6) creditor has priority in the fixture

43(5) – a single FS can perfect multiple PMSIs20(a) and (b) and 22(1) – Special PMSI Priority Rule – PMSI-holders have priority over 20(a) and (b) unperfected creditors even if the 20(a) and (b) interests arise when the PMSI is

unperfected so long as the PMSI is perfected(a) for all collateral except intangibles, within 15 days of D/D possession, or,

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(b) for intangible collateral, within 15 days of attachment

Agricultural Credit Corp vs. Pettyjohn (1991. Sask CA)Facts:

PF’s are cattle farmers Apply to ACCS for loan, which is approved by letter PJs take letter to BMO bank and ask for loon on strength of letter from ACC They buy cattle with bank’s loan, ACCS’s loan used to pay off bank loan

o Grant ACS an SI in their cattleo In their agreement, PJ’s not allowed to deal with the cattle without their

permission – which they do anyway The PJ’s default because of bad weather and other problems

Issue: Was ACCS a PMSI lender wrt the cattle? YES Need 3 things to be a PMSI lender

o The lender has taken a SI in the propertyo The lender has given value for the purpose of enabling the D to acquire

rights in propertyo The value has in fact been used to acquire rights in the property

TiB tried to argue that the money from ACCS didn’t give value b/c when they cut the cheque, the money had already been bought w/ the bank loan

Court disagrees - Value is given when lender makes a binding commitment to advance/fund credit, even if the actual loan doesn’t come until later

o Anytime there’s binding commitment to advance funds, then = value, even before funds have been given

The bank wouldn’t have given the loan if it didn’t know that the letter was good as $ in their hands

o Used ACC via bank’s banks to obtain rights in the collateral, PMSI Would be commercially unreasonable to divide this into separate transactions

Unisource Canada Inc. v. Laurentian Bank et al (2000, ON CA)SUBSTANCE OVER FORM!!Facts: T1: PG sells their printing press to RBC and leases it back, RBC = Creditor 1T2: Unisource gets an SI in the use and possession of the press (PG can’t give title because they don’t have it – can’t give more than you have) through an APAAP, Unisource – Creditor 2T3: Laurentian Bank refinances the press, pays out the RBC loan

As part of the SA, they convey title back to the printers, who now have all 3 of use, possession and title

L properly registersT4: PG goes bankruptIssue: 2 competing interests in the printer. Unisource, who registered first, and LB 2nd. LB claims they have a PMSI. Do they? YES

LB’s financing meets the definition of PMSI allowed PG to get more rights in the press than they had before (ie. didn’t have title, got title through the SA w/ LB)

SUBSTANCE OVER FORM – even though LB didn’t call it a PMSI, it was

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McLeod & Co. v. Price Waterhouse (1992, Sask QB)Grace period doesn’t start until we have all parties in existenceFacts: T1: Avonlea leases a tractor for less than 1 year.T2: Avonlea decides to buy the tractor. Applies for financing from Ford CreditT3: Avonlea keeps using the tractor, and 3 weeks after it made the application for financing, Ford Credit agrees to finance it and grants valueT4: Next day, Ford Credit perfectsT5: Avonlea defaultsIssue: Is Ford Credit a PMSI lender and therefore 1st in line for the proceeds of the tractor? YES

Another creditor claims Ford can’t have a PMSI because they didn’t perfect w/I the 15 days of the debtor getting possession of the tractor

BUT the court finds that the import of s. 34(1) is that the 15 day period STARTS when we have a debtor

Avonlea wasn’t a debtor until Ford agreed to finance – it was just a lessee, and Ford wasn’t a creditor until the day it granted the financing

By terms of the contract the SI of Ford extended to the “proceeds of any sale”o Thus, the SI in the proceeds of the sale of the tractor takes priority over the SI in

proceeds of the other creditors

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Special Situations – Negotiable Collateral

BEST WAY to perfect a SI in this type of collateral = possession so that the D cannot transfer it to another party, thereby subordinating the interest of the SP to that of the transferee

