General Info In PPSA “Funds” refers to things PPSA does not apply to real property unless fixture or corps Assignment is simply a mechanism for transferring property from one person to another

– this might be the only mechanism that you can use for certain types of properties (particularly intangibles)

Property that is subject to an attached si is called “collateral” 28(1) … the amount secured by the si in the collateral and the proceeds is limited to the

market value of the collateral at the date of the dealing. Will come back to this when dealing w/ remedies. ???

o The amount secured is fixed by the dealer. Amount that SP can actually extract is limited to the amount at the date that it was dealt w/ and gave rise to proceeds.

o Ex. If collateral is worth $1000 in the market and is sold and gives rise to $800 and it was securing an obligation of $3000. Before it was dealt, it rose up in value to $5,000.

o The $3000 is limited to the market value of the collateral at the date of dealing. It is amount that is secured gets fixed!

o Only operative if SP going after both collateral and proceeds, but if only going after one then not limited in this way.

o Before sold, if value rose to $5000 you could use, but once dealt w/ value is limited to date of dealing (market value was $1000)

o Feb 14 start of class.

Situating the PPSA s.73 PPSA prevails over everything unless the other Act explicitly says that it doesn’t:

Marine Bldg Holdings v Proton (secured interest prevailed over builder’s lien). Exceptions s.74(1): If there is a conflict between the PPSA and the Business Practices

and Consumer Protection Act, the Land Title Act (note: per 74(2), ss. 36, 37, and 49 still apply to the LTA), or the International Interests in Mobile Equipment (Aircraft Equipment) Act, those Acts prevail.

s.75 statutes that came before the PPSA don’t apply anymore. s.68(1) principles of the common law, equity and the law merchant continue to apply as

long as they aren’t inconsistent w/ PPSA.

TRANSACTIONS CREATING A SECURITY INTEREST

Key for getting into the statue is s.2(1): (a) PPSA applies to any transaction that creates a security interest w/out regard to form OR ownership // illustrations: (b) a chattel mortgage, a conditional sale, a floating charge, a pledge, a trust indenture, a trust receipt, an assignment, a consignment, a lease, a trust, and a transfer of chattel paper IF they secure payment or performance of an obligation.

Any transaction wherein an interest in personal property is taken to secure payment or performance of an obligation will be governed by the PPSA – subject to s.4 which excludes some transactions.

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Remember to come w/in the PPSA, the transaction has to be consensual. It is the substance of the transaction that matters, not the form. Are parties using a

particular form of transaction (ex. a trust or a lease) hoping to escape PPSA? Is it a secured transaction dressed up as X?

Parties to a ST (look @ def section) Secured party/creditor: party to whom an underlying obligation is owed

o SP: person who has si; person who holds si for benefit of another; or trustee of trust that holds si

o Creditor: includes an assignee for the benefit of a creditor, an executor, administrator or committee of a creditor

Debtor has various meanings: person who owes money; party who comes to own the collateral (who does not in fact owe anything); the guarantor; deemed debtors

o Guarantor or indemnitor (p.88)

Standards of Behavior Parties involved in a ST are subject to the requirement that all parties act in good faith and a commercially reasonable manner in the exercise of their rights, duties or obligations arising under a SA, this Act and any other applicable law (s.68 (2)). The statute separates the concept of “knowledge” from that of “bad faith”, in that acting w/ knowledge of another’s security interest does not alone constitute acting in bad faith (s.68 (3)).

The “Obligation Secured”

Obligation: must be owed to the SP; may or may not be created by K; almost all have money value

(i) What is the amount actually owing? Collateral can be used to secure amount that is actually in default, not the total amount (ex. installment payments) – otherwise will face claims for trespass or conversion. Per s.18, SP has to provide info & is precluded from denying accuracy of info provided.

For a lease look @ the def of “obligation secured”.

(ii) Tacking allows an existing creditor to increase the amount secured & tack that increased amount onto its existing priority position – pursuant to an “all obligations” clause in the SA.

Security agreement may provide for future advances s.14(1) A junior creditor that takes an assignment of the interest of a senior creditor cannot use

the senior position w/ respect to the obligations owed to the assignee before the assignment (Canamsucco)

Risk: senior party may swallow up all the value of the collateral Might opt-out of tacking b/c other creditors won’t lend $ to your debtor or debtor is a

strong position

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(iii) Acceleration clause: parties can agree that amounts otherwise due later become accelerated upon the happening of particular events, usually an event of default – normally has to be expressly agreed upon.

s.16 If SA provides for acceleration when the SP is or believes itself insecure or decides that the collateral is in jeopardy, then such a provision must be construed as applying only where the SP, in good faith, has commercially reasonable grounds for such a belief.

o If no default & debtor’s financial situation is improving, then there may be no such reasonable grounds.

o One missed payment, on its own, may not be enough to cause a SP to believe the collateral is in jeopardy. Debtor might be able to get relief from the acceleration clause by arguing that he is having short-term problems.

Form Requirements for the Security Agreement

1(1) Security agreement means an agreement that creates a security interest!

(i) Against who is the SP trying to assert its si? SP wants si to be effective with respect to both the original collateral and the proceeds.

SA gives SP a si in collateral – in order to have a si, need to have an effective SA s.2(1) form not important Per s.9, a SA is effective according to its terms subject only to a few constraints under

the Act. As between the 2 parties (SP and debtor) to the K that leads to an attached interest,

there is no particular form of K required: “SA effective according to its terms”. However, more is required to give effect as against 3rd parties. SP must ensure (beyond merely having a K w/ the debtor) either that the SP has possession of the collateral (downside: obvs can’t be intangible; not convenient in many cases – ex. if a lending institution; tying up debtor’s assets) (s.10(1)(a)) – beware of s.10(2) OR that certain writing requirements are met (s.10(1)(d)).

o In order for the agreement to have any effect at it all has to satisfy s.10, but s.10 doesn’t tell you what the effect is.

o When would you want possession? If collateral is a negotiable paper, SP probably wants possession – why would writing be important here? Proceeds

s.28(1)(b) extends si to proceeds (in addition to the original collateral) Property derived from the original collateral – profit from using

the goods or selling the goods If in competition for proceeds, you’ll have to perfect a financing

statement w/ respect to the original collateral. Therefore, probs have writing even if you have possession of property.

Granting a security interest – need language indicating this unless a deemed secured transaction

(ii) Writing requirements (apply to both true and deemed STs):

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The collateral describes the property by [item/kind/reference to] as set forth in 10(1)(d)(i) Per s.10(1)(d): signature of the debtor (+) description of collateral w/in the parameters

of one of the following sub paras: (i) description of collateral: ITEM / KIND (type of item) / or REFERENCE to one or more:

o goods, investment property, instruments, documents of title, chattel paper, intangibles, money, crops, or licenses

(iii) All PAAP statement (SA is called general security agreement = GSA) this prevents future problems with form & is the preferred method

o SP gets an interest in all the property that debtor has now & in the future (iv) All PAAP with exceptions

Si can be in a particular good (ex. X) OR a category of items (ex. all goods) – if want future items, have to note in agreement that want future goods unless have possession

How precise should the wording be? Can’t just say: security agreement in property; or security agreement in assets!

o Can’t use the word “all assets” as description 674921 (writing requirements not met 3rd party can ignore interest of SP)

No writing at all undermines property interest – as illustrated in Riepe, as a result of a failure to meet the writing requirements, a 3rd party who knows about the si is entitled to ignore it (owners entered a long-term lease w/ Riepe plus others in writing. Riepe negotiates a purchase on credit & Pacific is actually the purchaser, but no writing – conditional sale agreement (Pacific is debtor and Stingray is the SP) Stingray has a si interest in the car, but s.10 writing requirement not met // H: only effective against pacific not Riepe (a 3rd party). Riepe wins!)

o REMEMBER s.68(3) not bad faith if act w/ knowledge of another’s sio Could have been fine under s.9 if Pacific had not sold to Riepe.

(iii) Sections that qualify writing requirements in s.10(1)(d)ID category of goods (think about what are the goods used for): inventory, consumer goods, equipment (default category if not inv or CG) – look @ def section

Ex. si in “computer equipment” – issue is what happens if sold tomorrow (becomes inv) or take home to use (becomes consumer goods); doesn’t matter as long as met writing requirement at the time of the agreement. Exception is w/ inventory (s.10(4)) – risk of disappearance. Impacts interest in competition w/ any 3rd party!

Unless otherwise provided in this Act, the determination whether goods are consumer goods, inventory or equipment must be made as of the time the security interest in the goods attaches (s.1(4))

Description of collateral as … “consumer goods” or “equipment” require further reference to kind (type) – ex. serial

number or category (s.10(3))o equipment (bad) vs. computer equipment (good) o can’t get a si in all consumer goods – will only be effective against the original

parties, but not third parties – but OK to say all bicycle consumer goods. But OK to say all PAA goods.

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o excluded property may be described as consumer goods w/out further reference to item or kind (s.10(6))

“inventory” adequate only while property is held by the debtor as inventory (s.10(4))o once sold to someone, not inventory anymore and writing requirement not

satisfied. o BUT if property becomes inventory you’re fine b/c determination of goods made

at the time the SI attaches - 1(4)o Bruce: this is bizarre b/c it’s easy to get around this – just don’t use the word

“inventory”, ex. use All PAAP instead SA need not reference “proceeds” (= property derived from collateral) to be

enforceable against 3rd parties (s.10(5)) – but there are other reasons why you’d want to meet the writing requirements (look above)

o If si in All PAAP – if there is proceeds, it’s also after acquired property (2 characterizations). Why you would prefer to use nature as proceeds or as collateral? Note the different writing requirements for proceeds & collateral

o Ex. si in All PAAP & property is a car --- car sold for 300 --- 300 is proceeds & SP automatically gets si in the $300 as proceeds per s.28(1), but also original collateral as after acquired property.

o Look @ chart below a description of the collateral as … w/out further reference to is inadequate to meet the writing requirements. As a result, the agreement does not create security interests enforceable against 3d parties in accordance w/ s.10.

Example 1: Proceeds & Original Goodson day 1 debtor has possession of X (goods), Y (goods), Z (not goods) & gives SP si in

X no interest in Y & Z PAA goods have to investigate to see which of the properties are goods All PAAP si in everything that is recognized by 3rd party if its writing

On day 2 X is dealt w/ and leads to M (money); Z is dealt w/ and leads to N (goods)M

In all 3 situations SP will have an interest in M b/c it is proceeds – regardless of whether M is goods or not.

o SP automatically get an interest in proceeds per s.28(1)(b) – M doesn’t have to be goods for SP to get an interest

o As proceeds, M doesn’t need to meet writing requirements – s.10(5) All PAAP SP has an interest in M in 2 ways: it’s proceeds from X, but also

after acquired property (original collateral)o As proceeds won’t need writing requiremento As original collateral All PAAP satisfies writing requirement

N X N is not proceeds since SP has no interest in the original property (to

be proceeds must be property derived from collateral) PAA goods SP gets a si in N as original collateral (b/c N is goods) – not

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proceeds All PAAP in this case, Z would be collateral & N would be proceeds & SP

gets a si in N

Example 2Day 1 SP has si in All PAA inventory (this is OK!) – si in X (inventory)Day 2 X is dealt w/ and gives rise to Y (inventory) SP loses interest in X b/c no longer held

by the debtor, but will have an interest in Y (b/c after acquire inventory)Day 3 Y is dealt w/ and gives rise to Z (inventory)

Q: what happens to SP’s interest in Y? Y has 2 characterizations: original collateral b/c si in after acquired inventory & proceeds

Whether SP loses interest or not depends on characterization of Y: o If original collateral, SP loses interest b/c no longer held by debtor as

inventory – s.10(4) can’t assert against 3rd party o But if use characterization as proceeds, don’t have to meet writing

requirements under s.10 can assert against 3rd partyo So, assert interest in Y is an interest in proceeds of …

Example 3: If SP has a si in D’s car X --- D sells car for $100 down payment, promise to pay $2000 and a trade-in vehicle SP now has si in all three as proceeds for X

If D uses $100 as follows: $20 to buy wine (proceeds); $50 to deposit in savings account (proceeds); and keep $30 SP now has two other proceeds that he can go after – get si in bank account

Example 4: si in X [$30] for $500 – SP under secured --- X gives rise to A [$10], B [$15], C [$5] SP gets a si in each one for $500 --- B gives rise to E [$1] and F [$1000] SP gets si in each of those for $500 as proceeds – now, no longer under secured b/c collateral which includes the proceeds is sufficient to satisfy the debt

(iv) Delivery requirement: per s.11 SP must deliver a copy of the security agreement to debtor w/in 10 days after execution

Transactions Creating “True” Security Interest

Def “Security Interest” s.1(1)Transactions truly designed to secure an obligation in an earlier transaction:

True s.i. (a) an interest in goods, chattel paper, investment property, a document of title, an instrument, money, or intangible that secures payment or performance of an obligation

Transactions that might or might not create a s.i.: Deemed s.i. (b) an interest in

(i) the transfer of an account or chattel paper, note: only transferred by assignment

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o Ex. Bruce gives $100 to X and sells X’s promise to pay him back to the dean. Sale of X’s obligation to pay is treated as a secured transaction; B would be debtor; dean secured party.

o Any assignment of an account or chattel paper regardless of whether it is an absolute or conditional assignment is a ST

Transferee = SP; transferor = debtor (ii) commercial consignment, or

o Between 2 commercial parties (iii) a lease for a term of more than one year (look @ def of “obligation secured”)

o A true lease could be a ST if it’s for over one yr regardless of whether it secures performance of an obligation or not

Less of the statute applies if fall under (b)

Need to know why covered by PPSA b/c it tells you how much of the PPSA applies. True lease for more than 1 yr is covered by PPSA (s.3) – but not part 5, which is the remedies section (s.55(2)).

PPSA deals w/ the position of the SP w/ respect to the ROW not the debtor & no law prevents the remedies that the parties can agree on.

Lessee is not given procedural protections that debtors under a security lease would be given.

o Lessee wants PPSA to apply b/c it protects it in terms of remedies available o But lessor doesn’t want the PPSA to apply at all b/c then it has to worry about

the rest of the world – if it doesn’t protect itself in accordance w/ the PPSA, then someone else can take lessor’s ownership entirely.

The trust doesn’t have the same problem – either security trust or true trust – there is no overlap. Transfer of account/CP – all covered by PPSA regardless of being absolute (not security assignment) or conditional (true security assignment) – remedial provisions are outside of part 5, so distinction not important like it is for leases.

Scope of the PPSA s.2(1) PPSA applies to (a) every transaction that in substance creates a security interest w/out regard to its form & ownership // illustrations: (b) a chattel mortgage, a conditional sale, a floating charge, a pledge, a trust indenture, a trust receipt, an assignment, a consignment, a lease, a trust, and a transfer of chatte l paper IF they secure payment or performance of an obligation.

There has to be a transaction! Ex. an interest or right to recover payment under a court order is not governed by the PPSA.

Under sub(b)o first 4 (bold) definitely covered by PPSAo trust indenture, trust receipt usually should be covered o for the rest (underlined) PPSA applies only if in essence it works the same as

either a chattel mortgage, c.s.a. or assignment of accounts [can it be analogized to one of the categories always governed by PPSA?]

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FORMS OF SECURED TRANSACTIONS (A) PPSA Forms: which is called a s.a. (defined in s.1(1)); also, general security agreement (GSA) = s.a. allows for a security interest in all-PAAP s.13(1)

Historical Forms: mechanism used usually a conditional assignment; form used depends on the type of property that you are interested in (future property? Tangible? Intangible?)

(B) CL concerned w/ possession (couldn’t use w/ respect to property that couldn’t be possessed) – keeping something hostage to ensure that obligation completed

by operation of law: lien gives purely a defence, not a property interest by operation of agreement: PLEDGE/PAWN creates a conditional property interest – no

writing requirements per s.10 b/c have possession of collateral o Definition a pledge is the deposit of property or a document representing the

property w/ another as security. If pledged property is returned to the party who gives the pledge, that party can give the pledgee a trust receipt stating that the property is held in trust for the pledgee.

o a pawnbroker is treated as a SP for the non-remedies part of the PPSA.o in the context of PPSA, this is called “perfection by possession”

@ CL if gave up possession, would lose interest! CL did not allow s.i. over future property

(c) Equity not concerned w/ possession (could use w/ respect to property that could be possessed & could not be possessed); could come about in 3 ways:

MORTGAGE has an additional remedy = foreclosure (allows you to keep the property in the event of default); if foreclosure, can’t claim deficiency (so to your advantage to keep if property worth more than what you are owed, but not the other way around)

o need tangible property o possible to have mortgage over future property – but more likely will use a fixed

or floating charge FIXED CHARGE allows holder to sell property (have to payback surplus), not to keep –

disadvantage: have to register charge, so no one would buy the item; bad for debtor’s biz

o either tangible or intangible property FLOATING CHARGE allows holder to sell property, not to keep – charge or encumbrance

over a category of collateral owned by debtor the contents of which regularly change (ex. a charge over inventory). Essentially, charge floats over the items in the category, so no particular item in the inventory has a charge, so can sell an item charge free. Once default, charge crystalizes & anything in the category will have a charge – allows debtor to deal w/ content of category until default; this is good for biz

o either tangible or intangible property o Bruce: this doesn’t work under the PPSA – today, if you take a floating charge in

Canada, it will almost always operate as a fixed charge.

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PPSA allows you to use any of the forms! There is no real reason for choosing one of the structures over another – same rules apply to all. Won’t be examined on the forms directly!

Yeung v Au: Pre-PPSA legislation, no longer in effect, should not be used to interpret what a form of transaction entails. Bruce: just better to use a s.a.!

Owner (lessor) --- lessee (can become purchaser); but option had not been exercised Under MVA, if there is a conditional sale K, the seller is not the owner; and the owner is

responsible for an accident. If seller, not responsible for accidents. SoG Conditional Act, lessor under a lease w/ an option to purchase equivalent to seller

in conditional sale K, thus not the owner. Injured party sues the lessor --- court said SoG Conditional statute gone, and to get

benefit of MVA have to be seller in a true conditional sale K, not a lease w/ option to purchase. Lessor had to pay

H: PPSA repealed pre-PPSA legislation

FORMS THAT WILL NECESSARILY INVOLVE A SECURED TRANSACTION & TRIGGER THE PPSA(1) Chattel mortgage: owner of property gives an interest in property by way of mortgage to the mortgagee to ensure repayment.

Debtor A owns property X (mortgagor) --- gives mortgage (which is a property interest) to creditor B (mortgagee; SP)

A conditional assignment can operate by way of mortgage or charge.

(2) Conditional sale K (c.s.a.): seller retains title in goods until buyer has finished making payments

Seller B owns property X (creditor – retains ownership, which is a property interest = SP) --- A buys X on credit (debtor)

Leads to the creation of a purchase money security interest in the goods bought on credit and subject to the seller’s continuing title.

Reference to conditional sale Ks is often used to ascertain whether, in a given case, a lease or a consignment is a “security” lease or consignment. If the lease/consignment effectively does what a conditional sales K does, then it is a “security” lease/consignment. In these cases, the lessor/consignor is thought to retain ownership only as a back-up security devise, as is the case for a seller in a conditional sale.

Treated analogous to a s.i.

(3) Assignment by way of a charge: floating charge on debts and pledge SP will get security interests in accounts (usually monetary debt or accounts receivable provided that are not evidenced in writing) of their debtors (who are the account creditors under the accounts) either directly as original collateral or by virtue of accounts arising as proceeds from dealing w/ other collateral in which they have an interest. SP gets conditional assignment usually operating by way of charge. The assignment becomes absolute once the precondition is met (SP’s debtor defaults against SP), and SP will realize on its interest in the account by notifying the account debtor to make payments to the SP.

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Owns property X (account) = account creditor --- account debtor Account creditor needs $ & becomes debtor to someone else B creditor

(borrower/debtor); B asks for collateral & borrower assigns debt X to B (assignee of debt X)

If assignor doesn’t fulfil obligation, assignee can notify account debtor to pay B Under PPSA: B = SP; assignor = debtor Ex. a general assignment of book debts under the Income Tax Act is a s.i. – KEY:

borrower retains the right to redeem book debts once the borrowing is paid back, which is inconsistent w/ something that is absolute.

NOTE: under a conditional assignment, if precondition is default, then ST. BUT if pre-condition is performance of an obligation, the not a ST. So, a conditional assignment is not always a ST.

Chattel paper: a SA whereby there is given an interest in specific goods (as opposed to a category of goods) is called a CP. SP can obtain an interest in CP as security – conditional assignment of the interests in the CP (i.e. debt & s.i. in the goods)

Assignment vs. Conditional sale ASSIGNMENT: interest in an intangible property always works through an assignment Under conditional assignment A owns X and is B’s debtor --- A assigns ownership

interest in X to B under a conditional assignment (B becomes a SP); note: can’t use until condition satisfied SP gets something that he did not have previously that can be used in the event of default – takes form of one of the charges above

o Under an absolute assignment can use immediately! Under conditional sale B owns X --- A is debtor (buying X on credit) --- B transfers

possession to A, but retains the title which gives him an ongoing interest in X in case A doesn’t meet obligation retention of a property interest that SP already has

Bruce: don’t mix up the two!

