PPSA SKILLS SESSION

PPSA and Leases ofPersonal Property

by Andrew McFarlane

Application of PPSA to LeasedPersonal Property

• PPSA, s. 2(a) - PPSA applies to every transaction without regard to its form and without regard to the person who has title to the collateral that in substance creates a security interest, including a lease that secures payment or performance of an obligation.

• True Lease v. Financing Lease Distinction

Application of PPSA toAbsolute Assignments of Leases

• PPSA, s. 2(b) - PPSA applies to a transfer of an account or chattel paper even though the transfer may not secure payment or performance of an obligation.

• PPSA, s. 1(1) - A “chattel paper” means one or more than one writing that evidences both a monetary obligation and a security interest in or a lease of specific goods.

Absolute Assignments of Leases(cont.)

• PPSA, s. 1(1) - A “security interest” means an interest in personal property that secures payment or performance of an obligation, and includes, whether or not the interest secures payment or performance of an obligation, the

interest of a transferee of an account or chattel paper.

Assignments of Leases as Security

• Straightforward - PPSA applies to security interests granted in leases.

• However, the lease itself is “chattel paper” in the hands of the lessor/debtor - collateral classification is “Other”.

• Need to ensure that a security interest is granted in and registered against lessor’s interest in both the lease/chattel paper and in the leased property.

Four Scenarios

• Straight lease of equipment.

• Sub-lease of equipment.

• Grant of security interest in lease (assignment of lease by way of security).

• Absolute assignment of lease.

Lease

LESSOR

LESSEE

RentLease

Possession anduse of property

PPSA Registration:“Equipment”(potentially“Inventory”)

Sub-Lease

LESSOR

LESSEE

Rent

Lease;

Possession anduse of property

New PPSARegistration:“Other”, “Inventory”

SUB -LESSEE

Rent

Sub-lease

PPSA Registration: “Equipment”(potentially “Inventory”);Lessor added as additionalsecured party.

PPSA Registration:“Equipment”(potentially“Inventory”)

SecurityAssignment

of Lease

Event of Default

Security Interestin Lease

LESSOR

LESSEE

RentLease

Possession anduse of property

PPSA Registration:“Equipment”(potentially“Inventory”)

SECUREDPARTYPPSA Registration:

“Other”, “Equipment”,“Inventory”

Security Assignmentof Lease

Event of Default

Absolute Assignment of Lease

LESSOR /ASSIGNOR

LESSEE

RentLease

Possession anduse of property

PPSA Registration:“Equipment”(potentially“Inventory”)

ASSIGNEEPPSA Registration:“Other”

Absolute Assignmentof Lease; Saleof LeasedProperty

Lease Rent

Assignmentof securityinterest

On to Movable Goods. . . .

PPSA SKILLS SESSION

Movable Goods

by Andrew McFarlane

Problem with Movable Goods

• They can move from jurisdiction to jurisdiction!

• The cost of borrowing would be increased substantially if the secured party had to register in potentially every jurisdiction where the goods might conceivably end up.

• If the goods are leased by the debtor to third parties, the secured party has no way of controlling where those third parties move the goods.

PPSA’s Conflict of Law Rules

• Section 7(1): The validity, perfection and effect of perfection or non-perfection,

(a) of a security interest in,

(ii) goods that are of a type that are normally used in

more than one jurisdiction, if the goods are equipment

or inventory leased or held for lease by a debtor to

others,

shall be governed by the law of the jurisdiction where the debtor is located at the time the security interest attaches.

Solution: Register in One Place

• The result of the section 7(1) rules for movable goods is that the secured party only has to register in one jurisdiction in order to perfect its security interest in the movable goods.

• Sounds straightforward, right?

Issues Raised by the Section 7

• What are “goods that are of a type that are normally used in more than one jurisdiction”?

• How does one determine where the debtor was located at the time the security interest attached?

• What happens if the debtor subsequently changes its location?

Goods Normally Used in More Than One Jurisdiction?

