Secured Transactions – Winter 2013 Professor: Yael Emerich Summary


Miscellaneous Common-law Security Interests



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Miscellaneous Common-law Security Interests


Bank Act Security

Pursuant to the Bank Act (Canada), Schedule I and Schedule II banks also have the ability to take security from certain borrowers over certain property specified in the Act, such as raw materials, work in progress or finished goods in inventory of businesses. Certain formal requirements must be met in order to take Bank Act (Canada) security, and a separate registration system is involved.


Bank Act security was created by the federal government to fill a void in Quebec law in the 19th century, namely the lack of a non-possessory security interest. Banks obviously found it hard to operate without such a security interest. Now that Quebec allows hypothecs without dispossession, there isn’t the same need for Bank Act security, but it has persisted through inertia. Banks are no longer allowed to take out both federal Bank Act and provincial security on the same property.
Claire Gowdy’s summary contains good summaries of Bank Act cases scattered throughout the materials. In particular, section VI.2.E deals with conflicts between the Bank Act and the PPSAs.
Distress

At common law, a landlord could seize chattels that were on the leased property and sell them to make up for an missed rent payments. This was a more powerful form of security than a lien, since it had an inherent power of sale. Distress is still available for non-residential leases in common law Canada. It is an alternative to ending the lease and suing the debtor or re-leasing the property.


Charges

The charge is fairly close to the hypothec concept: it is a non-possessory real security that follows the property. It is the creation of a new interest in the property, rather than the transfer of existing interest like a mortgage. There are probably deep historical reasons why the common law used mortgages instead of charges.


The holder of a charge can seize and sell the property that is charged against the debtor’s obligation [98]. The holder has no right to possession of the property, since charges do not convey an estate it land or otherwise pass title [361]. Beyond that, I haven’t been able to find out much information about charges, despite the fact that “floating charges” came up a lot in our readings and are a well-known financing technique.
Equitable charges suffer from similar problems to equitable liens. It’s not clear if an equitable charge like a common law charge, but in equity, or whether it’s a kind of remedy granted by a court. Some sources seem to confuse equitable charges with constructive or resulting trusts. Again, no time to research this in depth.

    1. Seizure of Property in Common-law Jurisdictions


We didn’t cover this at all in class, but the relevant acts in both Ontario and New Brunswick are the Creditors’ Relief Act (RSNB 1973, c C-33; SO 2010, c 16, Sch 4) and the Execution Act (called the Memorials and Execution Act, RSNB 1973, c M-9 in New Brunswick; RSO 1990, c E.24).
The Execution Acts are relatively short (30-40 sections, depending on the province) and set out what property may be seized, what property is exempt, as well as the procedure for carrying out a seizure. The Execution Acts cover sale of both land and personal property to satisfy judgment creditors.
The Creditors’ Relief Acts are also short (20-40 sections), and govern the distribution of money to creditors, as well as any procedural issues or disputes that might arise during this process. The Ontario Act is only 20 sections and is relatively straightforward; the New Brunswick Act is 40 sections and seems to deal with a lot more issues, like registering judgments in the PPSA registry. These Acts deal with the judicial sale of property and distribution of the proceeds among creditors. There are rules on priority and payment, and the proof of claims by persons claiming to be creditors. The Acts also deal with garnishing wages or other income sources in order to pay debts.

  1. BANKRUPTCY AND INSOLVENCY




    1. Introduction


The readings we have for bankruptcy are not great. The Auger article leaves out an entire category of creditors, for example (deferred creditors)! We also don’t read Re Giffen, which is the leading SCC case on the interaction between the PPSAs and the BIA. Most of what appears in this section is taken from my Bankruptcy and Insolvency Law summary.