CL TRANSACTIONS THAT SOMETIMES CONSTITUTE ST & SOMETIMES DON’T Below are types of transaction where it is not entirely clear whether the PPSA or not.TIP: Make an analogy that functionally operating in the same way as [X] that is covered by PPSA.

(1) Consignment as SA: is a consignment a true consignment or a security consignment?TRUE CONSIGNMENTS: an agency arrangement whereby the owner gives possession of goods to someone else to act as their agent (to find someone to buy the goods).

If this is all it is, the transaction does not involve the creation of a security. Consignor (owner/principal) --- Agency K --- consignee (agent) --- sale K --- buyer

SECURITY CONSIGNMENTS: Agent looks an awful like a buyer under a conditional sale K – (1) agent (consignee) must find a buyer or become the buyer itself OR (2) if don’t become owner, have obligations under the K that are similar to obligations of an owner (ex. insure the goods; pay taxes). PPSA applies in full force.

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agent = debtor; owner = SP then must take steps to protect interst This consignment is in essence a disguised conditional sale and as such falls w/in the

PPSA.

Re Toyerama Consignor left toys w/ someone else to sell for them. Agent goes bankrupt while still in

possession & trustee in bankruptcy comes in (trustee can ignore interest of a SP w/ an unperfected interest). I: true consignment or security consignment?

If consignor is a SP w/ an unperfected interest (i.e. has not registered), then trustee can ignore their interest. BUT if consignor not a SP, then PPSA is silent.

Consignee required to sell? Or owner like duties? H: more like a true consignment than not – so owner of goods won!

Note: Ontario didn’t have commercial consignment as deemed s.i. In BC now, the outcome would have been different b/c even though true consignment, it would be deemed to be a ST b/c commercial consignment & trustee in bankruptcy would have won.

(2) Lease: Is it a lease? If yes, is it a true lease (PPSA doesn’t apply, unless a lease for a term of more than one yr) or a security lease (PPSA applies)? The first issue to be determined is whether the lease is a true lease or whether it is a security lease. If the lease is a true lease the common law applies to P’s rights as against D. If the lease is a security lease, then the provisions of Part 5 of the PPSA apply to a determination of the rights of and remedies available to the parties on default. If the lease is a security lease, then the question will be: is D entitled to reinstatement of the lease agreement pursuant to s.62?P might argue that the agreement is a true lease as it says so on its face and was signed by the D acknowledging the character of the lease at the time the lease was entered into. However, a determination of the true character of the lease must be based on the determination of the function of the agreement for the purposes of determining the extent to which, if any, the agreement is covered by the PPSA.

TRUE LEASE: lessor = creditor; lessee = debtor; lessor retains ownership b/c they want to remain owner – not b/c lessee owes $. It is not a security device; it is a function of the transaction.

SECURITY LEASE: when the transaction is functionally equivalent to a conditional sale K and therefore involves the creation of a s.i. Lessor = SP; lessee = debtor Main reasons: (1) lessee must buy the goods at the end of the lease; @ the end of the lease, lessee automatically becomes the owner (this is a conditional sale); (2) an option to purchase that will predictably will be used (ex. become owner upon payment of a nominal price)

Both depend on lease being for a mandatory period of time. If lessee could terminate the lease early, then it is not a conditional sale & is actually a true lease.

Mandatory lease period + automatic ownership or token option @ the end

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(3) Also, when lease for mandatory period of time and lessee can’t become the owner, but lease covers the entire useful life of the goods (i.e. at the end of the lease period goods have no commercial value), then functionally equivalent of a c.s.a.

BC courts using two different lists to determine whether a lease is a security lease:DaimlerChrysler Services v CameronFactors

whether there was an option to purchase for a nominal sum o the option purchase price represented a genuine effort to estimate accurately the

truck’s value at the end of the lease term. An option purchase price set at market value generally demonstrates that the lessee will acquire no equity in the truck

whether there was a provision in the lease granting the lessee an equity or property interest in the equipment;

whether the nature of the lessor’s business was to act as a financing agency; whether the lessee paid a sales tax incident to acquisition of the equipment; whether the lessee paid all other taxes incident to ownership of the equipment; whether the lessee was responsible for comprehensive insurance on the equipment; whether the lessee was required to pay any and all licence fees for operation of the

equipment and to maintain the equipment at his expense; whether the agreement placed the entire risk of loss upon the lessee; whether the agreement included a clause permitting the lessor to accelerate the

payment of rent upon default of the lessee and granted remedies similar to those of a mortgagee;

o upon default, lessor could take immediate possession of the truck, obtain early termination liability and sue for damages – Chamber’s judge erred b/c she gave a determinative role to the default provisions

whether the equipment subject to the agreement was selected by the lessee and purchased by the lessor for this specific lease;

whether the lessee was required to pay a substantial security deposit in order to obtain the equipment;

whether there was a default provision in the lease inordinately favourable to the lessor; whether there was a provision in the lease for liquidated damages; whether there was a provision disclaiming warranties of fitness and/or merchantability

on the part of the lessor; and whether the aggregate rentals approximate the value or purchase price of the

equipment. Term of the lease – a lease for a short period generally indicates a true lease

Newcourt Financial v Frizzell The intent of the parties;

o Agreed that true lease “for all purposes, including, ex. for the purposes of PP security law…”. However, there is no evidence that D was told what effect that would have on her rights & remedies under PPSA.

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Was a deposit, down payment or front-end payment required by the lease. If so, was that payment refundable and under what circumstances.

o Deposit was paid to secure obligation to make payments under the lease. If $ owing, then use deposit; if didn’t exercise option would get back; could apply towards purchase if exercised option – H: I find these arrangements ambiguous as to whether the lease is a true lease or a security lease, and therefore of little assistance in determining that question.

Ownership at the end of the agreement and purchase options. For example, if the vehicle automatically passes to the lessee at the end of the term or if the option to purchase at the end of the term specifies a price lower than market value, that could support a finding that the lease was in essence a security agreement.

Indicia of ownership. If the lessee bears the burden of repairing and insuring the vehicle or is to bear any loss or gain from unusual depreciation or appreciation in the value, that could support the characterization of the lease as a security agreement.

o Can equally be seen as an obligation on the part of D to preserve P’s property during the term of the lease.

In both cases: Lease for over 1 yr (application of PPSA not in doubt). Lessee in breach of lease

agreement. Under the lease, all future payments are accelerated & become due immediately when lessee fails to make payment.

Under PPSA part 5, if there is a default under a s.a. where the collateral is consumer goods, then debtor can reinstate the s.a. despite the default if debtor pays the amount that caused the default irrespective of any acceleration clause. Note: can only do this twice per yr: s.62(1) & (2)

o So a lessee late on payments would want the entire PPSA to apply b/c this remedial protection under part 5 won’t be available if a deemed lease (have to follow the K)

o Ex. lease computer for 5 yrs (pretty much the entire useful life) –> security lease; but in lease agreement might say: if late, all future becomes due. Since computer is consumer goods under the statue, then part 5 comes to the debtor’s rescue. Whereas, if computer had a 10 yr span & no option to buy at the end –> true lease; PPSA applies, but not part 5 – so lessee won’t get the protection.

o Part 5 doesn’t apply to any true leases even if over a yr. In the cases, the courts look at different factors

having regard to the relevant considerations, the impugned transaction is a true lease that comes w/in the definition of s.3 and, therefore, is excluded from Part 5 of the PPSA.

(3) Trust: true trust or security trust? Don’t have to worry about deemed trusts – either in the PPSA or not

Trustee (D) --- s.i. in X --- Beneficiary (SP)o X sold and gives rise to money; part of the money kept, rest goes to a bank

account – interest automatically transfers to proceeds

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o Various rules can kick in as a result of which s.i. in X will disappear Why? SP can use equitable rules of tracing when debtor owes him a fiduciary duty – one

way to achieve this is to require the debtor to hold property in trust. If a transaction is deliberately set up as a trust w/ the debtor agreeing to take the role

of trustee and SP taking the role of B – so as to facilitate SP’s ability of follow a particular type of property, then it would be a security trust & PPSA applies

o Most of the times deliberate, but as illustrated in Skybridge might be by surprise 1(5) proceeds are traceable whether or not there is a fiduciary relation.

o all jurisdictions have a similar provision, except Ontario (where you still have to establish the fiduciary duty to use tracing)

might be in BC but $ might end up in Ontario – so you’d have to rely on Ontario rules

o for BC won’t have to establish trust b/c of s.1(5)

Skybridge Holidays Bruce: wrong, but reached the right result A travel agency required purchasers pay $ in advance & according to the regulations it

was put in trust. Travel agency went bankrupt! Purchasers arguing that $ belongs to them. Trustee arguing trust ST and purchasers SPs and needed to register. Since no registration, SP w/ unperfected s.i. & trustee gets to keep.

I: was the trust a ST? H: not a ST b/c consumers did not think of themselves as SP and debtor (Bruce: true, but the statue does not operate whether you think it operates or not. An interest in property to secure an obligation is a ST).

Bruce: Consumer’s retention of $ under the trust is a collateral devise to ensure that the main obligation (the holiday) is provided, so the interest in the money is a collateral interest.

s.4(a) $ in trust by virtue of regulation in place (i.e. operation of law), not explicit agreement. This actually takes it out of the PPSA.

Lawyers/realtors holding $ in trust & b/c of the nature of how that trust operation works that is a secured transaction and the two parties must register their interest, but overwritten by PPSA.This case says that it doesn’t apply to trust accounts, but Bruce is sure that it does. For the exam, follow the case – don’t follow Bruce!

Contractual right of set-off: if one party agrees that an asset it holds (probably an account) can be used by another to set off claims of that other, then there is a s.i. in the asset before the set off occurs.

Security Transactions Excluded from the PPSA

Transactions that create a s.i. but are excluded are listed in s.4(a) lien/charge/interest given automatically by operation of CL or statute

Statute only covers consensual transactions Rights of subrogation arise by operation of law, and so are caught by the exclusion The act can bring it back under the PPSA

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(b) SAs covered by federal law for constitutional reasons Security governed by the Bank Act First nations property: under federal legislation Indian Act, there are controls over who

can take real and person property situated on a reserve.o Kingsclear: school bus purchased on credit by the band & they default. The

creditor couldn’t go on the reserve to get it so waited until bus went off the reserve to take it.

o Property that is normally situated on a reserve is subject to the Act & can’t be used as collateral (not governed by PPSA).

o Downside:cases like this make it difficult for bands to get loans b/c people don’t feel secure in the event of default

(c) interests/claims under insurance policies insurance $ paid out on collateral can be proceeds and so included w/in the statute, but

might be excluded if it amounts to a transfer of a right to tort damages (d) present or future wages or any compensation for labour/service

excluded from any all-PAAPs applying to individuals fees for professional services are not excluded does not exclude transfer of an interest in past wages, commissions, etc.

(e) transfer of an interest in an unearned right to payment in an uncompleted contract K assignments where there is something left to be done in order for the transferee to

claim that payment is owing

Interest in land land itself not covered, first generation of income from land not covered, but next generation of income from land is covered by the PPSA (f) creation or transfer of land interest; mineral claim; or (l) placer claim

a mortgage of land is not covered land interests that are included in PPSA: fixture (s.36); growing crops (s.37) defined in

s.1(1) (g) interest in payments from land – ex. rental payments under a lease

a mortgage of the mortgage payment in land is not covered a mortgage of the mortgage of the payment from the mortgage of land is covered – this

is mortgage backed security Conflict between the PPSA & Land Law: In BC, PPSA provides for the paramountcy of land legislation if there is a conflict w/ the provisions of the PPSA, but not w/ respect to the provisions relation to fixtures or crops, in which case the PPSA prevails (s.74).

Some transfers of accounts or chattel paper(h) (i)

(j) a right to damages in tort

Others

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interest of a seller shipping goods under a negotiable bill of lading to the order of the seller is excluded from the definition of a true s.i. under s.1(1).

Subordination agreements: a SP can agree to subordinate its s.i. to another party, including another SP (s.40). This does not create a s.i. – unless there is an assignment of an account and would

Transactions Deemed to Create Security Interests

Three types of situations are deemed to involve security interests and thus governed by the PPSA. According to the of definition of “security interest” in s. 1(1), a security interest means (b) the interest of

(i) a transferee arising from the transfer of an account or a transfer of chattel paper, (ii) a person who delivers goods to another person under a commercial consignment, and (iii) a lessor under a lease for a term of more than one year,

whether or not the interest secures payment or performance of an obligation. By treating the lessor, the consignor or the transferee (in the specific situations referred to in the definition of “security interest” in s. 1(1)) as a secured party, those individuals will usually have to register their interest in the property in the Personal Property Registry, as would any other secured party. This will give potential creditors of the lessee, the consignee or the transferor a place to check to see whether the property in the hands of those individuals is in fact “owned” by them. Also need to meet the writing requirements in the statute, assuming D is in possession of goods.

While most of the PPSA applies to transfers of accounts or chattel paper, commercial consignments and leases for a term of more than one year that do not secure payment or performance of an obligation, Part 5 of the PPSA does not, according to s. 55(2)(a). It is important, therefore, to be able to tell whether the transfer, consignment or lease does or does not secure payment or performance of an obligation. (i) Transfer of accounts and chattel paper

PPSA deems any transfer of an account or of chattel paper to be subject to the PPSA s.1(1) “security interest” para (b) – Regardless of whether it is absolute or conditional

Transferee (=SP, so has to take usual steps to perfect its interest) of account or chattel paper is deemed to have a s.i. s.1(1) “security interest” para (b)

o For an account (pure intangible), the only way that you can perfect your s.i. is by registering you interest. However, for a CP (while an intangible, it is a documentary intangible), a better way to perfect your interest is by possessing the paper.

Transferor of an account or chattel paper is included in the definition of “debtor” s.3 reiterates that the interest of a transferee of an account/CP is a s.i. even if it doesn’t

not secure payment/performance of an obligation. If transfer of account or chattel paper is absolute, then the remedies part of the PPSA doesn’t apply s.55(2)(a)

Remedies w/ respect to a s.i. in an account are in s. 41

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o The section on the operation of assignments of intangibles (including accounts) and chattel paper is outside the remedies part of the PPSA and so will apply to all such assignment whether involving “true” s.i. or not s.41

Transfers of account and chattel paper EXCLUDED from the PPSA: o Assignments relating to interests in land s.4(f)o A sale of accounts or chattel paper as part of a sale of a biz out of which they

arose unless the vendor remains in apparent control l of the biz after the sale s.4(h)

o a transfer of an account to facilitate collection s.4(i) s.1(1) “account” means a monetary obligation not evidenced by chattel paper or an

instrument, whether or not the obligation has been earned by performance, but does not include investment property.

o May include a bank account or an account receivable s.1(1) “chattel paper” means one or more writing that evidence both a monetary

obligation and a security interest in, or a lease of, specific goods or specific goods and accessions

o the monetary obligation in the chattel paper is a debto any transferee of CP is deemed to have a s.i. and this is subject to the PPSA. o 31(6)

(ii) Commercial consignment Can be a true or security consignment, but in either case it is brought into the PPSA b/c

it is a commercial consignment and is included in the def of s.i. a person who receives goods from another person under a commercial consignment is

deemed to be a “debtor” by the statute s.1(1) “debtor” The distinction between true & security consignment is important!!! If it is a TRUE CONSIGNMENT, the remedies part of the statute will not apply s.55(2)(a)

o Remedies not governed by PPSA To be a commercial consignment it must fall w/in the following def: s.1(1) “commercial consignment” means a consignment under which (1) goods are

delivered for sale, lease, or other disposition (2) to a consignee who, in the ordinary course of the consignee’s business, deals in goods of that description, (3) by a consignor who,

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

o (b) reserves an interest in the goods after they have been delivered, o both the consignor & consignee have to be in the biz of dealing w/ goods like

that & consignor retains title – if A is not in biz & leaves goods w/ B who is, then it is not a commercial consignment. If investigate the consignment and it is actually disguising a conditional sale, then it is a ST b/c it is a security consignment – but not commercial consignment.

o BUT DOES NOT INCLUDE AN AGREEMENT UNDER WHICH GOODS ARE DELIVERED

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o (c) to an auctioneer for sale, OR – auction transactions excluded even if the parties are in the biz of dealing w/ such goods

o (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 biz of selling or leasing goods of others

pple might be in possession of goods that they don’t own, but might mislead creditors into thinking that the goods in their possession are their own goods. So, there should be a registration system to alert those who might deal w/ such people. But if everybody knows that they are dealing w/ someone else’s property, then there is no point in registration.

Main point of registration is to make sure that creditors of consignee are not misled – but if they already know, then what’s the point of requiring registration? THE TEST is not what the actual parties before the court know or don’t know, but what other potential creditors (who may or may not exist) might be expected to know (Furmanek v Community Futures).

When Can It Be Said that Creditors “Generally Know” that a Person Is in the Consignment Business so as to Prevent Dealings with that Person Being Termed “Commercial Consignments”? Furmanek v Community Futures (true consignment)

Consignor of jewelry failed to register and was found to be an unperfected SP because the business was not objectively known to deal in consignment goods.

Party owned jewelry and left it on consignment for debtor (who dealt in jewelry) to sell true consignment. Consignor did not register interest. Debtor had other SPs (s.i. in All PAAP inventory) who were closely connected w/ debtor and knew fully how debtor operated and that debtor dealt w/ consigned goods. Debtor defaulted and SPs claimed to be able to seize the jewelry in possession of debtor. Before they seize, the owner went and took it back (I: is this still inventory? – will look @ this later). If still there, inventory & SPs would have s.i. in it.

Issue: whether consignor is a SP? SP only if commercial consignment b/c it is a true consignment. If owner of jewelry is a SP, then he will lose out to the other SPs b/c he has an unperfected s.i. & it doesn’t matter that he actually owns the goods. But if the interest of owner/consignor is not a s.i., then there is no rule in PPSA that sets out who wins the competition between the owner and the SPs. And, you’d have to go to CL = Nemo Dat (whoever had interest first wins).

Definition of CC says known to creditors in general, not the actual creditors – would a theoretical creditor necessary know that they are dealing w/ consigned goods! H: No, these creditors knew, but no reason why any creditor would know that. The test is whether a hypothetical creditor would know!

Owner/SP did not register s.i. and was not in possession & therefore had an unperfected s.i. and lost to the claims of SPs who had perfected s.i. despite the fact that unperfected SP was the owner of the goods.

Lease for a term of more than 1-yr Can be either a true or security lease.

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Important to know whether a security or true lease b/c of the remedies. If it is a TRUE LEASE that is also a lease for more than one year, the remedies part of the PPSA does not apply to it. The rights and remedies as between the lessee and the lessor are thus largely unregulated by the PPSA in such a situation. It is essentially the property claim of the lessor in competition w/ the claims of others (other than the debtor) that is governed by the PPSA.

o Newcourt Financial v Frizzell found to be true lease - instead of PPSA remedies, use remedies & rights as outlined in the lease agreement; P was able to recover vehicle) – B didn’t talk about

Not expressly included in the def but clearly covered under a straightforward interpretation is a lease expressly for a term of more than a yr.

s.1(1) “lease for a term of more than one yr” includes: (inclusive def – which means that it can be a lease for over a yr even though it’s not in the definition)

(a) a lease that is for an indefinite period, even if it is determinable by one or both parties w/in a yr from its execution.

Covered from the beginning, even if it lasts 3 wks (b) a lease for less than a yr where the lessee nonetheless remains in possession of the leased property over a yr.

Lease for a defined term that is less than a yr, but parties allow things continue through express or implied agreement so that it is a lease beyond a yr – then it is a lease for over a yr.

But according to s.1(3), a lease under para (b) of definition does not become a “lease for a term of more than one year” until the lessee’s possession extends for more than 1-yr.

Beware don’t do a lessee a favor by letting them stay in possession for longer than 1 yr.***

If lessee has given a s.i. to someone (All PAAP – this would include leased goods), they would be a SP w/ perfected interest & you would be a SP w/ deemed s.i. who probably has not perfected their interest b/c didn’t realize that you had to. Before the 1-yr period, lessor won’t be a secured party but still in competition w/ other SP – but PPSA doesn’t contain a priority rule that deals w/ the owner of goods leasing the goods and the SP who has been given an interest by the lessee. CL applies! Nemo dat = SPs can’t be in a better position than the person, who gave them an interest (i.e. the lessee). And, lessee’s interest is subordinate to the interest of the person who gave them the goods (i.e. the lessor).

Ownership interest irrelevant once lessor becomes a SP & they have to perfect their security interest.

This is purchase money security interest – super priority! (c) a lease for a term of less than a yr that includes an option to renew which if exercised, would take the term past a yr.

lease for over a yr from the beginning even if option not exercised. BUT DOES NOT INCLUDE (Bruce didn’t talk about these 3)

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(d) a lease involving a lessor who is not regularly engaged in the business of leasing goods.(e) a lease of household furnishings or appliances as part of the lease of land if the goods are incidental to the use and enjoyment of the land. (f) statute contemplates the possibility that leases might be excluded by regulation.

what about a lease that is exactly one yr? o If a lease for 365 days, then that is a lease for less than a yr. It has to go beyond

365 days.o On the exam, it would be obvious!

