Secured Transactions – Winter 2013 Professor: Yael Emerich Summary
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- Object and Scope of Security
- Opposability and Priority
- Remedies and Execution
Extinction of Security InterestsThis topic is covered implicitly in the sections above. Below is a summary. It is important to recall that often, rather than extinguishing an interest, the PPSA will merely make it subordinate to someone else. But this often has the effect of extinguihsing the interest. An unperfected security interest is unopposable against a trustee in bankruptcy. But the trustee will either sell the property (in which case it passes free of the security interest), or if the property is not sold, the bankruptcy will discharge the security. So the subordination effectively extinguishes the unperfected security interest. A security interest is extinguished if: - Authorized sale: implicit in both PPSAs that authorized sales pass clear title. - Unauthorized sale: 30 NBPPSA if the requirements of that section are met; OPPSA 28 - Sale as remedy: - Negotiable instruments: NBPPSA 31 OPPSA 29 - Bankruptcy: See Chapter 5. Unperfected interests are subordinated to the trustee in bankruptcy (OPPSA ; NBPPSA20) COMMON LAW (OTHER)There is a good summary of basic common law property concepts at 99, along with the table below:
MortgagesWe learned relatively little about mortgages in class, and there were almost no readings. What appears below is from the Ziff article at 360, with a little bit of extra information from Roach’s textbook on Mortgages. The Roach text is really good - the first 36 pages give a great overview of the law of mortgages. Legal Mortgages Santley v Wilde on the definition of Mortgage [Slide]: “A mortgage is a conveyance of land or an assignment of chattels as a security for the payment of a debt or the discharge of some obligation for which it is given… And the security is redeemable on the payment or discharge of such debt or obligation.” Roach Text, p 5, 7: “The mortgage is a transfer of property which becomes null and void upon payment of the mortgage debt or discharge of the obligation which motivated the transaction. … The mortgage of land is a financial transaction comprising of two important elements: a sealed promise for payment of a debt, and the transfer of land subject to a proviso that upon full payment of the debt, in accordance with the terms of the mortgage, the title to the property will return to the grantor.” The grant of land to the creditor is absolute - it is an actual title of the freehold estate in the land. Oosterhoff & Rayner. Anger and Honsberger on Real Property [Slide]: “An equitable mortgage is one that does not transfer the legal estate in the property to the mortgagee but creates in equity a charge upon the property. It may be created by mortgaging the equity of redemption… It may also be created when the mortgage is insufficient to transfer the legal estate or because of an incorrect description. An essential feature of an equitable mortage is a common intention that the property be made security for a debt due or for future advances. It that intention is lacking, no equitable mortgage can be created.” A few maxims: (1) “Once a mortgage always a mortgage” can’t change nature of mortgage transaction in order to get rid of equity of redemption. (2) No “clogs on equity” are allowed - in other words, the creditor cannot do anything that would make it difficult or impossible for the lender to exercise the equity of redemption. Type of Mortgage Statutory Mortgage+Torrens System: Alberta, British Columbia, Saskatchewan, NWT, Yukon. Mixed: Ontario, New Brunswick Nova Scotia, Manitoba. Traditional Mortgage+Registry System: Newfoundland and Labrador CreationTraditional Mortgage Jurisdictions If the mortgagor creates a mortgage over the land, this passes title to the mortgagee. The traditional mortgage and the land registry system go together. Equitable mortgages can also be created if there is a failed attempt to create a legal mortgage. For example, if legal formalities are not followed, the legal mortgage cannot be created Mortgages will need to satisfy all the formalities of a land transfer - normally in writing and in the form of a deed (sealed contract). Statutory Mortgage/ Mortgage as Charge Jurisdictions The statutory mortgage is basically a replacement of the traditional common law mortgage, which involves a transfer of title, with a new idea, closer to a hypothec or charge. This system normally preserves other aspects of mortgage law, by stating that the holder of the statutory charge has the same rights as a mortgagee or something similar. The statutory mortgage and the Torrens system go together. Smith v National Trust Co, 45 SCR 618 [Slide]: “The mortgage contemplated and provided for by the Act is a real security which derives its efficacy as a security of that character from the statute itself. … It is, consequently, to the statute that we must primarily resort to ascertain what are the rights and powers