Secured Transactions – Winter 2013 Professor: Yael Emerich Summary
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- Capacity
- Attachment
- Perfection
Creation of Security InterestsClaire Gowdy’s Summary of Attachment (PPSA (NB PPSA 10, 12; ON PPSA 11) (1) Value is given by the creditor. (2) The debtor has rights in asset or power to transfer. (3) Evidentiary requirement: There must be some objective evidence of the existence of security interest in the asset. a. General Rule: security agreement with minimum content (universal rule for any collateral). OR
b. For corporeal assets: delivery/possession (which means no written agreement is necessary). OR
c. Special types of property: For a certified security, the security certificate must be “delivered” as per Securities Transfer Act. For investment property: the SC must have “control” of the property.
CapacityThe common law rules on capacity apply. The definition of debtor below shows that third parties can grant security for others’ debts. The PPSAs do not have any special rules on capacity to grant security interests in ones’ property (in contrast to the CCQ), except for provisions on future crops (NBPPSA 13(2)(a), OPPSA 12(2)(a)) and after-acquired consumer property (NBPPSA 13(2)(b) (unless the security interest in question is a Purchase Money Security Interest); OPPSA 12(2)(b) (unless the consumer takes title within ten days of the secured creditor giving value)). The justification behind the crops exception is to allow farmers to sell their yearly crops on the market free of any security interest, even if they have granted a general security agreement on all current and future property. (note: Saskatchewan got rid of this exception, reasoning that the federal Bank Act doesn’t contain such an exception, so the banks were getting around it that way, and hence the PPSA restriction just discouraged lending to farmers). The justification behind the consumer property exception is that one lender should not be able to use a single general security agreement to monopolize the property of a non-commercial debtor. Another limitation on consumer-created security interests is the unseizability rules (NBPPSA 58(3)-(7)). OPPSA Provisions 1 debtor” means, (a) a person who, [main definition] (i) owes payment or other performance of the obligation secured, and (ii) owns or has rights in the collateral, including a transferee of or successor to a debtor’s interest in collateral, (b) if the person who owes payment or other performance of the obligation secured and the person who owns or has rights in the collateral are not the same person, [i.e. third party guarantees] (i) in a provision dealing with the obligation secured, the person who owes payment or other performance of the obligation secured, (ii) in a provision dealing with collateral, the person who owns or has rights in the collateral, including a transferee of or successor to a debtor’s interest in collateral, or (iii) if the context permits, both the person who owes payment or other performance of the obligation secured and the person who owns or has rights in the collateral, including a transferee of or successor to a debtor’s interest in collateral, (c) a lessee of goods under a lease for a term of more than one year, or (d) a transferor of an account or chattel paper. NBPPSA PRovisions 1 “debtor” means (a) a person who owes payment or performance of an obligation secured, whether or not that person owns or has rights in the collateral, [main definition] (b) [consignees]; (c) [lessees of leases for more than one year]; (d) [transferee of chattel paper or accounts]; (e) [sellers of goods without change of possession]; (f) [a provision that deems a tranferee of collateral to be the debtor for some sections - look it up!] (g) if the person referred to in paragraph (a) and the owner of the collateral are not the same person, [i.e. third-party guarantees] (i) where the word “debtor” is used in a provision dealing with the collateral, an owner of the collateral, (ii) where the word “debtor” is used in a provision dealing with the obligation, the obligor, and (iii) where the context permits, both the owner and the obligor
