SECURED TRANSACTIONS SUMMARY

Claire Gowdy Prof. Catherine Walsh Secured Transactions Fall 2011

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SECURED TRANSACTIONS SUMMARY

Table of Contents I. Introduction and Overview .............................................................................................................................................. 5

John Armour, “The Law and Economics Debate About Secured Lending” ....................................................................... 5 Twyne’s Case (England 1604): ............................................................................................................................................................. 7 Sources of the Law on Secured Transactions ................................................................................................................................ 8

II. Formal and Functional Concepts of Security ............................................................................................................ 9 1. Consensual (Conventional) vs. Non-‐Consensual (Legal) Concepts of Security ............................................. 9 2. PPSA Functional and Singular Concept of Security ................................................................................................ 9 Caisse Populaire Desjardins Drummond v. Canada, 2009 SCC ............................................................................................. 10 Saulnier v. Royal Bank of Canada, 2008 SCC ............................................................................................................................... 11

3. Civil Code Formal and Plural Concepts of Security ............................................................................................. 12 A. The Hypothec ...................................................................................................................................................................................... 12 B. Title-‐Based Security Devices ........................................................................................................................................................ 12 i. Sale with a Right of Redemption .................................................................................................................................................... 12 ii. Security Trusts ..................................................................................................................................................................................... 13 iii. Instalment Sale .................................................................................................................................................................................. 13 iv. Leasing (Secured Financing): CcQ art. 1842 (Note different rules of enforcement) ............................................. 13 v. Lease: CcQ art. 1851 (Note different rules of enforcement) ............................................................................................ 14

4. Deemed Security Interests in PPSA and Extension of Publicity Requirements in CCQ ........................... 14 A. Assignment .......................................................................................................................................................................................... 15 B. Lease, Short Recap ............................................................................................................................................................................ 15 C. Consignment ........................................................................................................................................................................................ 16 D. Sale Without a Change of Possession ....................................................................................................................................... 16

5. Summary: Where Do We Look for the Law on Secured Transactions? ......................................................... 16 Quebec ......................................................................................................................................................................................................... 16 Common Law Provinces ...................................................................................................................................................................... 17

III. Creation (“Attachment” in CML) of Consensual Security Rights .................................................................... 17 Introduction to the Creation of Conventional Security Rights ........................................................................................... 17

1. Limitations on the Ability to Create Security ........................................................................................................ 17 A. Who Can Grant Security? Limitations on the Parties ........................................................................................................ 17 B. What Can Security Be Granted in? Limitations on the Collateral ................................................................................. 18 C. What Can Security Be Granted For? Limitations on the Purpose of Security ......................................................... 19 D. Exempt Assets from Seizure under the CCQ & PPSA ......................................................................................................... 19 Saulnier v. Royal Bank of Canada, 2008 SCC ............................................................................................................................... 19

2. The Requirements for the Creation (“Attachment”) of Security Rights ....................................................... 19 A. First Requirement: the Existence of a Secured Obligation .............................................................................................. 20 B. Second Requirement: Grantor Must Have Title to or Real Rights in the Collateral ............................................. 21 C. Third Requirement: Objective Evidence of the Security Agreement .......................................................................... 22 1. A Written Security Agreement (fulfilling all necessary formalities) ............................................................................... 22 2. Delivery / Dispossession for tangible assets (of the property offered as security to the secured creditor) ..... 25 Caisse populaire Desjardins de Val-‐Brillant v Blouin, [2003] SCC ....................................................................................... 26 3. Control for investment property ................................................................................................................................................... 26

IV. Third Party Effectiveness (Publication/Perfection) .......................................................................................... 29 1. Modes of Perfection/Publication .............................................................................................................................. 29 A. Registration of notice of the security right ............................................................................................................................ 29 B. Delivery/Physical possession of tangible collateral by the secured creditor ......................................................... 31


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C. Control of Investment Property by the secured creditor ................................................................................................. 33 D. Automatic Perfection (Investment Property) ...................................................................................................................... 34 E. Automatic Temporary Perfection .............................................................................................................................................. 34

2. Continuity of Perfection/Publication: Changing Modes of Perfection .......................................................... 35 3. Consequences of Failure to Perfect/Publish ......................................................................................................... 36 Non-‐hypothecary security rights -‐ CCQ arts. 1263, 1745, 1749, 1847, 1852, 1750, 1752, 2961.1, 2964 ....... 38

4. Perfection and Transferees ......................................................................................................................................... 38 5. Perfection and Other Secured Creditors ................................................................................................................. 40 6. Perfection and Unsecured Creditors or Judgment Creditors ........................................................................... 41 7. Perfection and Parties Involved Upon Bankruptcy ............................................................................................. 42 PPSA: Priorities in Bankruptcy ......................................................................................................................................................... 42 Re Giffen – CML 1998 SCC ................................................................................................................................................................... 43 CCQ: Priorities in Bankruptcy ........................................................................................................................................................... 44 Lefebvre (Trustee of); Tremblay (Trustee of) – CVL 2004 SCC ............................................................................................. 44 Ouellet (Trustee Of) – CVL 2004 SCC .............................................................................................................................................. 45

