Secured Transactions – Winter 2013 Professor: Yael Emerich Summary
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- With Respect to Collateral
- Opposability
- Priority Conflicts
Effects of Security InterestsGeneralThe basic principle of the PPSAs is freedom to contract (9 NBPPSA; 9 OPPSA), thus the security has whatever effects the contract provides for. However, there are several clause that are either regulated, banned, or implied into security agreements. First, the modern PPSAs impose a duty of good faith and commercial reasonableness on the parties (65(2) NBPPSA). Ontario does not seem to create a general duty of good faith and commercial reasonableness, but imposes specific duties on various rights or obligations (e.g. OPPSA 16, 63). Second, most PPSAs give the debtor the right to cure any defect prior to the sale of the collateral, which will reinstate the security agreement and return the parties to the status quo (62(4) NBPPSA). In Ontario, this right is slightly different; section 66(1) OPPSA creates a right to redeem the collateral by curing the default and “tendering the fulfillment of all obligations secured by the collateral” [not sure if this means offering to assume ongoing debt payments, or to pay the debt all off at once - Mike]. This right is available to more people than just the debtor (specifically, to everyone listed in 63(4)). If multiple people wish to redeem, their priority ranking determines who gets to exercise the redemption right [does that mean the debtor always goes last, since technically the debtor doesn’t have any priority under the PPSA, given that the debtor doesn’t have a security interest in the collateral? - Mike]. The OPPSA also creates a right to reinstate the contract (not just redeem the collateral) under 66(2), but this right only applies to the debtor and then only if the collateral is consumer goods. The reinstatement requires the debtor to cure the default and pay any reasonable expenses of the creditor. Third, the PPSAs limit the ability of creditors to invoke acceleration clauses (16 NBPPSA; 16 OPPSA) except where the secured party believes in good faith and on commercially reasonable grounds that the collateral is in jeopardy or that the prospect of payment/performance of the secured obligation is about to be impaired. The debtor can also use the statutory right to cure the default (62(4) NBPPSA; 66(1)-(2) OPPSA) and thereby cancel the acceleration. Other Effects Debtor has a right to a copy of the contract (NBPPSA 11; OPPSA 10, with fines for failure to do so) Debtor (and a very small number of third parties) has right to information (NBPPSA 18; OPPSA 18)
With Respect to CollateralThe PPSAs impose basic obligations on secured parties who hold collateral. This includes a duty preserve the collateral (NBPPSA 17(2)). The debtor bears the risk of any loss that occurs otherwise than by the secured creditor’s negligence (17(3)(b)) unless the contract states otherwise. The creditor does not have an inherent right to use the collateral, unless conferred by one of the sources listed in NBPPSA 17(4). NBPPSA Provisions 17(2) Secured party must exercise reasonable care to preserve collateral in that party’s possession. In the case of chattel paper, securities, or instruments, reasonable care extends to preserving rights against third persons (i.e. suing and avoiding limitation periods, filing claims if the debtor of the instrument/security/chattel paper goes bankrupt). 17(3) Unless otherwise agreed: (a) the secured party can charge various reasonable expenses to the debtor; (b) the risk of loss or damage is on the debtor, unless the secured party was the one who caused the loss; (c) the secured party may hold any profit or increase in the collateral as additional security, except for money it produces; (d) speaking of money, any money generated by the collateral is applied to the debt, unless the secured party gives it to the debtor; (e) the secured party must keep the property identifiable, although fungible collateral may be mixed with the secured party’s property. 17(4) Subject to 17(2), the secured party can use the collateral in the manner set out in the security agreement, or to preserve its value, or in accordance with a Court order. There is no inherent right to use the collateral beyond these three sources. OPPSA Provisions 17(1) Equivalent to NBPPSA 17(2) duty of care. 17(2) Equivalent to NBPPSA 17(3) default rules; can be contracted out of. 17(3) Liability of secured party for loss/damage of collateral does not cause loss of security interest. 