• No additional clarification by PPSA.

• Very little judicial consideration in Canada.

• The Alberta Court of Appeal has suggested that Article 9 of the United States Uniform Commercial Code is a useful guide.

See Gimli Auto Ltd. v. Canada Campers Inc. (1998), 219 A.R. 166 (Alta. C.A.) and

Northwest Equipment Inc. v. Daewoo Heavy Industries America Corp. [2002] A.J. No. 327,

2002 ABCA 79 (Alta. C.A.)

Uniform Commercial Code• Article 9 of the Uniform Commercial Code provides

statutory examples of goods that are normally used in more than one jurisdiction:

• motor vehicles

• trailers

• rolling stock

• aircraft

• shipping containers

• road building equipment

• construction machinery

• commercial harvesting machinery

What Is a “Motor Vehicle”

• The definition of “motor vehicle” under the PPSA Regulations means:

– an automobile

– a motorcycle

– a motorized snow vehicle

– any other vehicle that is self –propelled

except for the equipment explicitly excluded from the definition. . . .

What is Not a “Motor Vehicle”• The definition of “motor vehicle” explicitly excludes the following:

– a street car or other vehicle running only upon rails

– a farm tractor

– an implement of husbandry

– a machine acquired for use or used as a road-building machine

– a craft intended primarily for use in the air or in or upon the water

• These goods can still be “equipment normally used in more than one jurisdiction” - however, would only have to be registered as “Equipment”.

• I.E. WOULD NOT HAVE TO COMPLY WITH THE PPSA’S REQUIREMENTS FOR REGISTERING MOTOR VEHICLES.

Collateral Classifications

• Goods that are normally used in more than one jurisdiction which constitute equipment.

• Goods that are normally used in more than one jurisdiction which constitute inventory leased or held for lease by a debtor to others [i.e. not inventory that is SOLD to others].

• Therefore, secured party must register against debtor under one or more of the following collateral classifications: “Equipment”, “Inventory” and “Motor Vehicles Included”.

Location of Debtor

• Section 7(4):For the purpose of this section [7], a debtor shall be deemed to be located at– the debtor’s place of business if there is one,

– at the debtor’s chief executive office if there is more than one place of business, and

– otherwise at the debtor’s principal place of residence.

Multiple Places of Business

• Very often when dealing with large corporations or businesses, they will have more than one place of business: therefore, it is necessary to determine where their “chief executive office” is located in order to figure out where to register a security interest in movable property.

• There has been very little judicial consideration in Canada of what is meant by a debtor’s “chief executive office”. It is very much a case-by-case, factual determination.

Chief Executive Office Indicia

• Where is the corporation’s head office located?

• Where are all of the substantial administrative, management and executive functions of the corporation located?

• Where is the registered office of the corporation located?

• Where are the substantial auditing and bookkeeping functions of the corporation located?

Where are the principal books and records of the corporation located?

Which location is given as the corporation’s address in its material agreements, contracts or other instruments?

Location of Debtor: Other Issues

• In Quebec, the conflict of law rule for determining perfection of security interests in movable equipment is based on the domicile of the debtor, which is deemed to be the jurisdiction in which its registered office is located. If the debtor moves its chief executive office to Ontario or another PPSA jurisdiction, this can create ambiguities.

• The UCC now has the same rule for corporations registered in the U.S. and therefore has the potential for the same problem.

• BOTTOM LINE: WHEN IN DOUBT, REGISTER IN BOTH JURISDICTIONS.

Change of Debtor’s Location

• Under section 7(2) of the PPSA, if a debtor changes its location from another jurisdiction to Ontario, then a perfected security interest in the movable goods continues perfected in Ontario if it is perfected in Ontario

(a) within sixty (60) days from the day the debtor changes

its location;

(b) within fifteen (15) days from the day the secured party

receives notice that the debtor has changed location; or

(c) prior to the day that perfection ceases under the law of

the jurisdiction in which the debtor was previously located,

whichever is the earliest.

THANK YOU