The interest of a lessor under a lease for a term of more than one yr is a purchase money security interest. s.1(1) “purchase $ si”

A lessee under a lease for a term of more than one yr is deemed to be a “debtor” under the Act. s.1(1) “debtor”

THE PROPERTY ENCUMBERED: COLLATERAL & PROCEEDS

The first part of the transaction is the K between SP and Debtor. What should be included in the K (SA)?

First, make it clear who the parties are. Understand this security agreement is collateral to some other transaction – be able to

ID what the obligation secured is. What is the point of this ST? o You can’t use your si unless there has been a default & you can only use it to the

extent of the obligation secured. o Know what the main transaction is

ID what the collateral is – what type of property are you supposed to be given a s.i. in? o This is not a legal decision – up to the parties to decide

Make it clear whether doctrine of tacking applies. Does this SA just apply w/ respect to the existing obligations secured or whether future indebtedness can also be added on?

o Sometimes statute clarifies this, but a good SA should address this. What constitutes a default under the main agreement that allows the SP to have access

to collateral? Interest under SA is a conditional interest, so what are the conditions for getting an absolute interest?

o Whenever main obligation not paid on time. o Put everything that you can think about – ex. moving location, not paying taxes,

changing nature of biz, becoming too small, change in director o Be creative w/ respect to what you can put in to constitute default!o There are certain controls – Bankruptcy Act prevents certain things from being

treated as default Acceleration clause – occasionally implied, but usually have to be expressed Remedies – include certain things that SP can do (expand remedies)

o There are certain types of remedies that are controlled by statue – but there are also other remedies that can be added that are not controlled by statute

Ex. when you can appoint a receiver Agreement should be in writing

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Collateral

What collateral are you being given a s.i. in under the agreement? Whether you have a si in a collateral depends on your K. It has to be set out in the K. Described in one of the ways that is approved by s.10 Make sure collateral is of sufficient value

o Oversecured = overabundance of collateral to meet the obligations owed; opposite situation is called undersecured.

o Realize that certain property can be destroyed or diminished in value. So, realize that value that a particular property has at the moment might not continue to the future.

Don’t have to ID particular items, can take a category of property (ex. all goods; all inventory)

o If want it to cover future property that is in that category, then have to say that in the agreement. Occasionally, implied – but bad practice to assume.

o If want after acquired property make sure it is expressly set out in the agreement o If want everything, then take All PAAP – note: don’t have to use it all; can waive

certain claims later on. s.i. in proceeds - Get proceeds automatically and technically doesn’t have to be part of

the SA s.28(1)(b) o but certain other provisions that you want to take advantage of require

description of proceeds. o Even though get interest automatically, but for some other reasons have to

describe what the proceeds are. So, good practice to describe them!o Can’t use All PAAP to describe – makes them original collateral not proceeds

So if want by way of proceeds an interest in all types of property, then have to describe all different types of property – there is no single way of describing proceeds in everything – list all the various categories

o Intangible is the default category Don’t forget about s.10 to ensure you’d be able to assert interest against 3rd parties

o Ex. have to categorize what type of “equipment” // “inventory” – met writing requirement while property is held as inventory

s.1(1) “collateral” means personal property that is subject to a security interest (created by the ST).

This term can mean both the original property that is the subject of the security interest and also any property derived from that original collateral. This derived property is called proceeds, but where the context permits, the term “collateral” can also include proceeds.

All PAAP (note: a si in after-acquired property attaches to that property without a need to a specific appropriation by the debtor s.13(1)); or can take an interest in all-present and after-acquired property but then exclude certain types of collateral

By category or specific collateral: SP takes an interest in a category of property - ex. all inventory or all accounts

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Real & personal property as collateral: when parties take an interest in both real & personal property, PPSA will cover only the personal property collateral in their agreement plus possibly interests in fixtures and crops.

Types of collateral First, make sure it is property (b/c can’t have a property interest in something that is not property). Beware that somethings are not property and therefore are not subject to si. They tend to look like defenses.

Ex. if D gives SP si in X (goods), the si itself is property – D owns X & SP owns si. SP can give another SP si in the si (b/c his si itself is property). But if a seller has a statutory lien over the goods b/c buyer has not paid when he should have, the lien is not a si b/c not given by the consent of the parties (lien arises automatically under the statute). Seller has a statutory benefit. If seller has a SP who has an All PAAP, his SP won’t have a si in the statutory lien b/c it is not property.

License – can holder give a si in that license to creditor?o Whether the license comes w/in the definition of “intangible” in the PPSA? o In Saulnier, a finishing license was held to be a commercial asset and so personal

property for the purposes of the PPSA. It gave the holder more than a “mere” license; a proprietary interest in the harvest was also give. It was more than a “mere” permission to do something that would otherwise be illegal.

Won’t be tested on this! Just know that law is mixed on whether a license constitutes property or not. Historically, license is a defense that can be used against somebody who claims that you are trespassing. But certain types of licenses like fishing licenses are seen as more than a defense & can be transferred to someone else (& can be subject to a si).

Assuming that is it property, then have to categorize it. Whether the collateral (that SP has a si in) fits w/in one of the categories in the statute. Categorization of collateral is important as different provisions might apply depending on the characterization of the collateral – but the correct classifications of collateral vary w/ time b/c of change in use/appearance (look at flour example on p.162).

Don’t need to know investment property. s.10(4) talks about what happens if you use the word “inventory”. But here we are

concerned w/ whether you use the word or not – what category does the property fit w/in.

If I owe you money (so you own the debt), then this is an account. o This also fits w/in the category of intangible. o Also fits w/in All PAAP.o The ACCOUNT could be w/in CP. If this is the case, then it doesn’t fit w/in the

definition of intangible. CP can contain w/in it an account to be caught by an All PAAP, but the rules relating to intangible can’t relate to an account that is in the CP (b/c def of intangible exclude CP).

o Ex. I promise to pay you $10 – this is just a debt. This is an intangible.

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But if I owe you $10 as part of a secured transaction (that is you have a si in something that you sold to me on credit for $10), you have si in that thing (whatever you sold me for $10) and you own the account that is embodied w/in that. The piece of paper, the doc that contains the security agreement is the CP. And, the account is in the CP, but the CP is not an intangible.

Main categories of personal property in PPSA Goods defined in s.1(1) An instrument Chattel paper – specific goods

o CP is a particular kind of instrument o s.1(1) chattel paper means one or more writings that evidence both a monetary

obligation and a security interest in, or at least of, specific goods or specific goods and accessions

o Ex. SA where there is an interest in specific goods; written conditional sale agreement

o SP concerned w/ s.i. in the CP & s.i. that lies w/in the CPo 41(2)(a)

A document of title Money Investment property Intangibles – means personal property other than the ones listed above & includes a

license; excludes CP o Interests in pure intangibles are usually dealt w/ by assignment o Accounts: book debts, deposit accounts, counsel’s right to bail $ (p.183-184)

Any transfer of account is deemed to be a ST Two debtors: debtor who gave the interest in the account (“account

creditor” & the debtor of the account itself (“account debtor”) If the account is assigned absolutely, the assignee becomes the new

account creditor. If the assignment is by way of a charge or mortgage (i.e. a true security

interest), the SP can collect from the account upon default, so becoming the account holder at that point (though not earlier).

Account debtor remains the same in either situation.

Goods Def: tangible personal property + fixtures + crops + unborn animals; excludes money a particular item of collateral can move from subcategory to subcategory as its use changes (look @ ex on p.164)

Ex. pen – in stock to sell inventory // take it for biz purpose and use as sculpture equipment b/c sitting there looking pretty // take home consumer goods

What happens if things move around?

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s.1(4) unless the statute otherwise provides, characterization of goods is made at the time s.i. attaches.

Key is that you need to know when s.i. attaches. Note that diff parties can have si in the same thing – but under diff

subcategories Ex. SP gets si in pen as equipment, but D deals w/ it. Per s.28(1), SP’s

interest remains – but if new buyer bought pen as inventory, then si disappears. Does it affect you? YES

(1) Inventory

Def s.1(1): (a) goods held for sale or lease; (b) furnished under K of service; (c) raw materials or work in progress; (d) materials used or consumed in business (judicially interpreted to mean materials “used up” in the biz)

Not everything used is inventory – has to be used up Ex. painting on the wall won’t be inventory Ex. photocopier might not be inventory, but the paper prob is inventory,

even though you don’t sell it.s.10(4) an interest in inventory is said to be attached and therefore perfected, as against third parties, only while it is held by the debtor as inventory.

So, if the goods have indeed become equipment the first SP might have no s.i. at all if it described its interest as being in “inventory”, at least insofar as the other SP is concerned.

The other SP will be concerned w/ the rule that a simple description of the collateral as “equipment” or “consumer goods” is inadequate for the purposes of attachment and perfection w/out a further particularization of the kind of collateral (s.10(3)).

Furmanek: SP can’t go take property from debtor, so that it’s not held by the debtor anymore.

When default occurred, consignor went to the debtor and helped himself to the jewelry that he had left there. And, then said – oh your security interest used to exist, but it doesn’t exist anymore b/c both SPs took a s.i. using the word inventory. Jewelry not held by debtor as inventory b/c I took it. Therefore, requirements of s.10 not met and since I’m a third party your interest is not effective against me! H: s.10(4) is not a self-help section. Consignor lost!

Bruce: but statute doesn’t say why not held by debtor – it just says not held by the debtor.

(2) Consumer

goods

Def: used or acquired primarily for personal, family, or household purposes. Could be for other purposes, but primarly has to be for the ones listed

Writing requirement: must include further reference as to kind per s.10(3)But use of consumer goods is sufficient to exclude personal property from description of collateral per s.10(6)Impact of an after-acquired property clause s.13(2)(b)

Accession is the one type consumer goods where a s.i. can attach in after-aquired property

(3) residual category s.1(1) – goods that are not inventory or consumer goods

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Equipment Writing requirement: a description of goods as equipment is adequate for the writing requirements of PPSA only if it further particularizes the type of goods per s.10(3)

Accessions Def: means goods that are installed in or affixed to other goods Ex. an engine attached to a plane s.38(1) “other goods”; “the whole” @ CL an interest in the “other goods” would extent to an accession

Fixture & crops

(p.186)

If fixture, s.36 applies. Determine whether fixtures CG or equip (unlikely that inv)? BC regulation deems fixtures to be personal property for PPSA purposes.

Depending on the interpretation relied on, a whole building could meet the def of fixture.

Can be further categorized into inv, cons goods, equipTimber & Minerals

Included in the definition of “goods” only once they have been severed or extracted from land.

Returned goods

Processed & commingled

goods

if goods are manufactured or dealt w/ so that they lose their identity and become part of a larger mass (ex. flour used to make cake), an interest in them may be permitted to continue in the larger mass s.39(1)

It can be argued that the larger mass is proceeds of the original component goods.

Proceeds

If SP has a si in property, then determine whether it is original collateral or proceeds?o Both meet the definition of collateral.

Proceed is property that derives from dealing w/ other property. o If trade cow for sheep, then sheep is proceeds from cow. o If cow has children, then children are proceeds from the cow.o It has to be a new property!

Every level of change in property creates a new item of property and the si can attach to each and every one of those (look at tab A).

s.i. in proceeds is enforceable against a 3rd party whether or not the SA contains a description of the proceeds per s.10(5) – but this provision says nothing about the priority of a s.i. in proceeds or (directly) about its status as perfected or unperfected.

Property that can be classified as proceeds is distinguished from “original collateral” A given property can be both original collateral & proceeds. Ex. If SP has an interest in

after-acquired property, then D deals w/ given property, what the D gets in exchange can fall w/in the definition of after-acquired property (in which case it is original collateral) as well as w/in the definition of proceeds.

o Note that the original collateral won’t have a dual characterization.

Definition

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To be characterized as proceeds, have to fit w/in one of the four paras w/in def of “proceeds”. 1(1) “proceeds” means (a) identifiable OR traceable personal property, fixtures, and crops

(i) derived directly or indirectly from any dealing with collateral or the proceeds of the collateral, AND (ii) in which debtor acquires an interest – look @ example on p.190

NOTE: Ex. X (goods) gives rise to money (b/c someone bought it) which gives rise to Y (goods).

Then, the new party who is holding X sells X and gets Z in exchange for it. Q: is Z proceeds from X? if yes, then the SP who has taken a si in X would automatically get a si in Z as well. BUT Z is not proceeds b/c it meets first part of the def under (a) but not the second part.

o It is property derived from property that is collateral, but it is not property in which the debtor has an interest.

o However, if X is an account, then it will meet the def of proceeds under sub(c) if it is $.

In order for SP to get an interest in a bank account as proceeds, the bank account has to be in positive balance in debtor’s favor. If (-) balance, the banks owns the account, not the debtor.

Debtor doesn’t have to retain an interest in proceeds b/c once interest attaches to proceeds, it is collateral (attaches under s.28(1)(b)). Once collateral, per s. 28(1)(a) SP’s interest continues.

Dealing has been held to require the converting of one property into another from a transaction such as selling, collecting (ex. crop) or exchange.

Original collateral & proceeds are identifiable when they continue to exist in their original form.

o Did this property lead to that? o Have to be able to ID! Ex. si in car but debtor owns a bunch of cars – have to be

able to ID si in which car. They are traceable if they are converted into a substituted form which can be located &

determined to be the substitution for the original collateral or proceeds. o Don’t need to know process for co-mingled goods

(b) a right to an insurance/indemnity payment or compensation for loss of/damage to the collateral or proceeds – insurance payments are investment property, so don’t need to know!(c) a payment made in total or partial discharge or redemption of an intangible, instrument, an investment property, or chattel paper

Account is a type of intangible Payment has to be in money NOTE: unlike sub(a), D must not acquire an interest in the property in order for it to be

proceeds (P.191). As long as SP has a si in the intangible, then any payment from that intangible (wherever that payment goes) is proceeds & it doesn’t have to go to its debtor. Thus, SP will have a si in that money. If the person who is paid out uses the $ to

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buy goods, then Z won’t be proceeds – since not intangible has to fall under(a), but debtor doesn’t have an interest in Z.

(d) investment property don’t worry for our purposes SI Persists

28(1)(a) preserves si & (b) extends it si in collateral is created by agreement, but interest in proceeds is created automatically

b/c of s.28(1)(b) – but parties can K out of or limit this automatic extension to proceeds o EXCEPTION: is SP expressly/impliedly authorizes the dealing, then s.i. detaches

per s.28(1)(a) Will be examined on s.28 for sure!

Class example: what si does SP1 have? 1. SP1 has si in X (goods) from D

X is the only original collateral; anything else that SP1 has a si in has to be by way of proceeds

2. D sells X on credit to F (assume not a ST; D doesn’t keep title to X as in a conditional sale); F gives promise to pay $1000 SP1’s debtor no longer has an interest in X (b/c it’s been sold to F), but SP1’s si

continues in the collateral per s.28(1)(a) Promise to pay $1000 is proceeds (debt = an account); SP1’s si extend to the debt by

virtue of s.28(1)(b) if it meets the def of proceeds. It meets def of proceeds in para(a): property derived from the collateral in which the debtor has an interest (the debtor now owns that promise). This proceed is not collateral.

SP1 now has a si in X as original collateral and the debt as proceeds (which is now collateral, not original collateral though).

3. D “sells” (absolute assignment) F’s promise to pay to G [i.e. “SP2”] for $900 (b/c it needs money right away); G notifies F to pay G F is the account debtor; D was account creditor and now selling position as account

creditor to G. PPSA deems absolute assignment to be a ST. Interest of the transferee is the interest

of the security holder. Thus, G is a SP. D selling its position b/c it needs $ right away $900 goes to D, which is property owned by D and is derived from proceeds that is

the account (which is collateral); 28(1)(b) extends the si that was in the debt to the proceeds ($900). $900 meets def of proceeds in para(a).

Note that the proceeds from the account is less than the account, which explains why SP1 has an interests in the account & wants to continue to have an interest in the account. SP1 has an interest in the 900 but he wants an interest in the account b/c otherwise short 100 – so wants to go after the $ that is paid out from the account at the end.

Now, SP1 has an interest in 3 things: (1) X as original collateral, (2) the account as proceeds and (3) 900 as proceeds. But w/ respect to the account now has competition from SP2 (another secured party who has an interest in the account).

4. F sells X to H for $300

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300 derived from dealing w/ X – is it proceeds? NO, b/c 300 goes to F, who is not the debtor of PS1. Thus, 300 does not fit w/in the def of proceeds in para(a).

5. F buys Y w/ the $300 Y not proceeds for SP1 although it arises from dealing w/ property in which SP1 has

a si. SP1’s debtor does not have an interest in Y; therefore, def of proceeds not met. Note that SP1’s interest in X continues per 28(1)(a). 4 & 5 are none events for SP1. In reality, it is now harder to find X.

6. F pays $500 (of $1000 debt) to G Account is now worth $500. What is the 500, which is property derived from the debt – is it proceeds for SP1? It

is derived from the debt, but it doesn’t meet def in para(a) b/c 500 paid to G not D. But it meets the def in para(c) b/c payment in total or partial discharge of an intangible.

Even though 500 doesn’t go to SP1’s debtor it still meets the def of proceeds. So, SP1 has a si in the 500 by way of being proceeds. SP2 (i.e. G) also has an interest in the $500 b/c it is property derived from collateral.

Even though in G’s hands it doesn’t mean that G has priority – have to look at the priority rules

7. G uses $200 of $500 to buy Z (assume not intangible) There is $300 left, which is clearly proceeds & both SP1 and 2 continue to have an

interest in the 300. o Property that is reduced in value – used to be 500, now is 300 o If G had used the entire $500, then it would be all gone. o As long as the 200 is money, it is part of the 500 – but once it’s converted to

something else, it’s not proceeds as far as SP1 is concerned. For G, Z is proceeds b/c it is property in which it actually has an ownership interest.

So, it can make a claim by virtue of ownership interest. Although derived from money in which SP1 has si, it is not proceeds b/c SP1’s debtor

does not have an interest in Z. o Since Z not an intangible, it has to fit under a SP1 won’t have an interest

At the end, SP1 has an interest in X, $500 account, $300 that was paid out from that account

o w/respect to the account and the 300, it is in competition w/ G (SP2)o the $500 account is the $500 that is still owing

SP2 owns Z and SP1 does not have an interest in it. If G further reassigns the account, SP1’s si continues in the account, but whatever G

gets won’t be proceeds b/c although payment connected to account – it is not payment that is in discharge of the account.

o Could sell back to F. But if doing that to undermine someone’s position, then it would be fraudulent.

If Z was intangible, the result would still be the same b/c not payment for discharge of an intangible.

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Tracing (being able to locate proceeds) Tracing is the process of locating or identifying a new fund or asset that is acquired

through a dealing with the original fund or asset. It is a different process than claiming! Tracing a mixed account is challenging – some are affected by 3rd parties interest and

some are noto When money is mixed w/ other money, it is hard to ID which money is yours.

When $ comes out of account to purchase something, is that your $ or not?o REMEMBER: the account has to be in a positive balance! If negative balance (i.e.

overdrawn account), then not an account owned by the debtor – it is owned by the bank.

s.1(5) says that proceeds are traceable whether or not there is a fiduciary relationship between the SP w/ an interest in the proceeds & the person who has rights in or has dealt w/ the proceeds.

o Ontario does not have this provision. So, may have to show a fiduciary relationship to be able to use tracing. There is Ontario law that says we’ll read into the statute that do not need fiduciary relationship.

o The fact that this section says that you can trace even if no FD owed means that the statute is contemplating that it might not be the entire set of equitable rules that you need to follow in order to trace when tracing in the context of PPSA.

EXAMPLE: SP1 has a si in X (which is worth $1300) for $372 --- X gives rise to $1000 in cash (proceeds) --- D has $500 in his bank account --- the $1000 goes in (thus total of 1,500 in bank account. This is mixed money & treated as proceeds). When the bank gets the $1000 SP1’s si in it disappears b/c of the law in money. SP doesn’t have a si in the entire account, only to the extent that its money went into the account. Si in the account that secures $372, but only in the account up to $1000 that the si exists. --- D withdraws $1200 to buy Y (which is worth 600) --- the account now has $300 in it. Does this account still represent property that is proceeds for SP1? And to what extent? Is the $ that came out of the account proceeds? Is the good bought w/ the money proceeds?

The extent to which you can say it is proceeds depends on rules of tracing. CL tracing rule: first in first out: when money comes out of a mixed account, it is

assumed that it came out from the money that first went in. This method is hardly used. o Using the CL tracing rules, the 500 that was already there is deemed to come out

first. And, the rest of the money comes out of the 1000, which means everything that is left in the account is subject to the interest of our SP. The si continues in the money that came out to the extent that it represents value that SP had in the account.

o According to CL, money that comes out of the account is subject to the percentages, but this is the end of the percentages. And, anything bought w/ that money is subject to si in its entirety – as long as any of the money was subject to si, then SP could go after the full value.

Equitable rules of tracing: when money comes out of a mixed account, it is assumed to come out first form the money that went into the account that was not subject to third

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party interest. Purpose of equity’s rule is to preserve as much money in the account as possible for people like SP1. To use the equitable rules of tracing, there has to be a FD owed by the account holder to the third person who is trying to use the equitable rules. Therefore, equity requires that account to be a trust account. This explains why STs are set up as trusts (to allow SP to use tracing rules).

o So, in this example, $1000 comes out last from the account. o In this example, equity and CL reach the same result. But if we had it the other

way around, the result will be diff – Account would not be subject to si at all. But in equity, it would be.