17(4) Equivalent to NBPPSA 17(4) powers of use. OpposabilityTo Debtor A security interest is opposable to the debtor as soon as it attaches [259], and the security agreement is effective between the parties as soon as it is signed, unless the PPSA provides otherwise (9 NBPPSA/OPPSA). To Third Parties [263; Walsh Commentary] “As against judgment creditors, a trustee in bankruptcy, and a purchaser for value without notice (other than another secured party), the effect of failing to perfect is… [that] the security interest is ineffective until it has attached and is registered or otherwise perfected. But if the priority contest is between a perfected and an unperfected security interest, the position is different. … [U]nder the PPSA, an unperfected security interest is subordinate to all perfected security interests in the collateral, regardless of when they attach and regardless of knowledge. Moreover, priority between perfected security interests is ranked, as a general rule, according to the order of [the perfection step], again regardless of the order of attachment and regardless of knowledge. ” Priority ConflictsDon’t forget the rules about protecting buyers and security interests over proceeds (above). Also, keep in mind that the Bankruptcy and Insolvency Act overrules all of this and creates a new system of priorities that apply when the debtor is bankrupt. i) General RuleIn contrast to the CCQ, which sets out a list of priority for creditors holding various types of claims, priorities, and hypothecs, the PPSA doesn’t give one general list. Instead, it is set up as a series of one-off “A takes precedence over B” statements. This probably flows from the litigation-focussed nature of the common-law, in contrast to the civil law’s more systematic approach. In essence: perfected securities have priority over unperfected securities. Between perfected securities, the one which is perfected first (which normally means the one that registers first) has priority. Between unperfected securities, the one that attaches first has priority. There’s a also a special rule for purchase money security interests (PMSIs), which take precedence over all other security interests, regardless of the order in which they are perfected (but PMSIs can only be taken out on certain kinds of collateral). In a conflict between a perfected creditor and a third-party claimant not claiming through the PPSA, the perfected creditor is generally protected. By contrast, an unperfected security holder will be displaced by a judgment creditor, trustee in bankruptcy, purchaser, etc. This can be turned into the following ordered list of PPSA priority: Certain non-PPSA securities → PMSI → perfected security interest (by order of perfection) → certain non-PPSA creditors → unperfected security interest (by order of attachment) It is possible for secured parties to make subordinate their claims to other secured parties (OPPSA 38; NBPPSA 40). In New Brunswick, subordination agreements can be enforced by third party beneficiaries (NBPPSA 40(2)). NBPPSA Provisions 35(1) Where this Act provides no other method for determining priority between competing security interests in the same collateral, the following priority rules apply: (a) priority between perfected security interests is determined by the order of the occurrence of the following: (i) the registration of a financing statement under section 25 without regard to the time of attachment of the security interest, (ii) possession of the collateral under section 24 without regard to the time of attachment of the security interest, or (iii) perfection under sections 5, 7, 7.1, 26, 29 or 74, whichever is earliest;
1. Where priority is to be determined between security interests perfected by registration, priority shall be determined by the order of registration regardless of the order of perfection. 2. Where priority is to be determined between a security interest perfected by registration and a security interest perfected otherwise than by registration, i. the security interest perfected by registration has priority over the other security interest if the registration occurred before the perfection of the other security interest, and ii. the security interest perfected otherwise than by registration has priority over the other security interest, if the security interest perfected otherwise than by registration was perfected before the registration of a financing statement related to the other security interest. 3. Where priority is to be determined between security interests perfected otherwise than by registration, priority shall be determined by the order of perfection. 4. Where priority is to be determined between unperfected security interests, priority shall be determined by the order of attachment. [this importance of 30(1)2.(ii) is that you can pre-register your security agreement, which is important if your security agreement covers future property, or property not yet belonging to the debtor. This provision allows you to use the date of registration, rather than the date of perfection, which would be later in both the examples given above. So the main effect of this provision is to benefit creditors who perfect via registration over those who perfect via possession. - Mike] 30(2) Continuous perfection: a security interest keeps its original mode of perfection. 30(3) Advances: Security interest over advances has the same priority as over the first advance. 30(5) For the purpose of subsection (1), the date for registration or perfection as to collateral is also the date for registration or perfection as to proceeds. 