Secured Transactions – Winter 2013 Professor: Yael Emerich Summary
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Scope of the Security InterestGeneralThe security interest extends to the goods described in the security agreement. In the event the debtor transfers the goods or otherwise receives “proceeds” the security interest attaches to both the original collateral and the proceeds (see section 3.4.2 below). It also can apply to future property (see section 3.4.3 below), in which case the security interest attaches as soon as the debtor acquires rights in the property. Common law recognizes three kinds of mixing between different property: fixture (chattel united with real estate); accession (chattel united with another chattel but is still identifiable); mixing/mass (chattel mixed with other chattels to the extent that it loses its individuality). The test for fixtures is given in Hellawell v Eastwood (1856), 155 ER 554. This was a case in which a lessor had seized cotton machines belonging to the lessee. Lessors only have the right to seize moveables at common law. So if the cotton machines were fixtures, they were unseizable. Some were bolted to the ground with screws, others were sealed in with molten lead. “The only question therefore, is, whether the machines when fixed were parcel of the freehold, and this is a question of fact, depending on the circumstances of each case, and principally on two considerations. First, the mode of annexation to the soil or fabric of the house, and the extent to which it is united to them, whether it can be easily removed, … without injury to itself or the fabric of the building. Secondly, on the object and purpose of the annexation, whether it was for the permanent and susbtantial improvement of the dwelling, in the language of the Civil Law, perpetu usus causa, or in that of the Year Book, pour un profit del inheritance, or merely for a temporary purpose, or the more complete enjoyment and use of it [the fixture] as a chattel.” On the facts of the case, no fixtures were found. MASS/COMINGLING OPPSA 37; NBPPSA 39(2): 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. FIXTURES See NBPPSA 36; OPPSA 34. The security interest subsists, but could be subordinate to other interests.Recall that the Ontario definition allows unmined minerals to qualify. ACCESSION See NBPPSA 38, OPPSA 35. The security interest of chattels used in the accession subsists and attaches to the goods as a whole, but there are some possible prioirity/execution issues. It seems that the secured creditor has a right to remove the part of the accession affected by his security interest. CROPS AND ANIMALS See NBPPSA 37; OPPSA 32 Proceeds and Tracingi) Proceeds [165+]Whenever collateral is sold, transferred or otherwise replaced with “proceeds” (which could also include insurance money if the collateral is damaged or destroyed), two things happen: First, the security interest attaches to the proceeds, and second, if the disposition was unauthorized the security interest continues in the collateral too (NBPPSA 28(1); OPPSA 25(1)). If the disposition was authorized, the security interest only attaches to the proceeds, and the collateral is transferred free of the security interest. New Brunswick restricts the value that the security interest protects to the market value of the collateral when it is enforced against both the collateral and proceeds (28(2)). In other words, if the value of the collateral falls, the fact that it was disposed of without authorization can’t put you in a better position. There does not seem to be a corresponding provision for Ontario. New Brunswick reduces the extent of the value secured by the security interest when the creditor enforces the security against both the proceeds and the collateral (28(2)). The value secured is reduced to the market price on the date of the unauthorized sale. Note that market value may or may not be identical to the actual consideration received by the debtor [167]. New Brunswick also imposes a requirement that the debtor “acquire an interest” in the proceeds. This word limits how far along the chain of title the creditor can trace proceeds. Walsh gives a good example at [168]. There is no corresponding limitation in Ontario, allowing secured creditors to follow the collateral or its proceeds along a very long chain of title [168 fn 10]. Also, be aware that this rule only applies to proceeds, not the original collateral [169] . Both PPSAs contain provisions dealing with the perfection of interests in proceeds. Security interests over proceeds need to be perfected independently of security interests over the original collateral, even though attachment is automatic. New Brunswick seems to make it fairly difficult for security interests in proceeds to be considered continuously perfected (28(3)-(4)), but Ontario is far more generous (OPPSA 25(2)-(3)). [see Walsh discussion at 171 fn 22] Keep in mind that third party purchasers are protected under other provisions of the act (30 NBPPSA; 28, 28.1 OPPSA). So just because the security interest survives under the relevant provision does not mean it is enforceable against all buyers. NBPPSA Provisions 1 … “proceeds” means (a) identifiable or traceable personal property that is derived directly or indirectly from any dealing with collateral or proceeds of collateral and in which the debtor acquires an interest, (b) an insurance or other payment that represents indemnity or compensation for loss of or damage to collateral or proceeds of collateral, or a right to such a payment, (c) a payment made in total or partial discharge or redemption of chattel paper, investment property, an instrument or an intangible, and (d) rights arising out of, or property collected on, or distributed on account of, collateral that is investment property;
(a) continues in the collateral unless the secured party expressly or impliedly authorizes the dealing, and (b) extends to the proceeds.