Two Categories: (can be both original collateral & proceeds)1. Negotiables = money, negotiable instruments, securities2. Quasi-Negotiables = documents of title and chattel paper

a. Quasis always have some kind of goods attached to themb. Document of title is evidence of title of the goods described in the documentc. Chattel paper = goods + writing

i. Must be double perfected – the chattel by FS and the paper by possession (unless you want to be dumb and risk just filing a FS for it)

PURPOSE of negotiables is ease of transfer – and the rules in s. 31 are there to protect that ease of negotiability

Generally speaking, all can be perfected in 3 ways – o Registration (s. 25), o Possession (s. 24 – best way b/c of neg nature, highly risky), o Temporary perfection pursuant to s. 26 or 28(3) (proceeds)

28(3) very imp for negotiables – deals with a change in perfection whereby the original perfection is be possession and then the SP delivers up the collateral to the D, and while it is in the D’s possession they deal with it to make proceeds

S. 31: Special Priorities Policy: to facilitate negotiability, don’t want to put fetters Special priority rules do 2 thins: 1) maintain highly negotiable nature; 2) bring them into

concert with federal acts31(1) Holder of Money (ONLY money, doesn’t include cheques, etc)

(a) holder of money (anyone in lawful possession) has priority over SI perfected by registration or temporary perfection as proceeds so long as it was acquired w/o knowledge of the SI

“knowledge”: s. 1(2) depends on Ds, under circumstances in which reasonable person would take cognizance (not actual knowledge)

(b) holder of money for value (includes antecedent) has priority over SI perfected by registration or temporary perfection as proceeds (s. 28(3)), regardless of knowledge of SI

* only cash, not term deposits – Indian Head CU

31(2) C receives Instrument (cheque) in PaymentC who receives instrument from a D for a payment will have priority in that instrument regardless of knowledge of SI if…

1. Instrument is made by D (D has to issue fresh cheque, can’t just endorse a cheque from someone else over to the C)

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2. Instrument is in payment of debt owed by D to C3. Case law: C has to actually receive payment, doesn’t count if it bounces or D stops

paymentPolicy: Facilitate payments of debts; don’t want C to have to run to PPR every time it receives a cheque in payment

31(3) Purchasers of Instruments or Securities (see 31(5) for special knowledge definition)Purchasers (not proceeds) of instruments/securities have priority over Sis in instruments perfected under 25, 26, or 28(3) IF:

(a) gave value for it(b) acquired w/o knowledge that it was subject to SI AND(c) the purchaser took possession

Policy: need to facilitate free transfer of sharesExample:T1: D sells goods (not inventory) and gets a chequeT2: SP1 loans D money, and D gives them an APAAPT3: SP1 perfects by registration (s. 25)T4: D borrows money from SP2, and D gives them SI in instruments (ie. agrees to give them all cheques they receive)

- SP2 doesn’t know about SP1’s APAAP- 2 SI’s in the original cheque, SP1 was first in time- SP2 is a purchaser of instruments, and therefore has priority ONLY TO THE EXENT of

the unpaid loan

31(4) Holder of Document of Title has priority over SI in DOT that have been perfected under 25, 26, 28(3) IF

(a) Gave value AND(b) Acquired DOT w/o knowledge it was subject to SI

31(5) – Knowledge for the purposes of 31(3) & (4)*** NARROWER than 1(2) – which applies to 31(1)(a)Requirements:

- Applies to a “Purchaser” of instrument OR holder of negotiable document of titleo Bank taking SI in deposit cert it sold to debtor wasn’t “purchaser” – Indian

Head- Acquires interest in ordinary course of transferor’s business- Has knowledge only if acquired interest w/ knowledge the transaction violates

terms of SA (creating or providing for the SI)- High standard to deny knowledge – bank needed to make some serious inquiries

into prior SI, even though customer claimed it wasn’t subject to SI (Indian Head)

Document of Title vs. Negotiable Document of Title

Document of Title – gives holder of the document JUST the right to possession of the goods

- ex: Moving company comes, you sign something to give them possession to move your things

Negotiable Document of Title – gives MORE than possession- Permits holder of document to negotiate transfer of the title of the goods described- Allows title to change with change in possession

Chattel Paper1(1) “Chattel Paper” – collateral composed of monetary obligation AND a SI in or lease of specific goods