30(6) Perfection and reperfection by registration: Where a security interest that is perfected by registration becomes unperfected and is again perfected by registration, the security interest shall be deemed to have been continuously perfected from the time of first perfection except that if a person acquired rights in all or part of the collateral during the period when the security interest was unperfected, the registration shall not be effective as against the person who acquired the rights during such period. 27(1) When a debtor sells or leases goods that are subject to a security interest and (a) the sale/lease was free of hte security interest under section 28; (b) the goods are returned or repossessed by the debtor; and (c) the obligation secured remains unpaid or unperformed, then the security interest re-attaches. 27(2) The perfection and priority of the re-attached security is determined as if the sale/lease never happened. ii) Purchase Money Security InterestsWith the emergence of general security agreements, debtors faced a problem: once they had granted a single GSA over their current and future property, no one would lend them money anymore, since there was no collateral left. The purchase money security interest (PMSI) solves this problem by creating an exception to the normal priority regime. Both Ontario and New Brunswick define a PMSI as a security interest created when a creditor extends credit to a debtor to buy a specific piece of collateral, and then takes a security interest in the specific collateral purchased with the creditor’s funds (paragraph (a) of both definitions). The economics of PMSIs are clear: the debtor benefits by being able to attract new secured creditors despite having granted a general security agreement; the PMSI creditor benefits by getting first ranking security on the collateral it financed, and the existing creditor(s) suffers no prejudice, since the PMSI only covers the new asset and doesn’t affect any other assets that were previously in the debtor’s possession. There are also deemed PMSIs that map onto the deemed security interests of each act. This ensures that lessors/consignors are not prejudiced by the PPSA. OPPSA Definition of a PMSI 1 “purchase-money security interest” means, (a) a security interest taken or reserved in collateral, other than investment property, to secure payment of all or part of its price, (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 or to the collateral, to the extent that the value is applied to acquire the rights, or (c) the interest of a lessor of goods under a lease for a term of more than one year, but does not include a transaction of sale by and lease back to the seller. NBPPSA Definition of a PMSI 1 “purchase money security interest” means (a) a security interest taken in collateral, other than investment property, to the extent that it secures all or part of the purchase price of the collateral, (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, (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 consignor who delivers goods to a consignee under a commercial consignment,
iii) Specific Rules NBPPSAThere’s no easy way to summarize these rules. You have to identify whether you are in a special case, then apply the rules of that case. Note that the PPSAs are set up to deal with binary conflicts, answering the question of “does X have priority over Y?” rather than providing a single unified list of priorities like the CCQ. Proceeds NBPPSA 28; see section 2.4.2(i) above. Buyers NBPPSA 30; see section 2.4.2(ii) above. Returned goods are dealt with by section 29 of the NBPPSA. Unperfected Security Interest 20(1) An unperfected security interest in collateral is subordinate to the interest of (a) a judgment creditor who has registered a notice of judgment in the Registry pursuant to subsection 2.2(1) of the Creditors Relief Act if the security interest is unperfected when the notice is registered, (b) all persons entitled by the Creditors Relief Act or otherwise to participate in a distribution of personal property subject to the interest of a creditor referred to in paragraph (a), and (c) a sheriff and a representative of creditors for the purpose of enforcing the rights of a creditor referred to in paragraph (a). 20(2) An unperfected security interest in collateral is not effective against (a) a trustee in bankruptcy if the security interest is unperfected at the time of the bankruptcy, (b) a liquidator under the Federal Winding-up and Restructuring Act if the security interest is unperfected when the winding-up order is made (c) a creditor, assignee or sheriff who has registered a notice of claim in the Registry pursuant to subsection 2.4(1) of the Creditors Relief Act for the purposes of any enforcement proceedings commenced under the Acts referred to in that subsection if the security interest is unperfected at the time the notice of claim is registered. 20(3) An unperfected security interest in collateral that is not investment property is subordinate to the interest of a transferee of the collateral if the transferee (a) acquires the interest under a transaction that is not a security agreement, (b) gives value, and (c) acquires the interest without knowledge of the security interest and before the security interest is perfected. 