AttachmentThe basic requirements for attachment under both PPSAs is: (a) Value is given: There must be consideration sufficient to support a regular common law contract. A binding promise to extend credit is value, and the definition of value allows existing/past debts to serve as value [204]. This means past unsecured indebtedness can be converted into secured indebtedness without any additional consideration. (b) The debtor has acquired rights in the collateral or power to transfer rights in the collateral to a secured party: The debtor must be able to grant the security interest, which requires some sort of proprietary right in the collateral. This also requires that the collateral exist. (c) The security interest is enforceable against third parties: Basically this means that either the secured party has taken possession of the collateral (NBPPSA 10(1)(a); OPPSA 11(2)(a)), or there is a security agreement that gives a sufficient description of the collateral (NBPPSA 10(1)(b); OPPSA 11(2)(b)). The sufficient description requirement in Ontario seems laxer than New Brunswick, but I could be wrong. [199; Walsh text] “The PPSA uses the term “attachment” to describe the creation of the security interest as distinct from the entry into force of the security agreement. Until attachment occurs, no security interest exists and the secured party’s rights against the debtor are purely personal and contractual. Conversely, once a secured interest attaches, the secured party acquires proprietary rights in the collateral.” [200; Walsh NBPPSA Commentary] The NBPPSA article 9 confirms that the basic rule is freedom of contract, subject to the Act itself and any other applicable act. In addition to the PPSA, the most significant source of restrictions on creditors’ rights comes from statutory liens, deemed trusts and other non-consensual encumbrances in favour of the Crown, or which are in favour of private parties but exempted from the Act. And of course the Bankruptcy and Insolvency Act. [205; Walsh PPSA Commentary] The expression “rights in the collateral” signals that ownership isn’t necessary. Any real right in the collateral will suffice. [87 ; Walsh text] Note that just because the PPSA gives a right of redemption to the buyer does not mean that this right can be used to trigger attachment by substituting for the rights of the debtor in the collateral. Otherwise the argument gets circular: I have rights so it attaches, and the rights I have the ones the PPSA gives me once there is attachment. [206; Walsh Commentary] Postponement will not be implied merely because a floating charge is used as the underlying security mechanism. NBPPSA Provisions 9 Except as otherwise provided for in this or any other Act, a security agreement is effective according to its terms. 12(1) A security interest, including a security interest in the nature of a floating charge, attaches when (a) value is given, (b) the debtor has rights in the collateral or power to transfer rights in the collateral to a secured party, and (c) except for the purpose of enforcing rights as between the parties to the security agreement, the security interest becomes enforceable within the meaning of section 10. 12(2) Notwithstanding subsection (1), if the parties have specifically agreed to postpone the time of attachment, the security interest attaches at the agreed time. 12(3) Lessees and consignees deemed to acquire rights in the collateral when they take possession from lessor/consignor. 12(4) Debtor doesn’t have rights in crops before harvest, young animals before conception, minerals before extraction, or uncut trees. 12(5)-(6) Special provisions for securities and futures accounts. 10(1) A security interest is enforceable against a third party only where (a) the collateral is (i) not a certificated security and is in the possession of the secured party or an agent of the secured party, (ii) [complex provisions for securities]; (iii) [investment property provision], or (b) the debtor has signed a security agreement that contains (i) a description of the collateral by item or kind or by reference to one or more of the following: “goods”, “document of title”, “chattel paper”, “investment property”, “instrument”, “money” or “intangible”, (ii) a description of collateral that is a security entitlement, securities account, or futures account if it describes the collateral by those terms or as “investment property” or if it describes the underlying financial asset or futures contract, (iii) a statement that a security interest is taken in all of the debtor’s present and after-acquired personal property, or (iv) a statement that a security interest is taken in all of the debtor’s present and after-acquired personal property except specified items or kinds of personal property or except one or more of the following: “goods”, “document of title”, “chattel paper”, “investment property”, “instrument”, “money” or “intangible”.
