Part 1 Security Interests in Personal Property: The PPSA Section I Introduction

Outline History of PPSA History of PPSA Basic Concepts Basic Concepts Enforcement Enforcement Priorities Priorities

Potted History of Mortgage Law Land Transfer of the fee simple with a covenant for reconveyance on condition (or defeasible on condition subsequent Transfer of the fee simple with a covenant for reconveyance on condition (or defeasible on condition subsequent The lender held legal title The lender held legal title Strict interpretation Strict interpretation Condition is not satisfied if a payment is missed Condition is not satisfied if a payment is missed Debt remains owing, with no obligation to reconvey land Debt remains owing, with no obligation to reconvey land

Potted History of Mortgage Law Land Consumer protection rules developed Consumer protection rules developed Eg the “right of redemption” Eg the “right of redemption” As a result, the mortgage was more than a transfer of the fee simple As a result, the mortgage was more than a transfer of the fee simple

Potted History of Mortgage Law Personal Property Myriad forms of security interest Myriad forms of security interest Chattel mortgage Chattel mortgage Conditional sales agreement Conditional sales agreement Financing lease Financing lease Consignment Consignment Assignment of book debts Assignment of book debts Corporate securities Corporate securities

Potted History of Mortgage Law Personal Property Substantive law depended on form Substantive law depended on form Registration requirements depended on form Registration requirements depended on form Multiple filing venues Multiple filing venues

US Personal Property Law Reform The Uniform Commercial Code is model legislation proposed by the US National Conference of Commissioners on Uniform State Laws The Uniform Commercial Code is model legislation proposed by the US National Conference of Commissioners on Uniform State Laws Article 9 of the UCC deals with secured lending in personal property Article 9 of the UCC deals with secured lending in personal property Drafted in the 1950s by Professors Grant Gilmore & Allison Dunham Drafted in the 1950s by Professors Grant Gilmore & Allison Dunham The most successful Article of the UCC The most successful Article of the UCC

Canadian Law Reform on the US model Ontario PPSA based on UCC Article 9 Ontario PPSA based on UCC Article 9 Enacted in 1967 Enacted in 1967 All other Canadian common law jurisdictions have since followed All other Canadian common law jurisdictions have since followed Atlantic provinces most recently – Atlantic provinces most recently – Overall structure of Article 9 and the PPSAs is the same Overall structure of Article 9 and the PPSAs is the same But there are significant substantive differences But there are significant substantive differences

Canadian Law Reform on the US model Two models for the PPSA in Canada Two models for the PPSA in Canada Ontario Ontario The “Model Act” or “Western model” used by all other provinces The “Model Act” or “Western model” used by all other provinces

Features of the PPSA Substance over form Substance over form Law no longer depends on the form of the transaction Law no longer depends on the form of the transaction All transactions are “security interests” All transactions are “security interests” “I hereby grant a security interest in X collateral to secure” “I hereby grant a security interest in X collateral to secure” Facilitation of secured financing Facilitation of secured financing Notice financing Notice financing

Outline of the PPSA Part I – Interpretation and Application (& Conflicts Part I – Interpretation and Application (& Conflicts Part II – Validity of Security Agreement and Rights of Parties Part II – Validity of Security Agreement and Rights of Parties Part III – Perfection and Priorities Part III – Perfection and Priorities Part IV – Registration Part IV – Registration Part V – Default Rights and Remedies Part V – Default Rights and Remedies

PPSA is Incomplete The PPSA is not a complete code The PPSA is not a complete code It is comprehensive in a general sense, but it is incomplete in many details It is comprehensive in a general sense, but it is incomplete in many details Existing legal principles are preserved to fill in the gaps Existing legal principles are preserved to fill in the gaps 65(1)The principles of the common law, equity and the law merchant, except insofar as they are inconsistent with the provisions of this Act, supplement this Act and continue to apply 65(1)The principles of the common law, equity and the law merchant, except insofar as they are inconsistent with the provisions of this Act, supplement this Act and continue to apply

PPSA & Unsecured Creditors In a separate reform, registration in the Personal Property Registry (PPR) is also used to publicize an interest in assets taken by an unsecured creditor who has obtained a judgment (”judgment creditor”) In a separate reform, registration in the Personal Property Registry (PPR) is also used to publicize an interest in assets taken by an unsecured creditor who has obtained a judgment (”judgment creditor”) Registration by a judgment creditor is a pre-requisite to further enforcement Registration by a judgment creditor is a pre-requisite to further enforcement

Basic Concepts Scope of the PPSA Scope of the PPSA Attachment & Perfection Attachment & Perfection