20(4) For the purposes of subsection (3), a purchaser of an instrument or a holder of a negotiable document of title who acquires it under a transaction entered into in the ordinary course of the transferor’s business has knowledge only if the purchaser or holder acquires the interest with knowledge that the transaction violates the terms of the security agreement creating or providing for the security interest. Judgment Creditors 35(6) A perfected security interest has priority over the interest of a judgment creditor referred to in paragraph 20(1)(a) only to the extent of (a) advances made before the judgment creditor registers the notice of judgment referred to in paragraph 20(1)(a), (b) advances made before the secured party has knowledge of the registration of the notice of judgment referred to in paragraph 20(1)(a), (c) advances made in accordance with a statutory requirement, or a legally binding obligation owing to a person other than the debtor entered into by the secured party before acquiring the knowledge referred to in paragraph (b), and (d) reasonable costs and expenses incurred by the secured party for the protection, preservation, maintenance or repair of the collateral. Transferees of Collateral 35(8) If a debtor transfers an interest in collateral that, at the time of the transfer, is subject to a perfected security interest, that security interest has priority over any other security interest granted by the transferee before the transfer except to the extent that the security interest granted by the transferee secures advances made or contracted for (a) after the expiry of fifteen days from when the secured party who holds the security interest in the transferred collateral has knowledge of the information required to register a financing change statement in accordance with section 51 disclosing the transferee as the new debtor, and (b) before the secured party referred to in paragraph (a) takes possession of the collateral or registers a financing change statement in accordance with section 51 disclosing the transferee as the new debtor. 35(9) Subsection (8) does not apply if the transferee acquires the debtor’s interest free of the security interest granted by the debtor. Purchase Money Security Interest Note that inventory PMSIs (34(2)) have to be perfected prior to delivery and notice must be given to existing creditors. Non-inventory PMSIs only need to be perfected within 15 days of delivery (so more time and no notice requirement). 34(1) Subject to section 28, a purchase money security interest in (a) collateral or its proceeds, other than intangibles or inventory, that is perfected not later than fifteen days after the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier, or (b) an intangible or its proceeds that is perfected not later than fifteen days after the security interest in the intangible attaches, has priority over any other security interest in the same collateral given by the same debtor. 34(2) Special rules only for PMSI in inventory. More onerous requirements than 34(1). 34(4) Priority among PMSI holders. 34(5) Priority among PMSI holders of original collateral and PMSI holders of that collateral as proceeds. 34(7) A purchase money security interest in an item of collateral does not extend to or continue in the proceeds of the item after the obligation to pay the purchase price of the item or repay the value given for the purposes of enabling the debtor to acquire rights in it has been discharged. Fixtures 36(2) Except as provided in section 30 and subsections (3) [purchaser of the land without notice of security interest], (4) [mortgagees without notice in some circumstances], and (9) [judgment creditor who registers against the land], a security interest in goods that attaches before or when the goods become fixtures has priority with respect to the goods over a claim to the goods made by a person with an interest in the land. 36(7)-36(8) If security interest attaches after the goods become fixtures is subordinated to most other creditors and transferees. 36(10) Priority of purchase money security interest in fixtures. 37 Security interests in crops. Negotiable Instruments 31(1) Anyone who becomes a holder of money subject to a security interest has priority over the secured party if (a) the money was acquired without knowledge of the security interest or (b) the money was acquired for value, regardless of knowledge. 31(2) Subordinates the security interest to almost any other creditor who receives the negotiable instrument as payment for a debt, even if the creditor knew of the security interest. 31(3) If the instrument is purchased, the creditor has priority over the secured party If the creditor gave value, took possession of the instrument, and did not have knowledge of the security interest. 31(4) A holder to whom a negotiable document of title is negotiated has priority over the secured party if (a) the instrument was acquired without knowledge of the security interest or (b) the instrument was acquired for value, regardless of knowledge. 