Secured Transactions – Winter 2013 Professor: Yael Emerich Summary
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- Liens
- Common-law Liens
- Contractual Liens
- Statutory Liens
- Equitable Liens
PledgeThis is the oldest secured transaction known to the common law. The debtor gives property to the lender, who holds that property as collateral for the debt. If the debtor fails to discharge his obligations, the lender can sell or keep the pledged property. LiensLiens1 began as a primitive form of security developed by the early common law, and were later used by equitable courts as well. There is very little in common between common-law and equitable liens beyond their name. The terminology of “lien” was taken up and used in various statutes like the provincial Mechanic’s Lien Act (called the Construction Lien Act in Ontario) and the Repair and Storage Lien Act. Some of these acts modify the law of common-law liens, but others create new kinds of security interest that have nothing to do with common-law concept of a lien (like the Mechanic’s Lien Act). So keep in mind that although various statutes use the term “lien,” not all of them are using it to describe a possessory security interest. Liens can also be created contractually. Liens arising by rule of law (so common-law and equitable liens) or by statute (assuming that statute doesn’t subordinate itself to the PPSA). Contractual liens obviously are subject to the PPSAs. Sources for this section: Alberta Law Reform Institute, A Report on Liens; Walsh’s PPSA Textbook (2012 edition, pages 506+); Ziff, Property Law Reader (1027+); Oosterhoff on Trust (for equitable liens). Common-law LiensA common-law lien gives a creditor the right to retain property belonging to the debtor until the debtor pays a debt owed to the lien-holder. They are non-consensual and do not require the debtor’s consent. Common-law liens are not subject to the PPSAs (NBPPSA 4(a); OPPSA 4(1)(a)). Common-law liens can be seen as the functional equivalent to the civil-law priority given to persons with a right to retain moveable property until paid (2651(3) CCQ, which applies to rights arising under articles 2003, 2058, 2185, 2293, 2302, 2324, etc). The property must already be in the creditor’s possession (i.e. a lien is a right to retain property, not to seize it), and the debt secured by the lien is almost always related to the retained property itself (e.g. the costs of repairing a piece of property). CL liens are possessory, and the lien is normally lost if the creditor loses possession of the property for any reason, and reacquiring possession does not reinstate the lien. Liens may be general or specific. Specific means that a lien secures only property related to a particular debt. General means that the lien covers all property belonging to the debtor that is currently in the creditor’s possession, regardless of its connection to the debt which gave rise to the lien. Most common-law liens are specific. Example: A jeweler performs repairs on a piece of jewelry and appraises another piece belonging to the same person. The repair work generates a specific lien over the jewelry that was repaired. As his lien is specific, the jeweler can only retain the repaired jewelry, and not the appraised jewelry, even though both are in his possession. Even if unpaid, the jeweler must return the appraised jewelry to the client if asked, since a specific lien only attaches to the repaired jewel. If the lien were a general one, the jeweler could have retained both jewels, since the lien would attach to both. The lien was originally a purely passive right to retain property, without a power of sale. Nowadays, sale powers are often granted by statute (see below). Holders of common-law liens: (1) innkeepers (lien over property brought to hotel, including guests’ vehicle, until hotel fees are paid); (2) common carriers (lien over the property that was to be delivered for delivery charges); (3) artificer’s/mechanic’s lien (despite the name, it applies to anyone who improves or repairs property (but not just maintaining property in its current state, like feeding animals) has a lien over that property for the repair/improvement charges). Other classes of persons have liens, such as a solicitor’s lien over client documents as long as legal fees remain unpaid, or a stockbroker’s lien over client’s securities as long as brokerage fees remain unpaid. However, it’s not clear if these liens are considered common-law liens, or those arising from trade usage. This is important, because liens arising from trade usage are contractual liens and thus subject to the PPSAs, but common-law liens are not (NBPPSA 4(a); OPPSA 4(1)(a)). Contractual LiensThe parties to a contract can agree to give a creditor the power to retain certain property until payment. This right will be governed by the terms of the agreement, which normally means it will be treated like a common-law lien, rather than an equitable or statutory one. Contractual liens are subject to the PPSAs, since they create security interests and are not included in the exception for liens arising by statute or operation of law. A contractual lien can be either express or implied. Implicit contractual liens are known as “liens arising by usage of trade” - in other words, liens that will be implied into a contract because they are customary in that industry, and reasonable persons in that industry would assume that the lien will be granted unless the contract provides otherwise. Hence, if such a usage is proved, the lien will be implied into the contract, unless it expressly excludes such a lien. However, courts generally require strict proof that such a trade usage exists. Rights of sale may also be implied by trade usage (stockbroker’s lien apparently). Statutory LiensVarious statutes create security interests called “liens” although not