(a) includes a description of the proceeds that would be sufficient to perfect a security interest in original collateral of the same kind, (b) includes a description of the original collateral, if the proceeds are of a kind that are within the description of the original collateral, or (c) includes a description of the original collateral, if the proceeds consist of money, cheques or deposit accounts in a bank, credit union or similar financial institution. 28(4) If the security interest in the original collateral is perfected other than in a manner referred to in subsection (3), the security interest in the proceeds is a continuously perfected security interest for the first fifteen days after the security interest in the original collateral attaches to the proceeds but becomes unperfected on the expiry of that period, unless the security interest in the proceeds is otherwise perfected by any of the methods and under the circumstances specified in this Act for original collateral of the same kind. 35(3) The time of perfection of proceeds is considered the time of perfection of the original security interest over the collateral. 34(5) Priority among PMSI holders of original collateral and PMSI holders of that collateral as proceeds. OPPSA Provisions [note lack of requirement that the debtor acquire an interest in the Ontario definition of proceeds - Mike] 1 … “proceeds” means identifiable or traceable personal property in any form derived directly or indirectly from any dealing with collateral or the proceeds therefrom, and includes, (a) any payment representing indemnity or compensation for loss of or damage to the collateral or proceeds therefrom, (b) any payment made in total or partial discharge or redemption of an intangible, chattel paper, an instrument or investment property, and (c) rights arising out of, or property collected on, or distributed on account of, collateral that is investment property; 25(1) Where collateral gives rise to proceeds, the security interest therein, (a) continues as to the collateral, unless the secured party expressly or impliedly authorized the dealing with the collateral free of the security interest; and (b) extends to the proceeds. 25(2) Where the security interest was perfected by registration when the proceeds arose, the security interest in the proceeds remains continuously perfected so long as the registration remains effective or, where the security interest is perfected with respect to the proceeds by any other method permitted under this Act, for so long as the conditions of such perfection are satisfied. 25(3) A security interest in proceeds is a continuously perfected security interest if the interest in the collateral was perfected when the proceeds arose. 25(4) If a security interest in collateral was perfected otherwise than by registration, the security interest in the proceeds becomes unperfected ten days after the debtor acquires an interest in the proceeds unless the security interest in the proceeds is perfected under this Act. [Walsh suggests that this provision could perform the limiting function as similar language in the NB definition of proceeds does [168 fn 10]] 25(5) Special rule for motor vehicles sold to third parties as consumer goods. 30(5) The date for registration or perfection as to the original collateral is also the date for registration or perfection as to proceeds. ii) Sale of the CollateralIn New Brunswick, the debtor may sell or otherwise transfer the collateral, and this right may not be restricted (33(2) NBPPSA). The transfer does not affect the rights of the secured party, so the security interest over the collateral remains intact. However, the creditor must update the registry if the security interest was perfected by registration within fifteen days, otherwise the security interest will become unperfected (51 NBPPSA). In Ontario, there is a similar protection against restrictions of the right to sell the collateral (39 OPPSA). Where collateral is transferred or sold with the consent of the secured party, there is a similar re-registration requirement (48 OPPSA). iii) Protection for Third Party Buyers/Lessees [146+]Section 30(2) NBPPSA provides protection for any kind of purchaser of goods sold in the ordinary course of business, but only if the buyer either did not know about the security agreement, or didn’t know that the sale was unauthorized (if the sale was authorized, no problems arise, since the security is extinguished by 28(1)). Section 30(3) protects sales made outside the ordinary course of business, but only to consumers without knowledge of the security agreement, and only if the value of the goods is under $1,000 (30(4)). Section 30(5) creates exceptions in favour of buyers and lessees during fifteen-day “grace periods” included in the act. Ontario’s 28(1) and 28(2) provide similar protection to 30(1). However, Ontario does not have a “yard sale” exception like 30(3). And Ontario also imposes an “identification” requirement on the purchased/leased goods. The identification requirement is only likely to cause problems if the sales/leases aren’t followed by immediate possession of the collateral by the buyer/lessee. Section 31 NBPPSA and 29 OPPSA deal with priority of “holders and purchasers of money, instruments, documents of title or chattel paper.” In order to preserve the negotiability of these documents, it provides a far broader level of protection. NBPPSA Provisions 30(1) [definitions omitted; most had to do with fixtures and accessions] 30(2) A buyer or lessee of goods sold or leased in the ordinary course of business of the seller or lessor takes free of any perfected or unperfected security interest given by the seller or lessor or arising under section 28 or 29, whether or not the buyer or lessee knows of it, unless the buyer or lessee also knows that the sale or lease constitutes a breach of the security agreement under which the security interest was created. 30(3) A buyer or lessee of goods that are acquired as consumer goods takes free of a perfected or unperfected security interest in the goods if the buyer or lessee (a) gave value for the interest acquired, and (b) bought or leased the goods without knowledge of the security interest.