When security interest attaches to collateral (2) Subject to section 11.1, a security interest, including a security interest in the nature of a floating charge, attaches to collateral only when value is given, the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party and, (a) the debtor has signed a security agreement that contains, (i) a description of the collateral sufficient to enable it to be identified, or (ii) a description of collateral that is a security entitlement, securities account or futures account, if it describes the collateral by any of those terms or as investment property or if it describes the underlying financial asset or futures contract; (b) the collateral is not a certificated security and is in the possession of the secured party or a person on behalf of the secured party other than the debtor or the debtor’s agent pursuant to the debtor’s security agreement; (c) [exception for securities]; or (d) [investent property provision] (3) If the parties have agreed to postpone the time for attachment, the security interest attaches at the agreed time instead of at the time determined under subsection (4)-(5) Securities accounts and futures accounts provisions. Both acts define “value” to mean “consideration sufficient to support a simple contract.” Which is strange - why not just use the term consideration? And for that matter, why choose “value” as your defined term, given that it already has a special meaning in equity (i.e. non-nominal consideration; consideration roughly equivalent to the value of the thing given in exchange). Perfection[262; Walsh Commentary] “As a general rule, secured parties have only two methods of perfection available to them under the Act: registration or taking possession of the collateral. Exceptionally, the Act recognizes a security interest as perfect for a temporary period would either possession or registration (NBPPSA 5, 7, 26, 28, 29, 35(7), 51). However, because the security interest is not publicized, buyers and lessees for value without notice take free of the security interest if the sale or lease occurred during that period of temporary perfection.” Registration of a financing statement is the main way to perfect a security interest (NBPPSA 25; OPPSA 23), and applies to any type of collateral. Financing statements can be registered prior to attachment (43(5) NBPPSA; 45(2) OPPSA). Registration does not create a presumption of knowledge of the interest (OPPSA 46(5)(a); NBPPSA 47); nor of validity; nor of the fact that the PPSA applies to the transaction (OPPSA 46(5)(b)). Errors in the registration (OPPSSA 46(4); NBPPSA 43(7)-(10)) do not affect the validity of the registration unless they are “seriously misleading” NBPPSA 43(7) or are likely to “materially mislead” others (OPPSA 46(4)). Getting the debtor’s name wrong will generally invalidate the registration. Indeed, the PPSAs impose a re-registration requirement if the debtor’s name changes (48(3) OPPSA, 51(1) NBPPSA)! Transfers and subordinations can also be registered (45(1) NBPPSA). Possession can be used too, although it does not apply to all types of collateral (NBPPSA 24; OPPSA 22). More specifically, only collateral which can be transferred physically or symbolically can be possessed or perfection by possession. The “subject to section 19” language” in both acts means that possession does not perfect a security interest until the interest has attached [265]. Walsh discusses perfection via possession at [264]. Note that information rights under the PPSA are much more restricted than Québec’s open registries (18 OPPSA/NBPPSA). NBPPSA/OPPSA Core Provisions (identical) 19 A security interest attaches at the later of the following two dates: (a) it attaches; (b) all perfection steps have been completed. 19.1-19.2 special rules for investment property and security accounts/futures accounts OPPSA Provisions 21(1) Continuous perfection: If a security interest is originally perfected in any way permitted under this Act and is again perfected in some way under this Act without an intermediate period when it was unperfected, the security interest shall be deemed to be perfected continuously for the purposes of this Act. 21(2) Transferability of perfection: An assignee of a security interest succeeds in so far as its perfection is concerned to the position of the assignor at the time of the assignment. 22 Perfection by possession, repossession, or delivery. 23 Registration perfects a security interest in any type of collateral 24 Temporary perfection. 25 Perfecting over proceeds NBPPSA 25 Subject to section 19, registration of a financing statement perfects a security interest in collateral. 22 Grace period for the registration of purchase money security interests. 23(1) Continuity of Perfection: If a security interest is originally perfected under this Act and is again perfected in some other way under this Act without an intermediate period when it is unperfected, the security interest shall be deemed to be perfected continuously for the purposes of this Act. 23(2) A transferee of a security interest has the same priority in relation to perfection of the security interest as the transferor had at the time of the transfer. 24 Rules for perfection by possession or delivery. 26 Temporary perfection rules for collateral returned to debtor or third parties for short periods. 27 Perfection for goods held by bailee. 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