      1. The Bankruptcy and Insolvency Act


This is Canada’s oldest bankruptcy statute (dating from 1919), and the one that deals with core issues of liquidating insolvent companies’ and persons’ estates. Proposals were added later, so that a debtor could avoid liquidation and the full brunt of bankruptcy by offering a deal to creditors, but the BIA still remains liquidation-focused. Once you have gone through bankruptcy, you are fully discharged and free from all pre-existing debts and liabilities that were considered “provable claims”. The BIA is applicable to almost any entity in Canada except certain kinds financial services companies, which must use the Winding Up and Restructuring Act.
The main interest of the BIA for secured creditors is (1) they can face a stay of proceedings, which prevents them from exercising their rights in some circumstances; (2) they have a right to be paid in preference to other creditors; (3) section 244 impacts their ability to exercise certain rights against insolvent corporations.
A note on terminology: “insolvent” means “the factual situation that arises when a debtor is unable to pay creditors.” (Century Services v Canada (Attorney General), 2010 SCC 60). By contrast “Bankruptcy” means “the procedure by which an insolvent debtor’s property is coercively brought under a judicial administration in the interests primarily of the creditors.” (Sam Levy & Associates v Azco Mining, SCC). In other words, bankruptcy is a legal state attached to a debtor by the BIA itself, while insolvency is the underlying factual state of being unable to pay one’s debts.
DC – Banque Canadienne Impériale de Commerce c Marcano, 1990 QCCA [396]

Facts: A married couple, Rochon-Crête and Crête, owed money to CIBC. CIBC got a personal judgment against them, and registered the judgment against their house. Rochon-Crête and Crête sold their house to a third party, Marcano. They then went bankrupt and were discharged from their bankruptcy a little while later. A discharge from bankruptcy clears your outstanding debts and obligations (BIA 178(2)). CIBC apparently did not participate in the bankruptcy process. CIBC now attempts to enforce it’s legal hypothec against Marcano.

Issue: Did the discharge from bankruptcy extinguish the obligation to which CIBC’s hypothec was accessory?

Holding: Yes.

Reasoning: CIBC makes two ridiculous arguments: (1) that the discharge does not extinguish the debt, but merely makes it unenforceable against the debtor, so that CIBC can proceed against Marcano, and (2) a bankruptcy discharge is not a mode of extinguishing obligations under the CCQ, so their claim still exists. As to the first argument, the bankruptcy regime discharges the debt; this is clear and consistent case law. As to the second argument, it is well known that hypothecs are accessory rights. Thus if the underlying debt is extinguished, so does the hypothec. While it is true that the list of causes of extinction of obligations does not mention bankruptcy, doctrine is unanimous that this list is not closed. Furthermore, there would be no reason for the province to include federal law in the CCQ.

Ratio: (1) The list of causes of extinction of obligations under the CCQ is not closed, and it includes bankruptcy discharges among others; (2) Reaffirmation of the accessory character of hypothecs.

Comment: The CCQ now provides for other modes of extinction of hypothecs beyond those in the CCQ at 2802, although the article on causes of extinction of obligations (1671 CCQ) is no clearer now than it was under the CCBC.
DC – Syndic d’Ouellet, 2004 SCC [428]

Facts: O bought some goods from a merchant under an installment sale contract. O then went bankrupt. The rights were never published within the delay provided by 1745 CCQ. When creditor attempted to prove the claim for the goods in bankruptcy, O’s trustee stated that because there was no publication, the claim was invalid and would not be honoured.

Issue: Is the creditor’s claim opposable to the trustee?

Holding: Yes.

Reasoning: It is important not to confuse an installment sale with a security in the sense of the CCQ, even though such creditors are treated as secured by the BIA. Under the sales contract with O and the creditor, the creditor retained ownership of the property. The publication requirements of 1745 are directed only at making the retention of property rights by the creditor effective against third parties. Yet he trustee in bankruptcy is not a third party, since he steps into the shoes of the debtor. Thus even though there was no publication, the creditor can still claim proprietary rights in the goods against the trustee.

Ratio: (1) Reserve of property rights under a conditional/installment sale contract will operate against the trustee in bankruptcy even without publication; (2) Just because a claim is treated as a secured claim under the BIA does not mean that the CCQ rules on securities apply if they would not otherwise apply.
DC – Syndic de Boisclair, 2001 QCCA [435]

Facts: Boisclair signed a loan agreement with BMO in which he gave irrevocable authorization to MBO to apply the product of his RRSP to any loan deficiency that might arise. The loan was for $58,000 which would be applied towards a RRSP with BMO. When Boisclair went bankrupt, the trustee asked for the money in the RRSP. BMO refused, invoking several different grounds: mandate, assignment, etc. There’s also a corporate law issue about BMO’s divisions selling certain rights related to the RRSP between each other.

Issue: Does BMO have a right to the RRSP as a secured creditor?

Holding: No.