- Includes secured installment sales Ks, leases (incl. security leases) & secured lending transactions

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31(6) Transfers of Chattel Paper“Purchaser” (not as proceeds) of CP where:

1. Purchaser takes possession2. In ordinary course of business (doesn’t matter if its transferor or transferee)3. For NEW value (ie. excludes antecedent debt liability)4. Without knowledge CP is subject to a registered SI (s. 1(2) knowledge)

Has Priority over SI’s(a) Perfected by registration (under s. 25 as original collateral) IF NO KNOWLEDGE of SI,

or(b) SI that has attached to proceeds of inventory (under s. 28) regardless of knowledge

- Why? Want to facilitate dealers selling inventory – it’s the point of inventory- Encourages D’s to buy more inventory and inventory financers in this case can

protect their interest in the CP by making sure there is a clause in the SA saying that every time you get CP it must be coveyed to its possession

o Or endorse or stamp it overo Remember, if D breaks the SA, it’s a default and you can put them out of

business

Policy: If you’re a SP that is going to take a SI in CP either as collateral or proceeds, NEVER leave it in your D’s hands

When is an instrument acquired without notice of a SI in it? What constitutes knowledge?

Indian Head Credit Union v. Andrew (1992, Sask CA)Facts: D granted CU a SI in all livestock and proceeds from the sale of livestock. SA perfected by registration. D gets loan to buy cattle.

D’s herd had to be destroyed, and D was compensated for. A cheque was issued jointly to D and CU. A separate cheque was issued to D (unclear why) who then deposited it in an account at Bank and purchased a term deposit. SI held by CY via proceeds. Bank (SP2) made loan to D, which was secured by the term deposit.

Bank manager had knowledge of D’s indebtedness to CU as well as the fact that D’s cattle had been destroyed and was to be compensated for such a loss. D TOLD the manager that the cheque was NO subject to CU’s SI.

NOTE: if joint cheque to CU and A, then no problem.Term deposit = proceeds of cheque and this is why CU claimed money. Bank loaned money and took SI in term deposit. D defaults. CU obviously claims term deposit but bank says its ours to set off against the loan.Issue: Who is entitled to the term deposit? CU

- s. 31(1) is not triggered. D did not get cash moneyo 31(1) deals with cash money. IT does not apply where Bank collects on a

cheque or other instrument that is subject to a SI and credits the D’s account with the proceeds. There is no cash money in this situation and so the section is irrelevant

“Set Off”If A owes B $100 and B owes A $70, setoff allows B to pay $30 in full settlement

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- s. 31(2) no application – the bank didn’t receive the cheque in payment of a debt, and D did not write the cheque to the bank

- 31(3) Is the Bank a purchaser of an instrument or security? Ie. for the term deposito Term deposit is not an instrument or security (see defn of instrument)o Definition of purchase: taking by sale, lease, discount, assignment,

negotiation, mortgage, pledge, lien, and any other consensual transaction creating an interest in property

Includes SI, therefore, if take an SI in something you are a purchaser

Because Bank took an SI in the term deposit, it probably = a purchaser

o Term deposit is probably not instrument or security under PPSAo Bank may be a purchaser – they did take a SI in term deposit, and gave

balue by giving loan and also didn’t know of SI held by CUo BUT court said, Bank NOT a purchasero And even if bank was a purchaser, Bank lost because it (through the

manager) had notice of the SI of CU Had knowledge and so not purchaser as contemplated within s.

31(3)The Bank had knowledge that A owed $ to CU and that proceeds of cattle were subject to a SI of the CU. Bank knew A was subsidized for destroyed cattle, and should have therefore investigated further.Priority went to CU under the general s. 35 rule b/c no special rule helped bail out the bank. CU registered first. Comments:Bank did not give notice and therefore did not have priority. If were transferring money through accounts and no knowledge held by bank then bank could exercise their set off rights. It was a key point that cheque was issued by the Dept. of Agriculture – implies more knowledge by bank. CU has SI in cows.Proceeds in cows reflected in cheque2nd generation proceeds reflected in deposit account3rd generation proceeds reflected in term deposit (which bank has SI, perfected by possession).CU has priority, and Bank is not allowed to set off.

