Secured Transactions – Winter 2013 Professor: Yael Emerich Summary
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- Types
- Creation
- Effects of Priority
- Opposability and Priority
- Remedies and Execution
- Extinction
PrioritiesA prior claim is a kind of “modality” of a claim/créance, in the same way that there are modalities of property. It is a way of being a claim, just like co-ownership is a way of being a co-owner. Depage, Traité élémentaire de droit belge : “Le priorité est un aspect particulier de certain droits personnels, une manière d’être de certains créances” 2650 A claim to which the law attaches the right of the creditor to be preferred over the other creditors, even the hypothecary creditors, is a prior claim. // The priority of a claim is indivisible. Note that the state may also publish its fiscal claims as legal hypothecs 2725. TypesThere are currently five recognized prior claims. This is down from 19 (10 moveable, 9 immoveable) under the CCBC [272-273]. The Minister’s Commentary indicate that the reduction was an attempt to simplify this area of law [274]. The remaining priorities were kept because they protected claims created by creditors acting in the common interest (#1), or the interest of society in general (#4-5) or because they protected a particular interest (#2-3) [275]. The particular interests in question deserved protection because “il s’agit de situations qui ne se pretent pas à la stipulation d’une garantie hypothécaire” [275]. That last one is meaningless… plenty of situations don’t lend themselves to hypothecs and they don’t receive a prior claim! Boudreault, Les sûretés 1997 [276]: Note that 2651(2) does not apply to commercial sales, only to consumer sales [277]. Most commentators believe that the Federal Government does not benefit from 2651(4), typically arguing that the provinces cannot bind the federal Crown [278] [that’s a bad argument, since this isn’t “binding” the federal government… it’s conferring a benefit! - Mike]. 2651(5)’s reference to “specially provided for by laws applicable to them” means taxing powers granted by City Charter to certain municipalities [279]. Transitory law of priorities is discussed [280-282, especially fn 75] 2651 The following are the prior claims and, notwithstanding any agreement to the contrary, they are in all cases collocated in the order here set out: (1) legal costs and all expenses incurred in the common interest; (2) the claim of a vendor who has not been paid the price of a movable sold to a natural person who does not operate an enterprise; (3) the claims of persons having the right to retain movable property, provided that the right subsists; (4) claims of the State for amounts due under fiscal laws; (5) claims of municipalities and school boards for property taxes on taxable immovables as well as claims of municipalities, specially provided for by laws applicable to them, for taxes other than property taxes on immovables and movables in respect of which the taxes are due. CCQ Provisions Giving a Right of Retention Major: 1592 A party who, with the consent of the other party, has detention of property belonging to the latter has a right to retain it pending full payment of his claim against him, if the claim is exigible and is directly related to the property of which he has detention. 1593 The right of retention may be set up against anyone.// Involuntary dispossession does not extinguish a right of retention; the party exercising the right may revendicate the property, subject to the rules on prescription. Minor: 875 (heirs); 963 (possessors in good faith for reimbursement of improvement/maintenance costs); 946 (holder of lost or stolen thing); 974 (accession); 1369 (administrator of property of another); 1250 (person obligated to deliver property under gift or will); 2003 (shipowner over cargo for cost of carriage); 2058 (transporter, similar to shipping); 2185 (mandataries); 2293 (depositories, seems to overlap with 1592); 2302 (innkeepers). All priorities arise automatically by operation of law. Object and Scope of SecurityThe state’s claims under 2651(4) and 2653 are general securities over the entire moveable property of the debtor [105]. Because there is no publication requirement, priorities are said to have “un caractère occulte” for other creditors [285]. CCQ Provisions 2652 Prior claims covering legal costs and expenses incurred in the common interest may be executed on movable or immovable property. 2654.1 Prior claims of municipalities and school boards for property taxes constitute a real right. //They confer on the holder of the claims the right to follow the taxable property into whosever hands it may be. 2653 Prior claims of the State for sums due under fiscal laws may be executed on movable property. 2650 … The priority of a claim is indivisible. 1051 Notwithstanding articles 2650 and 2662, a hypothec, any additional security accessory thereto or any preferences existing at the time of registration of the declaration of co-ownership on the whole of an immovable held in co-ownership are divided among the fractions according to the relative value of each or according to any other established proportion. Effects of PriorityNone really, since they’re not real rights for the most part, and thus can’t really affect any collateral. Nor do they have an impact on the debtor’s actions. They just give you a right to be paid first whenever the debtor’s property is being judicially sold. Opposability and PriorityThere is no need to publish priorities for them to be opposable (2655), but they do not have a droit de suite except for municipal/schoolboard tax claims (2654.1). So most priorities are opposable only to the debtor and other creditors. The order of payment for a prior claim is in the order they are listed in 2651 (2657 para 1). Claims of the same rank are paid proportionately (2657 para 2) CCQ Provisions 2655 Prior claims may be set up against other creditors, or against all third persons if they constitute a real right, without being published. 