all of them actually resemble common law liens. Statutory liens are not subject to the PPSAs unless the statute granting them expressly states that they are subject to the PPSA (NBPPSA 4(a); OPPSA 4(1)(a)). Below are some of the more important statutory liens still in force, but there are others, such as those in favour of forestry workers, warehouse keepers, unpaid taxes, etc. Although there is some consistency between provinces over what types of statutory liens exist, there have also been some very odd lien statutes, like Alberta’s Beet Lien Act (SA 1926, c B-3… sadly repealed). The proliferation of statutory liens was one of the motivations for PPSAs. Construction Lien Act (Ontario) ; Mechanic’s Lien Act (New Brunswick) These acts use the term “lien,” but they create a non-possessory security over land, so really they have nothing to do with liens. A very good summary of the Ontario Construction Lien Act is “The Construction Lien Act” by Don Short (no relation) of Fasken Martineau. Google the title and it will show up as a free PDF online. The secured transaction stuff is from pages 1-6 and 11-14. The Ontario CLA is interesting in that it also creates deemed trusts, like a Quistclose trust, over all money received by a building’s owner that is intended to finance construction (s 7-13). The money is held in trust to pay the contractor (s 8). Turning back to liens, the CLA creates the following lien: “A person who supplies services or materials to an improvement for an owner, contractor or subcontractor, has a lien upon the interest of the owner in the premises improved for the price of those services or materials” (s 14(1)). This is treated like a charge, rather than a true lien, since obviously the suppliers aren’t in possession of the land or building. The lien expires under certain conditions (s 31) unless it is registered against the land in a land registry (s 34). Even after registration, if you remain unpaid you have to sue within two years of registering your lien or it expires (s 37). Suing over a CLA lien follows a simplified procedure (s 50-67) and can be heard by a master rather than a judge. You can order the property encumbered by the lien to be sold if you win (s 62(5)), or you can get a personal judgment (s 63). The New Brunswick MLA is a lot shorter and simpler. It gives a lien to anyone who “does, or causes to be done any work upon or in respect of an improvement, or furnishes any material to be used in an improvement” to land (s 4(1)). The lien covers wages or the price of the work or material, as the case may be, and encumbers the estate or interest of the owner of the land (s 4(1)). This lien has a super-priority over almost all other interests in land (s 9(1)). MLA lienholders rank equally among each other (s 10(1)), except for liens over wages, which outrank other types of MLA liens (s 10(2)). While the lien exists, no part of the building can be removed to the prejudice of the lienholder. Lienholders can ask that the owner pay them directly, rather than paying the contract (s 16). Liens must be filed promptly, or the right to the lien is lost (s 24, 25). Filing allows ninety days to start litigation to recover the money (s 27), this litigation can be registered against the property (s 28). In contrast to Ontario, the procedural vehicle is the normal rules of court with a few modifications (s 33). Judgment on a MLA lien “may” result in sale of the property (s 44). but always results in personal liability for the amounts secured by the lien (46). Repair and Storage Liens Act (Ontario) ; Liens on Goods and Chattels Act & Storer’s Lien Act (New Brunswick) The Ontario RSLA confers lien on anyone who stores or repairs personal property with the understanding that they will be paid for the storage/repair (s 1, 3-4). These liens outrank the interests of “all other persons” in the article (s 6). The lien is specific (s 3-4) and lost on dispossession (s 5). However, after dispossession, a new, non-possessory lien emerges (s 7), although only if the lienholder has a written acknowledgement of debt from the debtor (s 7(5)). The non-possessory lien has to be registered under the PPSA to be enforceable against third parties (s 9-10). The lienholder has a power of sale, but must give notice to various people (s 15-16). The lienholder can also “foreclose” and just keep the article (s 17). The article can also be donated to charity (s 19). The New Brunswick LGCA is essentially identical to the “repair” section of the Ontario RSLA. It’s not clear whether it is subject to the PPSA, since section 12 states “12This Act applies to liens only where there is no provision in any other Act for sale or for determining the rights of the owner and the bailee”. Presumably though a “bailment” does not secure an obligation, since the bailee has to return the property when asked by the bailor. Which means that LGCA liens are not subject to the PPSA. The New Brunswick SLA is a very short statute. It confirms the existence of a lien for persons who store goods in return for payment (s 2), and gives them a power of sale (s 4). Equitable LiensThis is a confusing kind of lien, since there seem to be two very different conceptions of what it is: (1) An equitable lien is a lien over an equitable interest (just as common-law liens would be liens over common-law property rights), in which case there are very few examples of equitable liens. (See Black’s Law Dictionary for some examples). (2) An equitable lien is a kind of remedy granted by the courts when there has been a breach of an equitable obligation. If a trustee stole $40,000 of trust money and used it, together with his own money, to buy a $100,000 home, the court could grant an equitable lien of $40,000 on that house in favour of the trust beneficiary. (this was Prof Lionel Smith’s view)
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