PRIORITIES: SPECIAL SITUATIONS: ACCOUNTS

Account = intangible- If another person owes the D money, making the debtor the unsecured creditor of

that other person, then the D has what is called an account- A SI in an account usually takes the form of an assignment

o D (assignor) assigner position as account creditor to the SP (the assignee)

s. 1(1) “Account” – “A monetary obligation not evidenced by chattel paper, instrument or security” (bare debt)

- D gets rights in account only when it comes into existence

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- Must have rights in it to grant SI in it- Can be for present or future debts- Anytime transferred/assigned (even if it doesn’t secure payment or performance) – its

deemed included under s. 3 of the PPSA- It will NEVER have anything tangible attached to it- Can only be perfected by registration- IF account is not assigned, we don’t use s. 41 – use s. 35 for priority

o 41 is ONLY for assignments

How are accounts used in business financing?- Buyer puts down payment and pays rest of purchase price over time- D finances over time

o Creditor of the D may take an APAAP or just SI in accounts- D needs inventory financing

o Can get through a 34(2) PMSIo If a non-PMSI holder who gives new value can defeat SI in new proceeds – 34(5)

– when we have accounts as original security take priority over PMSI

s. 41: Assignments of Intangibles or CPSituation:A sells to BB can’t pay in full, owe money, so we have a K

- B is the account debtor- This is K #1, the underlying K

A sells B’s debts to C- A becomes the account assignor- C becomes the account assignee- This is K #2, the assignment K

41(1) “Account Debtor” means a person who is obligated under an intangible or chattel paper

41(2)(a) An assignee takes the assignment subject to the terms of the K [often a SA] between the AD and the assignor unless the AD has agreed otherwise in the [underlying K]

41(2)(b) An assignee of intangibles or CP takes the assignment subject to any defenses or claims [e.g. a right of set off] that the AD has against the assignor IF

- The defence or claim arose before the AD knows about the assignment UNLESS- AD has validly agreed otherwise

RECALL34(5) Non-PMSI special Priority Rule (overrides general PMSI priority) – Accounts Proceeds

- SI in accounts as original collateral has priority over PMSI in accouns as proceeds IFo Accounts acquired for “new value” (no antecedent debt liability)o FS relating to SI was reg’d before PMSI interest is perfected or registered

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- “Knowledge” – assignee filing FS is NOT deemed knowledge

41(3) & 4 – At CL after assignee gives AD notice of the assignment, any changes (post assignment modification) that A & B make to the underlying K don’t affect the assignee because they don’t have privity to the K41(3) & (4) allow for post-assignment modification of the underlying K BUT only when change:

(a) To underlying K is made in good faith(b) Made in accordance with reasonable commercial standards(c) If no material adverse effect to C/assignee’s interest in the assignment of the AD’s

ability to performIF these are met, then A and B don’t need C’s permission to make the change unless the AD has otherwise agreed. Policy – for commercial purposes, parties need to be able to change their K w/o disturbing the second assignment KEx – red and blue pencils

41(5) If post assignment modification criteria are satisfied, C acquires rights in the modified K

41(6) If a term in the assignment agreement prohibits the modification/substitution of the [underlying] contract, the modification/substitution is a breach of the assignment agreement [not the underlying K]

- The assignee can only sue A under the assignment K for any mods because not privy to the underlying K

41(7)(a) An AD is not affected by assignment of the account until notified- So until the assignee provides notice to the AD to pay them instead of the assignor, AD

can continue to make valid payments to A in satisfaction of the debt- C would have to come after A to make up the shortfall, because B is just doing its thing

41(7)(b) When the assignee gives notices to AD about paying them, the AD can request evidence to prove that the account has been assigned

- If proof not given in 15 days, can continue to pay A in satisfaction of debt

41(8) Once AD has appropriate notice, he is free to make payments to the assignee – discharges the obligation to the AD (and the AD is absolved of liability if it turns out the assignee didn’t have the right)

41(9) When an assignor assigns the whole of a [underlying] K in breach of a non-assignment term of account or CP in the [underlying] K, the assignee may enforce the assignment agreement against the AD, however the AD may sue the assignor for breach of the [underlying] K