Scope: Substance over Form 3(1) Subject to section 4, this Act applies 3(1) Subject to section 4, this Act applies (a) to every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral, and (a) to every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral, and (b) without limiting the generality of paragraph (a), to [all old forms of security interest] (b) without limiting the generality of paragraph (a), to [all old forms of security interest]

Scope – Substance over Form Corresponds to para (a) of definition of “security interest” Corresponds to para (a) of definition of “security interest” "security interest" means "security interest" means (a) an interest in personal property that secures payment or performance of an obligation (a) an interest in personal property that secures payment or performance of an obligation

Deemed Security Interests 3(2) Subject to sections 4 and 55, this Act applies 3(2) Subject to sections 4 and 55, this Act applies (a) to a commercial consignment, (a) to a commercial consignment, (b) to a lease for a term of more than one year, (b) to a lease for a term of more than one year, (c) to a transfer of an account or chattel paper, and (c) to a transfer of an account or chattel paper, and (d) to a sale of goods without a change of possession, (d) to a sale of goods without a change of possession, that do not secure payment or performance of an obligation that do not secure payment or performance of an obligation

Deemed Security Interests Are NOT true security interest Are NOT true security interest Addresses ostensible ownership problem Addresses ostensible ownership problem When person in possession and control does not have title to goods When person in possession and control does not have title to goods Publicity needed to protect third parties Publicity needed to protect third parties Registration and priority scheme of PPSA applies Registration and priority scheme of PPSA applies Enforcement provisions do not apply – s55(1)(a) Enforcement provisions do not apply – s55(1)(a)

Deemed Security Interests Avoids some borderline cases problem Avoids some borderline cases problem Eg true lease or financing lease Eg true lease or financing lease (b) to a lease for a term of more than one year, (b) to a lease for a term of more than one year, Creates others Creates others Because enforcement provisions do not apply Because enforcement provisions do not apply

Sale of Goods 3(2)(d) sale of goods without change of possession [outside ordinary course of business] 3(2)(d) sale of goods without change of possession [outside ordinary course of business] See def’n of “sale of goods without a change of possession” See def’n of “sale of goods without a change of possession” Unique to Atlantic provinces in PPSA Unique to Atlantic provinces in PPSA Addresses ostensible ownership problem Addresses ostensible ownership problem Ordinary course requirement Ordinary course requirement )If sale without change of possession is in ordinary course, third parties have implicit knowledge )If sale without change of possession is in ordinary course, third parties have implicit knowledge

Exclusions – S4 4 Except as otherwise provided in this Act, this Act does not apply to the following: 4 Except as otherwise provided in this Act, this Act does not apply to the following: (a) a lien, charge or other interest given by rule of law or statute unless the statute provides that this Act applies; (a) a lien, charge or other interest given by rule of law or statute unless the statute provides that this Act applies; Eg Landlord’s right to distrain; Lien on Goods and Chattels; Tax liens Eg Landlord’s right to distrain; Lien on Goods and Chattels; Tax liens

Exclusions – S4 Problems with this exclusion Problems with this exclusion Priority problems with liens and security interests in the same property (often solved with express provisions) Priority problems with liens and security interests in the same property (often solved with express provisions) Notice/searching problems with liens; particularly with non-possessory liens Notice/searching problems with liens; particularly with non-possessory liens Some progress towards integration of liens into PPR Some progress towards integration of liens into PPR Eg Filing of notice of judgment in PPR Eg Filing of notice of judgment in PPR

Exclusions – S4 4 Except as otherwise provided in this Act, this Act does not apply to the following: 4 Except as otherwise provided in this Act, this Act does not apply to the following: (e) the creation or transfer of an interest in land including a lease; (e) the creation or transfer of an interest in land including a lease; (f) the creation or transfer of an interest in a right to payment that arises in connection with an interest in or a lease of land other than an interest in a right to payment evidenced by a security or an instrument; (f) the creation or transfer of an interest in a right to payment that arises in connection with an interest in or a lease of land other than an interest in a right to payment evidenced by a security or an instrument;

Exclusions – S4 Different registries for land and personal property Different registries for land and personal property Why? Indexing method Why? Indexing method Problems – Boundary issues Problems – Boundary issues Security interest in a real property mortgage 4(f) Security interest in a real property mortgage 4(f) Fixtures Fixtures

Exclusions – S4 4 Except as otherwise provided in this Act, this Act does not apply to the following: 4 Except as otherwise provided in this Act, this Act does not apply to the following: (k) a mortgage registered under the Canada Shipping Act (Canada); (k) a mortgage registered under the Canada Shipping Act (Canada); (l) a security agreement governed by an Act of the Parliament of Canada that deals with the rights of parties to the agreement or the rights of third parties affected by a security interest created by the agreement, including any security agreement governed by Part VIII of the Bank Act (Canada) (l) a security agreement governed by an Act of the Parliament of Canada that deals with the rights of parties to the agreement or the rights of third parties affected by a security interest created by the agreement, including any security agreement governed by Part VIII of the Bank Act (Canada)