incidental to such a security” Don’t analogize it to a real mortgage any more than the statute commands you to do. Other Information The creation of a mortgage on future property is not possible in traditional jurisdictions, since common law did not recognize transfers of title of things that did not exist. I think you could make an equitable mortgage on future property. In a Torrens system it is somehow possible to create a future mortgage [class]. Object and Scope of SecurityIn traditional mortgage jurisdictions, a mortgage passes title to the land. So anything that becomes a fixture in the land will be subject to the mortgage. In statutory mortgage/charge jurisdictions presumably the same holds true - you have a charge on the land, so anything becoming part of the land will be covered by your security. See the Effects of SecurityIf the mortgagee remains in possession, he has a duty not to damage the property, nor make use of it in a way that reduces its value for the mortgagee (the tort of waste, an example of which would be cutting down valuable timber) unless the mortgage states that the mortgagor is “unimpeachable for waste” (that is, gives permission to commit what would otherwise be waste. Opposability and PriorityBecause the mortgagee holds the legal estate in the land, the common-law position is that it is opposable to anyone. The mortgagor’s equity of redemption would be vulnerable to defeat if the legal estate is sold to a good faith third party without notice though. Presumably statutory mortgages are not subject to this kind of defeat, particularly since they’re part of a Torrens system. Mortgages rank in the order of their creation. Keep in mind that in traditional mortgage jurisdictions, the second mortgage and any mortgages after that will be equitable mortgages, since the second mortgage is a mortgage on the equity of redemption, and any subsequent mortgage will be a mortgage on the equity of redemption of the equity of redemption. This process can theoretically go on forever. Why would anyone accept a second mortgage? That’s a good question. In general there are only two scenarios that would incentivize a lender to offer a second mortgage: The first is if the mortgagee has made at least some payments on the first mortgage, since the equity of redemption would then have economic value. Imagine the mortgagor borrows $1 million to buy a building worth $1 million. At this point an equitable mortgage would be the right to assert an equity of redemption to buy a $1 million building for $1 million. Not too interesting for a lender, since there’s no value to that right. But if the mortgagor has paid off half the loan, then the equity of redemption is a right to buy a $1 million building for $500,000 (the remaining loan funds). That is a right with a value of $500,000. The second is if the size of the loan secured by the first mortgage was less than the value of the land. The reasoning is exactly the same as above. If the mortgagor secured a $300,000 loan against a building worth $1 million, then the second mortgage is the right to acquire a building worth $1 million for $300,000. So there is up to $700,000 The economic rationale here is to conceive of the equity of redemption as a right to acquire the mortgaged property. This right has value, and can be used to secure a loan, to the extent that the price of the equity of redemption is less than the value of the building. Mortgagor-----> 1st Mortgagee (Mortgagee holds legal estate) | Mortgagor holds Equity of redemption (EOR) on legal estate -----> 2nd mortgagee (Equity of redemption) | Mortgagor holds EOR on the EOR to the legal estate-----> 3rd Mortgagee (holds EOR on the EOR to the legal estate) | And so on… Remedies and ExecutionMortgagees have access to a wide variety of remedies. These remedies may be exercised concurrently [365], although often the effect of pursuing one remedy is to foreclose others (the mortgagee can’t go into possession once the property is sold, for example). Alberta law states that once a mortgagee has paid off any arrears, the mortgage is in good standing, and any payments due under an acceleration clause do not count for the purpose of default [365]. Consumer protection laws and maximum interest rate laws may provide some protection to mortgagees [365-366]. i) Action on the Covenant [360]The mortgage is the security transaction itself, which is normally accompanied by a contract. The contract and the mortgage are distinct, even if both are needed to make a sensible business transaction. The distinct nature of the contract means that any default can be treated as a normal breach of contract. Alberta passed legislation preventing action on the covenant, so that the mortgagee only has mortgage-based remedies, and no personal ones [360]. ii) Take Possession [361+]Because the mortgagee holds the legal estate in the land, the mortgagee technically always had a right to possession. However, almost all mortgages include an “attornment clause” giving possession back to the