Which law prevails? Equity always prevails over common law. In reality, equity is used! But equity is only used if you ask the court to use it. In practice, you always go to equity b/c the assumption is that equity prevails.

Another $100 is deposited in the account. Total money in account = $400. Is this subject to si? Yes. What does it secure? $372. How must of the account can be used to secure $372? $300. Additional money that comes into the account from other sources does not top up the account.

$1200 withdrawn from the account – is this collateral for SP? Yes, b/c of part of that money came from money in the account in which SP has a si. Based on the equitable rules, this money first came from the $500 that is not subject to si and the other 700 subject to the si. So, 700 of the 1200 is subject to si of sp1 to secure 372.

o Percentage is fixed for anything that is derived after that meets definition of proceeds.

Is Y proceeds? Yes, b/c property derived from dealing w/ the collateral. What amount of Y can be used to secure 372? Equity will continue to use the percentage w/ respect to money that came out of the account. Thus, 7/12 of value of Y is subject to the si that secures 371.

o At common law, you get the entirety of the collateral. If have an interest, can use it for its entire value.

On the exam, won’t be given enough numbers to calculate proportions. Bruce will just say there is already $ in the account, so talk about it in the abstract.

SP wants as much money as possible preserved in the account b/c it is easier to go after that money.

CIBC [proceeds] confirms that proceeds of proceeds constitute proceeds. This is b/c proceeds become collateral, so can have infinite generation of proceeds.

Universal CIT Credit v Farmers Bank [equitable rules of tracing] Car dealership’s inventory was subject of a si. When cars sold, money was put in the

bank. Some of the money in the account was derived from dealing w/ collateral or proceeds of collateral, and other money was not derived from collateral.

When debtor was about to default, he withdrew $1200 from the account at an unusual hour (assuming that everyone in town knew what was going on) & paid amount to the bank itself.

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o When money is paid to 3rd party, 3rd party will normally get it free from anyone’s interest b/c of the law of money.

o But in this case, the bank was not holder in due course b/c it knew that money was subject to si. Therefore, the usual law of money didn’t apply and some of the money was subject to the si.

I: How much of the $1200 that was taken out of the account was subject to the si of the SP?

Court used the lowest intermediate balance (LIB) rule, and said $7600 was subject to the si & only $4300 was not subject to the si. Therefore, the bank was able to keep $4300.

Agricultural Credit v Pettyjohn [sets out the PPSA rules] – Bruce thinks this case is wrong This is good law in BC. Agricultural credit had si in all cattle. BMO was supposed to be a SP as well, but it didn’t

do what it was supposed to do. Cows sold & money was put into an account, which was in overdraft and remained in overdraft. Money came out of the account and was used to buy new cows (called Watusi).

I1: does Agriculture credit have a si in the Watusi? If apply the usual rules of tracing, there is in no si in Watusi b/c the money itself was proceeds but when it goes into the account the account is in overdraft, so the account is not owned by the debtor, so any money coming from the account is not proceeds from proceeds.

o But since they took a si in all cattle, they actually had a si in the Watusi as original collateral. But in order to get purchase money security interest, they had to have an interest in Watusi as proceeds.

I2: did Watusi constitute proceeds? Under the usual rules the answer would be no. But the court said that there is a si as proceeds in the Watusi b/c this account was a revolving line of credit – in a sense it’s just a technicality that it was an overdraft. To trace under the PPSA, the usual rules of tracing don’t have to be followed. How do we know this? b/c the statute tells us that – ex. it says that don’t need fiduciary obligation owed to trace. This seems to allow us to change other tracing rules.

H: can trace from one item (cows) to later cows (despite the fact that through the usual rules of tracing can’t get to them) if there is a close & substantial connection b/w the original property and later property.

o The later cow clearly related to earlier cows & the connecting factor is actually the line of credit.

o Bruce doesn’t know what close and substantial means. In this case, the type of property was close. BUT not clear if cows led to hats, whether it would be close and substantial connection.

o How much of the value can be used to secure the indebtedness? When using the close and substantial approach, look at the value of original collateral at the time that it was dealt w/ and what percentage is swallowed by obligation owing. In this case, 50% of the value of the cow had to be used to satisfy the indebtedness. So, 50% of the Watusi could be used to satisfy the indebtedness.

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Issue: what if the new cows are worth more than older cows? Bruce’s guess is yes!

Summary of the law(1) CL rules of tracing which no body uses(2) Equitable rules (3) PPSA rules - % w/respect to the original collateral. Note: if you don’t reach a dead end, use the CIT case approach. If you reach a dead end relying on equity, can maybe use Agricultural Credit case. (4) The common sense rule – when you have competing SPs trying to use the lowest intermediate balance rule & you can’t satisfy both of them, then you don’t use the LIB rule and give each of them a percentage.

Only use when the situation reaches the level of complexity that won’t allow you to use the LIB rule.

This has not been used outside of Ontario.

CREATING THE SECURITY INTEREST: ATTACHMENT

General

Attachment gives you property rights that you didn’t have before. SP doesn’t get a single si in a category; gets a si in each individual property; might come out of a single transaction, but they are not one property interest.

There is no such a thing as si in a herd of cattle. There is a si in every member of herd.

Is there actually a si in a particular item? When did si come into existence (attachment)? The SP has no rights to particular property unless the SP has an interest that has

“attached”. Attachment creates the si.

The requirements set out in s.12(1) must be met in order for the si to attach; make sure attached for each particular item. They need not continue in order for the state of attachment to continue in the original collateral. 12 (1) A security interest, including a security interest in the nature of a floating charge, attaches when

(a) value is given, SP has to give value to D in exchange for the si debtor is giving the SP Value is a defined term in s.1(1) – value means any consideration sufficient to

support a simple contract, and includes an antecedent debt or liability.o This means that consideration was given by SP, including past

consideration. Consideration is a promise under K to do something, not the performance of the promise.

o If Bruce promises me a line of credit, but hasn’t actually lent. The promise given today – not the actual giving of the money. Consideration is the promise to lend, not the actual lending of $.

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o Value can be past consideration. It is generally the promise of SP to lend money, but don’t actually have to lend any new money to have attached si in the property given by debtor if already lent money to the debtor, then that is past debt and it is sufficient consideration for the purposes of this requirement. Ex. unsecured creditor converts unsecured credit into secured credit & debtor says you are not lending me anymore $, but I’ll give you a si anyway in property. This is fine!

TD Bank: whether you are allowed to convert existing debt into the basis for ST to allow you to get si in property.

o SP wanted to add existing debt to new money that it was going to lend. o H: court said it is OK!

(b) the debtor has rights in the collateral OR power to transfer rights in the collateral to a secured party, AND (conjunctive and)

Debtor must have rights in the property that is to become collateral upon attachment of the si – but not required to own.

Can’t have an attached interest in the collateral until debtor has a property interest in the collateral. This is usually w/ respect to future property. Ex. interest in All PAAP, SP will get interest later on, not now; note that value might have been given now.

Can it be property? There are no rights in a lien or certain licenses. Thus, can never get a si in these.

Magnitude of rights that debtor has doesn’t matter. As long as the debtor has some property interest (as minimal as it may be), then GTG

o Ex. employee has bailment interest in vehicle – this is probably a property interest in the vehicle.

o 28(1) when debtor deals w/ collateral, SP’s si continues. Note that the magnitude of rights that the debtor has is irrelevant (Ex. can just

be a bailement)! s.12 just says that D has to have rights. o Nemo dat quod non habet continues to apply

Past rights are insufficient (c) except for the purpose of enforcing rights between the parties to the security agreement, the security interest becomes enforceable under section 10,

If asking about attachment, there might be a diff answ depending on who wants to know (debtor or someone else?).

o If debtor wants to know, then only need to satisfy (a) & (b)o If 3rd party wants to know, then the writing requirements in s.10 have to

be met – unless SP takes possession of the collateral, in which case there is no writing requirements.

Meeting the writing requirements is usually significant when 3rd party involved.unless the parties have specifically agreed to postpone the time for attachment in which case the security.

Must expressly (not implicitly) agree Notes:

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Attachment can only be spoken of logically on an item by item basis. Another basic requirement for attachment is that the SA between the parties

contemplates that the SP will get an interest in the claimed collateral in the first place.

Are the rights sufficient to meet this requirement?Per s. 12(2), a debtor is said to have rights in goods leased to the debtor or consigned to the debtor when the debtor obtains possession of them in accordance w/ the lease or consignment. Kinetics Technology v Fourth National Bank

Illustrates that notion of rights is broad. Manufacturer would either create or modify equipment. Kinetics sends equipment to

manufacturer to be worked on. Manufacturer had an indebtedness to the bank that had si in All PAA Inventory of the manufacturer. While manufacturer was working on 3rd party’s heating equipment, it defaulted on payment and bank seized the equipment on the basis that it has a si in the equipment.

Ultimately, the owner of the equipment won. 3 arguments – bank won the first 2:o (1) The lenders did not have a si in the machinery that was being worked on b/c

manufacturer had no rights in it b/c owned by owner. Court said when you leave property w/ someone to work on it that is a bailment transaction and that gives that party rights to the property. This was sufficient to give the bank si.

Leaving something w/ someone to do some work on it gives them enough rights that they can give si in the same thing.

o (2) now bank is in competition w/ the owner – Q: who has priority? Owner said that ownership interest should have priority over security interest.

Generally, an ownership interest will prevail over a si b/c of Nemo Dat CL rule (si came after and takes subject to the ownership interest), unless a priority rule says otherwise. Where there are 2 security interests in competition, the party who has perfected their si prevails over the party who has not perfected their si. Court held that bank has a perfected si & the owner had an unperfected si. Q: how can the owner be said to be SP? On what basis did its ownership interest convert into si? The owner has facilitated the biz of manufacturer by giving credit (either through lending money or giving property to use in lieu of money). Owner sending property to be worked on is no different from lending manufacturer money to go out and buy the equipment. Giving equipment to work on is functionally the same as giving money. And, retaining the ownership in the property constitutes a si. This is fairly similar to the idea of c.s.a being a SA. When you leave property w/ someone to be worked on to be enhanced in some way that is a ST (retaining ownership is equivalent to retaining ownership in c.s.a).

Is this the law in Canada? 15:30-15:55 Feb 7o (3) While the owner was in fact a SP, it was actually repurchasing the property in

an enhanced value. Therefore, it was taking a transfer back. When you buy

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inventory that is subject to si, the presumption is that the si in that property is detached. Court said effectively, there is a transfer back to the owner and as a result bank’s interest has detached. So the original owner is the only person left w/ an interest in the property.

Takeaway: You don’t need much by way of rights to give si to a sp that could, as the bank in this case, potentially deprive the owner of its interest in that property down the road.

Haibeck v No 40 Taurus Ventures Legal possession of property can be enough to be able to give rights. Is title necessary to have rights? Don’t need rights in ownership for s.12 Bruce didn’t talk about this case in class.

Example: when is it attached w/r to the debtor? When is it attached w/r to the ROW?on day 1, D has X & Y // on day 2, SP1 gets si in All PAAP (promise to lend) // on day 3, SP1 actually lends money.

Does the SP have an interest in any property and if so when did it get si in that property? Could only have an interest in X & Y; SP1’s interests have not attached w/ respect to anyone else b/c there is no indication that the writing requirements have been met or that SP has possession of X or Y. Therefore, the third element in s.12 has not been met. But with respect to the SP and its D, SP has an attached interest in X & Y on day 2, but there is no obligation secured b/c no $ is lent at this stage – don’t need to show that money is actually lent to say that the si exists.

o Attachment is separate from the obligation secured. Can have a si even though there is nothing actually owed b/c value can be a promise to lend in the future.

On day 4, debtor gets Z. No si w/r to the ROW, but w/r/s to D and SP, SP1 gets an attached si to Z on day 4.

On day 5, SP1 and D record SA in writing. Si interest in X, Y & Z become attached w/r to the ROW on day 5.

On day 6, D gets omega. *Si w/ respect to everybody attaches on day 6.

On day 7, D trades X for K. There is an attached interest in K on day 7. K proceeds from X. Also, happens to be original collateral.

Purchase Money Security Interest

Can have a si in collateral that might not be PMSI, might be entirely PMSI, or might be partly a PMSI and partly not a PMSI.

Whether the si that exists can be subcategorized as purchase money si?Some security interests attract a particular label as: purchase money security interests (PMSIs). If a SP’s interest is (at least in partly) in collateral that his money or credit has allowed the

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debtor to get rights in, then the si in that collateral is a PMSI (true PMSI). The interests of lessors in a lease for a term of more than 1-yr and the consignor under a commercial consignment in the leased or consigned goods are also deemed to be PMSIs (deemed PMSI).

This is just a designation, doesn’t give SP anything additional. But to get access to certain beneficial rules in the PPSA, you’d want si to be PMSI.

PMSI means SP has given D money that D needs to acquire the property in which SP’s si is going to be attached.

o SP facilitating D’s acquisition of property in which SP has a si. How can this be done?

Selling on credit (csa), or Lend money to buy from someone else

o Enhancing position of lenders who facilitate acquisition of collateral by giving special priority to PMSIs (called superiority) – they come after SPs’ who have ALL PAAP, but why should their interest be second? If it wasn’t for their help those SPs’ that came before them won’t have this new interest.

Definition You have PMSI as long as you fit w/in one of the categories in section 1. s.1(1) “purchase money security interest” means True (or actual) PMSIs:

(a) a security interest taken in collateral, other than investment property, to the extent that it secures payment of all or part of its purchase price,

o Seller PMSI: allowing someone to buy property on credit. The most common one is c.s.a.

(b) a security interest taken in collateral, other than investment property, by a person who gives value for the purpose of enabling the debtor to acquire rights in the collateral, to the extent that the value is applied to acquire the rights,

o Lender PMSI: o SP’s actions allow the debtor “to acquire rights in the collateral” – it is not always

easy to say whether this requirement is met. o Possible to argue that not used to acquire rights – when can money be said to

allow debtor to acquire rights? What if D already has interest & your money is used to allow D to expand its interest? As long as D’s relationship to property enhanced in some way, then PMSI.

Note: the wording in red indicates that it is possible that your interest is partly a PMSI. So, might have split priority (look at example below)

Deemed PMSIs: (c) the interest of a lessor of goods under a lease for a term of more than one year, and (d) the interest of a person who delivers goods to another person under a commercial consignment,

but does not include a transaction of sale by and lease back to the seller and, for the purposes of this definition, “purchase price” and “value” include credit charges or interest payable for the purchase or loan credit.Note: Money must be intended to acquire a particular property.

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For How Much?One issue relates to the extent of the PMSI. The si of the creditor might secure a certain sum of money but only part of that represents money used by the debtor to acquire rights in that particular item of collateral. The si is a PMSI only to the extent of the value used to acquire the rights in that particular item of collateral.In this fact pattern, the SP has advanced $X and that amount is secured by an interest in Y. The debtor used $Z of the $X to acquire rights in Y. The interest of the SP secures payment of the full $X, but it is a PMSI only to the extent of $Z. If the SP is in competition for priority w/ another SP it might want to use its PMSI to take advantage of a priority rule that will give it superpriority. It can do so only for the $Z secured. For the rest it will have to use a priority rule that is not dependent on the interest being a PMSI (also look @ example on p.230).

Example: (1) D owns X & Y(2) sp1 lends $1000 (line of credit) and gets si in ALL PAA inventory

sp1’s si attaches in X & Y on day 2; obligation secured is $1000 Is this PMSI? No b/c D already owned X & Y, sp1’s money did not facilitate acquisition of

X & Y(3) sp2 lends $900 & gets si in ALL PAA inventory

Attached interest in X & Y on day 3; and its interest secures $900 (4) sp2 advances additional $300 to facilitate D’s acquisition of Z (inv)

Both sp1 and 2 have an interest that attaches on day 4 o Sp1 has an attached interest in X, Y, Z; si in each of these secures $1000o Sp2 has an attached interest in X, Y, Z; si in each of these secures $900

sp2’s interest in Z is a PMSI b/c sp2’s money allowed D to acquire Zo sp2 gets priority w/r to Z only to the extent that its interest is a PMSIo interest in Z is both a regular si and a PMSI – it is a regular si for $900 and PMSI

for $300, so can only use the super priority rule to the extent that it is a PMSI. So if D defaults (sp1 1000; sp2 1200):

sp1 gets to use X & Y first w/ respect to Z: sp2 has priority to the extent that its interest in Z is PMSI

sp2 300; sp1 1000; sp2 900 – sp2 gets access first for $300 (5) D swaps Z for omega (inv)

sp2 has si in omega both as original collateral and proceeds. As proceeds, its interest in omega is a PMSI b/c it is derived from Z in which sp2 had PMSI. If uses nature as proceeds, then will get access to super priority rules.

o If omega was not inventory (not covered under sa in 2), then it would be only proceeds – it would still be a PMSI.

D also had to borrow 300 from sp3 to acquire omega. So, sp3 has a si in omega; its PMSI & omega is its original collateral.

o Sp2 has a PMSI in omega by virtue of it being proceeds from Z

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Both sp2 and sp3 have PMSI in omega, but sp2 is proceeds PMSI, and sp3 is original collateral PMSI, which the statute calls a non-proceed PMSI

The proceeds PMSI that passes is only the 300.

If your competition is arguing PMSI you’d want to claim that (1) they don’t have a si at all; or if they do, they don’t have a PMSI

o possible argument by relying on (b): the value given was not to acquire rights in the collateral. Q: Exactly when can your money be said to allow the debtor acquire rights, and when can’t the money be said to allow your debtor to acquire rights.

If D didn’t have the thing before and your money allowed him to get it, then there is clearly an acquisition

What if D already has the property, but your money is simply used to pay off someone else, or used to allow the D to expand the scope of its property interest in the property (used to lease, but now owns). Courts say: as long as D’s relationship w the property is enhanced in some way by your giving value, then that is enough to fit w/in the def of PMSI even though D already had rights in the property.

(2) their PMSI is limited in value (3) you also have a PMSI and therefore priority rules cancel each other out.

What does it mean to enable the debtor to acquire rights in the collateral?Agricultural Credit Corp v Pettyjohn (cow case)

Agricultural Credit Corp needed its si to be a PMSI. D was supposed to use money advanced by ACC to acquire original cattle. IF this was the

case, then it would be PMSI. But D went out and borrowed $ from another lender to buy the cows and used the money from Agricultural Credit to pay lender (D already owned the cattle when it got $ from ACC).

I: was the interest a PMSI? H: Although technically don’t meet definition of PMSI, it is close enough. Intention was

to use $ from ACC to acquire the cows and it effectively was. As long your money is intended to allow the debtor to acquire property interest that the

debtor technically already has, then that might be enough. o Bruce: I would not run too far with it. o *In order for something to be a PMSI, you’d have to intend that your money be

used by the debtor for that purpose. It has to be part of the agreement*. o If open up a line of credit w/ the debtor (& get si in ALL PAAP) and the debtor

can do whatever he wants w/ the line of credit, then don’t have a PMSI b/c money was not intended to acquire property.

Have to show lender knew or ought to know that borrow was going to acquire that property.

From the book (p.233): when an earlier creditor (who holds a PMSI) is paid off using funding from a later lender that later lender can obtain PMSI if it was intended all along

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that its financing would be that used to acquire the interest in the collateral. The existence of the earlier creditor’s PMSI in such a situation is merely accidental.

Another issue is when it can be said that the debtor has acquired rights in the collateral by use of the SP’s financing. Generally, as long as it can be said that SP’s entitlement to the collateral has been enhanced in some way through the value supplied by the SP, the D can be said to have obtained rights in the collateral. So a SP can have a PMSI in collateral that the D already had right to before the SP came along (Unisource). Unisource Canada Inc v Laurentian Bank

I: can providing funds to allow the debtor to change the nature of her right to property constitute allowing the debtor to “acquire rights” in the property?

D in possession of property, but doesn’t own it. Ex. may be leasing the property Owner of the property is a SP and meet definition of PMSI in (c) D has other SPs

o D leased X (w/ an option to purchase) from SP1 (who is the owner); there are 2 other SPs. SP4 advances money to D to buy out the lease and takes a si in X to buyout SP1. So, SP1 gone!

It is possible that sp2 & sp3 were there before sp1 in the sense that they got interest in after acquire property, but sp1 has a PMSI.

o SP4’s money advanced to allow D to acquire rights in the collateral – Although D had rights in the collateral, sp4’s money is allowing D to enhance its rights in the collateral (becomes an owner); therefore, SP4 has a PMSI

As long as you can show D is using $ to expand its rights to the collateral & that the $ is being lent for that purpose (SP has to know), then there is probs a PMSI.

How do we figure out what the value is that was used to allow D to acquire rights in the collateral? What do you do when it is not possible to know what part of the money was used to allow D to acquire that particular thing? Look @ class notes from Feb 7; pp.230-231Chrysler Credit Canada v RBC

Where you know what purchase price of each individual item was (where items are part of another unit), the result should be the same as a situation where you don’t know what each individual purchase price in each one was.