V. Registration ....................................................................................................................................................................... 47 1. Land Registries ................................................................................................................................................................ 47 2. Movable Registries ......................................................................................................................................................... 47 Characteristics of Movable Registries ........................................................................................................................................... 47

3. Advance Registration .................................................................................................................................................... 48 4. Multi-‐Agreement Registration ................................................................................................................................... 48 5. The Data Required in Registration ........................................................................................................................... 49 A. The Identity of the Grantor ........................................................................................................................................................... 49 B. The Identity of the Secured Creditor ........................................................................................................................................ 49 C. Description of the Collateral ......................................................................................................................................................... 50 D. Duration ................................................................................................................................................................................................ 50 E. Maximum Value of the Obligation (only in Quebec) .......................................................................................................... 50

6. The Effect of Errors in Registration .......................................................................................................................... 50 Re Lambert (OCA 1995) – CML ......................................................................................................................................................... 51 Exode Automobile Inc. (Syndic d’) (QCA 2005) – CVL .............................................................................................................. 52

VI. Competing Claimants: Priority among Secured Creditors ............................................................................... 53 1. The General Rule: First to Perfect/Publish Prevails ........................................................................................... 53 A. The General Rule for Priority among Secured Creditors in the PPSA ........................................................................ 53 B. The General Rule for Priority among Secured Creditors in the CCQ .......................................................................... 54 C. Relevance of knowledge/notice of unpublished security right (CCQ 2963) ........................................................... 55 D. Priority With Respect to Successive Advances .................................................................................................................... 55 E. Policy Justifications for First-‐to-‐Perfect Rule ........................................................................................................................ 56

2. The Exceptions to the General Rule of Temporal Priority ................................................................................ 56 A. Purchase-‐Money Security Interest (Acquisition Financing) ‘super priority’ .......................................................... 56 i) The PMSI in the PPSA ........................................................................................................................................................................................ 57 ii) The PMSI in the CCQ: Vendor Hypothecs ................................................................................................................................................ 58 iii) Alternatives in the CCQ: Retention of Title Sales ................................................................................................................................ 59

Maschinenfabrik Rieter AG v. Canadian Fidelity Mills Ltd. – CVL (2005) ......................................................................... 59 iv) Alternatives in the CCQ: Ownership rights in leasing and lease transactions ....................................................................... 60

B. Money and Negotiable Collateral ............................................................................................................................................... 61 C. Investment Property related exceptions ................................................................................................................................ 62 Claire’s summary of ranking for investment property: ......................................................................................................... 62 -‐ Control over non-‐control perfection ....................................................................................................................................... 62 o Intermediary’s control ................................................................................................................................................................. 62 -‐ Control agreement .......................................................................................................................................................................... 62 i) PPSA: Priority rules for security interests in investment property .............................................................................................. 64 ii) CCQ: Movable hypothecs with delivery on certain securities or security entitlements ..................................................... 65


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D. Voluntary Subordination of Priority ......................................................................................................................................... 65 E. Bank Act Security v. PPSA Security ............................................................................................................................................ 66 Innovation Credit Union v. Bank of Montreal – CML (2009) ................................................................................................. 66 Radius Credit Union Ltd. v. Royal Bank of Canada – CML (2009) ....................................................................................... 67

VII. Droit de Suite (“Right to Follow”): General Rule and Exceptions .................................................................. 68 The Secured Creditor’s General Droit de Suite .......................................................................................................................... 69

1. Exception One: Failure to Perfect/Publish ............................................................................................................. 69 2. Exception Two: Authorized Sales .............................................................................................................................. 69 3. Exception Three: Sales in the Ordinary Course of the Seller’s Business ...................................................... 70 4. Exception Four: Money or Negotiable Collateral ................................................................................................. 71 5. Exception Five: Investment Property ...................................................................................................................... 71 6. Exception Six: Serial-‐Numbered Goods ................................................................................................................... 72 7. Exception Seven: Low-‐Value Goods (NB ONLY) .................................................................................................... 73

VIII. Competing Claimants: Unsecured Creditors and Non-‐Consensual Secured Creditors ........................ 73 1. CCQ: Prior Claims ............................................................................................................................................................ 74 2. CCQ: Legal Hypothecs .................................................................................................................................................... 75 3. Common Law Provinces: Non-‐Conventional Security Interests? .................................................................... 76 The Rights of Judgment Creditors ................................................................................................................................................... 77

4. Competing Creditors Created by the BIA ................................................................................................................ 78 A. By Demoting the Crown (ss. 86-‐87) .......................................................................................................................................... 78 B. By Trumping Provincially-‐Ranked Security Interests with Super-‐Priority Claims .............................................. 79 Section 95: if a security interest is fraudulent, its preference will be set aside ......................................................................... 79 Section 81.1: unpaid suppliers have a right to demand their goods back .................................................................................... 79 Section 81.2: unpaid farmers, fishers, agriculturalists that supply stuff that makes the inventory more valuable. . 79 Sections 81.3, 81.4: unpaid wages ................................................................................................................................................................ 79