Reasoning: BMO drafted the loan agreement, so there is no reason to interpret the “irrevocable authorization” as an assignment. BMP therefore received no property rights in the RRSP. Nor can BMO reserve a right to become the owner of the RRSP, since this is forbidden under 1801 CCQ. That leaves securities, which can be either priorities or hypothecs. There is no priority which might apply here. Nor has BMO presented any proof of it’s registration of a hypothec or of taking steps necessary to render the hypothec over a claim opposable to third parties. Thus it has no right to the RRSP and must give the money to the trustee.

Ratio: Provincial law determines the kinds of security interests which can be recognized under the BIA.

Comment: There are some important droit transitoire issues I’m glossing over.

      1. The Companies’ Creditors Arrangement Act


This is a rescue-style piece of legislation that was introduced in the 1930s. Its goal is to keep the company running by shielding it from creditors long enough to come up with a plan to satisfy its existing liabilities. These plans generally involve compromising its debts down from 100% to some lesser percentage (20%-50% being typical). In some cases money debts will be replaced with equity in the debtor company, wiping out existing shareholders. Creditors typically agree because the alternative is bankruptcy and recovering close to nothing.
It has numerous advantages for a company that invokes CCAA protection, including a stay of proceedings by all creditors (including secured creditors) or any other lawsuit. It is more expensive to administer, since there is a lot of court-time, and the debtor corporation has to hire a “Monitor” (typically an accounting firm) to supervise all of its activities during the CCAA process. The CCAA is a skeletal statute, so courts have granted themselves wide-ranging discretion to make whatever orders seem appropriate in the circumstances. The CCAA is available only to corporations, who must also have debts of more than $5 million.
Realistically though, we aren’t covering this statute at all in Secured Transactions.

      1. The Winding-up and Restructuring Act


Not to be confused with provincial “Winding Up Acts” that deal with the voluntary dissolution of solvent companies.
The Federal WRA applies to certain kinds of companies: any corporation incorporated under federal jurisdiction, banks, trust companies, insurance companies, some loan companies, some building societies, and “incorporated trading societies.” That said, it does not apply to any railway or telegraph company, or any company incorporated under the Canada Business Corporations Act [so the “any corporation incorporated under federal jurisdiction” part loses a lot of its scope… I think this would just leave federal corporations incorporated under a Special Act of Parliament – Mike].
The WRA is not a preferred method of dissolving an insolvent corporation and paying off its debts in an orderly manner, especially since it’s been left out of the last few rounds of statutory modernization, so it is ambiguous and archaic in many places. However, it’s obligatory for the specific companies listed above [although I’m not sure why – Mike]. A company cannot opt for the WRA if BIA proceedings are already underway (s 213).

      1. The Wage Earner Protection Program Act


Enacted in 2008, WEPPA provides a mechanism to protect wage earners of bankrupt corporations and also addresses the power and knowledge imbalance between individual employees and their employer’s creditors. Changes to the BIA following the introduction of WEPPA give employees a first rank secured claim of $2,000 per employee over the current assets (inventory, accounts payable, cash) of the employer who is bankrupt or subject to receivership (81.3 BIA for bankruptcy, 81.4 BIA for receivership). This is a secured claim on very liquid assets that outranks all other claims, so there’s a high chance of full recovery. However, WEPPA allows the employee to assign this bankruptcy claim to the government in return for a cash payment. The employee gets guaranteed cash immediately, while the government takes the risk of non-recovery and also can aggregate all the employee claims together until they are worth litigating to recover. Interestingly, the government pays a larger amount to the employee (currently over $3,000) than it gains in terms of secured claims (still $2,000). Presumably this is to encourage employees to use WEPPA. WEPPA is a two step process:

(i) Workers whose employer is bankrupt or subject to a receivership submit their claims for eligible wages to Service Canada for payment. They currently receive up to $3,250.

(ii) The federal government then assumes the interests of the wage earners against the estate of the employer. This becomes a super-priority secured claim ahead of all other creditors. The priority charge has a limit of $2,000 per employee and is over the current assets of employer only.

For more details on this process, see sections 4.3(ii) (super-priorities) and 4.3(iii) (secured claims).