Chrysler advancing $ to dealer to acquire cars on credit (and there was specific price for each vehicle) & had si in All inventory. Arguably, the PMSI was the actual amount that each car cost.

o 1M owing to CCC and secured over X (cost 1000), Y (cost 2000), Z (cost 2000) There was a competing interest: RBC who was there before Chrysler credit. So, under

the usual rules RBC would have first place for access to vehicles. Court says scenario where you know what each is worth should be treated same as

when you don’t know what each item is worth.o CCC could have simply had one big transaction w/ all the cars being bought at

the same time and no differentiation among the vehicles and the rule would

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simply allow CCC to say that PMSI would cover all the money that was owing that was used to facilitate acquisition of vehicles. The results should not be diff.

Where you have si in all inventory or all category of property, and purchase of property is through $ lent by one of the SPs, then that SP should be allowed to say that it has a PMSI in each item in that category for the full purchase price for all items of that category.

Bruce similar to the Agricultural Society case it is not clear how similar the items have to be.

For inventory acquired at different times and for specific amounts, a PMSI in all relevant inventory for the total amount owing on all such relevant inventory was held to exists.

If you have PMSI in original collateral and that collateral is dealt w/ and leads to proceeds, then per 28(1)(b) si extents to proceed; therefore, si in the proceeds is a PMSI.

Sometimes need to know if PMSI is proceeds PMSI or non-proceeds PMSI Look at example above non-proceed perfected PMSI is the best

PERFECTION OF THE SECURITY INTEREST

Is si perfected or not?Perfection gives si a status that has potential benefits under the PPSA when the si is in competition w/ claims of other parties. A si cannot be perfected unless the requirements for attachment are met. If they are, then there is a choice of two further steps the SP must take to perfect the si: registration of a financing statement or taking possession of the collateral.

It’s just a status, doesn’t give you additional property rights & result is not guaranteed (someone else’s method of perfection might be better than yours).

Automatic perfection: by virtue of attachment, si is perfected Don’t need a perfected interest to have any rights against the debtor. Attachment alone

is enough to give SP standing w/r D. Status of perfection relates only to SP’s interaction w/ everybody else, except the debtor.

You will probably prefer one method over another for certain types of property – ex. for intangible property probs want to perfect by registration. For certain intangibles where there is a documentary form, then want to use possession.

When security interest is perfected? Regardless of method of perfection, have to make sure that you come w/in s.19 (which sets the parameter).19 A security interest is perfected when

(a) it has attached, and (b) all steps required for perfection under this Act have been completed,

o Methods in ss. 24 (through possession), 25 (registration) & 42-54 (details of how registration works), 26 (temporary perfection)

regardless of the order of occurrence.

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The Registry System

If the secured party does not want to keep possession of the collateral, he must perfect his security interest by registering a financing statement in the Personal Property Registry. If somebody finds this information in the Registry and wants more details, then s. 18 provides the means to acquire it from the secured party.

Filing 2 F/Ss can be problematic

Section 23(2) provides that the transferee of a security interest has the same priority with respect to perfection of the security interest as the transferor had at the time of the transfer.

Procedural Rules w/r to Perfection Personal property registry

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Sets up the registry

Registration of financing

statements43

(1) A person who wishes to have a financing statement registered must submit it for registration at an office of the registry.(2) Registration of a financing statement is effective from the time assigned to it in the office of the registry and, if 2 or more financing statements are assigned the same time, the order of registration is determined by reference to the registration numbers assigned to the financing statements in the registry office.

In BC, online.(4) A financing statement may be registered before a security agreement is made and before a security interest attaches.

Do not have to wait until the deal is in place before you register. When we get to the priority rules, you see that is the best practice – you should never wait until the SA is in place to register the financing statement. And, register against everything.

(6) The validity of the registration of a financing statement is not affected by a defect, irregularity, omission or error in the financing statement or in the registration of it unless the defect, irregularity, omission or error is seriously misleading.

If there is a seriously misleading error, then your registration is effected – but doesn’t say how it is affected. Don’t assume that it is invalid. What other effect is possible? Can prevent access to certain priority rules.

(8) If it is alleged that a defect, irregularity, omission or error is seriously misleading, it is not necessary to prove that anyone was actually misled by it.

Have to prove misleading, but don’t have to prove that someone was actually misled. Have to prove that nature of the error is such that somebody might be misled by it.

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Might be able to deprive someone of their perfected status by proving that it was misleading, even if you actually were not misled.

(7) Subject to subsection (9), if (a) one or more debtors are required to be disclosed in a financing statement, or

Usually b/c collateral is transferred to someone else (b) collateral is consumer goods that are defined in the regulations as serial numbered goods,

and there is a seriously misleading defect, irregularity, omission or error in (c) the disclosure of the name of any of the debtors other than a debtor who does not own or have rights in the collateral, or (d) the serial number of the collateral,

the registration is invalid.What can be considered a misleading error and then what the consequence is?

Have to look @ case law Name errors p.262

NotesIn BC, have to file online unless there is an emergency. The registry contains registry for various statutes. For our purposes indicate that registering under the PPSA. Content (p.252)

Terms of the registration: have to indicate how long it is for. o Can put in years or infinity o If put 2 yrs, then it ceases to be perfected at the expiration

of 2 yrs; have to go back and register. o D might be strong enough not to allow you to register for

infinity. o Don’t need agreement of the other party to register, but if

you have agreed not to register and you register, your registration is valid, but you’d be in breach of K.

Indicate who the debtor is – name, address, DOBo If inaccurate, registration can be invalid – so get proof that

D is who they say they are o Name & DOB important to get right

SP’s name Description of the collateral

o If serial # goods, have to put serial #o If described too ambiguously might constitute a registration

error Registration of

transfers of A secured party can transfer his security interests. Section 45(1) allows a financing change statement to be registered to show that the security

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security interests 45

interest has been transferred, but such a filing is not necessary. BUT a transfer of collateral by debtor (sells ownership interest in the collateral to a new D) must be registered.The absence of such a filing should not mislead a third party. The third party checking the Personal Property Registry would find the registration of the original secured party and upon seeking further information from that party would discover the transfer.If the transfer of a si is itself a ST then the usual rules relating to creation and perfection of a si will apply (p.256).

Registration not notice

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Registration of a financing statement in the registry does not by itself constitute express, constructive or implied notice to any person of, or express, constructive or implied knowledge on the part of any person of

(a) the financing statement or its contents, or (b) the security interest perfected by the financing statement or the contents of any security agreement.

s. 47 states that registration of a financing statement does not by itself constitute express, constructive or implied notice to anybody about anything (unlike registration in the land registry). Except where the PPSA specifically states otherwise, notice or knowledge of a security interest (or the registration of a financing statement) is supposed to be irrelevant under the PPSA (p.260).

Registry searches 48

Outlines how you can do a registry search.

Registration in land title office

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Fixtures and corps are covered by the PPSA and b/c these are land the statute allows for registration of that type of security interest in the LTO (p.257).

Amendment or discharge of registrations

50

This section allows you to change your registration. For the most part it is not retroactive. If a person has a filing against her name and wants it removed, s. 50 provides the means to achieve this. A registration where there is in fact no SA can be the subject of a request by the debtor to have it removed w/in 15 days of the request s.50(4).

Transfer of debtors’

interests in collateral or

change of debtors

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If the debtor transfers its interest to somebody else, then SP required to register against the name of the new person. Failure to register can have dire consequences (p.255).

Actually a priority rule – kicks in when you don’t make this change in your registration. Will come back to this section.

For this part just know that it permits registration if D transfers collateral to someone else.

52, 53, 54 We don’t care about these!

674921 BC v New Solutions

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I: can a financing statement relate to a si that comes into existence after the filing of the financing statement?

Financing statement for All PAAP registered a yr before SA held to be valid. You can have a single financing statement that relates to more than one security

agreement; and SAs can deal w/ diff collateral; but debtor and SP must be the same

How much info about a collateral is a registration ought to reveal? Are you held to the same level of precision in the financing statement as you are in the SA?

Authorities on this are mixed.

Example On day 1, we have a D who has X, Y, Z --- on day 2, D gives sp1 si in Y & Z --- on day 3,

sp1 files a financing statement covering X & Y --- on day 4, what is the si in? Is it perfected?

o On day 4, it has a si in nothing b/c it has not met the writing requirements. Therefore, the financing statement doesn’t do anything.

o w/ respect to the debtor, there is a si in Y & Z; it doesn’t matter if it is perfected or not.

On day 4, SA is reduced to writing which said Y & Z & W --- there is now a si in Y & Z that the rest of the world has to acknowledge b/c the writing requirements have been met w/ respect to Y & Z – si attaches on day 4. There is no si in W b/c the debtor has no interest in W.

o Are either of the interests perfected? Yes, Y is perfectedo When is it perfected? Day 4

Attachment provision not met until day 4 o Unperfected si in Z on day 4

On day 5, sa is amended to add X. Now, there is a si in X on day 5 and it is perfected. On day 6, financing statement amended & adds Z. Now, si in z, which already existed is

perfected as of day 6. For priority rules – have to know if an interest attached? When it attached? If it’s

perfected, when was it perfected? Regal Feeds (after acquired property)

This case represents the view that the law is less concerned w/ precision w/r to a financing statement as compared to what it expects for a SA.

In the SA itself, you actually have to stipulate after acquired property. In this case the security interest was in swain & SA specifically said that it is in after acquired swain, but the financing statement although it said swain did not say after acquired.

I: was the si in the later swain perfected even though after acquired not mentioned in financing statement?

H: yup – it is close enough. Financing statement is just a system requiring you to put on notice. If you are a debtor and someone else has registered in swain, then you should go ask the debtor or SP for more info to see if the SA covers after acquired property.

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Bruce: This is only one view and there are other views that say if the financing statement does not say after acquired, then it doesn’t cover after acquired. To be on the safe side, make financing statement include everything that is in the sa, even better make financing statement cover a lot more than what sa says.

Re Munro I: what can be left out of the registration of a name and not be seriously misleading? F/H: The correct birthdate was given in the financing statement and this, together w/

the debtor’s correct first and last name, is sufficient to avoid the omission of the middle name or initial being seriously misleading.

The fact that nobody could be shown to have been misled was considered as a factor in deciding that the serial number errors were not seriously misleading in Re Munro.

A search using the correct serial number generated the registration under the erroneous serial number – held not seriously misleading (p.265)

Class note: There could be errors, but it doesn't mean that it is seriously misleading b/c there might

be info that could correct it. Just b/c there are errors, it doesn’t mean that there is going to be any impact at all. It is

up to the courts to decide whether it is seriously misleading or not.

Coates (?) Should the registry computer programme determine what is seriously misleading? Financing statement filed under an incorrect vehicle serial number. A seriously misleading registration is one that (a) would prevent a reasonable search

from disclosing the registration or (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 the similar registration to make this determination.

Class notes: In Ontario, you ask for certain info – they give you exactly what you are asking for, so if

you have not asked for the correct info, then not useful for you. o What you are asking for might be correct, but someone made an error when

filingo System does not compensate for errors, but other jurisdictions do.

BC, gives you lots of variations (ex. diff spelling for McDougall) – the system overcompensates; there is room for error.

There is a debate that if putting erroneous info gives the info anyway, how can you claim that anybody is seriously misleading.

o If you don’t get the match, then it is seriously misleading. o There is a debate whether this is true or not.

By Possession (or Delivery)

Section 24 allows SP to perfect si by taking possession. Pure intangibles can’t be perfected by possession (ex. account; debt).

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24 (1) Subject to section 19, possession of the collateral by the secured party, or on the secured party’s behalf by another person, perfects a security interest in

(a) chattel paper, (b) goods, (c) an instrument, (e) a negotiable document of title, and (f) money,

unless possession is a result of seizure or repossession. Can’t perfect by possession if it is a result of seizure or repossession. Have to be able to

explain that the reason SP has possession of collateral is for the purpose of perfecting its si. Just appearing to be in possession not enough.

o Party opposing to SP’s perfected status can argue didn’t have possession for the right purpose; had possession b/c there was a default. Therefore, not a mechanism for perfecting si. OR

o You happen to have possession Probs need some written document explaining why property in your possession

(2) For the purposes of subsection (1), a secured party does not have possession of collateral that is in the actual or apparent possession or control of the debtor or the debtor’s agent.

Symbolic delivery does not constitute possession

Re Bank of Nova Scotia Lenders thought they had a perfected si in truck. Both filed financing statements, but

deemed invalid b/c of errors (both realized that there was a problem w/ their F/Ss). Debtor defaulted against both lenders. One party seized vehicles w/ the intention of perfecting its security interest. The other party filed a financing statement. Both claiming that they had perfected si.

o If both actually had perfected interest, then the party that took the first step to perfection would have priority, which in this case would be the Bank that took possession (s.35).

I: who had priority to the truck? Bank lost b/c per s.24 cannot perfect possession when it is result of repossession of

goods. If there is default and SP takes possession of the goods, then the presumption is that the reason that SP is taking those goods is to act on its remedy to seize the goods & sell them, not for the purpose of perfecting interest. If SP has tangible property and there has been a default and wants to use remedy against that collateral, the first thing he needs to do is to get control of the property.

If there is a default & sp is unperfected, the only way to perfect si is to file a financing statement (can file at any point to perfect si). But taking possession of the property can be problematic for attaining perfection. If you take possession of property before there is a debt at all, then you don’t have possession of collateral. At the time possession arises, it has to be collateral at the stage. If it remains in your possession once it becomes collateral, then must do something (ex. the reason I’m retaining possession is b/c it is now my collateral).

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o Can’t take possession & then negotiate – but can perfect by F/So If default and then you seize, then that has nothing to do w/ perfection. So, you

need to disclaim the default – if trying to perfect si in collateral and there is a chance that it could be argued that the debtor is already in default, then you should document whatever that default is you are waiving the default, and then proceed to take the collateral. Otherwise, possession would be thought to relate to remedies.

o Is there a chance to argue that the debtor is in default? Ex. debtor borrowing money – SP1 filed financing statement saying there

is a si in X. Assume there is an error in F/S, so financing statement is invalid. Then, SP realizes that D is late on payment. This default allows SP to seize the property.

200 300 – late 400 SP realizing there is a problem w/ F/S takes possession at this

point & he thinks he has perfected interest. Then, SP2 files a financing statement covering X.

500 – another default SP1 wants to take si in X and claim amount owing. SP2 will argue

that its interest is perfected. SP1 took possession after default and this was to remedy default. Unless SP1 can document that when they took possession, they were taking possession not as a result of any default. Therefore, SP1 has to waive default for the 300 to prevent argument that possession is a seizure.

look at p.259

Royal Trust Crop A voluntary return of the property by the debtor, unrequested by SP, does not

constitute possession for purposes of perfection. Have to indicate purpose!o This is for the benefit of SP, so that they don’t have property dumped on them

for foreclosure by the D. SP has to accept surrender. Constructive possession: when you have part of the property but not all of it (ex. si in a

set of dining room chairs, but you only possess one) o Have to have all that is necessary to possess – having the key alone is not enough o @ CL constructive possession is enough o For some of the remedies, you can have constructive possession, but not for

purpose of perfecting si.

Temporary Perfection

Possession of the goods prevents the debtor from dealing w/ the goods in ways that SP probs wants the D to deal w/ the goods. In certain situations, SP needs to return the goods to D. Do you have to file a F/S? Not for certain purposes. If the reason that you are returning property to

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the D for short period is to allow D to do the things that are mentioned in s.26, then even though don’t have possession and have not registered F/S, you are deemed to have a perfected si for 15 days.

This could be misleading b/c purpose of perfection is to give notice to potential parties of existence of SP, but temporary perfection undermines this b/c puts the property in the apparent possession of the debtor.

Grace periods – periods of time that statute builds to protect one party that could mislead and possibly be detrimental to another party. The longest grace period is 60 days.

o Hold off lending until the longest grace period expires. o There are 2 types of grace periods: some give an immediate benefit such as this

one in s.26, while others give you a certain period of time to do something with retrospective effect.

Some give you something immediately; others work backwards to change the world

Between registration and possession.

26 (1) A security interest perfected under section 24 in (a) an instrument or a certificated security that a secured party delivers to the debtor for the purpose of

(i) ultimate sale or exchange, (ii) presentation, collection or renewal, or (iii) registration of transfer, or

(b) a negotiable document of title or goods held by a bailee that are not covered by a negotiable document of title, which document of title or goods the secured party makes available to the debtor for the purpose of

(i) ultimate sale or exchange, (ii) loading, unloading, storing, shipping or transshipping, or(iii) manufacturing, processing, packaging or otherwise dealing with the goods in a manner preliminary to their sale or exchange,

remains perfected, despite section 10, for the first 15 days after the collateral comes under the control of the debtor. (2) After the 15 day period expires, a security interest referred to in this section is subject to the provisions of this Act relating to the perfection of a security interest.

Priority Generally, whoever took the first step towards perfection has priority. If both interests perfected, it doesn’t matter when they were perfected, what matters is when the first step towards perfection was taken.

on day 1, SP1 files F/S in X on day 2, SP1 gets an oral SA & lends $ on day3, SP2 has a written SA & lends $ on day 4, SP1 has a written SA on day 5, SP2 files F/S in X

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what is priority on day 6? By day 6, both parties have a perfected si. Who got an attached si first? SP2 b/c although SP1’s interest attached on day 2 for

certain purposes, it had attachment on day 4; whereas, SP2 had an attached interest on day 3. But not perfected until F/S filed (so day 5). SP1 got perfect si on day 4, but it filed F/S first. So on day 6, have competition between 2 perfected security interests. SP1 took the first step towards perfection b/c filed first (race to the registry).

If on day 0, SP2 took possession of collateral, then nothing changes b/c can’t have possession for purpose of perfection until the collateral involved is actually collateral (which cannot happen until day 3; on day 3 should probs make a note that retain possession by way of perfecting si).

o Filing a F/S can only relate to perfection o Possession relates to perfection only as of day 3

If there is SP3 who got a written SA and takes possession to perfect on day 0 – then it will win

On day 3.5, SP3 files F/S and gives X back to D – as long as uninterrupted, then continuous perfection and look are earlier date, so SP3 first. But if there is a break in continuity …

o But if X was retuned on day 3 and F/S filed on day 3.5, then there is no continuous perfection b/c there is a break. Therefore, F/S gives a new perfection. So, SP3 would be in second place.

If on day 0, SP3 had an oral agreement & possession – then they would have priority b/c if have possession then don’t need a written agreement

o Oral SA, then first put agreement in writing, file F/S and then give property backo If not reduced to writing, the moment you give it back you cease to have a si at

all let alone a perfected si. On day 7, X gave rise to Y

o Each will have a si in Y (proceeds) per s.28(1)(b). But is it perfected? Noo If they want perfection, each has to file a F/S covering Y o Each SP would want a continuously perfected interest in the proceeds – 28(3)

extends it for 15 days as long as interest in original collateral perfected o But to go beyond the 15 days (automatic), then have to take the steps set out in

s. 28(2) Have to make sure steps in 28(2) satisfied Take steps in 28(2) in advance of getting proceeds so that when you get

the proceeds, you can extend the perfected status.

Other Perfection Issues

Attachment itself gives you perfection!

Proceeds

The description of proceeds in the financing statement is important. The SA itself is not required to contain a description of proceeds (s.10(5)). The PPSA gives an interest in proceeds automatically when collateral (or even proceeds) is dealt with (s.28(1)(b)).

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You’d want a perfected si not only in the collateral, but also the proceeds. SP gets a si in proceeds automatically by virtue of s.28(1)(b). If you have a PMSI in original collateral, then you get a PMSI automatically in the proceeds. However, just b/c you have a perfected security interest in the original collateral, it doesn’t mean you have a perfected security interest in the proceeds. Have to find perfected status of proceeds independent of the collateral. You want a continuously perfected si so that you can trace your perfection back to the first step that you took w/ respect to the original collateral.

If perfected PMSI in original collateral gives rise to proceeds, you will automatically have a PMSI in the proceeds – but you will not automatically have a perfected PMSI in the proceeds

o 28(1)(b) does not extend the perfected status to the proceeds, it extends the PMSI status

Have 15 days b/c of 28(3)

28(3) If the security interest in the original collateral was perfected other than in a manner referred to in subsection (2), the security interest in the proceeds is a continuously perfected security interest, but becomes unperfected on the expiration of 15 days after the security interest in the original collateral attaches to the proceeds, unless the security interest in the proceeds is otherwise perfected by any of the methods and under the circumstances prescribed for original collateral of the same kind.

gives automatic perfection in proceeds for 15 days (grace period) deemed to have a continuously perfected si in the proceeds for the first 15 days Ex. Day 1: si in X & file F/S --- Day 5: X gives rise to Y (proceeds) si in X continues as

perfected si; F/S doesn’t cover Y, but have an interest in the proceeds by virtue of 28(1)(b) and have a perfected si in Y b/c of s.28(3) --- Day 6: have perfected si in X & Y --- Day 26: perfected si in X and unperfected si in Y b/c 15 days grace period has expired. BUT if file a F/S on day 18 taking a si in Y, then si will remain continuously perfected.

o This can be misleading to future borrowers only get this if interest in original collateral (not the collateral that gave rise to the

proceeds) was perfected o Ex. if X gave rise to Y which gave rise to Z

Interest in X was perfected Interest in Y was perfected for 15 days, but then it became unperfected &

while unperfected, gave rise to Z Z is deemed to be automatically perfected for 15 days b/c X was

perfected

28(2) A security interest in proceeds is a continuously perfected security interest if the interest in the original collateral is perfected by registration of a financing statement that

Even if you have perfection by possession, it is recommended to also file a F/S to get access to 28(2) to extend that perfected status that you have w/ respect to original collateral as continuous interest to the proceeds.