C. By Barring Enforcement by Judgment Creditors ................................................................................................................. 79 IX. Enforcement of Security on Default ......................................................................................................................... 80 1. Introduction to Enforcement of Security upon Debtor Default ...................................................................... 80 What Constitutes Default? (Defined in the Security Agreement) ...................................................................................... 80

2. Enforcement Remedies under Part V of the PPSA ............................................................................................... 81 A. Default .................................................................................................................................................................................................... 81 B. Reasonable Notice Doctrine ......................................................................................................................................................... 81 C. Self-‐Help by Secured Creditors under the PPSA .................................................................................................................. 82 D. Remedy I: Sale (s. 59 NB) .............................................................................................................................................................. 82 E. Remedy II: Taking in Payment (s. 61(1) NB) ........................................................................................................................ 83 F. Remedy III: Receivership (s. 64 NB) ......................................................................................................................................... 84 G. Remedy IV: Collection of Accounts Receivable (s. 57 NB) ............................................................................................... 84 H. The Grantor’s Rights in Enforcement Proceedings under the PPSA .......................................................................... 84 1. Right of Redemption – s. 62(2) NBPPSA .................................................................................................................................................. 84 2. Right of Re-‐Instatement – s. 62(4) NBPPSA ............................................................................................................................................ 85

I. What Property Right Does a Purchaser of a Seized Asset Get? ....................................................................................... 85 3. Enforcement Remedies under arts. 2748-‐2794 of the CCQ .............................................................................. 87 A. Preliminary Measure a Hypothecary Creditor Must Take before Enforcing: Prior Notice ............................... 88 B. Surrender of the Property by the Debtor ............................................................................................................................... 88 C. Remedy I: Sale by the Creditor (arts. 2784-‐2790) .............................................................................................................. 89 D. Remedy II: Sale by Judicial Authority (arts. 2791-‐2794) ................................................................................................ 89 E. Remedy III: Taking in payment (art. 2778ff) ........................................................................................................................ 89 F. Does This Enforcement Regime Apply to Other Creditors? ............................................................................................ 89 G. CCQ Enforcement Regime on Receivables: “Collection” (arts. 2743-‐2747) ............................................................ 89

X. Choice of Laws / Conflict of Laws ............................................................................................................................... 90 1. Immovables ...................................................................................................................................................................... 90


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2. Movables ............................................................................................................................................................................ 90 A. Ordinary Goods .................................................................................................................................................................................. 90 i. General Rule – lex situs -‐ ONPPSA/NBPPSA s. 5(1) & CCQ 3102 ........................................................................................ 90 ii. Re-‐located Goods – Reperfection – ONPPSA s. 5(2), NBPPSA s. 5(3) & CCQ 3104 ..................................................... 90 iii. Special Intervening Buyer Exception – ONPPSA s. 5(2), NBPPSA s. 5(3) & CCQ 3104 (para. 2) ......................... 90 iv. Goods Intended for Export – Law of the Destination Jurisdiction – ONPPSA/NBPPSA s. 6(1) & CCQ 3103 ... 91 v. Goods in Transit – Law of the Destination Jurisdiction – CCQ 2093 (para. 2) ............................................................. 91 B. Mobile Goods ....................................................................................................................................................................................... 91 C. Money, Chattel Paper, Instruments and Documents of Title .......................................................................................... 91 D. Pure Intangibles – Law of the debtor’s location – ONPPSA/NBPPSA s. 7(2) .......................................................... 92 E. Determining the Location of the Collateral or the Debtor ............................................................................................... 92 F. Post-‐Attachment Change in the Location of the Debtor ................................................................................................... 92 G. Investment Property ........................................................................................................................................................................ 92


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I. INTRODUCTION AND OVERVIEW

COURSE DESCRIPTION: This course is about the legal and economic logic of the institutions used in market economies to enable vendors and lenders, as well as non-consensual and judgment creditors, to secure the performance of obligations due by their debtors. It will primarily examine security over movable property (personal property) although passing reference will be made to security over immovable property (real property). The concept of security explored in this course includes not just hypothecs in the strict sense but also other mechanisms such as conditional ownership, leases, trusts, and assignments by which a debtor’s assets can be deployed to secure a credit obligation. The course will focus on the sometimes different solutions to the same policy and doctrinal issues arrived at by the different units that make up Canada, most notably as between Quebec’s civil law tradition and the statutory (Personal Property Security Acts) and common law framework of the other provinces and three territories. Passing reference will also be made to federal laws that relate directly or peripherally to secured transactions as well as to international and foreign developments. What is a Secured Transaction? • A secured transaction is a business arrangement by which a buyer or borrower gives collateral to the seller or

lender to guarantee performance of an obligation, for example repayment of a loan (Black’s Law Dictionary) • Collateral is property offered by the debtor to back up the money he owes to the creditor

o This property is what the CR can seize if the DB doesn’t pay the $$ back o The CR has no actual interest in the property itself à they want its liquidated value as an alternative form of

repayment of the loan Advantages and Disadvantages of Allowing Security Interests • Why does the law allow secured lending? See the Armour article below.