31(5) Under sections (3)-(4), knowledge of the security interest means knowledge that the transfer breaches the security agreement. Repairer’s Lien 32A lien on goods that arises as a result of the provision, in the ordinary course of business, of materials or services in respect of the goods, has priority over a perfected or unperfected security interest in the goods unless the lien arises under an Act that provides that it is not to have such priority. iv) Specific Rules OPPSAThere’s no easy way to summarize these rules. You have to identify whether you are in a special case, then apply the rules of that case. Note that the PPSAs are set up to deal with binary conflicts, answering the question of “does X have priority over Y?” rather than providing a single unified list of priorities like the CCQ. Proceeds OPPPSA 25; see section 2.4.2(i) above. Buyers OPPSA 28; see section 2.4.2(ii) above. Unperfected Security Interests 21(1) subordinates an unperfected security interest to perfected interests (21(1)(a)(i)), judgment creditors (20(1)(a)(ii)-(iii)), the trustee in bankruptcy (20(1)(b)). 20(1)(c)-(d) give a very wide exemption for transfers who give value and take without notice of the security interest, as long as the transferee is not seeking to create a security interest himself. 20(1) Except as provided in subsection (3), until perfected, a security interest, (a) in collateral is subordinate to the interest of, (i) a person who has a perfected security interest in the same collateral or who has a lien given under any other Act or by a rule of law or who has a priority under any other Act, or (ii) [Judgment creditors] (iii) all persons entitled by the Creditors’ Relief Act, 2010 or otherwise to participate in the distribution of the property by [judgment creditors], or the proceeds of such property; (b) in collateral is not effective against a person who represents the creditors of the debtor, including an assignee for the benefit of creditors and a trustee in bankruptcy; (c) in chattel paper, documents of title, instruments or goods is not effective against a transferee thereof who takes under a transaction that does not secure payment or performance of an obligation and who gives value and receives delivery thereof without knowledge of the security interest; (d) in intangibles other than accounts is not effective against a transferee thereof who takes under a transaction that does not secure payment or performance of an obligation and who gives value without knowledge of the security interest. 20(2) Timing issues for statutory liens and representatives of debtors. 20(3) A purchase-money security interest that is perfected by registration, (a) in collateral, other than an intangible, before or within 15 days after, (i) the debtor obtains possession of the collateral, or (ii) a third party, at the request of the debtor, obtains possession of the collateral, whichever is earlier; or (b) in an intangible before or within 15 days after the attachment of the security interest in the intangible, has priority over, (c) an interest set out in subclause (1) (a) (ii) and is effective against a person described in clause (1) (b); and (d) the interest of a transferee of collateral that forms all or part of a sale in bulk within the meaning of the Bulk Sales Act.
(a) the secured party makes the advance for the purpose of paying reasonable expenses, including the cost of insurance and payment of taxes or other charges incurred in obtaining and maintaining possession of the collateral and its preservation; or (b) the secured party is bound to make the advance, whether or not a subsequent event of default or other event not within the secured party’s control has relieved or may relieve the secured party from the obligation.
Note that inventory PMSIs (33(1)) have to be perfected prior to delivery and notice must be given to existing creditors. Non-inventory PMSIs only need to be perfected within 15 days of delivery (so more time and no notice requirement). 33(1) A purchase-money security interest in inventory or its proceeds has priority over any other security interest in the same collateral given by the same debtor, if, (a) the purchase-money security interest was perfected at the time that the debtor or the debtor’s agent obtained or held possession of the inventory (b) before the debtor receives possession of the inventory, the purchase-money secured party gives notice in writing to every other secured party who has, before the date of registration by the purchase-money secured party, registered a financing statement that describes the collateral as, or as including, (i) items or types of inventory, all or some of which are the same as the items or types of inventory that will be subject to the purchase money security interest, (ii) inventory, or (iii) accounts; and (c) the notice referred to in clause (b) states that the person giving it has or expects to acquire a purchase-money security interest in inventory of the debtor, describing such inventory by item or type.
(a) in the case of collateral, other than an intangible, was perfected before or within 15 days after the debtor or the debtor’s agent obtained or held possession of the inventory whichever is earlier; or (b) in the case of an intangible, was perfected before or within 15 days after the attachment of the purchase-money security interest in the intangible.