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(a) contains a description of the proceeds that would be sufficient to perfect a security interest in original collateral of the same kind,

in addition to the description for the original collateral, need a description for proceeds (as proceeds). Ex. si in X and proceeds including Y …

Can’t use the term “ALL PAAP” in your proceeds description b/c “ALL PAAP” by its very nature is not proceeds; it is original collateral.

o Need to include description of proceeds if want to rely on the nature of property as proceeds.

I have an interest in bicycles X, Y, Z and their proceeds You have to describe the proceeds in the original financing statement – but you

can’t just say ALL ASSETS b/c this can’t use this to describe original collateral (b) covers the original collateral, if the proceeds are of a kind that are within the description of the original collateral, or

si in ALL PAA bicycles and then proceeds are bicycles, then covered even though F/S silent about the proceeds.

Have to show language is broad enough that it could cover proceeds as well If no description in F/S,

(c) covers the original collateral, if the proceeds consist of money, cheques or deposit accounts in deposit taking institutions.

Do not have to put anything in the F/S about the proceeds. o Remember, don’t have to described proceeds in SA

By far the easiest route

Summary Cannot have a perfected si if attachment has not occurred. If proceeds, the writing requirements in s.10 don’t need to be met. There are various methods of perfection.

o Typical method is filing a F/S that covers the original collateral and any proceeds that might arise from that original collateral. This gives access to s.28(2), which allows you to have a continuously perfected si in the proceeds that dates back w/ reference to the filing of the F/S covering the original collateral.

o Even if want to perfect by possession, file a F/S with respect to the original collateral b/c it would give access to s.28(2). If simply perfect by possession of original collateral, then run the risk of proceeds arising and you not having possession for the relevant period of time.

With respect to the debtor, it doesn’t matter if SP’s interest is perfected or not; all you need is attached interest. Perfection matters w/ respect to other people.

COMPETING INTERESTS: PRIORITY & DETACHMENT RULES

Who are the competitors and who has priority?(1) Can only answer priority for a particular point in time. Need to know precisely when your client wants to know if they have priority or not.

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On the exam, if B asks about priority on a particular day, don’t talk about priority for the day before/after. Don’t give advice on what you are not asked about!

(2) Always on an item by item (called fund) basis Ex. if take si in all bicycles, then have to discuss priority for each individual bicycle Need to categorize (inventory?)

(3) Who has a property interest in that thing?(4) Determine who is a SP among those who have a property interest in that thing? PMSI? At least one of them has to be a SP in order for PPSA to say something

A (could be leasing; bailment interest; assume not SP); B (sp1); C (owner); D (sp2); E (sp3); F (gov: owner owes some tax) – these are the parties that have an interest of some sort.

(5) Figure out whether interest of sps is perfected or not? When perfected? Also, determine what the obligation secured is? (6) Work out all the possible pairings: B-C; B-D; B-E; B-F; C-D; C-E; C-F; D-E; D-F; E-F – ignore A

Priority competitions are always two-sided If you have a pairing which does not involve a SP, the PPSA says nothing. Ex. PPSA silent

w/ respect to the competition between C-F Need to know whether one party is SP or both SP

(7) Finally, determine the priority rule that applies to the competition. Some rules don’t actually give priority; they eliminate security interests (detachment)

o When detachment occurs SP drops out of the competition w/ respect to everyone. SP no longer has a property interest.

Once C became owner, B’s interest detaches For E, w/respect to the obligation secured part of it is PMSI and part of it is non-PMSI. So

have to look at 2 diff rules when looking at its competition w/ D. Rule in PPSA must fit the competition exactly; need exact correspondence! Also, rules

don’t apply in a negative way (i.e. b/c the rule doesn’t apply, the opposite must be the case).

Assuming not a detaching rule, then priority rules fit into 3 categories: (1) Specific priority rules (in the statute)

o If no specific rule, then go to residual rule. o If you come across 2 specific rules, have to figure out which one is more specific

than the other. (2) Residual or general priority rules (in the statute) (3) Common law (s.68 says common law continues to apply if statute doesn’t change it)

o Situations where the statute has no rules OR when two rules cancel each other out

o Nemo dat (8) Determine the rule for every pairing, then try to make the rules work so they have a linear progression.

D priority over E for non-PMSI and E priority over D for PMSI. Who has priority? C, E (PMSI), D, E(non-PMSI).

(9) After statutory priority is established, there are ways that priority can be changed. Have to determine statutory priority before looking at these.

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Priority can be changed through K (subordination agreement) o Can’t have an adverse effect on anyone else.

Priority can be changed through a court order o Court can through an order of marshaling order that the claims to property be

reorganized. o Equity has a role, but it plays no role w/r to priority.

Robert Simpson Co v Shadlock Actual knowledge of another’s si should not affect the operation of the priority rules in

the PPSA unless the rule specifically says so.

(10) Is there a circular priority problem? Ex. F has priority over G; G has priority over H; H has priority over F – circular priority

problem On the exam, if the there is a circularity problem, don’t think you got the issue wrong!

Just point out that there is a circularity problem. o It seems to result to a circularity problem.

BC statute does not resolve a circularity problem, so have to go to court and argue about how a court should resolve that. Textbook talks about various rationales that can be used to convince the court.

GMS Securities v Rich-Wood Kitchens (an example of circularity) Fixtures cause a lot of circularity problems b/c for PPSA personal property & for LTA

land. F: owner of land wanted cabinets attached. There was one mortgagee who was already

registered in the LTO. SP sold cabinets (not fixed to the land yet) on credit. Then, the cabinet becomes a fixture. Then, another mortgagee comes along and gets an interest in the land. Owner of the land defaulted to the parties. They all have security interest in the cabinets.

I: who has priority? PPSA prevails over LTA (s.36). M1-M2: per LTA, M1 gets priority over M2; PPSA silent on their priority b/c neither is a

SP SP1-M1: according to PPSA, a person who got an attached interest (doesn’t have to be

perfected) in goods that later become fixtures has priority over any person who has an existing interest in the land. So, PPSA says that sp1 has priority over M1 just by virtue of having an attached interest.

SP1-M2: SP1 subordinate to M2, b/c M2 came along after the thing was already a fixture, unless SP1 has perfected its interest in the LTO.

Read the various factors that the court might consider in resolving the situation

1. What a Priority Rule Is

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The rules that indicate which of two competing interests is in the better position are called priority rules and which rule to use depends on the nature of the si and the nature of the competition interest or the type of collateral or both. Other rules might detach a si, so ending or precluding a competition.

Detaching a si: X takes its interest free from the interest of the SP (Y). As a result in this case, there is evidently no competition left w/ Y.

No rule in the PPSA: There are times when the PPSA simply does not contain a priority rule governing the competition b/w two given interests. Here, the retention by the PPSA of the CL to the extent that it does not conflict w/ the statute (s. 68(1)) will cause a CL rule or principle to be applied so as to give resolution to the priority competition. If it is used in this way, the CL principle of nemo dat quod non habet will mean in practice that the interest that is first in time will have priority.

If there are more than 2 interests competing w/ respect to the same collateral, break the competitors up into all possible pairs and then find the appropriate priority rule to decide each of the two-sided competitions.

Robert Simpson Co v Shadlock Actual knowledge of another’s si should not affect the operation of the priority rules in

the PPSA unless the rule specifically says so.

Knowledge & Good Faith (p.300) Knowledge should not affect operation of priority rules unless the rule specifically says

so PPSA requirement to act in good faith and in a commercially reasonable manner

(s.68(2)). Statute separates the concept of knowledge and bad faith, in that acting w/ knowledge

of another’s security interest does not alone constitute acting in bad faith (s.68(3)).

2. Priority Rules: General Issues

The priority rules set out by the PPSA (and the common law) can be changed to a limited extent by the parties to security agreements or by the courts. A party to a security agreement can agree to subordinate its priority position to others through contract. A court can alter the practical effect of the priorities through the doctrine of marshalling. Sometimes court intervention in the operation of the priority rules is needed because the priority rules do not present a clear hierarchy of interests - but instead end up creating circular priority.

Circularity Problems (p.302) Circular priority results when the priority rules end up giving irreconcilable priorities. For example, A, B and C have interests in the same property. Say, rule 1 is used to establish priority for A’s interest over B’s; rule 2 give B priority over C; rule 3 gives C priority over A. The result is a circular priority. This is unfortunately a common possibility under the PPSA.

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A has priority over B through use of the A-B priority rule, but B gains priority over A through the combined use of priority rules B-C and C-A.

The PPSA has no built-in solution to circular priority issues as exists in some other regimes. One resolution to the problem might occur if it can be shown that one of the parties

could have prevented the circularity problem by having taken some sort of action earlier.

o The challenge is that it cannot always be said that one party is “at fault” for the circularity problem. This could be b/c more than one party is to blame or b/c nobody is to blame.

Another way to resolve the circularity problem is to judge why the parties have their various interests and then decide, on a policy basis, that one type of interest is to be preferred over another.

Impose burden on first SP to take remedial action (GMS)

A logical analysis of the relevant legislation leads to what has been referred to as a circularity priority problem. Section 36 of the PPSA deals w/ the priority of si in fixtures. The first step of the analysis is to determine what priorities are established by 36(4). X has priority over Y.

GMS Securities v Rich-Wood Kitchens Here, the approach was essentially to impose the burden of the resolution of the

circularity problem on the first party taking remedial action against the collateral. The “expectations” of the parties is the primary consideration in the resolution of a

circularity problem according to the court (p 304).

Subordination Agreements Priorities may be re-arranged between secured parties or between a debtor and secured parties by virtue of contracts called subordination agreements. Such contracts are authorized by s. 40. Subordination may be enforced by a third party if the third party is the person or one of a class of persons whose benefit it was intended (s.40(1)). Although s. 45(6) allows a subordination to be recorded in the Personal Property Registry, a subordination agreement, whether registered or not, does not change the priorities as otherwise established by the PPSA.

Note: the subordination may be limited in whatever way the parties wish. The parties might limit the subordination to particular types of collateral, to particular amounts of money, to particular time periods and so on.

Can be permanent or might specify a time period Can’t have an adverse effect on someone who is not a party to the K

o But 3rd party can enforce if agreement was intended to benefit them Look @ example from Feb 28: generally, subordination agreements are b/w SP1 & D,

but SP3 would be able to enforce it. Essentially, changing the benefit that they get from the priority. If there is more than one party, then may want to specify how the money is to be split

o How will SP1’s interest be split b/w SP2 & SP3? Doesn’t extent to proceeds!

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Parties to subordination agreement Two secured parties: the senior SP will agree to subordinate its priority position to the

junior SP. SP & D: entered into by one SP (usually the senior lender) and the D. These parties enter

the agreement whereby the senior lender promises in advance to subordinate its priority position to another (probably unnamed) party or category of parties who comes along later or has some other subordinate interest.

Note: whichever type of subordination or priority agreement the parties have chosen, it cannot have an adverse effect on a 3rd party.

The first issue is whether the parties have even created a subordination or priority agreement, and the second is what terms any such agreement has.

The two cases represent two different ways in which the law has interpreted s.40 or the equivalent of s.40.

s.40 is particularly important for 2 reasons: (1) b/c it says it doesn’t matter what the agreement looks like, (2) elimination of privity rules for certain parties.

RBC v Gabriel of Canada (form not super important) What constitutes a subordination agreement & who can enforce it? No particular words/form is required in order to have a subordination agreement As long as you find somewhere that SP has agreed to subordinate its position, then

agreement is effective according to its terms. Courts are generous in terms of accepting diff forms.

Transamerica Commercial Finance v Imperial TV (wording very important) How strictly will subordination agreements be interpreted? Courts are strict w/ the wording of the subordination agreement Agreed to subordinate si to banks, then financial institutions that are not banks cannot

have an advantage of the subordination agreement – it is possible that intended to be covered, but can’t take advantage if word doesn’t cover it

Bruce: if subordination agreement w/ respect to X, then agreement doesn’t cover proceeds

Sequential subordination agreements (p.308) Can set up a circularity problem that might be resolved by construing the intention of

the subordination agreements. Partial subordination is the presumptive intention. A complete subordination should be

expressly set out.

Marshalling (an equitable doctrine, NOT A PRIORITY RULE)The doctrine of marshalling can be applied to require an oversecured party to proceed against other collateral or subrogate an undersecured party to the claim of the oversecured party.

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Need 2 creditors in order for marshalling to apply + come here if one SP is oversecured and another undersecured OR b/c oversecured party has taken action against the collateral in which the undersecured party had an interest causing that interest to be eliminated and leaving the undersecured party w/out collateral. Marshalling is something that is ordered by a court at the request of a party. In the context of ST, it will either amount to:

a court order to an oversecured party to use particular funds instead of other available funds so as to allow the value in those other funds remain available to undersecured parties who have only those funds available to use, or

o creditors would have to have an existing competition to at least some funds a court order that the junior creditor be subrogated to the rights of the oversecured

party to certain of its collateral. o There might not be a pre-existing overlap.

Marshalling is an equitable doctrine designed to promote fairness. The court will not use it if the interests of third parties would be adversely affected by the marshalling order. Because it is difficult to say how a person’s security interest might be affected by marshalling where there has been no default under that person’s security agreement, marshalling will very rarely be ordered in the absence of defaults and realisation on collateral under all relevant security agreements. Also, need to come in a timely way and with clean hands.

Requirements (Surrey Metro) (p.310-311)A court will require several issues be satisfied before it will order marshalling.

First, it will have to be ensured that no third party will be adversely affected by the order.

Second, the court will have to be satisfied that the senior party does in fact have access to multiple funds (i.e. items of collateral) and that it would not be unfair to that party to order it to realize on certain funds instead of others it has an interest in. Furthermore, if the senior lender is not presently proposing to realize on that or other funds, it will probably be premature to order marshalling.

Third, this is an equitable order of the court so it is appropriate for the court to examine the conduct of the party seeking marshalling to ask whether it has delayed bringing such a request or has only itself to blame for being undersecured (Ex. it might have prudently released its security interest in other collateral that might have been available to it).

Surrey Metro Savings v Chestnut Hill Homes

Example SP1 (senior creditor) is owed $1000 and has si in X ($50,000), Y ($45), Z ($300)

o Once there is default, SP can proceed against any collateral o When you precede against collateral when there is default, any si subordinate to

you disappears from the collateral, and any si that is senior to you remains. SP2 (junior creditor) is owed $200 has a si in Z – fears that SP1 might proceed against Z

first

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If SP1 precedes against Z first, then SP2’s interest detaches. So, SP2 would like to get rid of SP1’s si in Z. They could enter a subordination agreement. If can’t get SP1 to cooperate, then you can go to court and ask them to use their equitable jurisdiction to order marshalling.

o Ex. court could order that SP1 proceed against X Application is made by SP2 and SP1 is considered a third party Court has to be satisfied that SP1 will not be hurt in anyway by this order To get order, there must be default against both SP1 and SP2 at the same time.

Otherwise, SP1 can argue that it is still in biz w/ D and might make advancements, so it might need Z to satisfy any future indebtedness. Unlikely that court will order marshalling b/c it might have an impact on SP1.

Court will also look @ impact on other parties. All the creditors of the same debtor who have an interest in the same collateral must

proceed to realize against that collateral at the same time. Tends to be ordered in bankruptcy or insolvency situations

3. Residual Priority Rules: Competition w/ Another SI

Come here if you have competition between 2 security interests!!!

When used? A residual priority rule applies when there is no other more particular rule available to

apply.

What are the rules? Whether one or both security interests in competition are perfected? Section 35 are true priority rules – they rank the interests, not eliminate security

interestso If only one si, then rule in s.35 silent on the priority competition

Residual priority rules are built on the assumption that first SP to take action should end up w/ a better priority. Even if action is taken before SP has si, the fact that they registered the F/S is enough to put other people on notice.

o The idea of perfection is to give competitors some notice that you are there.

2 Perfected Security Interests

What was the method of perfection?As between perfected security interests, if they are both perfected by the filing of a financing statement, then the si that was the subject of the first filing takes priority (s.35(1)(a)(i)).

Order of attachment as between the two interests does not matter If the collateral is serial numbered goods that are equipment that

must be registered by serial #, then there is no registration for these purposes unless the serial # has been described in the financing statement (s.35(4)).

If one of the security interests is perfected by possession and the other by

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the filing of a financing statement, then the relevant date is the date for filing the financing statement on one side and the date of the other SP’s having taken possession (s.35(1)(a)(ii)).

You can’t actually possess property for the purpose of perfecting si until you have a si in it.

If a si was originally perfected in one way (usually by possession) and then later perfected in another way (probably by filing a financing statement), then for this si the relevant date for the competition will be the date of possession for the original method of perfection, even though it is no longer perfected in that way. This approach can only be used where there is no break in the perfection status of the relevant si (just a change in the method of perfection) (s.35(2)). If there is a hiatus b/w the 2 methods of perfection, then the date of perfection of the most recent perfection method is the relevant date using one of the residual priority rules.

Continuously perfected si Can’t rely entirely on the registry – you might file on day 1 and

someone else on day 2. You might think you have priority, but the party that filed on day 2 might actually have had possession of property for a period before that.

35(3) Subject to section 28 for the purposes of subsection (1), the time of registration, possession or perfection of a security interest in original collateral is also the time of registration, possession or perfection of its proceeds.

Only 1 perfected Interest

As b/w a perfected and an unperfected si, the perfected si will have priority (s.31(1)(b)).

Date of attachment doesn’t matter Unperfected

InterestsIn a competition among unperfected security interests, priority is established by reference to the order in which the unperfected security interests attached (35(1)(c)).

look @ time of attachment Can use this rule when more than 2 parties are in competition Under this rule, it is common that 2 or more si will have the same

priority. o Usually arises w/ respect to proceeds

One solution to the equal priority is to have the parties share rateably (Ontario Dairy Cow).

Tacking 35(5) specifically allows for tacking in the context of residual priority rules. • “All Obligations” Clauses

Restoration Rule

35(7) if registration has been removed, then can go back w/in 30days to register and partially restore priority position.

This grace period doesn’t give you anything, unless you act w/in the 30days

Hiatus = period after lapse and before reregistration

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EXCEPTION: interim advances - rule does not apply to advances made by competing SP’s after lapse & before re-registration

Look @ ex on p.378-379; Feb.28 notes A SP who files during the hiatus is not affected by the restoration

rule. Can lead to circularity problems! s.35(7) doesn’t say anything about a SP who does not have a

subordinate position immediately before the lapse

Example (s.35(1))It is important to know when you are asked about priority. For example, until day 3 only SP1 has a si, and on day 3, both parties have a si.

SP1 X SP2Day 1 si attach F/SDay 2Day 3 si attach 35(1)(a) is silent on the priority competition b/c

only one of the two si is perfected35(1)(b) addresses this situation; P2 has priority

Day 4 F/S Now that both si are perfected, 35(1)(a) kicks in; SP2 filed first, so it will have priority

Day 5Day 6 X is

exchanged for Y

Per s.28(3), for the first 15 days, both have a perfected si in Y – so same priority as X. On expiration of the 15 days, both will have an unperfected si and if neither takes steps to file a F/S & neither F/S covers Y, then have to determine when si attached (35(1)(c)). Si attached on day 6 for both, so SP1 and SP2 have equal priority w/ respect to Y.

Ontario Dairy Cow How is priority established as b/w unperfected security interests? Milk license and money derived from license was proceeds – Q: who has priority to the

proceeds? H: equal priority

RBC v Agricultural Credit Corp Single financing statement can perfect lots of security interests Bruce: so you will file a F/S that covers everything

4. Specific Priority Rules: Competition w/ Another SI

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These special rules arise b/c of a particular type of si (purchase money priority and liens) or b/c of a particular type of collateral (negotiable collateral, accounts, chattel paper, fixtures, accessions).

Priority for a PMSI (Section 34)Competition b/w 2 security interests and at least one is a PMSI!!!

For some of the rules in s.34 both of them have to be PMSIs; si given by same D; si given by diff Ds

These are the superpriority rules! The particular priority rules for PMSIs apply only where both interests in the

competition are security interests w/ at least one being a PMSI If there is superpriority it will only be for the obligation secured by the PMSI.

o Superpriority rule can only be used to the extent that there is a PMSI, not necessarily for the entire amount owing to SP.

Split priority To get superpriority, the PMSI holder must come w/in the terms of s.34, which in most

cases extends superpriority (and inferentially the designation of PMSI) to the proceeds of collateral that is the subject of PMSI.

Need to categorize the collateral, particularly the original collateral that gave rise to the PMSI.

o Where the PMSI is in inventory, s.34(2) requires that the SP w/ PMSI take several steps to get superiority.

If there is no provision in s.34 dealing w/ the priority of the PMSI, then some other priority rule not peculiar to PMSIs will apply to the situation, often one of the residual priority rules.