Exclusions – S4 Federal security interests – Why? Federal security interests – Why? Functional: Shipping – mobility of collateral Functional: Shipping – mobility of collateral Historical/political - Bank Act Historical/political - Bank Act Not all PPSAs exclude Bank Act security Not all PPSAs exclude Bank Act security

Summary Consensual transaction Consensual transaction creating real interest in creating real interest in personal property personal property for the purpose of securing payment or performance of an obligation for the purpose of securing payment or performance of an obligation

Debtor “Debtor” “Debtor” Definition of “debtor” parallels that of security interest Definition of “debtor” parallels that of security interest True debtors True debtors Deemed debtors Deemed debtors Plus guarantors Plus guarantors

Personal Property PPSA creates various categories of personal property PPSA creates various categories of personal property "personal property" means goods, a document of title, chattel paper, a security, an instrument, money or an intangible; "personal property" means goods, a document of title, chattel paper, a security, an instrument, money or an intangible; Categories are functional Categories are functional Eg Some types of property are incapable of being physically possessed => Registration is the sole means of perfection Eg Some types of property are incapable of being physically possessed => Registration is the sole means of perfection

Functional Categories “Goods” “Goods” Tangible personal property Tangible personal property Document of title, chattel paper, security, instrument, money Document of title, chattel paper, security, instrument, money Debts capable of being transferred by possession Debts capable of being transferred by possession

Functional Categories “Accounts” “Accounts” Subcategory of intangibles Subcategory of intangibles Needed to deal with accounts receivable financing Needed to deal with accounts receivable financing Interaction between security interest in inventory and accounts as proceeds of sale of inventory Interaction between security interest in inventory and accounts as proceeds of sale of inventory

Intangibles “Intangible” is the residual category “Intangible” is the residual category Open- ended definition Open- ended definition “intangible" means personal property that is not goods, a document of title, chattel paper, a security, an instrument or money; “intangible" means personal property that is not goods, a document of title, chattel paper, a security, an instrument or money;

Intangibles The usual view among commentators is that “intengible” encompasses anything of value that is not specifically excluded by s 4 The usual view among commentators is that “intengible” encompasses anything of value that is not specifically excluded by s 4 Usually because it is covered under some other regime: eg land Usually because it is covered under some other regime: eg land Is there room for other exclusions? Is there room for other exclusions? Eg are transferable agricultural quotas “property” or a mere “licence”? Eg are transferable agricultural quotas “property” or a mere “licence”?

Basic Concepts Freedom of contract Freedom of contract Attachment Attachment Perfection Perfection

Freedom of Contract S9 – Freedom of Contract S9 – Freedom of Contract Except as otherwise provided in this or any other Act, a security agreement is effective according to its terms Except as otherwise provided in this or any other Act, a security agreement is effective according to its terms Does NOT mean complete freedom of contract Does NOT mean complete freedom of contract PPSA creates debtor rights PPSA creates debtor rights DOES mean abolition of common law constraints on lending DOES mean abolition of common law constraints on lending

Freedom of Contract Freedom of contract v consumer protection Freedom of contract v consumer protection Is it good for debtors if lending law is “pro-debtor”? Is it good for debtors if lending law is “pro-debtor”? Eg long notice period, court supervision, before SP can seize assets Eg long notice period, court supervision, before SP can seize assets

Attachment Attachment means creation of a security interest Attachment means creation of a security interest Creditor becomes a secured creditor Creditor becomes a secured creditor Obtains rights against the collateral itself Obtains rights against the collateral itself Attachment alone is inadequate to secure rights good against the world Attachment alone is inadequate to secure rights good against the world Attachment without perfection results in rights which are good against the debtor, but which are ineffective or subordinate in priority to most competing third party interests Attachment without perfection results in rights which are good against the debtor, but which are ineffective or subordinate in priority to most competing third party interests

Attachment 12(1) A security interest attaches when 12(1) A security interest attaches when (a) value is given, (a) value is given, ‘value’ means any consideration sufficient to support a simple contract and includes an antecedent debt or liability” ‘value’ means any consideration sufficient to support a simple contract and includes an antecedent debt or liability”

Attachment 12(1) A security interest attaches when 12(1) A security interest attaches when (b) the debtor has rights in the collateral, and (b) the debtor has rights in the collateral, and Can’t use collateral that isn’t yours Can’t use collateral that isn’t yours But, need not have a full ownership interest But, need not have a full ownership interest Any real rights, ie any right to the property itself, including an equitable right Any real rights, ie any right to the property itself, including an equitable right

Attachment 12(1) A security interest attaches when 12(1) A security interest attaches when (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 (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

Attachment 10(1)A security interest is enforceable against a third party only where (a) the collateral is in the possession of the secured party or another person on the secured party’s behalf, or (b) the debtor has signed a security agreement that contains (i) a description of the collateral...