Other Accounts-related Sections3(a) deemed inclusion of accounts when they are transferred22(1)(b) a properly perfected PMSI in accounts has priority over 20(a)+(b) creditors

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34(1)(b) general PMSI priority rule for intangibles and their proceeds if the PMSI is properly perfected

34(2) general PMSI priority rule when accounts are proceeds of PMSI-financed inventory

34(5) an original SI in accounts for new value has priority over PMSI proceeds in accounts if it is perfected before the PMSI

34(6) a non-proceeds PMSI in accounts has priority in a proceeds PMSI in accounts if it is properly perfected

35 governs priorities of non-assigned accounts where there is no special priority rule

Canada Western Bank v. Gescan Ltd. (1991, Alb QB)Can a SP with 2nd priority to an account take payment from the AD free of the interest of the senior secured party?Facts: GP (account creditor/assignee) gave bank a general assignment of book debts. This assignment was registered. GP also assigned to Gescan a specific account owing to GP by an account debtor, Jen-col. This specific assignment was not registered.

Gescan demanded payment from AD and received payment. Therefore – have 2 assignments.Issue: Bank now demands that Gescan pay this sum to it, b/c bank had registered general assignment of book debts and claims it has priority. GHeld: Bank’s security, being perfected, takes priority over D’s unregistered security

- S. 35 of the PPSA governs: first to register gets priority- This trumps the C/L in Dearle v. Hall that was the first assignee to notify the D that it

was the assignee of the debt got priority- The argument that Gescan should get priority because the payment from the account

debtor is cash “money” (by virtue of s. 31(1) fails)- The issue is not what happens when payment is made- The CRUCIAL issue is who is entitled to the debt – the first party to perfect its SI- Court looks to rest of s. 31 – the word account is never actually used in the section, so

doesn’t apply it to the situation- Further, the payment wasn’t made in ordinary course of business- Court is very unsympathetic to Gescan – clear there was a pre-existing SI and they should

have been asking questionsAssignments of accounts fall under the priority rules of the PPSA. Therefore, priority goes to the first to register. Exception: when negotiable collateral is used to pay debts. It would be unfair the other way because it would deprive the main lender.

CONSIDER:If Jen-Col had paid/sent cheque to GP, and GP had paid the money them to Gescan, that would have fallen under s. 31, protection of transferees of negotiable collateral. It would have been in ordinary course of business, in payment of a debt, etc.

Chattel Paper

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s. 1(1) “Chattel Paper” – collateral composed of monetary obligation & a SI in or lease of specific goodsSee above – s. 41 but as opposed to accounts, typical way to perfect is take possession of CP

- Both halves have to be properly perfectedo Paper by possessiono Goods by registration

Example:T1: D borrows money from lender buys inventoryT2: Lender registers (s. 25) to gen SI in inventory (original collateral) and proceedsT3: D sells an item of financed inventory

- At the point of sale, the buyer needs financing- Seller provides it, buyer gives a WRITTEN promise to pay- D takes an SI in the item

T4: D possesses the paper/written promise, and files a FS describing the goods- Chattel paper has been created!- Tends to be used for non-inventory transactions- Also tends to be used when dealing with a small number of goods- Don’t get super priority with it, so much more worthwhile for someone who is financing

to get a PMSI

Commercial Credit Corporation v. National Credit Corporation (1971, Arkansas)How does a disposition of CP affect the interests of others in it?Facts:

RECALLCP can only be used for specific goods (so not used for inventory where it goods disappear)

31(6) Transfers of Chattel Paper“Purchaser” (not as proceeds) of Chattel Paper where:

1. Purchaser takes possession2. In ordinary course of business3. For new Value (excludes antecedent debt liability)4. Without knowledge CP is subject to a registered SI

Has priority over SI (a) Perfected by registration (under s. 25 as original collateral) IF NO knowledge of

SI(b) SI that has attached to proceeds of inventory (under s. 28) regardless of

knowledge

While with PMSI’s, and SI is limited to the amount unpaid of it, CP is valid until the entire debt is paid