(a) a fixture, or (b) goods if the purchase price of the goods exceeds one thousand dollars or if the market value of the goods, in the case of a lease, exceeds one thousand dollars.
(a) gave value for the interest acquired, and (b) bought or leased the goods without knowledge of the security interest and (i)in a case within subsection 26(1) or (2), 28(4) or 29(4), before the security interest was perfected by possession under section 24 or by registration under section 25, or (ii)in a case within section 51, before the registration of the security interest was amended in accordance with that section or the secured party took possession of the collateral.
(a) the buyer or lessee bought or leased the goods without knowledge of the security interest, and (b) in the registration relating to the security interest, the goods were not described by serial number entered into the field labelled for the receipt of serial numbers. 30(7) Subsection (6) applies only to goods that are equipment and that are of a kind that are prescribed as serial numbered goods. 30(8) A sale or lease under subsection (2), (3), (5) or (6) may be for cash, credit, or exchange of property. Does not include transfer of goods as security for or total/full payment of a past debt. OPPSA Provisions 28(1) A buyer of goods from a seller who sells the goods in the ordinary course of business takes them free from any security interest therein given by the seller even though it is perfected and the buyer knows of it, unless the buyer also knew that the sale constituted a breach of the security agreement. 28(1.1) Section 28(1) applies whether or not the buyer took possession, the seller was ever in possession, title passed to the buyer, or the seller retained a security interest in the goods. 28(1.2) However, section 28(1) only applies if the goods are “identified to the contract” which means either identified and agreed upon by the parties at the time the contract was made, or marked as being identified to the contract (by a sticker or something) afterwards. 28(2) A lessee of goods from a lessor who leases the goods in the ordinary course of business holds the goods, to the extent of the lessee’s rights under the lease, free from any security interest therein given by the lessor even though it is perfected and the lessee knows of it, unless the lessee also knew that the lease constituted a breach of the security agreement. 28(2.1)-(2.23) are equivalent to (1.1)-(1.3) except for lessees rather than purchasers. 28(3) Rules for purchasers of chattel paper 28(4) Rules for purchasers of instruments 28(5) special rules for motor vehicles. 28(6)-(10) and 28.1 special rules for securities (i.e. stocks in companies) iv) A Primer on TracingThis is copy-pasted from my Trusts summary, with minor editing. Page number references in this section are to Oosterhoff on Trusts. Although the PPSAs use the general rules of equitable tracing, the rule that equitable interests can’t be asserted against good faith purchasers for value without notice does not apply in the PPSA context [171 fn 21]. Good faith third parties receive explicit statutory protection (see above). Anyone falling the scope of those protections is out of luck. There are three concepts at play here: following, tracing, and claiming [1209 citing Lionel Smith’s The Law of Tracing]. It is important to distinguish between them: Following is the act of locating a specific piece of property (the book limits this to tangible property) as it changes hands between multiple people. Tracing is the act of identifying the underlying value of a piece of property as that value is converted from one asset to another (e.g. if a car is sold, then you can trace the value of the car into the cash received on the sale; if that cash is used to buy government bonds you trace the value of the cash into the bonds). Obviously, tracing will be futile when money is spend on consumables or services. Claiming is the end result of a successful following or tracing process, and is the act by which a person asserts a proprietary right in the followed or traced property. Thus claiming is the right/remedy, whereas following and tracing are merely legal processes and not rights or remedies themselves. Some of the older readings in the textbook suggest there are separate rules for legal and equitable tracing. This distinction doesn’t matter in New Brunswick, since the PPSA adopts equitable tracing rules, which are the more flexible of the two (NBPPSA 2(3)). In Ontario, even though the OPPSA is silent on this issue, the Supreme Court merged common law and equitable tracing (BMP Global Distribution v Bank of Nova Scotia, 2009 SCC 15). So the rules below apply in both provinces. At the end of a successful tracing exercise, the creditor has the remedies available under the PPSA. The cases below just discuss how to trace and what tracing means. Foskett v McKeown, 2000 UKHL [1214] Facts: The plaintiffs are investors who gave money to a Timothy Murphy in trust to buy land in Portugal. Instead of doing that, he spent the money on a variety of things that were not land in Portugal. One of those things was 2 of 5 payments of his life insurance premiums. The trust money payments would have passed through his bank accounts. The other three payments were from his own money, or at least weren’t clearly trust money. When Murphy committed suicide, this resulted in a £1 million payout. The defrauded investors now claim 40% of that amount via tracing. The insurance policy was held on trust for Murphy’s children, so they oppose the investors. Issue: Can the investors trace