o Lower risk situation created by the presence of security means secured creditors will charge a lower interest rate for the loan § This also partially explains why debtors grant creditors security à to get the lower rate § Debtors also grant security because they might not get the loan without doing so

o Increase in the amount of credit available in the marketplace • Advantages of security to creditor:

o 1. Priority: the law respects the property right given to the creditor and gives them the first claim to the value of the liquidated asset

o 2. Increase in the likelihood of repayment o 3. Gives creditor control and knowledge over their debtor’s asset

§ Unsecured creditors are to a certain extent dependent upon the secured creditor to monitor the debtor • Disadvantages of security:

o Once a debtor grants security to one creditor, all other unsecured creditors are going to raise their interest rates because their loans are now higher risk (is this true?)

John Armour, “The Law and Economics Debate About Secured Lending” • Thesis: secured credit is socially beneficial and such benefits outweigh any social costs

What does secured credit do? • Essence of the institution of secured credit: a rule that one creditor is entitled to claim control over/ priority to

payment from an asset as opposed to an open-ended set of other parties • Confers on the lender 2 entitlements:

o 1. Control of the collateral § If debtor not in default, control is negative (veto powers) § If debtor in default, control is positive (to seize and liquidate the collateral) § That is, the control rights are what economists call ‘state contingent’, because their extent is contingent

on whether the debtor continues to meet their obligations under the loan. o 2. Priority of payment out of the proceeds of sale of collateral


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From the point of view of the secured creditor, a grant of security lowers default risk. All other things being equal, a creditor may therefore be expected to offer a debtor more advantageous terms—for example, a reduced interest rate—when lending on a secured rather than an unsecured basis. However, the priority accorded to a secured creditor means that unsecured creditors will now fare worse in insolvency. They may therefore be expected to demand terms that are correspondingly less advantageous for the debtor—for example, an increased interest rate. The early literature on secured credit viewed these stylised facts as giving rise to a ‘puzzle’ over why debtors grant security: if the effect of security on a debtor’s aggregate cost of capital is neutral (secured creditors reduce rates, unsecured creditors increase them) But from the debtor’s point of view, there is no difference in the consequences of default as between secured and unsecured borrowing: in either case, the debtor’s assets will be seized by creditors. The benefit of being a secured creditor under such circumstances is not vis-à-vis the debtor, but against other creditors—the secured creditor has priority as regards repayment.

Theories of Security • Economic Signalling Theory: A debtor who offers security to a creditor signals to them their seriousness about

repaying, their creditworthiness à not borne out by empirical evidence • Economic Monitoring Theory: the grant of security is a promise/bond by debtor not to engage in practices harmful

to creditors’ interests, and creditor can check up on this (“agency costs”) o This reduces the probability of default, and increases the value of all creditors’ claims

• Redistribution Theory: by borrowing on a secured basis, the debtor obtains a lower interest rate – by failing to

adjust their rates in response to this increased risk, the debtor’s unsecured creditors bear the cost of this lower interest rate o This theory is not supported empirically – likely the benefits of security (i.e. increased monitoring) outweigh

the costs

Domestic Laws and Secured Credit Clearly, the institution of secured credit must be facilitated by a country’s legal system in order to function. The essence of the institution is a rule whereby one creditor is entitled to claim control and/or priority to payment from an asset as regards an open-ended set of other parties. • Legal facilitation of non-possessory security and general security interests (over entirety of debtor’s assets) will

increase the availability of finance, reduce risk of default (greater oversight) • Stronger enforcement rights stimulate lending at lower interest rates also • Subordinating some of the secured creditor’s claims to unsecured creditors’ claims will reduce the use of that type

of security right

Informing Third Parties • All jurisdictions have a mechanism for bringing the existence of security rights to the attention of other creditors

à if they don’t publicize adequately, security right will not be enforced • Three strategies to reduce search costs of subsequent creditors:

o 1. Fixed list of security interests that one can create o 2. Selective enforcement: secured creditor’s right is only enforceable v. third parties if their cost of publishing

it was higher than the cost of the third party finding out the info for themselves o 3. Public registry

§ Specific registration: only these types of security interests have to be published, with this information à Stifles innovation in secured lending

§ Generic registration: define a security interest broadly, and say they have to be published with less information à Permits greater customization and innovation in the form of security arrangements

Concepts of Security Interests


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• Concepts of security vary in different places/jurisdictions • Can be called and conceptualized as a security right, or can be thought of as a title transfer • Hypothec v. mortgage: hypothec is called a security right, while mortgage was originally a conditional transfer of

title (no longer really) Types of Security Rights • Some security devices are consensual (contractual/conventional), some are legal (non-consensual, created by

operation of law) Publicity/Perfection & Third-Party Effectiveness • One publishes a hypothec/security right in QC; one perfects a security interest in CML provinces • Why do we require publicity/perfection?