• Justification: the special position for the holder of a PMSI is justified on the basis that without the holder’s money or credit, the debtor would not have rights in the relevant collateral. Therefore, none of the debtor’s secured parties would have an interest in the collateral. The holder of the PMSI is the individual who has facilitated everybody’s interest in the collateral and so it is right that he should have superpriority, provided he take the right steps.

34(1) & 34(2) ID type of original collateral! Superprioty rules that apply when a PMSI is in competition w/ a non-PMSI – where both

security interests were given by the same debtoro If a competitor SP takes through another D then these rules will not apply and

another rule will apply, probs a residual priority rule. If the PMSI arose from inventory, then use the inventory PMSI rule in s.34(2)

o For inventory has to be perfected as soon as D gets possession If the PMSI was in something other than inventory, then s.34(1) is used

o For collateral other than inventory, have to perfect w/in 15 days of D getting property

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What happens if D already has the property? Ex. D was leasing and now wants to buy; SP who provides financing to D has a PMSI – does SP lose superpriority b/c D has possession for a yr? Look @ McLeod

Doesn’t matter if dealing w/ PMSI in proceeds or original collateral

Collateral &

Proceeds

Original collateral not a PMSI s.34(1) appliesPMSI in collateral or its proceeds that is perfected no later than 15 days after the day the D or its rep obtains possession of the collateral has priority over any other si in the same collateral given by the same D (s.34(1)(a)).

Has 15 days to perfect interest o This is a grace period, but not like the one in 35(8)(a) that gives

you something free for 15 days o Could be misleading to SP1 & 2 in terms of making D seem more

asset rich than he actually is b/c don’t realize encumbered by SP3’s PMSI. Do not lend money unless check once and recheck 15 days later before actually lending the $.

Example Day 1 --- SP1 --- ALL PAAP (D1) Day 2 --- SP2 --- ALL PAA boats Day 3 --- SP3 --- SI “boat X” (not inventory); Filed F/S on day 3 Using the superpriority rules, SP3 would be in third place But if part of SP3’s interest is a PMSI ($5000 owing and $1000 relates to

the PMSI), then SP3 gets superpriority per s.34(1) for the $1000 that represents PMSI (not the $4000)

o Can still take advantage of 34(1) if it files F/S on day 10 On Day 7, it would have an unperfected si

Assume on Day 0 --- SP0 si in boat X --- D2o When boat is sold to D1, SP0’s interest in the boat continues –

s.34(1) doesn’t say anything w/ respect to competition w/ SP0. McLeod & Co

• When does the grace period to perfect superprioty begin?• Relevant time is 15 days from the time D gets possession as “collateral”

o 15 days of the day si attaches & property is in the possession of the D

• obtaining possession as D vs. obtaining it for some other purpose Intangible

& Proceeds

PMSI in an intangible or its proceeds that is perfected no later than 15 days after the day of the si in the intangible attaches has priority over any other si in the same collateral given by the same D (s.34(1)(b)).

Inventory &

Proceeds

If inventory s.34(2) appliess.34(2) PMSI in inventory or its proceeds (doesn’t have to be inventory) trumps other si in the same collateral given by the same DRequirements (have to satisfy all in the correct order) (a) PMSI perfected at the time D gets possession

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(b) SP gives notice to any other SP who has registered a F/S covering the same collateral; (d) notice states that SP expects to get PMSI in D’s inventory & described inventory by item or kind (c) give notice to any other party who has a registered SA covering same collateral – basically give notice to other parties who are not SP(e) notice has to be given before D obtains possession of collateral Note: it is extremely difficult to get superpriorty w/ respect to inventory

What happens if 2 PMSIs?If both holders of PMSIs have complied w/ what the rule requires for superpriorty, then the rule is nonsensical and so the residual priority rule should be used.

S.34(4) deals w/ this in certain contexts Example of having 2 PMSIs

o D has borrowed $ from 2 diff people to buy the same thing have 2 lender PMSIs

o PMSI given by seller in competition w/ lender PMSISeller vs. Lender PMSI

TWO PMSIs: seller PMSI in competition w/ lender PMSI + original collateral is goods s.34(4) For collateral other than inventory, a PMSI in goods or its proceeds taken by a seller, lessor or consignor of the collateral that is perfected not later than 15 days after D obtains possession the collateral has priority over any other PMSI in the same collateral given by the same D (s.34(4)(b)).For inventory, a PMSI in goods and its proceeds taken by a seller, lessor or consignor of the collateral that is perfected at the date D obtains possession has priority over any other PMSI in the same collateral given by the same D (s.34(4)(a)).

For 34(1), (2), and (4) security interests must have been given by the same D. This is not the case for 34(6)! Also, for (1)(2)&(4), it does not matter if dealing w/ proceeds or original collateral, but (6) requires to know whether proceeds PMSI or non-proceeds PMSI. Here, statute prefers non-proceeds PMSI over proceeds PMSI.

Collateral PMSI vs. Proceeds

PMSI

Possibility a 2D problem – competition b/w a non-proceeds PMSI and proceeds PMSI, but do not have to be PMSI in goods (can be any type of property) s.34(6) Non-proceeds PMSI trumps proceeds PMSI in the same collateral.

Interest could be given by same D or diff Ds Doesn’t matter if lender or seller PMSI Look @ March 9 notes

Requirements:(a) for inventory, non-proceed PMSI must be perfected at the date D obtains possession of the collateral. (b) for collateral other than inventory, non-proceed PMSI is perfected no later than 15 days after D or its rep obtains possession of the collateral.

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Example (388-389): • SP1 has perfected PMSI in X, which leads to Y as proceeds• SP2 advanced funds to assist D in the acquisition of Y • SP2’s non-proceeds PMSI will have priority over SP1’s proceeds PMSI as

long as SPs perfects in the 15-day periodThis rule will apply where the competition is b/w security interests given by 2 diff Ds.

• Assume SP2 has its PMSI given by transferor of Y to SP1’s D• Again SP2 would have priority to Y over SP1 by virtue of this rule, even

though their interests came from 2 diff DsAccounts & Chattel

Paper

Competition b/w PMSIs in accounts 34(5) only applies if you have a competition to an account & only if one of

those security interests is a PMSI. Holder of non-PMSI gets superpriority.One the exam, usually pple get an interest in an account b/c they have an ALL PAAP. 2 ways to have a si in accounts: (1) ALL PAA Accounts – buying D’s accounts as they arise (i.e. taking absolute assignments); (2) si in inventory & seller in the habit of selling inventory on credit. Knowing that si can be lost once inventory is dealt w, SP probably is particularly interested in the proceeds from the inventory – i.e. the accounts that arise from selling the inventory on credit interest in accounts as proceeds from inventory in which they had a PMSINon-proceeds si in accounts given for new value [financial institution taking absolute assignment of accounts as they arise] has priority over a PMSI in the accounts as proceeds of inventory if a F/S relating to the si in the accounts [absolute assignment] is registered before PMSI is perfected or a F/S relating to it is registered (s.34(5)).

Practically speaking it would be 2 security interests from the same D Give priority to the financial institution that takes the ongoing absolute

assignment of the account. This is like an exception to 34(2) The rule applies to the account itself; the rules doesn’t say what happens

when money is paid from that account – Bruce: I don’t think this rule applies to proceeds from the account

Example (389-390)• SP1 has an agreement to buy (i.e. take an absolute assignment of) All PAA

accounts from D as they arise• SP1 file a F/S• SP2 obtains a PMSI in X & X is sold on credit to give rise to an account• SP1 has a non-proceeds si in the account given for new value; SP2 has a

PMSI in the account as proceeds of inventory SP1 has priority b/c of the operation of s.34(5), despite not having a PMSI.

Note: other than this there are no rules dealing w/ accounts. Therefore, generally, will use a residual priority rule, and since can’t be perfected by

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possession will have to look at who filed a financing statement first.

C/PPMSI in C/P as proceeds will not have superpriority over the interest of the purchaser of C/P who takes possession of it in the ordinary course of biz and gives new value for it (s.31(6)).

Didn’t talk about this

Collateral-specific priority rules The special priority rules for particular types of property generally apply even where

only one of the parties in the competition is a SP.

Competition b/w SP and a non-SP w/ respect to the person who has a si determine if perfected w/ respect to the non-si party determine what type of interest they have

o on the exam, Bruce will tell us if person has an interest or not there are 2 possible results:

o one rule will cause the si to disappear (detachment rules) priority rule gives SP1 priority over SP2 there is also a competition b/w SP1 and non SP

rule says SP1 has no interest – this is of particular interest to SP2 b/c SP2 won’t be in competition w/ SP1

SP2 will be interested in this rule (even though it is not directly applicable b/w SP1 and SP2) and might be the party who argues it

SP2 will try to find a rule that detaches SP1’s interest but not its own interest

competition b/w SP2 and non-SPo statute doesn’t rly have a residual priority rule dealing w/ this situation. Thus,

the CL will apply (Nemo Dat – so the Q is who was there first?)

5. Competition with a Trustee in Bankruptcy or a Liquidator

si must be unperfected to use s.20 (says nothing if si is perfected)s.20(b) an unperfected si is non effective against the trustee in bankruptcy.

Doesn’t actually say that the si is detached, but trustee in bankruptcy can ignore the si and anybody who takes through the trustee in bankruptcy can also ignore the si

Provincial law changing Federal bankruptcy law – challenged as unconstitutional, but SCC in Griffen says its provincial law dealing w/ property rights.

The SCC in Re Griffen has said that this section does not purposely give title or any other property interest to the trustee in bankruptcy. Instead, it prevents a SP (including a deemed SP) w/ an unperfected si from exercising its rights against the trustee. The effect is to give the trustee full rights to property (i.e. equivalent to ownership) when the bankrupt had only limited rights. Anybody who takes through the trustee in bankruptcy can take clear title, if that is the

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effect of what the trustee in bankruptcy gets through the operation of this provision wherein the unperfected si is made “not effective”.

• The SP can still claim as would any unsecured creditor, but it won’t have a special position w/ respect to the collateral.

Re Giffen• An example of not realizing you have a si and failing to perfect si • Can the Trustee in Bankruptcy Have a Better Position in Relation to the Collateral than

Had the Bankrupt Debtor?• F: lease (true lease) of equipment for over a year; lessor did not realize that its

ownership in the leased property is a si and did not file a F/S; lessee’s interest subordinate to lessor

o Lessor has a PMSI – but s.34 requires PMSI to be perfected So can’t use s.34 to get superpriority if PMSI is unperfected

o D goes bankrupt while the leased goods are still in the hands of Do Owner arguing I’m the owner, breach of lease, and it should be returned to be o Trustee in bankruptcy relies on s.20(b); your ownership interest is a si and is not

effective against me b/c you have not perfected your interest • The trustee in bankruptcy of the lessee effectively became the owner of the leased

goods b/c it doesn’t have to worry about the si (which happens to be an ownership interest)

PMSI PMSI in collateral, other than an intangible, that is perfected no later than 15 days after the D or 3rd person obtains possession of the collateral has priority over the trustee in bankruptcy or the liquidator (s.22(1)(a)). For an intangible, the 15-day grace period stats at the day the si attaches (s.22(1)(b)).

Bruce didn’t mention in class

Leases and consignments • s.21

6. Competition with Transferees of Collateral and Buyers and Lessees of Goods

What options does the non-SP have? Trustee in bankruptcy can rely on s.20(b) if si is unperfected There are two main provisions that operate to detach si – except for trustee in

bankruptcy where there is an unperfected si, generally parties will try to use the detachment provisions (s.28(1)(a) and s.30), and then go to s.20(a) or (c) to subordinate si.

A few rules the buyer might use to eliminate the si entirely and also eliminate the competition. It is only necessary for a given 3rd party (buyer, etc.) to find that one of these provisions applies, before it is entitled to take free from a particular si or have that si subordinated (in the case of

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the unperfected si provision). In many cases more than one of the provisions might apply, but only one is sufficient to serve the purpose of the third party.

(1) Transferees where Security Interests UnperfectedSection 20 sets out rules that detrimentally affect an unperfected security interest where it comes into competition with certain non-security interests.

Both (a) and (c) preserve the si that is unperfected, but subordinate it; but (b) effectively detaches the si.

Section 20(a) subordinates the security interest to some claims of unsecured creditors. Unsecured creditors get benefit of 20(a)

o Once there is a default, any creditor can go to court and get a judgment (becomes a judgment creditor) and if D still fails to pay back, then can get access to certain machinery set up by the estate to ensure that judgment debt paid, which can involve having a sheriff or authorized person seize the property of the D

o Ideally, sheriff wants to seize property that is not subject to other parties’ interests – security interests are the main impediment to an unsecured creditor having access to property to seize. S.20(a) makes it easier for judgment creditors who is having the property seized = if si is not perfected at the time that the interest of the judgment creditor (who tend to be unsecured creditors // section 20(a) person) arises, then the interest of the SP is subordinate to the interest of the judgment creditor. Therefore, the sheriff can seize it and sell it.

Unsecured creditor who obtains a judgment is also protected in the competition w/ respect to a perfected si in certain cases (those mentioned in s.35(6)).

If SP has a perfected si, then have to look @ CL (who had their interest in the collateral first?). If SP was there before unsecured creditor, then SP has priority w/ respect to the obligation secured. If sheriff manages to sell, buyer takes subject to sp’s perfected si & have to realize that property might be seized by sp1 to satisfy indebtedness.

o b/c of rule 35(5) SP can continue to tack on, but 35(6) prevents SP from taking on certain advances when SP is in competition w/ s.20(a) person.

35(6) – an exception to ability to tack ono once holder of perfected security interest knows that goods seized by sheriff to

satisfy the indebtedness, then can’t claim priority w/ respect to any advances made after SP gains that knowledge

It is knowledge of when property is seized o look @ example from March.14 o In theory, sheriff must notify SP that property seized. But in reality, sheriff wants

si to go away, so that he can sell the goods w/out any encumbrances. Have to figure out how much SP wants to release its si Unsecured creditor will have to buy out SP’s interest Knowledge has to be w/ respect to the specific item Just b/c unsecured creditor has a judgment it doesn’t mean that it has a

claim against anything

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(b) have to know unsecured party is going after that particular property; something beyond the existence of judgment debt must have happened

o This section freezes amount SP can claim once knowledge acquired o There might be a circularity problem

Purchaser that is not involved in a ST: Section 20(c) subordinates an unperfected security interest (in all property except investment property) to the interest of a transferee (ex. D transfers to someone else who is not a SP – buyer, lessor) of personal property where (1) the transferee is not a secured party and (2) gives value and (3) acquires her interest without knowledge of the security interest & before the si is perfected.

another SP can’t use this provision to take priority over the unperfected si ex. SP has an unperfected si in a washing machine and D leases the washing machine to

someone else for a few months (transferee unaware of SP’s interest). Therefore, SP’s interest is subordinate to the transferee’s interest.

o interest doesn’t become detached o if lessee subleases to someone else and SP’s si is perfected at that point, then

can seize it b/c now in the hands of someone who knows your interest was perfected – so could seize from the sublessee but don’t know if original lessee losses interest or not

interest might be a temporary interest like leasing the goods (so have to worry for the period that lease effective/temporarily subordinate) or might permanently subordinate (sale of good to someone else – permanent property interest – ownership interest).

the only situations involving C/P to which this section would apply would be where the transferee of the C/P is w/in the provision that takes certain sales of C/P outside the scope of the PPSA (s.4(h)).

Requirements (p.326): o Transfer : transferee can’t be a secured party o Value: PPSA definition makes it clear that “value” means consideration sufficient

to support a simple K and including some forms of past consideration. Some cases say that value must be actually given – Bruce: this is clearly

wrong! o Knowledge: the PPSA stipulates that the registration of a F/S does not by itself

constitute implied knowledge (s.47) Actual knowledge – if check registry and F/S contains an error, then might

know you were there s.1(2) knowledge of non-natural person (ex. corporation) RBC v Dawson: what constitutes value for the purposes of s.20(c)?

Section 20(b) eliminates an unperfected security interest from competition with a liquidator or a trustee in bankruptcy (look above).

(2) Authorised Dealing Free from Security InterestAccording to s. 28(1)(a), a secured party can expressly or impliedly authorise that the collateral be dealt with free of the secured party’s interest.

SP can release its security interest (i.e. si doesn’t exist anymore)

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o Different from a subordination agreement; no privity of Ko There is no section that exempts privity of K, so have to go to SP directly o When and how this is done is just a Q of K.

Should be given by holder of si Other parties can piggyback as long as SP negotiates to release si Unlike s.30 where SP doesn’t have much control, SP is in total control here implied authorization

o I in the past have always allowed you take collateral free from my si, so implicit that I am going to continue to allow; these cases operate on the basis of estoppel // past practice or behaving as if no si

o b/c of the nature of the property involved the law assumes, unless SP contradicts it, that when the owner of property deals w/ it that SP is agreeing to release si in it even though not asked // implied authorization to deal (@ CL called license to deal) is presumptively there w/ respect to inventory.

if inventory in the hands of the person holding it and that person deals w/ it in the o.c.b, then the law assumes that I am releasing my si in it.

s.30 is a statutory variation of the CL license to deal, which would be there anyway even if didn’t have s.30

BFPFV = acquires inventory for value and without notice of the si; @ CL, if 3rd party knows of the si, then CL doesn’t imply that sp’s interest is going to become detached

If doesn’t give value (ex. gift), then again CL doesn’t assume si becomes detached

o If the other person knows your si exists, then can’t use w/out authorization; as long as let D know that not authorizing any dealing, then interest will not detach – even if the 3rd party buying doesn’t not know, interest won’t detach. In this case, 3rd party has to use s.30 (b/c this section doesn’t depend on relationship b/w D and SP)

Knowledge of si will generally prevent the operation of s.28(1)(a) detachment “Dealing” could be by the SP’s own debtor or by any other party; not a defined term double recovery? P.331 if giving up claim only w/ respect to one party, then that is a subordination agreement

not a release of si

(3) Buyer (or Lessee) in the Ordinary Course of Businesssection 30 allows buyers or lessees to take free from perfected or unperfected security interests in certain situations.

Usually used by other SPs to detach another SP’s interest Only operates w/ respect to goods; if collateral is not goods, then s.30 doesn’t have

anything to say; it can indirectly have something to say – ex. if X leads to other property, then there is a good chance that the de …

o Don’t really understand this – March 16 // 11:36

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Disadvantage is that it is limited in scope, but the upside is that it applies to eliminate both perfected and unperfected security interests. Another advantage is that there is not much that SP can do about the operation of this rule – SP may have forbidden that sale or may have specifically said if that transaction takes place it must take place subject to my si. Such desires and wishes of SP are irrelevant to operation of s.30. Section 30 will only not operate if the transaction is not in the ordinary course of business of the seller. There is not much that SP can do, except by taking possession.

o If D wants to sell to SP and doesn’t have it, then this transaction is likely not in the o.c.b – can argue not o.c.b when seller didn’t have possession and couldn’t show it. So could prevent operation of s.30 by taking possession of collateral.

General provision 30(2) A buyer or lessee of GOODS sold or leased in the ordinary course of business of the seller or lessor takes free of any perfected or unperfected security interest in the goods given by the seller or lessor or arising under section 28 or 29, whether or not the buyer or lessee knows of it, unless the buyer or lessee also knows that the sale or lease constitutes a breach of the security agreement under which the security interest was created.

Buyer or lessee won’t take free from security interests not given by the seller/lessor. When is something sold? Agreement to sale vs. sale Can have knowledge of si, but have to know that it is a breach of the SA This section useful to parties who actually know that the si exists b/c interest can be

detached as long as don’t know breach of SA. Statutory version of license to deal which is mentioned in s.28(1)(a) CL license generally applies to inventory, so has to be characterized from p.o.v person

acquiring it. But s.30(2) applies to goods!

Example on day 1, sp1 gets a si in X (goods) & SA contains a provision that D promises not to sell

free from sp1’s interest. on day 1.5, sp1.5 – managed to tell D2 about its interest, so covered by s.30

o wants to get rid of sp1 so that can get priority over D2 on day 2, sp1 perfects si by filing a F/S on day 3, D in breach of agreement sells X to D2 28(1)(a) says when collateral is dealt w/ si in it continues, but 30(2) protects D2. When does s.30(2) detach si of Sp1? When goods sold in ordinary course of seller’s biz

unless D2 has knowledge of the provision in the SA. o Knowledge of existence of si doesn’t prevent use of 30(2); have to know of the

SA itself prohibiting this transfer free of si Ex. in the US writing on washing machine that should not be sold In this case ignorance is bliss, so don’t ask

If in this case, on day -1, D0 had given si in X to Sp0 and on day 0, D1 acquired X from D0 o Assume s.30(2) did not apply to the transaction b/w D0 and D1 o Once sale on day 3 occurs – s.30(2) only applies to clear si given by D1, so sp0’s si

survives. So, D2 takes subject to sp0’s security interest.

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o Only relieves the collateral from the interest of the SP if the person who is doing the selling/leasing is the person who gave the si to that sp.

o If sp0 doesn’t register (unperfected si), s.20(c) applies and as a result sp0’s interest will be subordinate to D2.