(a) before the goods became a fixture, has priority as to the fixture over the claim of any person who has an interest in the real property; or (b) after the goods became a fixture, has priority as to the fixture over the claim of any person who subsequently acquired an interest in the real property, but not over any person who had a registered interest in the real property at the time the security interest in the goods attached and who has not consented in writing to the security interest or disclaimed an interest in the fixture.
(a) a subsequent purchaser for value of an interest in the real property; or (b) a creditor with a prior encumbrance of record on the real property to the extent that the creditor makes subsequent advances, if the subsequent purchase or subsequent advance under a prior encumbrance of record is made or contracted for without knowledge of the security interest and before notice of it is registered in accordance with section 54. 34(3)-(5) Ability of person with security interest in fixture to remove fixture. Responses of land owner. Accessions (Personal property joined to other personal property) 35(1) Subject to subsections (2) and (3) of this section and section 37, a security interest in goods that attached, (a) before the goods became an accession, has priority as to the accession over the claim of any person in respect of the whole; and (b) after the goods became an accession, has priority as to the accession over the claim of any person who subsequently acquired an interest in the whole, but not over the claim of any person who had an interest in the whole at the date the security interest attached to the accession and who has not consented in writing to the security interest in the accession or disclaimed an interest in the accession as part of the whole.
(a) is subordinate to the interest of, (i) a subsequent buyer of an interest in the whole, and (ii) a creditor with a prior perfected security interest in the whole to the extent that the creditor makes subsequent advances, if the subsequent sale or subsequent advance under the prior perfected security interest is made or contracted for befeore the security interest is perfected; and (b) is subordinate to the interest of a creditor of the debtor who assumes control of the whole through execution, attachment, garnishment, charging order, equitable execution or other legal process, if control is assumed before the security interest is perfected. 35(3) Despite clause (2)(b), a purchase-money security interest in an accession that is perfected before or within 15 days after the debtor obtains possession of the accession has priority over the interest of a creditor referred to in that clause. 35(4)-(8) Ability of secured party to remove accession from the whole. Ability of others to block this. Real Property 36(1) A security interest in a right to payment under a lease of real property, to which this Act applies, is subordinate to the interest of a person who acquires for value the lessor’s interest in the lease or in the real property thereby demised if the interest, or notice thereof, of the person is registered in the proper land registry office before the interest, or notice thereof, of the secured party is registered in the proper land registry office. 36(2) A security interest in a right to payment under a mortgage or charge of real property, to which this Act applies, is subordinate to the interest of a person who acquires for value the mortgagee’s or chargee’s interest in the mortgage or charge if the interest of the person is registered in the proper land registry office before a notice of the security interest is registered in the proper land registry office. Comingled Property 37 A perfected security interest in goods that subsequently become part of a product or mass continues in the product or mass if the goods are so manufactured, processed, assembled or commingled that their identity is lost in the product or mass, and, if more than one security interest attaches to the product or mass, the security interests rank equally according to the ratio that the cost of the goods to which each interest originally attached bears to the cost of the total product or mass. Account of Inventory and Employee/Payroll Claims 30(7) A security interest in an account or inventory and its proceeds is subordinate to the interest of a person who is the beneficiary of a deemed trust arising under the Employment Standards Act or under the Pension Benefits Act. 30(8) Subsection (7) does not apply to a perfected purchase-money security interest in inventory or its proceeds. Crops: section 32. Directory: pubdocs -> files files -> International maritime conventions files -> Chapter 1: Property as rights, not thing files -> Insurance Law – May 4 files -> Contractual Obligations – Prof. Helge Dedek Introduction 1 files -> Constitutional Limits on Criminal Law 1 files -> Antonio Iacovelli Winter 2005 Advanced Criminal Law files -> Private International Law – Prof. Walsh Summer 2005 files -> Part I: conceptualizing and justifying ip space 3 files -> Part I – general 5 The Sources of Int’l Air Law 5 Q? How does customary law relate to int’l law? Download 0.72 Mb. Share with your friends:
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