o 1. To protect other secured creditors § Want to know if anyone else has a priority claim on the property

o 2. To protect unsecured creditors § One creditor would want to know if another creditor has a security interest in any of their common

debtor’s property (changes risk assessment of loan) o 3. To protect buyers

§ A person purchasing property would want to know if there are any security interests in the property, i.e. if someone could seize what they had bought

§ N.B. It is always a term in the security agreement that the debtor not sell the property they offered as security for the loan; but sometimes debtors breach

o 4. To help assess creditworthiness of a particular debtor o 5. To guard against debtors giving security to unjustly preferred creditors, or fraudulently

§ N.B. a security can be given for a current obligation or a past obligation. We allow this because of business realities: if the assessment of the creditworthiness of the debtor changes, a lender with an ongoing loan obligation is exposed to more risk à so we allow the lender to take security to secure the performance of the past obligation

• Do we really need publication? o A legal system could validly say that security rights are enforceable against people who know nothing about

them § Nemo dat quod non habet: you cannot give what you do not have § Third parties would only get what the seller (grantor of security) had left to give – an encumbered asset § Imposes transaction costs on third parties – they need to spend resources to find out if security rights exist

o n.b. Germany operates without publication: just has a detailed set of priority rules • The opposite kind of legal system would protect good-faith third parties who purchase property encumbered by

security rights they did not know – and could not know – anything about o Proper registration systems are essential to this type of system

§ Imposes transaction costs on the secured creditor à spend resources on publishing their right so as to make it enforceable against third parties

History of Publicity Requirements Twyne’s Case (England 1604):

o Facts: Twyne is a farmer who has not paid one of his creditors. Creditor of Twyne goes to the sheriff, asks him to seize Twyne’s sheep in lieu of repayment. Twyne says: “you can’t seize my sheep, someone else has a security interest in them.”

o Issue: Who has priority to the sheep? Holding: The creditor who seized them. o Reasoning: because the first creditor left Twyne in possession of the sheep, it looks to the world like Twyne

owns the sheep; the transaction was secret and could not have been discovered, so it was deemed fraudulent and therefore void. § Court is concerned with the “secret lien” – gives the insolvent debtor the opportunity to avoid their

creditors by making up a prior security interest in favour of someone else


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§ So unless SC takes possession of the property given in security, the transaction was deemed to be fraudulent

o Ratio: need to take possession of security for security interest to be valid. • This philosophy dictated the CML on secured lending until the Industrial Revolution (200 years)

o Need for non-possessory secured financing arose because the collateral the industrialists had to offer were the machines they needed for their business to run and make money

o So the legislature intervened and created public registries: publication rebutted the presumption of fraud attending non-possessory financing transactions

• None of this ever happened in Germany – non-possessory financing wasn’t prohibited o So no equivalent need for Legislature to establish a registry o So CVL in Germany has a Nemo Dat system

• In North America, legislatures have always been committed to registration o Why? Settler societies – more anonymous market and mobile society (less trust).

§ Immovables: security is always over a certain parcel of land (indexed in reference to the asset). Land must be registered.

§ Movables: registries index everything to the name of the debtor not the item.

Sources of the Law on Secured Transactions • 1. Personal Property Security Acts (common law provinces/territories)

o Brought into force starting in 1975 (ON) and ending in 2001 (Nunavut/PEI) o Model for PPSAs was Article 9 of the UCC (1972)

§ Grant Gilmore came up with organizing idea of Art. 9: the concept of the “security interest” à unifies the proliferation of different types of security interests into one functional definition subject to a uniform body of rules

§ This functional concept of security is replicated in the PPSAs to replace the huge variety of security interests that had come to be recognized in the common law

o Registry systems are at the heart of the PPSAs

• 2. Civil Code of Quebec (Quebec) o Quebec also recognized a number of individual security interests à “numerus clausus”

§ Was complex: came to be at competitive disadvantage for interjurisdictional transactions o In 1994, CCQ was reformed and the hypothec became the principal security device in CCQ

§ Hypothec: legal right over a debtor’s property that nevertheless remains in the debtor’s possession § Governs both moveable and immovable security interests

o Complication: other Titles in CCQ recognize different security interests (trust, SWAROR) § So if a security interest comes in a form other than a hypothec, have to go to a different part of the Code

to find the rules applicable to that transaction

CCQ art 2660 A hypothec is a real right on a movable or immovable property made liable for the performance of an obligation. It confers on the creditor the right to follow the property into whosever hands it may be, to take possession of it or to take it in payment, or to sell it or cause it to be sold and, in that case, to have a preference upon the proceeds of the sale ranking as determined in this Code.