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- CCC finances M’s cars. He gets specific financing for car X from NCC and M conveys title to the NCC and signs promissory note for loan

o This made CP – instead of filing FS at the registry, he conveys title- B buys car X with cash, trade in (that was bought and financed through M, financing

agreement sold to CCC as a financer), and borrowed money- He signs a conditional sales K with M- M regularly sold his financing agreements to CCC, and did so with that of car X

o CCC took unpaid balance of trade in, added it to the financed amount of car X and got B to agree that this was the amount owed

o This also creates CP- At this point, the trade in car = proceeds for NCC- NCC finds out that the CCC bought the CP- NCC wants the CP back claiming its proceeds- CCC says no, and further asks that NCC surrender the title of the car to them- NCC goes to register their interest in car X, but they are second in priority to CCC- NCC has title, CCC has possession of writing and they were getting the payments, but

has no rights in the car,- M had the proceeds (trade-in and the cash) and B had possession and use- Neither NCC or CCC registered in the PPR - NCC claims the payments as proceeds – contends it also has a SI in the car, and that since

it attached first, it should have priorityIssue: Who has priority for payments that B is making?

- Court says, car X was sold in ordinary course of business such that NCC’s SI was cut offo Section 30 (2) Taking free, protection of the buyer

- As soon as the car was sold, NCC’s SI would no longer follow the car, would only continue in the proceeds

o NCC could only claim proceeds (Conditional sales K and trade-in) BUT could only claim while M had possession of both

- When M sold the CP, NCC lost the CP as first generation proceeds- But the proceeds are still traceable and identifiable – continue in the proceeds M got

when it sold the CP to CCC- But with respect to the payments owed by B under the CP, they have no rights in them –

they have been cut off from themo Court looks to s. 31(6)(b) – ordinary course purchaser of CP for new value has

priority without regard to knowledge (b/c inventory) – AND HOLDS that CCC is entitled to payments b/c they are an ordinary course purchaser

Had regularly bought financing agreements from M And b/c the car was inventory, it was irrelevant that CCC knew the car

was subject to NCC’s SI

PRIORITIES: TAKING FREE

Taking free/cut off rules render a SI ineffective, its not like the other rules that give priorityCONTEXT: Between unperfected SI & 3rd party claimant

General Rule: An SI in collateral continues after it is sold & extends to proceeds

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Taking free rules are exceptionsExample:s. 20(b) An unperfected SI is “not effective” against a Tib – that is, the TiB takes free of it.

Taking Free by Permission of the SPs. 28(1)(a) SP can expressly or impliedly authorize that the collateral be dealt with free of a SP’s interest

- Authorization could be given to D or 3rd P- Unless SA specifies otherwise, 28(1) is taken to say there is authority to deal, cuts off the

SI- PARTICULARLY where collateral is inventory – assumed the SP has authorized dealing- DOESN’T HAVE TO BE IN ORDINARY COURSE OF BUSINESS

s. 28(1)(b) The SI extends to the proceeds, even if there is express or implied permission to deal with the collateral

- Ie. even if 28(1)(a) cuts off the SI in the collateral, you still have SI in proceeds

Taking Free – Buyers & LesseesAllows buyers and lessees of goods to take them free of unperfected and perfected SI’s in the goods.

Policy:- Protect buyers and lessees- Every time you go to store, don’t want to run down to PPR to see if what you’re buying is

subject to a SIo Unrealistic, particularly when the seller is doing this in their ordinary course of

business

There are 4 rules:1. Ordinary Course buyer rule – s. 30(2)2. Low value consumer goods rule – s. 30(3) (4)3. Buyer protection against temporary perfection rule – s. 30(5)4. Serial number goods rule – s. 30(6)(7)

ALWAYS DISTINGUISH BETWEEN a person taking free of a SI and a person whos interest has PRIORITY to a SI

- in the second situation, the SI continues to exist in the background, in a subordinate position

-

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Before a buyer can take property free of SI of the SP (ie. gain protection of s. 30), he must establish that there has been a sale and that he is a buyer in the ordinary course of business (RBC v. 216200 Alberta)

THRESHOLD – HAS THERE BEEN A SALE? (if no sale = no buyer = no s. 30)- Must be a sale under 30(8) definition- Sales include (all or part of purchase price in)

o Casho Exchange for other propertyo On credito Delivering goods OR document of title under pre-existing K for sale