      1. Constitutional Issues


While the federal government has jurisdiction over “Bankruptcy and Insolvency” by virtue of s 91(21) of the Constitution Act, 1867, its legislation often interacts with provincial legislation passed under the “property and civil rights” power of 92(13). Section 3 of the Bankruptcy and Insolvency General Rules also provide that “In cases not provided for in the Act or these Rules, the courts shall apply… their ordinary procedure to the extent that that procedure is not inconsistent with the Act or these Rules.”
Essentially, the provinces can define who owns property, who has a security right (lien, hypothec, etc). But only the BIA can set priorities among creditors, and only the BIA can classify creditors as secured/unsecured.
Concurrent Remedies

BIA 72(1) “The provisions of this Act shall not be deemed to abrogate or supersede the substantive provisions of any other law or statute relating to property and civil rights that are not in conflict with this Act, and the trustee is entitled to avail himself of all rights and remedies provided by that law or statute as supplementary to and in addition to the rights and remedies provided by this Act.”

(2) BIA orders, assignments, and other documents aren’t covered by provincial laws on the registration of liens, charges, etc, unless the Act otherwise specifies.


Husky Oil v MNR (1995 SCC): This case sets out six general principles governing the interaction of federal and provincial laws in the realm of bankruptcy:

(1) provinces cannot create priorities between creditors or change the scheme of distribution on bankruptcy under s.136(1)…;

(2) while provincial legislation may validly affect priorities in a non-bankruptcy situation, once bankruptcy has occurred s. 136(1) of the BIA determines the status and priority of the claims specifically dealt with in that section;

(3) if the provinces could create their own priorities or affect priorities under the Bankruptcy Act this would invite a different scheme of distribution on bankruptcy from province to province, an unacceptable situation;

(4) the definition of terms such as “secured creditor”, if defined under the Bankruptcy Act, must be interpreted in bankruptcy cases as defined by the federal Parliament, not the provincial legislatures. Provinces cannot affect how such terms are defined for the purposes of the Bankruptcy Act;

(5) in determining the relationship between provincial legislation and the Bankruptcy Act, the form of the provincial interest created must not be allowed to triumph over its substance. The provinces are not entitled to do indirectly what they are prohibited from doing directly; and

(6) there need not be any provincial intention to intrude into the exclusive federal sphere of bankruptcy and to conflict with the order of priorities of the Bankruptcy Act in order to render the provincial law inapplicable. It is sufficient that the effect of provincial legislation is to do so.

The fifth and sixth propositions bear a close resemblance to the doctrine of colourability, but with two fundamental differences. First, the doctrine of colourability is a concept which only applies in assessing the pith and substance of the impugned legislation whereas propositions 5 and 6 continue to apply after the validity of the impugned provincial law has been determined. None of the quartet cases was concerned with colourable provincial legislation. Second, a legislative intention to intrude into an exclusive federal sphere is neither necessary nor sufficient to scrutinize the applicability of provincial law. The intrusion, and not the intention to intrude, is determinative for division of powers purposes.”


Robinson v Countrywide Factors (Majority judgment): Four things stand out. First, s. 91(21) is an exclusive federal power; second, it is a power confided to the Parliament of Canada notwithstanding anything else in the Act; third, it is a power, like the criminal law power, whose ambit, does not lie frozen under conceptions held of bankruptcy and insolvency in 1867; and, fourth, the term “insolvency” in s. 91(21) has as much an independent operation in the reservation of an exclusive area of legislative competence to the Parliament of Canada as the term “bankruptcy.”
CL – Robinson v Countrywide Factors, 1978 SCC

Facts: R is trustee in bankruptcy of K Co. Prior to R taking over, K Co made certain transactions with Countrywide. These preferences were disputed by R under the province’s Fraudulent Preferences Act.

Issue: (1) Is the Fraudulent Preferences Act ultra vires? (2) If it is not, is it nonetheless rendered inoperant be a conflict with the BIA?

Holding: (1) No; (2) No.

Reasoning: Majority: The provincial legislation is valid (not much reasoning). The BIA, by granting a three-month window to reverse transactions, did not intend to prohibit any longer window under provincial law. Hence there is no operational conflict here.

Concurring Minority: It is impossible to define the scope of valid provincial jurisdiction by looking merely to the federal bankruptcy and insolvency power and giving the provinces “whatever is left.” Provinces need to be able to legislate over insolvency in the non-statutory sense. They also need to be able to create coherent property and civil rights regimes, which will interact with the statutory scheme. The Fraudulent Preferences Act is a valid property and civil rights law.