• 3. Federal Secured Transactions Law

o Bank Act Security (s. 427 of the Bank Act) § Allows banks to take security in business assets § This is a full-fledged security regime at the federal level § The coexistence of the provincial and federal regimes creates much confusion § It was enacted to fill a void in QC law: allowed bank to take non-possessory security when QC law didn’t

have a similar security device (gap no longer exists, however) § Whether this security should exist is a current controversy:

• Encourages banks to pick the regime most favourable to them in a particular case


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• Encourages banks to take security under BOTH regimes (no longer allowed) o Ships Registry: mortgages, etc. on ships are registered under a federal statute o Maritime Law: provides a lot of security rights at sea (by operation of law), ex. “salvage lien” o Railway Act: mini-secured lending regime on rolling stock o Intellectual Property Rights: trademarks/copyright registries o Indian Act: creditors are not permitted to seize assets located on reserves o Federal bankruptcy and insolvency laws (enforcement and priority implications)

• 4. International Covenants on Secured Lending o Capetown Convention on International Interests in Mobile Equipment (hasn’t been adopted yet)

§ Sets up a secured transactions regime and a registry for mobile equipment that moves between states (ex. aircraft; railway cars; space assets)

§ There have been changes to the Canadian insolvency act to accommodate this treaty o UNIDROIT was not able to achieve real agreement on many of the issues because the systems in place in

different countries are so radically different § Have a skeletal convention that allows each country to develop their own position on issues § Is more of a model law (departure from what UNIDROIT normally does, which is harmonization

endeavours) o UNCITRAL Legislative Guide on Secured Transactions o Some of these are soft law, but could trump Canadian law if we sign on

SUMMARY OF SECURED TRANSACTIONS Generally, a secured transaction is a loan or a credit transaction in which the lender acquires a security interest in collateral owned by the borrower and is entitled to foreclose on or repossess the collateral in the event of the borrower's default. The terms of the relationship are governed by a contract, or security agreement. The law treats differently those creditors who are secured (i.e. have an authenticated, perfected security interest) from those creditors who are unsecured. An unsecured creditor is simply a person who is owed money and has not received payment according to the terms of the agreed upon transaction. Upon default of a debtor who has multiple creditors, the distinction between being a secured creditor and an unsecured creditor is huge in the eyes of the law. The secured creditor will generally always have priority to getting his money before the unsecured creditors do. In other words, the unsecured creditor is at the back of the line of priority - his only remedy is to obtain a judgment from the court for the amount of the defaulted loan.

II. FORMAL AND FUNCTIONAL CONCEPTS OF SECURITY 1. CONSENSUAL (CONVENTIONAL) VS. NON-CONSENSUAL (LEGAL) CONCEPTS OF SECURITY CCQ art 2664 Hypothecation may take place only on the conditions and according to the formalities authorized by

law. A hypothec may be conventional or legal.

2. PPSA FUNCTIONAL AND SINGULAR CONCEPT OF SECURITY s 3(1) NBPPSA

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 (b) without limiting the generality of paragraph (a), to a chattel mortgage, conditional sale, fixed charge, floating charge, pledge, trust indenture, trust receipt, an assignment, a consignment, lease, trust or transfer of chattel paper where they secure payment or performance of an obligation.


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s 2(a) ONPPSA

Subject to subsection 4 (1), this Act applies to, (a) 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, without limiting the foregoing, (i) a chattel mortgage, conditional sale, equipment trust, debenture, floating charge, pledge, trust indenture or trust receipt, and (ii) an assignment, lease or consignment that secures payment or performance of an obligation

s 1 ONPPSA

“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,

(a) the interest of a transferee of an account or chattel paper, and (b) the interest of a lessor of goods under a lease for a term of more than one year

s 1 NBPPSA

“security interest” means (a) an interest in personal property that secures payment or performance of an obligation, but does not include the interest of a seller who has shipped goods to a buyer under a negotiable bill of lading or its equivalent to the order of the seller or to the order of an agent of the seller, unless the parties have otherwise evidenced an intention to create or provide for a security interest in the goods, and (b) the interest of (i) a consignor who delivers goods to a consignee under a commercial consignment, (ii) a lessor under a lease for a term of more than one year, (iii) a transferee under a transfer of an account or a transfer of chattel paper, and (iv) a buyer under a sale of goods without a change of possession, that does not secure payment or performance of an obligation.

• The PPSA regime has a broad concept of security, functionally defined: it captures every single secured

transaction, regardless of form o You can call the transaction anything you want, but it will qualify as a security interest if its substantial nature

is to secure an obligation o Any functional security interest will be governed entirely by the PPSA (not by the statutes on the law of Sale,

or Trusts) o More importantly, ALL security interests are captured by the PPSA due to this functional definition, and

subject to the same regime • Compare with the CCQ: when a creditor retains title to an asset they sell to the borrower to secure the purchase

price (see art. 1745, instalment sale), it is functionally a security interest o PPSA’s functional definition of a security interest includes what the CCQ calls instalment sales