- EXCLUSIONSo Transfer of security for a money debt or past liabilityo Transfer in total or partial satisfaction of a money debt or past liability

In determining whether or not there has been a sale – must fulfill the technical definition of Sale of Goods Act – RBC v. 216200 Alberta

1. For the title to pass to buyer, goods MUST be ascertained goods2. Where there was a sale of a specific item in the possession of the seller, title passed on

the making of the contract, notwithstanding that the full amount of the purchase price had not been paid

Example:T1: SP loans D money

- D grants SI in a truck (equipment)T2: SP perfects by FS, describes by serial #T3: D sells truck to a used car dealer

Ordinary Course Buyer Rule – 30(2)- Buyer takes free of perfected/unperfected SIs GIVEN BY SELLER if:

- Good purchased/leased in OCB of seller AND - Seller’s “OCB” is a question of fact, influential factors incl

i. Transaction type – normal pt of debtor’s bizii. Place of sale – if @ seller’s place of biz, more likely OCB (if not, more

scrutiny)iii. Parties to transaction – is buyer an ordinary customer? (if

dealer/financial iffy)iv. Quantity of goods soldv. Price charged – mkt more likely OCBvi. Advertising – if do so, more likely OCBvii. Percentage of overall sales volume

- Buyer doesn’t know that sale/lease is a breach of SA (btw debtor & SP) - 1(2) – “knowledge”

- SI was given by the seller Doesn’t matter if debtor had a rt to deal

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T4: UCD sells truck to a buyer for $2K.- The UCD also has an inventory financer, so there’s at least 2 SI’s now in the truck

T5: Debtor defaults- The truck has been taken free by the buyer from the SI the UCD’s inventory financer had

in it- BUT it’s not taken free from the SI the D gave to the original SP

o WHY? Because the D didn’t sell the truck in the OCB (in this example, was just a business selling off equipment)

- So the SP can come after the truck and scoop it (and the UCD will have to find the buyer a new truck/give money back)

Royal Bank v. Wheaton Pontiac (1990, Sask QB)Does Section 30(2) allow a buyer to take free only of SI’s given by her seller?This case illustrates a gap in the legislation where the innocent buyer is not protected. Only saving grace = if dealing with SN goods.Facts: Bank entered into SA with Debtor (Key West), whereby Bank was given SI in Key’s inventory, including car. Bank registered SI. Since car was part of the inventory of Key, it was not required to register a SN for each car.Debtor ceased doing business. It lost its business premises. Debtor sells car to dealer.

Low Value Consumer Goods Rule – 30(3),(4) “Garage Sale Exception”- Buyers/leasees of low-value consumer goods take free of ALL SIs (perfected,

unperfected, from any SP)- Doesn’t have to be OCBRequirements

- Buyer gave value – 30(3)(a)- Buyer must acquire for personal, family, or household purposes – 30(3)- Price < $1,000 – 30(4)(b)- Buyer must acquire w/o knowledge of SI – 30(3)(b)

- *NOT fixtures – 30(4)(a)

Buyer protection against temporary perfection rule – 30(5)- Buyers take free when SIs in those goods are temporarily perfected under 26(1), 28(3),

29(4)- Purpose – reduce risk of loss encountered by buyers when search of registry reveals no

registrations- Puts the risk on the SP, who can perfect immediately instead of waiting out the 15 day

grace period to protect themselvesRestrictions

- Buyer gave value AND- Didn’t have knowledge of SI (s. 1(2) knowledge)

- 30(5) restricts the benefits of temporary perfection to situations where parties in conflict are NOT buyers

Serial number (equipment) goods rule – 30(6), (7)- Only applies to serial numbered equipment goods – (7)

- Can describe serial-numbered equipment by item, kind, APAAP, or serial # - 9(1)(b) regs

- IF described equipment by serial # - MAINTAIN PRIORITY OVER BUYER (not cut-off by 30(6), (7))

- IF goods are NOT serial numbered equipment AND described as such, buyer/lessee takes free of perfected SI

- NARROW – only serial #ed, only equipment

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Dealer then sold car to respondent #1 (who conducted search before purchasing – SI of Bank was not disclosed therefore is an innocent purchaser). Respondent 1 traded in car to respondent #2, with a warranty that it was free from encumbrances. Car was subsequently sold to a 3P. When the Debtor defaulted, the bank came after the 3P for the car – was this valid?Issue: Did the car (subject to SI of Bank) cease being “inventory” and become “consumer goods”, thus requiring Bank to register a serial no to maintain its perfected si?