mortgagor, typically as a tenant of the mortgagee. Additionally, an equitable mortgagee does not have a right to possession, since the equitable mortgage does not involve a transfer of the legal estate. Thus where there is an attornment clause, or in the case of an equitable mortgage, the mortgagee must seek a court order to be put in possession. Once a mortgagee is in possession, he has a right to collect rents from tenants whose leases predate the mortgage, and to terminate leases that were granted after the mortgage by the mortgagor (although some provinces, including Ontario, protect lessees in this situation ). The mortgagor is also entitled to charge reasonable expenses to the mortgage debt. The scope of “reasonable expenses” is quite wide: necessary repairs and even the cost of improvements to the property, as long as the cost of the improvements do not make it effectively impossible for the mortgagor to pay off the mortgage. A mortgagee in possession has a duty to act as a reasonable owner, and to protect the equity of redemption of the mortgagor. iii) Appoint a Receiver [362]The appointment of a receiver is subject to the same rules that apply when the mortgagee takes possession directly. The right to appoint a receiver may be included in the mortgage covenant, or it may be sought by court-order. In many cases court-appointed receivers are preferable, since they immunize the creditor and receiver from certain forms of liability. In general, receivers are only appointed by courts where the property is an income-producing commercial property. Residential homes aren’t the proper subject of a receivership. iv) Foreclosure [362+]Foreclosure is the remedy by which the mortgagee becomes the owner of the property, so it is equivalent to civilian taking in payment. It is obviously a “blunt instrument” that tends to either over- or under-compensate the mortgagee [363]. The foreclosure procedure is quite cumbersome in most jurisdictions, so much of the time it is preferable for a creditor to sell the land instead. The right to foreclose first arises when there is a breach of the mortgage’s terms. The mortgagee may then seek an order of foreclosure as long as the default continues. The mortgagor is generally given a wide window of time during which he can either transform the foreclosure into a sale, or redeem the mortgage. Typically this means when the mortgagor asks for an initial order f foreclosure, the court grants a nisi (temporary) order. This order gives the mortgagor a certain time to cure the default, after which the mortgagee may proceed by foreclosure. Even after this period though, the equity of redemption can still be exercised, since the court has discretion to allow the mortgagor to exercise the equity of redemption based on various factors [363]. However, keep in mind that an equity of redemption, like all equitable interests, is extinguished by a sale to a bonafide purchaser for value without notice. Foreclosure “operates downwards to destroy the equity of redemption and any interests [inferior to the foreclosing mortgage] founded on that equity” [363]. This gives inferior mortgagees the incentive to pay off the mortgage of superior creditors, in order to step into their shoes and protect their own interest in the land: “redeem up, foreclose down” [363]. iv) Sell the Property [363+]The right of sale is used far more often than foreclosure. “Just as with foreclosure, the rules for court-ordered sales are somewhat different across Canada. However, the essence of all the schemes is that there is a judicial power to either pursue a judicial sale or to convert a foreclosure action into one allowing for sale, frequently with foreclosure as a backstop if the attempt to sell fails.” [363]. Interestingly, it is permissible for a mortgagee to insert a clause stating that the mortgagee has the right to sell the mortgagor’s equity of redemption. This is allowed, and is not considered a clog on the equity of redemption, as long as the power of sale is conditional on the default of the mortgagor [363]. This remedy is severely restricted in Alberta [363-364]. Duties of a mortgagee selling the property are ill-defined [364], although it is known that the mortgagee becomes trustee for any proceeds beyond what is needed to pay off the mortgage, and the proceeds must be accounted for “fully, promptly, and accurately” [364]. Canadian courts sometimes impose a duty of prudence and diligence, although the British position is that only a duty of good faith applies [364]. The Alberta “Rice order” approach is detailed at [363]. ExtinctionMortgages are extinguished when the loan is repaid and the legal estate is conveyed back to the debtor. They are also extinguished by foreclosure, or sale by the creditor. An unauthorized sale by the creditor to a good faith purchaser for value without notice can also extinguish the mortgage, since this will extinguish the equity of redemption. 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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