Attachment – S10 Evidentiary requirement Evidentiary requirement Cf. Statute of Frauds – “writing” requirement Cf. Statute of Frauds – “writing” requirement Protects third parties by defining the scope of the actual security interest Protects third parties by defining the scope of the actual security interest It is not uncommon that the registered description of the collateral is broader than the actual collateral It is not uncommon that the registered description of the collateral is broader than the actual collateral

Attachment – S10 Two methods Two methods Possession s10(1)(a) Possession s10(1)(a) Writing requirement s10(1)(b) Writing requirement s10(1)(b) When the requirements of s10 are met the security interest is effective against a third party When the requirements of s10 are met the security interest is effective against a third party This does NOT guarantee priority against a third party This does NOT guarantee priority against a third party

Perfection Attachment secures SP rights against D Attachment secures SP rights against D Perfection secures SP rights against the world (third parties) Perfection secures SP rights against the world (third parties)

Perfection Perfection is a publicity requirement Perfection is a publicity requirement How can a third party know whether you own the thing that you possess? How can a third party know whether you own the thing that you possess? A publicity requirement is needed to avoid the problem of secret prior interests A publicity requirement is needed to avoid the problem of secret prior interests Two methods of publicity / perfection Two methods of publicity / perfection Possession – s24 Possession – s24 Registration - s25 Registration - s25

Possession - S24 Limited to those types of property which are capable of possession: s24(1) Limited to those types of property which are capable of possession: s24(1) Actual possession required: s24(2) Actual possession required: s24(2) Not favoured, as D cannot use the collateral Not favoured, as D cannot use the collateral

Registration - s25 Security interests in all types of property can be perfected by registration Security interests in all types of property can be perfected by registration 25 Subject to section 19 [attachment requirement], registration of a financing statement perfects a security interest in collateral 25 Subject to section 19 [attachment requirement], registration of a financing statement perfects a security interest in collateral The registration system – the “PPR” – is the key to an efficient financing system The registration system – the “PPR” – is the key to an efficient financing system

Perfection S19 A security interest is perfected when S19 A security interest is perfected when (a) it has attached, and (a) it has attached, and (b) all steps required for perfection under this Act have been completed, (b) all steps required for perfection under this Act have been completed, “All steps” = Possession / Registration “All steps” = Possession / Registration Regardless of the order of occurrence Regardless of the order of occurrence Pre-registration is effective Pre-registration is effective

Perfection Failure to perfect results in loss of priority Failure to perfect results in loss of priority S 35(1)(b) a perfected security interest has priority over an unperfected security interest; S 35(1)(b) a perfected security interest has priority over an unperfected security interest; Perfected beats unperfected Perfected beats unperfected

Perfection “in order to make a security interest effective against third parties, the Act requires that the secured party "perfect" it by performing some act of public notice” Commentary to s19 “in order to make a security interest effective against third parties, the Act requires that the secured party "perfect" it by performing some act of public notice” Commentary to s19 Practically correct, but not technically correct Practically correct, but not technically correct If s10 is satisfied, the security interest is effective against third parties, but if unperfected will almost always be subordinate in priority to third party interests If s10 is satisfied, the security interest is effective against third parties, but if unperfected will almost always be subordinate in priority to third party interests

After-Acquired Property - S13 13(1) Subject to section 12 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 without any need for specific appropriation by the debtor 13(1) Subject to section 12 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 without any need for specific appropriation by the debtor

After-Acquired Property - S13 D may grant a security interest in property which she does not own D may grant a security interest in property which she does not own It does not attach until D acquires rights (s12), but then attaches automatically It does not attach until D acquires rights (s12), but then attaches automatically General Security Agreement (GSA) – “All present and after-acquired property” General Security Agreement (GSA) – “All present and after-acquired property”

Summary The PPSA - a single unified Act dealing with The PPSA - a single unified Act dealing with Consensual Consensual security interests (not ownership interests) security interests (not ownership interests) in personal property in personal property )Except property under federal jurisdiction )Except property under federal jurisdiction Attachment Attachment Security interest enforceable against the debtor Security interest enforceable against the debtor Perfection Perfection