If not in the ordinary course of biz, then don’t have to worry about s.30(2)

Under SGA, when sale occurs D1 ought to reveal charges/encumbrances and person might not even come along

Royal Bank v. Wheaton Pontiac Underscores that if s.30(2) applies – it only detaches si given by the person who

conducted the sale or person leasing. F: sale of a car; there was a chain of sales // there was a default by the D and a receiver

was put in place & parts of the inventory were sold including the car // SP proceeded to go against the inventory sold; buyer arguing that it should be able to reject vehicle on the basis that a SP that it did not know about came along & claim to have a prior interest and is seizing that vehicle b/c of default by some early party // seller trying to argue that buyer took free from si; therefor, no breach under the SGA which would allow the buyer to reject the goods. The claims of SP was non-existent b/c the sale was in the ordinary course of biz & that o.c.b characterization caused all the si that might otherwise be attached be detached. So, there were no encumbrances that should have been revealed.

The particular sale was not done in the o.c.b; it was done when the seller was in receivership, so s.30(2) did not apply. And although it applies b/w the seller and buyer, it only applies w/ respect to security interests given by the seller not security interests given by other parties. Therefore, buyer was subject to that si. Therefore, seller was in breach under the SGA for not revealing that encumbrance and therefore the buyer is able to reject the goods under this transaction.

o Court said: As the facts of this application demonstrate, there is a lurking danger to purchasers of automobiles secured by lenders as inventory, but it is for the legislature, not the courts, to remedy this deficiency.

o There is danger that you think you are buying in the o.c.b and you might know of s.30(2), but it is not going to clear security interests that were not given by your immediate seller.

H: buyer able to reject

(A) Buyer or lessee of goods Who constitutes a buyer? P.333

(B) Ordinary course of biz (p.336-340)What is in the ordinary course of biz?

Has to be in the ordinary course of biz of the seller – this might involve examining the buyer b/c it might not be an ordinary course transaction b/c you don’t normally sell to

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people like that. Focus is not on the buyer, but who it buyer is might be helpful in determining whether it is in the ordinary course of biz or not.

Various factors can come into play to assess ordinary course of biz. Courts will look @ factors such as where the agreement is made, the quantity of goods

sold or leased, and price (Fairline Boats). o What the price is? Where the transaction took place? Etc.

Whether there has been a sale or not? When can we say something is sold? On the exam, if told that goods have been sold, then have to worry about o.c.b but know that there has been a sale. If says X is claiming goods, then that depends on whether there is a sale sufficient to bring it w/ s,30(2). If there is, this is what happens. If not, this is what happens.

When can title be said to be passed to the buyer under the SGA? Person might have possession, but there has not been a sale.

o Does the section apply when party to a sale under the SGA, and not simply a party to an agreement under the SGA?

Under a sale, the buyer become the owner; whereas, under an agreement to sell, the buyer is not yet the owner of the goods

o The law is split on whether this distinction is important when dealing w/ this section of the PPSA.

RBC v 216200: To determine whether 30(2) is available to protect ordinary course buyers, have to go to the sale of goods act to determine whether there has been a sale; but the Ontario case that follows it says that SGA is irrelevant – as long as this is a transaction to which SGA applies we don’t need to know if sale or not.

A question of which one makes more sense. This is not clear in BC yet. o Debtor was a dealer in furniture; there was a SP who had a si in inventory; D

entered a number of transactions w/ respect to furniture – (1) some of the buyers got their items, (2) some had their items set aside when something came in that met the description of what they were supposed to get, (3) others didn’t have anything set aside although the dealer had certain items that met the description of what that buyer wanted. Under SGA, if you buy something by description, you do not become the owner of the goods until that item has irretrievably been set aside and allocated to your K. Before that point all you have is an agreement to sell, but not a sale.

Sale of goods act applied! Group (1) can benefit from s. 30(2) Group (2) goods that were set aside but not sent onto the buyer – not

sale b/c still in control of seller Group (3) – For those that particular item has not been set aside yet,

property has not passed; therefore, there is no sale in the o.c.b and the buyer is subject to the si that is attached to the goods.

o The Ontario case said that it doesn’t matter as long as realize that it was meant to be allocated.

(C) Special rules for fixtures

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Where goods are supplied that become a fixture or accession under a K w/ a buyer of the buyer’s contractors, such transaction comes w/in the protection (s.30(1))

(D) Relevance of knowledge It must be shown that the buyer/lessee did not know that it was a breach of the SA for

the dealer/debtor to engage in that particular transaction It is not sufficient to simply know that a si existed

Consumer protection 30(3) A buyer or lessee of goods that are acquired as consumer goods takes free from a perfected or unperfected security interest in the goods if the buyer or lessee

(a) gave value for the interest acquired, and (b) bought or leased the goods without knowledge of the security interest.

If buying consumer goods, then can take free from any si – not just si given by your seller

Has to be consumer goods from perspective of the person getting the protection of this provision (i.e. consumers); doesn’t matter that SP doesn’t think of them as consumer goods (and s.1(4) might increase that characterization as inventory).

o This section is for the protection of consumer buyer not SP Requirements: Acquire for value and don’t have knowledge of si (diff from s.30(2) where

couldn’t have knowledge of breach of the SA)o If consumer goes to the registry and finds the registration, then can’t rely on

30(3), but could still rely on 30(2) There is no requirement on consumer to check the registry, and just b/c

something is registered it is not notice of registration 30(4)(b) limits application of s.30(3) – applies to low value consumer goods

o 30(4) Subsection (3) does not apply to a security interest in o (a) a fixture, or o (b) goods the purchase price of which exceeds $1 000 or, in the case of a lease,

the market value of which exceeds $1 000. Overall price has to be $1000 or less

For s.30, except for certain leases, there has to be a buyer and a seller and it has to be in the ordinary course of biz of the seller.

S.30(1) defines these terms; these are for the purposes of fixtures – relates to situations where someone is having work done on their home and they are having goods installed and the person installing the furnace has given a si in it to the creditor; does buyer take the furnace subject to the si given by the person who installed the furnace? w/out these def can’t use s.30(2) b/c the person installing the furnace has a labour K; so buying subject to a labour K not a sale K and therefore s.30(2) doesn’t kick in; so the defs in s.30(1) deems labour Ks and goods supplied under that K enough to trigger the provisions

definitions in s.30(1) are for the purposes of fixtures – deems labour Ks to be a sale K will look @ when dealing w/ fixture provisions

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Ford Motor Credit v Centre Motors talks about the various sections – 20, 28(1)(a), 30 w/ respect to 20(c), 30, 28(3) often the same party can use all 3

o Bruce: if can use 28(1)(a) or 30 to detach interest, then there is no point in using s.20

7. Two-Debtor Situations

If different Ds, then it is likely that property has been transferred at some point! What happens when interests in collateral are given by different people?

There can be situations where there are various interests in the same collateral given by different people

Example 0 --- SP0 gets a si in ALL PAAP from D21 --- SP1 gets a si in X (worth 1000) from D1 for 100 2 --- SP2 gets a si in X for 500 (Subordination agreement w/ SP1)3 --- SP1 advances 300SP1 and SP2 get a promise from D1 not to deal w/ X – but on day 4, D1 transfers X (Which leads to Y = proceeds) to D2 // who has priority on day 5? By virtue of the operation of the residual priority rules, SP0 has first priority with respect to X b/c it filed its F/S first. So, the interest undermines interest of SP1 and SP2 – the fact that agreement violated is a matter of K, and has nothing to do w/ SP0 & D2 (who are not privy to the K). This is called a 2 debtor problem – the 2 security interests that are in competition w/ one another were given by two diff Ds. Typically arises when one of them has after acquired property interest.

The statute has special rules to deal w/ such scenarios: s.35(8); s.51 28(1)(a) si continues when collateral is dealt w Looking @ situations where there is a transfer of collateral from one person to

another and where both parties involved in the transfer have given si in that thing. Look @ diagram from March.7 We’ll look at two rules, but note that these two rules are not exhaustive

(1) Competition b/w si given by transferor and si given by transferee BEFORE THE TRANSFER s.35(8) might say nothing about priority, then have to look @ residual priority rules, or It might say the same thing as residual priority rules According to def of debtor – when D1 sells collateral, the new owner is SP’s debtor.

o Owed debtor should be registered right away, but harder to do w/ respect to a new owner

o New transferee is debtor, but SP is not expected to register until he knows about it OR has given permission in advance to D to transfer to someone else.

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Section 35(8): perfected si granted by transferor has priority over si granted by transferee (applies to all advances) – so in the example below, SP1 would have priority over SP0 (doesn’t matter that SP0 filed F/S first b/c not using residual priority rules)

Remember: w/ respect to any priority rule tacking presumptively applies unless stated otherwise.

Proviso: this rule has no application in the following circumstances – doesn’t apply to certain advances made by the SP of the transferee (doesn’t apply to certain advances made by SP0) – which advances? The advances made in the hiatus!

o SP1 has priority SP0 except to the extent that SP0 makes advances in the period described by (a) and (b)

o Advances made by transferee in the following period Beginning in para a: Hiatus begins 15 days after SP of transferor (SP1)

learns about the transfer – hiatus begins on day 21 If give advance consent to a particular person, then probs will

know; but if give advance consent, but not to a particular person – then less likely that you will know

If SP1 never learns of the transfer, the hiatus doesn’t begin & the rule in 35(8) will continue to apply to all advances

If SP1 learns of the transfer and doesn’t act w/in 15 days to add D2 as its D, then it risks not getting the advantage of priority rules in s. 35(8)

o If sp1 learns of the transfer to D2 on day 6 – sp1 will have 15 days (grace period) to add D2 to its F/S. Hiatus begins after the 15-day grace period is over.

Ending in para b: ends when there is reregistration If there is never reregistration, hiatus never ends

SP1 is only negatively impacted if SP0 makes an advancement in the hiatus period s.35(8) says nothing about priority of advance 25 (have to look @ residual priority rules)

ExampleTransfer happened on day 4, but both parties continue to make advances (Ignore SP2 in example above for simplicity)

SP0 Made advances everyday up to day 4 4 advancesD1/SP1 D2/SP0

SP of transfereeDay 5 Advance 5 s.35(8)

1&215 days (grace period)

Day 6 Learns of transferDay 20 Advance 200Day 21

Hiatus Day 24 Advance 24Day 25 Advance 25

Not covered by 35(8)s.511&3

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Day 30 SP1 changes registration to add D2

Day 35 Advance 35Day 40

Note: priority b/w the parties is split depending on which advance we are dealing w/Can lead to circularity problems (assume we have SP2): SP1 priority over SP2 b/c of residual priority rule – possible that SP2 never learned of the transfer, but SP1 does & doesn’t re-register SP2 would have priority over SP0 b/c of s.35(1) // circularity: sp1 priority over sp2; sp2 priority over sp3 b/c of 35(8) and sp3 might have priority over sp1 b/c of residual priority rules.35(8) might give same result as residual priority rule in 35(1)

Ex. sp0 got si on day 3, then same result as residual priority rule(2) Competition b/w si given by transferor and si given by transferee AFTER THE TRANSFERTwo scenarios where rules in s.51 apply (note that this section does not resolve all situations)

transfer of collateral from one D to another o basis of the rule: when SP knows there has been a transfer and a new D, they

should actually be registering the new D (even though new D doesn’t owe them any money) – if not, then should be subordinate

no new D, but D has changed its name – D known as F and F changes name to G o old SPs registered against F and new SPs register against G – you should go to

the registry and alter the registration to indicate that the D w/ new name is your D – if don’t do this, then causing potential loss to new SPs and should be subordinate to their claims.

s. 51 applies to competition b/w 2 security interests as well as competition b/w si who is in quadrant 1 and another party who is not necessarily a SP (i.e. an interest that arises in property after the transfer).

Gives you 15 days to change registration; if act, then get benefit o Diff from s.35(8) – 15 days won’t adversely affect you o If learn of transfer on day 15

Under s.35(8) have 15 days to act – if don’t act, then beginning of hiatus This doesn’t affect anything in the 15 days

If act w/in 15 days, then s.51 doesn’t apply & have to look @ residual priority rules

Have 15 days to act, you did not act, any si (or any other interest) given by transferee (D2) either in that 15 day period or in the period after that 15 day period until you reregister (on day 47), your si is subordinate to any interest (si or non-si) that comes in those periods.

If nobody comes along in this period, then there is nothing for s.51 to do

s.51(1) applies when SP who gets interest from transferor (SP1) has consented to the transfer Knows about transfer of property – if knows, then s.28 probs has kicked in to detach its

interest

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on exam often in s.51(1), but in reality a person who has consented to transfer has also released si

when consented to transfer, required to change registration and add new D immediately

15 day starts as soon as transfer occurs (consent given) if don’t register in 15 days then have these other parties to worry about (could be either

perfect SPs or non-perfected – could have come in the 15 day period or after) if not a secured party can only take advantage if come in the period after the 15 days consent to sell to a particular person – need to be specific (a) any non-si & (b) any si – that arise from the end of 15 days until there is a re-

registration SP1 subordinate to those interests (c) if a perfected si in the 15-day period and not re-registered SP1 subordinate if reregister in the 15-day period, then prevent operation of this section

s.51(2) applies when SP who gets interest from the transferor (SP1) learns about the transfer troubles might arise once you learn if you don’t change your registration the other situation 51(2) applies to is if there is a change in the name of D and you learn

about it 15 day starts as soon as have knowledge – but otherwise same structure as 51(1)

Note: the starting time for these 2 is different

If there is a transfer and your si survives the transfer, BUT you never consented to it/learn about it, s.51 NEVER applies to you and have to look at the residual priority rules. Same as if you don’t learn about the name change.

When do you have knowledge? Ex. on exam – there is a sign; is this knowledge? IDK, did you read it – not sure There is an ambiguity Not clear whether sufficient knowledge to trigger that rule

Once you re-register s.51 doesn’t have anything to say; have to look at residual priority rules. Also, doesn’t say anything about parties who come after the transfer, but before you have knowledge. Whether 51(2) could be interest of a trustee an bankruptcy (Orion)For the problem, whose interest survives the transfer and what are the priorities?

Circularity problem: one knows and re-registers, other doesn’t Truck case, problem, accounts, fixture

2-D Example If inventory the only interest that survives is SP5 b/c explicitly says can’t deal w/out my interest (s.28(1)(a)). Delete SP2 and 3 b/c their interest won’t survive the transfer. SP2 never consented and never learned about the transfer, thus s.51 will never apply!

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W/ respect to the people who got their interest from the same D, SP2 has priority over SP3 and SP5. And priority over SP1 b/c of s. 35(8) SP2 has priority over everyone! Can tell for sure that SP75 last b/c everyone who needs to register has registered, which preempts operation of s. ? (look @ residual priority rules) The rest is a mess b/c of circularity problems that arise. 35(8) allows SP3 and 5 to have priority over SP1. SP5 expected to re-register on day 21 subordinate to any SP who gets interest in period between day 6 and 60: SP7, SP12 and SP30 b/c of 51(1)

Assumption is that once consent given, then knows of transfer SP has priority over SP7, 12, 30 b/c of residual priority rules Circularity problem, except for the advances that SP1 has priority for

HP begins @ day 10 – advance i and K Ambiguity about given contest is it clear enough – if giving consent in abstract, then it is your problem to monitor. s.35(8) inapplicable to SP3 until it re-registers, so any advances made in the HP not affected by 35(8) adv I can’t give an overall picture of priorities – other than SP2 always senior and SP75 always at the bottom if inventory, then the only person whose interest survives is SP5

Other Rules

Accounts Problem is the nature of the property ID account and proceeds

o Remember there is a rule that makes proceeds broader Both payment and sale of account // money SP3 paid to get the account is proceeds, so

anybody who had an interest in the account has the interest in that money (s.28(1)(a)).

Perfected si and unsecured creditor Have to go to common law Unsecured creditor has no interest until judgment obtained and something done to

exercise If si happens after, then it would be subordinate

Registration errors Knowledge of transfer and not registering – is this a registration error? Bruce doesn’t

think so

Lapse in registration 35(7) can be of some help if SP1 re-registers w/in 30-ds treated as if on D1 w/ respect to competitions involving other parties who had a

subordinate position before the registration lapsed 35(7) can’t help w/ SP3

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Rule can’t be used w/ respect to advances made by SP2 after the lapse and before the re-registration

11. Competition w/ Holders of Interests in a Fixture or in Crops

Fixtures (si before thing became a fixture or at the moment it becomes a fixture) Can go to land regime that treats it as land or can go to PPSA which treats it as personal

property S.36 of PPSA prevails over LTA (s.74) Fixtures – doesn’t include building materials // other than this have to go to CL Definitional problem What about something that used to be goods and now is a fixture? s.36(3) – look @ diagram from March 23

o SP1 priority over M1 36(4) curves an exception

o just know that s.49 notice is there // a way of giving people notice that your interest exists

o M2 priority over SP1o SP1 subordinate w/ respect new advances made by M1 after it becomes a fixture

before s.49 notice filed by SP (an issue in GMS) Circularity b/c M1 priority over M2 (GMS case) interest in something that is already a fixture (this could include a whole building) –

s.36(5)o required to file a s.49 notice

to protect, have to register in the land registry

Manning Owner of land wanted the builder to install a furnace Builder bought furnace on credit & installed it – there is a sp interest b/c bought on

credit // builder defaulted and sp removes the furnace Arguments made that SP1’s interest detached once transaction occurred One argument under s.30

o Debtor becomes seller to the owners of the land and this is a sale in the o.c.b & this detached si

o O.c.b of builder is building not selling furnaceso Definition in s.30 help resolve this

Builder party to a K for services of goods Interest attached at the moment if became a fixture b/c of 30(3) this is not good law – now, …

Competition w/ Holders of Interests in an Accession

Ex. engine if an aircraft Goods that are attached to other goods and can be removed later

flour used to bake a cake – this is not accession, it is co-mingled goods

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how do you determine what is an accession? Question of arguing // will be obvious on the exam

can have something that is a fixture to which there is an accession one example where an attached unperfected si can have priority over a perfected si

Often for accessions, they are serial number goods – so for perfection have to ensure that number is registered

DEFAULT & REMEDIES

SP’s interest in collateral can be used as collateral, as such a si constitutes personal property. There is a failure by D to perform the main obligation.

If there is a default by debtor under SA, how does SP use si to satisfy indebtedness? SP has the option of waiving the default. A series of waivers might constitute some sort

of estoppel restricting the SP’s ability to act on a default in the future. Determine how much is due

Part 5 provides lots of procedural protections to debtor that can’t be contracted out of 55(2) – this part does not apply to deemed transactions Foreclosure means that obligation owing is satisfied and there is no money owing or

accept voluntary surrender of property by the debtor. 56(2) – there are remedies in 2 places: (a) statutory; (b) remedies that are in the SA

o statute is not a complete code on remedies o there are limits on what you can put in the SA by way of remedies o (3) those rights and obligations provided by the statue cannot be waived or

varied Andrews and Trotchie is an example of this

o Contractual right to put in place a receiver

Before going to the statute @ common law have to notify D that default has occurred and that they have a certain

period of time to remedy the default o the Q is whether this CL notice survives the PPSA o the assumption is that it survives o Waldron: court said that CL notice survives under the old PPSA

Can proceed like any other D (i.e. sue) // If position w/ respect to so weak, so better off giving up or you sue the debtor on the deficiency

Steps First, have to get control of the collateral

o For tangible, get possession/seizure S.58 says that you can do this

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o For intangible, notify the person who owes the obligation under the intangible Accounts are the easiest to go after

57(2) Might want to get control of the D – want to receive any property that D gets and

manage their affairs o Might want to appoint someone (a receiver, receiver manager)

Appointing a receiver is a remedy itself Only allowed to do this if D is a corporation, not an individual

o Who can be a receiver? A question of corporate law o 64, 65 (qualifications of receivers)o How does a receiver gets appointed? Appointed by K (SA) (s.64(1)); go to court

(s.66)

RBC v White Cross

Statutory vs. Other Remedies

Section 56(3) limits the ability of parties to waive or contract out of much of the PPSA Andrews and Trotchie v Mack Financial (Canada) Ltd

Seize or search approach if the collateral is consumer goods Have option to either sue or seize per s.66 66(1) if debtor under default, SP may excerise the rights in s.58 (seizure) or s.61 (sue) // (2) if do one of the 2, then D’s obligations are extinguished. Thus, nothing left to sue on. Paras in 66(1) connected w/ OR In reality, secured creditors want to sue rather than seize. 67(1): can accept the surrender of the goods What can a debtor do by way of initiating a process and what does a SP have to do to accept?

Just b/c D has dumped the property on your premises – this does not constitute acceptance (Whitewater of Motors)

If b/c in possession b/c d has not come back to get them, then doesn’t mean that in possession for perfection

What can the court do in certain cases? S.63 court has supervisory jurisdiction order anything The court can go beyond declaration S.70 – w/ respect to orders made S.69(2): you have a cause of action // (3) can recover actual damages – set out a test:

reasonable foreseeability // (4) there are regulations that set our prescribed damages // (7) if certain provisions …

S.69 preserves a claim for damages // cause of action // but rest of the statute doesn’t say this is the complete remedy

Osman: there was registration against D and SP did not remove registereation when asked to remove it. D claims that this caused difficulty with other creditors. D brought an action for slander of title and this can be cause of action under 69(2)

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