§ But also, NBPPSA s. 3(1)(b) conditional sale qualifies as a security interest § The general functional definition of “security interest” is supplemented by a specific list that does not

limit the generality of the functional definition • The PPSA approach is a slippery slope: the tentacles of the security interest concept reach out further and further to

include more and more things So what can be included in this “functional” concept of the security interest? When might a compensation/set-off arrangement function as a security right in substance? Caisse Populaire Desjardins Drummond v. Canada, 2009 SCC Facts: On September 18, 2000, Caisse Desjardins granted Camvrac a line of credit up to $277,000 under a credit agreement. A week later, Camvrac deposited $200,000 with Caisse Desjardins under a "Term Savings Agreement." This deposit matured in five years, was not negotiable or transferrable, and could not be hypothecated or given as security in favour of any person other than Caisse Desjardins. On the same day, Caisse Desjardins and Camvrac entered into a "Security Given Through Savings" agreement under which Camvrac, "to secure the repayment of" the line of credit, agreed to maintain and permit Caisse Desjardins to keep the $200,000 deposit for as long as Camvrac owed money to Caisse Desjardins. Upon a default by Camvrac under the credit agreement, Camvrac agreed there would be compensation (set-off) between the credit agreement and the term deposit. Camvrac defaulted on the loan on November 25, 2000, and later made an assignment in bankruptcy. On February 21, 2001, Caisse Desjardins noted on


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its copy of the "Term Savings Agreement": "To be closed on 21/2/2001 to realize on security." In June, the Crown gave notice to Caisse Desjardins to pay all of the remittance arrears owing by Camvrac to the Crown out of the term deposit. Issue: Was the term deposit/line of credit arrangement a security interest? Holding: Yes, with dissent. Reasoning: Majority (Rothstein J. + 4): • The definition of “security interest” in the ITA does not require that the agreement between the creditor and debtor

take any particular form • As long as the creditor’s interest in the debtor’s property secures payment or performance of an obligation,

it is a security interest • Based on the terms of the agreements between Caisse Desjardins and Camvrac, the majority of the Supreme Court

found that Camvrac had "conferred on the Caisse an interest in the property of Camvrac," principally by denying Camvrac the ability to withdraw the term deposit as long as the line of credit was still outstanding, and that this created a security interest within the meaning of Section 224(1.3) of the Income Tax Act (Canada) (ITA). The majority of the court contrasted such an arrangement with a simple set-off agreement that permits a bank to apply any credit in the depositor’s account to any potential indebtedness of the depositor to that bank. The distinguishing features in a simple set-off agreement are that: (i) there is no obligation on the depositor to maintain any amount deposited in the account as security for any indebtedness of the depositor to the bank, and therefore no "continuous right in the customer’s property to protect the bank against default"; and (ii) the depositor may withdraw any amount on deposit at any time and, therefore, "no specific property secures repayment."

Ratio: This case provides a basis for claiming that a right of set-off in circumstances similar to those considered by the Supreme Court creates a security interest within the meaning of the PPSA, thereby requiring registration in order to perfect the creditor’s interest as against third parties. The “functional” concept of security is extremely broad: it can include a right to compensation, or set-off, that functions like a security interest in the terms of the contract creating it. Walsh on Caisse Desjardins: • This case interprets what many people did not think was a security interest as a security interest under the

functional approach to security interests • There were some express provisions surrounding the right of set-off which lead the court to believe that the K in

question created a security interest: o Customer was not entitled to demand payment of their deposit account at any time, so long as customer was

indebted to the bank o Bank immobilized the deposit account

• The law in Canada is now that you have to publish these types of security interests for them to be enforceable against third parties (under CCQ and PPSA) o This is a problem for banks, because they don’t want their identities (often banks) to be known

• This case is an interesting example of how the functional concept of security interest operates What constitutes property in which a security right may be taken? Saulnier v. Royal Bank of Canada, 2008 SCC Facts: Mr. Saulnier, who holds four fishing licences (worth upwards of $600, 000) granted by the Minister of Fisheries and Oceans, owns Bingo Queen Fisheries Limited. The Royal Bank holds a security agreement, made pursuant to the Nova Scotia Personal Property Security Act (PPSA), which addresses “security over all present and after acquired personal property including ... intangibles ... and in all proceeds and renewals thereof ...”. In July 2004, the bank demanded payment to Mr. Saulnier and his Bingo for amounts due and gave notice of its intention to enforce its security. Issue: Are the fishing licences personal property and thus secured and seizable by RBC? Holding: Yes. Reasoning:


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• The Supreme Court concluded that fishing licences and the “bundle of rights” that licence holders possess are indeed “property” for limited statutory purposes. The Supreme Court held that a fishing licence is more than a “mere licence” (like a driver’s licence for example), and that it does more than simply allow the holder to do something that would otherwise be illegal. Rather, the licence gives the holder the opportunity to participate in the fishery, a proprietary right in the fish caught, and the right to earn profits from their sale. While this “bundle of rights” may not be considered property in an ordinary sense, the Court held that a fishing licence is “unquestionably a major commercial asset”, and that the “subject matter of the licence ... coupled with a proprietary interest in the fish caught” is sufficient to bring fishing licences within the broad and sweeping definitions of property found in the BIA and the PPSA.

Ratio: Individuals may pledge their profitable licences as collateral for loans, making them effectively “security interests” that are subject to the PPSA. A licence can only be transferred if the proposed new holder is duly qualified. 3. CIVIL CODE FORMAL AND PLURAL CONCEPTS OF SECURITY A. The Hypothec Definition of a hypothec: art 2660 A hypothec is a real right on a movable or immovable property made liable for the performance of an

obligation. It confers on the creditor the right to follow the property into whosever hands it may be, to take possession of it or to take it in payment, or to sell it or cause it to be sold and, in that case, to have a preference upon the proceeds of the sale ranking as determined in this Code.

art 2661

A hypothec is merely an accessory right, and subsists only as long as the obligation whose performance it secures continues to exist.