2657 Prior claims rank, according to their order among themselves, and without regard to their date, before movable or immovable hypothecs.//Prior claims of the same rank come in proportion to the amount of each claim. 2658 In a case of distribution or collocation among several prior creditors, the creditor of an indeterminate, unliquidated or conditional claim is collocated according to his rank, but subject to the conditions prescribed in the Code of Civil Procedure (chapter C-25). 2770 Where a hypothecary creditor seizes a moveable over which the holder has a right of retention, the hypothecary creditor must provide the moveable to the seizing creditor, but the seizure preserves his priority in spite of dispossession, so if the moveable is sold the proceeds go back to the priority holder. DC – Québec (Sous-ministre du Revenu) c Banque nationale du Canada, 1999 QCCA [290] Facts: National Bank exercised a taking in payment remedy against a bankrupt company that also owed large tax debts to the government. National Bank then sold the property it took in payment. The State claims that it is owed this money due to its priority. National Bank argues that once it took the property in payment, the property left the patrimony of the debtor, and so the priority cannot be opposed to it. Issue: If a hypothecary creditor exercises the right of taking in payment and later sells the property, can the state still exercise a priority against the proceeds of the sale? Holding: No. Reasoning: Priorities do not have a droit de suite, and are personal recourses exercised against a debtor, not against a piece of property. The remedy of taking in payment transfers property from the patrimony of the debtor to the patrimony of the creditor. Once that property is in the hands of the creditor, it can be sold by the creditor without any restriction, since the prior claim is against the debtor, not the creditor and not the property involved. Although some authors believe that 2782 CCQ forces the hypothecary creditor to pay for the prior claim, it is at best ambiguous, and the legislative history shows that the legislator withdrew a proposal to explicitly give prior claimants priority over money from property sold after taking in payment. Various policy reasons support this position as well [296-297]. Ratio: Taking in payment allows the hypothecary creditor to avoid preferred creditors, with the exception of those whose claims are real rights. Article 2656 appears to give new remedies to creditors with prior claims. This is in fact an error. At one point there was a plan to create special remedies for holders of prior claims, but that project was abandoned. Despite the change in legislative plans, the text of 2656 was never revised. The reference to “mesures provisionnelles” refers to seizure before judgment, conservatory orders, sequesters, etc. Property that can be seized by Prior Creditor Immovable property: legal expenses in the common interest (2652); unpaid municipal claims that are real rights (2654.1) Moveable property: legal expenses in the common interest (2652); claims of the state for unpaid taxes (2653); retention rights of moveable property 2651(3); unpaid vendor’s claims 2651(2) CCQ Provisions 2653 Prior claims of the State for sums due under fiscal laws may be executed on movable property. 2656 In addition to their personal or, as the case may be, real right of action and the provisional measures provided in the Code of Civil Procedure (chapter C-25), prior creditors may exercise their remedies under the law for the enforcement and realization of their prior claim. 2654 A creditor who takes procedures in execution or who, as holder of a movable hypothec, has registered a prior notice of his intention to exercise his hypothecary rights, may apply to the State to declare the amount of its prior claim. The application shall be registered and proof of notification shall be filed in the registry office. // Within 30 days following the notification, the State shall declare the amount of its claim and enter it in the register of personal and movable real rights; such a declaration does not have the effect of limiting the priority of the State's claim to the amount entered. 2652 Prior claims covering legal costs and expenses incurred in the common interest may be executed on movable or immovable property. 2654.1 Prior claims of municipalities and school boards for property taxes constitute a real right. //They confer on the holder of the claims the right to follow the taxable property into whosever hands it may be. 2653 Prior claims of the State for sums due under fiscal laws may be executed on movable property. Extinction2659 The priority granted by law to certain claims ceases by operation of law when the obligation which is its cause is extinguished. DC – Caisse Populaire Les Méchins c 9035-0489 Canada Inc, 1999 QCCS [284] Facts: The numbered company is bankrupt and owes a large tax debt to the state. The state was put on notice to publish the size of its claim under 2654, but never did so. Issue: What is the effect of failure to publish the amount of the prior claim? Holding: Loss of the claim’s status as a prior claim. Reasoning: It is clear from the use of the word “doit” in 2654 that the State has an obligation to state the amount of its claim. The only issue is the sanction for the non-observance of this requirement. The government argues that if 2654 were intended to extinguish the prior status of the claim, it would say this explicitly. Doctrinal authors seem to believe that failure to publish the amount of the claim results in loss of priority status, and there are no decisions on this point. “Le tribunal endosse sans rgserve cette position unanime des auteurs, principalement au motif que dans notre droit des sûretés, la sanction normale et usuelle du défaut d’inscrire un droit soumis à cette formalité réside dans l’inopposabilité de ce droit.” [287]. Ratio: Failure to publish the state’s claim under 2654 results in the loss of the claim. Comment: The claim about GST not being protected under 2651(4) since it’s owed to the state was abandoned. 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