the embezzled funds into the proceeds of the life insurance policy? Holding: Yes. Reasoning: Lord Millet (Leading judgment on tracing): “Following is the process of following the same asset as it moves from hand to hand. Tracing is the process of identifying a new asset as the substitute for the old. Where one asset is exchanged for another, a claimant can elect whether to follow the original asset into the hands of the new owner or to trace its value into the new asset in the hands of the same owner.” Tracing is part of the law of property, not the law of unjust enrichment. There is no need to show unjust enrichment to invoke tracing. Nor should equitable and legal tracing be thought of as distinct; there should be but one law of tracing which follows equitable rules. Because trust moneys represented only 2 of 5 premium payments, they should receive only 40% of the amount. The fact that the life insurance policy was held on trust for the children changes nothing - they are volunteers and cannot defeat the equitable title of the investor-beneficiaries. It is irrelevant that the trustee mixed trust money with his own prior to making the purchase; the mixing would occur at the moment trust funds and personal funds were used to buy a single asset anyways. Because a lien can be asserted only against a wrongdoer and those asserting title through him, it will be unavailable where the mixed fund is deficient and there are other innocent claimants against the fund [1221]. That problem does not arise here because the children are donees and claim under Murphy’s title. Additionally, the rule that a fiduciary may not profit from the breach requires that the entirety of the property purchased with mixed assets go to the beneficiaries if it is no possible to divide in pro rata. Browne-Wilkinson (plus Hoffman): This case involves only an express trust and tracing from it. There is no resulting or constructive trust. Equitable property rights are not discretionary any more than legal property rights would be. The children argue that paying the premiums was more like repairs or maintenance than the purchase of a new asset, so the only remedy allowed should be a lien equal to the value of the two payments, not a 40% ownership stake. This must be rejected for the reasons given by Lord Millet. Lord Hope of Craighead (Dissenting in part): The children try to argue that the plaintiffs are recovering twice for the same loss, because they already received £600,000 from Lloyd’s Bank for allowing Murphy’s misappropriation to occur. This argument fails to distinguish between proprietary and personal remedies. Here the plaintiffs seek to recover property that belongs to them. That is very different from the settlement they received for their claim in damages. But the plaintiffs should not receive 40% of the payout, because the rights which Murphy acquired crystallized when he paid the first premium with his own money. The remaining premiums did not contribute to the creation of new property rights, so it would be unfair to allow tracing [note that he seems to go with discretionary approach to tracing - Mike]. Ratio: (1) Tracing/following/claiming distinction; (2) A person has the same rights in traceable proceeds that he would have in the property before it was exchanged; (3) Tracing rules for law and equity should be the same; (4) Where traceable funds are only part of the purchase price of a new asset, the beneficiaries can only claim that portion of the value of the asset either as partial ownership or as a lien; (5) Innocent contributors to a mixed asset must be treated equally between each other, so the lien is unavailable where the fund is deficient; (6) Where a pro rata division of assets between beneficiary and trustee after improper mixing of assets is impossible, the beneficiary gets all of it. Comment: This is a good example of Professor Smith’s encumbrance theory of the beneficiary’s interest. Taylor v Plummer, 1815 UKHL [1210]: Plummer had given money to Walsh, a stockbroker, to buy English securities. Instead, Walsh bought American securities and gold, and tried to flee the country. Walsh was apprehended before he could put his plan into action, and the gold/securities were given to Plummer. Taylor, Walsh’s trustee in bankruptcy, tried to get the assets back, claiming that Plummer merely had a debt claim against Walsh, and would have to get in line with the other unsecured creditors. The House of Lords disagreed, saying that: “It makes no difference in reason or law into what other form, different from the original, the change may have been made, whether it be into that of promissory notes for the security of the money which was produced by sale of the goods of the principal… or into other merchandise… for the product or substitute for the original thing still follows the nature of the thing itself, as long as it can be ascertained to be such, and the right only ceases when the means of ascertainment fail, which is the case when the subject is turned into money, and mixed or confounded in a general mass of [money].” [1211] Tracing Through Wrongful Mixing of Assets Where secured property assets are only part of the purchase price, there is a mixing of traceable secured property with other property. Most mixing occurs in the context of bank accounts. The courts have developed several rules that attempt to deal with the evidentiary difficulties this creates. The Rule in Clayton’s Case [bottom of 1239]: This is a first-in-first-out rule that says you line up all the deposits and withdrawals in the order that they occur. The oldest withdrawals