The 2 respondents acquired car subject to bank’s SI Bank’s perfected SI has priority over that of the 2 respondents unless the transaction b/w

debtor and dealer was made in ordinary course of business So the court considered the facts – WRT Respondent #1, was it in OCB? (see box 30(2))

o Debtor had no place of business when sale took placeo Court decides NO, not in OCB and therefore the SI wasn’t cut off

With respect to respondent #2, the sale was in the OCB, but SI here was not given by the seller, thus also not cut off under s. 30(2)

There is a lurking danger to purchasers of automobiles secured by lenders as inventoryo BUT its for the legislature to remedy this deficiency

The SI continued in the car, and therefore purchaser losesPolicy: The 3P purchaser has a remedy. It bought the car from a reputable dealer – can claim against the vendor for breach of warranty to sell.

Royal Bank v. 216200 Alberta (1986, Sask CA)Who is a buyer in the ordinary course of business?Facts:

Furniture seller granted debenture to retail vendor, securing all its present and future assets

Debenture was registered, creating a SI in APAAP Seller defaulted under the debenture, receiver appointed Prior to appointment of receiver, some customers had paid all or a portion of purchase

price on furniture they intended to purchase from sellerIssue: What is the status of claims of:

1. Persons who have paid the full purchase price, but the property is not in the possession of seller AND Persons who have paid part of the price for property NOT in seller’s possession

a. These two are addressed together – their rights turn on the issue of whether they bought goods in the OCB

2. Persons who have paid part of the purchase price for property in seller’s possession3. Persons to whom cash refunds are owed by seller

Held:Those persons who paid part of the price of goods in the possession of seller which were in a deliverable state, and identified as being the goods purchased, have priority

Before a buyer can take property free of SI of the SP (ie under s. 30), he must establish that there has been a sale and that he is a buyer in the OCB

In determining whether or not there has been a sale – must fulfill technical defintion of Sale of Goods Act

o No title can pass to a buyer if the goods are not ascertained goods

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o Where there was a sale of a specific item in the possession of seller, title passed n the making of the K, notwithstanding that the full amount of the purchase price had not been paid

A sale, in the OCB, includes a sale to the public at large, of the type normally made by the vendor in a particular business where the basic business dealings between buyer and seller are carried out under normal terms and consistent with general commercial practice

o DOES NOT INCLUDE private sales between individual buyersThe result:Class #2 people – The goods were ascertainable, & deliverable and therefore title passed to them when they entered the sales K. s. 30(2) applies and they could get their furniture by paying the balance or getting a refund of $ already paid. Classes #1 people – goods were not ascertained. Under Sale of Goods Act, title has not passed. Since good not been sold, they were not buyers.Class #3 People – all the money paid (ie for ordered item that is not specifically determinable because has to be made). These people have not given the vendor SI – no evidence of a trust being created. Thus, they are unsecured creditors.

NOTE: In BC, these people are protected by consumer lien in Sale of Goods Act. Where in OCB of seller, the seller makes an agreement with buyer who is buying goods in good faith for consumer purposes, then buyer (who pays money to a vendor or retail supplier) gets lien for the amount they pay. Covers all goods and similar types of inventory and covers all deposits in accounts. This lien gets super priority. In this case, class 1 and 3 people would have had a lien and would have recovered or have at least had a better shot at recovery

This case still applied for commercial sales.

Policy: Definition of “sale” should be what an ordinary person would think fo a sale. The purpose of a non-technical definition is to protect innocent people who don’t have law degrees to deal with transactions in their everyday lives. A technical/statutory definition would expose consumers to significant degree of risk potentially losing items to secured creditors. However, others argue that the SOG Act is a legal statute which provides a definition of sale and this cannot be ignored.

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