Dissenting Minority: The provincial legislation makes insolvency the trigger of certain reversible transactions. This is a direct invasion of the federal competency over bankruptcy. The provincial legislation allows a creditor to interfere with the eventual distribution of assets by reversing transactions that would not otherwise be reversible under the BIA. Hence it is ultra vires: “No more under bankruptcy and insolvency law than under the criminal law can a Province make unlawful what is lawful under valid federal legislation, nor make lawful what is unlawful under valid federal legislation.”

Ratio: Provincial Fraudulent Preferences Acts are intra vires and applies concurrently with the BIA.

Comment: Fraudulent Preferences Acts or Fraudulent Conveyances Acts allow the trustee to set aside certain transactions if they seems suspicious and were undertaken by a bankrupt corporation within a certain amount of time prior to bankruptcy. The time period is longer than the time period available under the BIA.
CL – Pacar Financial Services v Sinco Trucking, 1989 Sask CA

Facts: P leased four trucks to S, and never perfected its lease as required under the PPSA. S leased and then later sold two trucks to third parties. The third parties paid fair market value and had no notice of P’s interest in the trucks. S went bankrupt, and now both P and the third parties claim the trucks from the estate of the bankrupt.

Issue: (1) Is the PPSA ultra vires? (2) If it is not, is it nonetheless rendered inoperant by a conflict with the BIA?

Holding: (1) No; (2) No.

Reasoning: (1) The PPSA is legislation concerning property and civil rights, since it deals with broad questions of property and security interests. It is not disguised or colourable bankruptcy legislation. Furthermore, relying on Robinson, the court reasons that if the trustee in bankruptcy can rely on provincial fraudulent preferences legislation, then the trustee can also use any other beneficial aspects of provincial law without creating a constitutional conflict. (2) P argues that it is a secured creditor under the BIA, and that the provincial legislation robs it of its secured status. However, applying the definition in the BIA, a lease is not a security interest for the BIA’s purpose. Furthermore, the trustee has control over “property of the debtor” and this includes leased items. Lastly, the BIA does not define secured creditors rights, it merely preserves them in bankruptcy. Under provincial law, P had no security rights because the lease was unperfected.

Ratio: (1) The BIA merely preserves the rights of a secured creditor in bankruptcy, and the “determination of what rights a secured creditor has in the collateral is made under provincial law”; (2) Legal integration of provincial and federal laws in this field is “not only permissible, but desirable and essential.”
CL – Re Griffen, 1998 SCC

Facts: Telecom Leasing Co leased a car to a company, who then leased it to G, an employee. The lease was for more than one year and allowed G to purchase the car at the end. TLC was not a party to the lease, but it played an active role in the terms and received a deposit. TLC was also described as the lessor and G as the lessee on insurance documents. G went bankrupt. Neither the employer company nor TLC had registered their security interest under the PPSA. G went bankrupt, the car was sold, and now G’s trustee and TLC are disputing who gets the proceeds of the sale. TLC claims it owns the car since it never sold it to G, while the trustee relies on the PPSA declaring him to have priority over the lessor of an unperfected lease.

Issue: Who has the right to the sale proceeds?

Holding: The trustee.

Reasoning: The PPSA effectively replaces the common-law “title” system with a system of “priority” for “security interests.” This represents a radical departure from the common law of property. The PPSA deems all leases of more than one year to be security interests. And the PPSA subordinates the interest of the unperfected security interest holder to that of the trustee once bankruptcy occurs. TLC did not perfect its security interest. Hence the trustee is accorded “priority” over TLC. The trustee can pass valid title by selling the car, because section 81 of the BIA applies, extinguishing all competing titles and encumbrances. The trustee is thus entitled to the full proceeds.

Ratio: (1) Explanation of how PPSAs create and regulate security rights; (2) Agree with Paccar that leasehold interests are property; (3) Reaffirms that the BIA is built on the foundation of provincial property and civil rights legislation which specifies what sorts of rights exist between the parties, whereas the BIA merely sets out the order of payment in bankruptcy.

Comment: The SCC makes a big deal about the trustee not acquiring better title than the bankrupt, and says that the PPSA creates an exception to this rule. Their reasoning gets very complicated at times, and I’m not sure that they needed to go down that road. It seems to me that the PPSA could be interpreted as extinguishing or lowering the quality of the lessor’s title, rather than improving the quality of the trustee’s title. Hence the trustee acquires exactly the same rights as the bankrupt, but we arrive at the same result in this case because the relative title of the lessor was lowered below that of the lessee.



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