will be matched against the oldest deposits so that the oldest deposits are withdrawn first. This was a default common law rule developed for general banking law purposes and lead to extremely arbitrary results, so it has been abandoned in the trust context [1248; Greyhawk]. The Rule in Hallet’s Case [1239]: This case is very confusing and could have been interpreted two different ways, either: (1) the trustee spends his own money first, or (2) the court will draw the most unfavourable conclusions possible for the trustee, whether that involves him spending his money first or last or sometime in between. Principle in Re Oatway [1241]: A fraudulent trustee was held to have withdrawn trust funds from his account first, in order to allow the beneficiaries to claim against the assets he purchased with those funds. This case is consistent with Hallet only if the rule both applied is that the courts apply the presumption most favourable to the beneficiaries and least favourable to the trustee. The Lowest Intermediate Balance Rule (LBIR): This is currently the dominant approach in Canada. “The lowest intermediate balance rule essentially says that a person cannot get out a mixture more than he contributed to it” [1243]. See numerical example at [1242]. Essentially a trust beneficiary can claim the lowest amount in the account between the time of the wrongful mixing and the brining of the action, because this is the most trust money that can possibly be in the account. For LIBR and multiple innocent claimants, see [1249]. Note that by invoking the LBIR, you are not performing tracing, because you could always trace out of the bank account instead of asking for the money that remains therein. See [1242 n 284] for the interaction of LBIR and tracing. Example: a bank account starts with $10, then $15 in trust property is added, resulting in a total of $25. Then there is a withdrawal down to $8, then a deposit of $10, for a final balance of $18. The lowest intermediate balance rule says that because the account once only held $8, the most of your money that can still be in the account is $8, even if more money was added later to bring it to $18. Boughner v Greyhawk Equity Partners Limited Partnership (Millenium), 2012 ONSC [PDF] Facts: Greyhawk was an investment firm that perpetuated a large-scale fraud. When the fraud was discovered, the firm was put into receivership [a kind of contractual, creditor-initiated bankruptcy regime - Mike]. As part of the liquidation process, the receiver is attempting to pay off the debts of the firm occasioned by the fraud, but there is a large shortfall. Certain defrauded investors argue that each creditor should receive their pro rata share of the remaining money in proportion to the amount they invested (called the pro rata ex post facto approach in the). Other creditors argue for the lowest intermediate balance rule. Choosing one method over the other will have a massive impact on the recovery each group receives. The receiver had enough data to calculate reimbursements under either method. Issue: How should the funds be distributed? Holding: Following the lowest intermediate balance rule (LIBR). Reasoning: The basic rule of tracing is the LIBR. This rule is to be applied by courts whenever the evidentiary basis is sufficient to apply it. However, if courts lack the information necessary to do this, they may use pro rata shares. The rule in Clayton’s case has consistently been rejected by Canadian courts, and should never be applied in any circumstance. Ratio: (1) The lowest intermediate balance rule is the default rule of tracing that should be applied by courts wherever possible; (2) Where it is impossible to apply the LIBR, pro rata ex post facto calculations should be used; (3) Under no condition should LIFO/the Rule in Clayton’s Case be used. Future PropertyGenerally common law PPSA agreements require the express use of the word future to charge future property [Class]. “All my cars” when you have two cars will create a security interest against your two cars, and this will not include a third car you acquire later. OPPSA Provisions 12(1) A security agreement may cover after-acquired property. 12(2) No security interest attaches under an after-acquired property clause in a security agreement, (a) to crops that become such more than one year after the security agreement has been executed, except that a security interest in crops that is given in conjunction with a lease, purchase or mortgage of land … ; or (b) to consumer goods, other than accessions, unless the debtor acquires rights in them within ten days after the secured party gives value. NBPPSA Provisions 13(1) Subject to section 12 [attachment in general] and subsection (2), a security agreement that provides for a security interest in after-acquired personal property attaches to that property in accordance with the terms of the agreement…. 13(2) A security interest does not attach under an after-acquired property clause in a security agreement to after-acquired personal property that is (a) to crops that become such more than one year after the security agreement has been executed, except that a security interest in crops that is given in conjunction with a lease, purchase or mortgage of land … ; or (b) consumer goods, other than an accession, unless the security interest is a purchase money security interest or a security interest in collateral obtained by the debtor as replacement for collateral described in the security agreement 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? 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