• The civil law interpretation might be that if you want security for the performance of an obligation, you have to use

the legal instrument of the hypothec – this is the one provided by the Code • But this is not the right assumption – the CCQ recognizes a number of different institutions that are also ways to

create security rights (like instalment sales) o But subjects them to the rules for publicity (and sometimes enforcement) in the book on hypothecs o Difficulty: figuring out the relationship between the two regimes

B. Title-Based Security Devices

i. Sale with a Right of Redemption art 1750 A sale with a right of redemption is a sale under a resolutory condition by which the seller transfers

ownership of property to the buyer while reserving the right to redeem it. A right of redemption in respect of a road vehicle OR other movable property determined by regulation, OR in respect of any movable property acquired for the service or operation of an enterprise, has effect against third persons only if it has been published; effect against third persons operates from the date of the sale provided the right of redemption is published within 15 days. As well, the transfer of such a right of redemption has effect against third persons only if it has been published.

art 1756 Where the object of the right of redemption is to secure a loan, the seller is deemed to be a borrower and the acquirer is deemed to be a hypothecary creditor. The seller does not, however, lose the right to exercise his right of redemption unless the acquirer follows the rules respecting the exercise of hypothecary rights laid down in the Book on Prior Claims and Hypothecs.

• Article 1756 expressly recognizes that one of the objects of the sale with a right of redemption can be to secure

the loan o The seller is deemed to be a borrower and the acquirer is deemed to be a hypothecary creditor


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§ The borrower (debtor) sells property to the lender (creditor); the loan is the purchase price; the ownership right/title is the “security interest”; the seller will pay back the purchase price, which is the loan, and get their title back

§ This is different from a hypothec because the creditor gets title, not a security right in the form of a hypothec

o This sale with a right of redemption should never have been allowed in the CCQ, because it’s redundant – it’s really just a hypothec

o But it’s unclear to what extent the book on hypothecs actually applies to this area

ii. Security Trusts art. 1263 The purpose of an onerous trust established by contract may be to secure the performance of an

obligation. If that is the case, to have effect against third persons, the trust must be published in the register of personal and movable real rights or in the land register, according to the movable or immovable nature of the property transferred in trust. In case of default by the settlor, the trustee is governed by the rules regarding the exercise of hypothecary rights set out in the Book on Prior Claims and Hypothecs.

• Contemplates that the purpose of a trust can be to secure the performance of an obligation • If a trust is used in this way (“security trust”), trustee is subject to rules in the book on hypothecs

iii. Instalment Sale art 1745 An instalment sale is a term sale by which the seller reserves ownership of the property until full

payment of the sale price. A reservation of ownership in respect of a road vehicle or other movable property determined by regulation, or in respect of any movable property acquired for the service or operation of an enterprise, has effect against third persons only if it has been published; effect against third persons operates from the date of the sale provided the reservation of ownership is published within 15 days. As well, the transfer of such a reservation has effect against third persons only if it has been published.

art 1749 A seller or transferee who, upon the default of the buyer, elects to take back the property sold is governed by the rules regarding the exercise of hypothecary rights set out in the Book on Prior Claims and Hypothecs; however, in the case of a consumer contract, only the rules contained in the Consumer Protection Act (chapter P-40.1) are applicable to the exercise by the seller or transferee of the right of repossession. [… consequences of non-publication/late publication …]

• The seller here reserves ownership of the movable property until it is paid for, but only as a form of security until

receipt of the full price.

iv. Leasing (Secured Financing): CcQ art. 1842 (Note different rules of enforcement) There are two types of leasing transactions contemplated by CCQ – leasing and lease. art 1842 Leasing is a contract by which a person, the lessor, puts movable property at the disposal of another

person, the lessee, for a fixed term and in return for payment. The lessor acquires the property that is the subject of the leasing from a third person, at the demand and in accordance with the instructions of the lessee. Leasing may be entered into for business purposes only.

art 1847 The rights of ownership of the lessor have effect against third persons only if they have been published; effect against third persons operates from the date of the leasing contract provided the rights are published within 15 days. As well, the transfer of the lessor's rights of ownership has effect against third persons only if it has been


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published. • There are three people in this scenario: lessor, lessee, supplier

o The lessor purchases the leased asset from the supplier (whom the lessee has chosen) o The lessor is not in the business of leasing the property in question – they are in the business of secured

financing o Lessor buys the property for the lessee, it is delivered directly to the lessee, and makes a lease arrangement

with and receives lease payments from the lessee o Supplier likes this situation, because they get paid right away (lessor pays up front) – lessee pays off the

purchase price to the lessor • Note: leasing is subject to publication, but not to the rules in the book on Hypothecs for enforcement

o This is a separate regime, it appears o However, the register is most likely the same register

v. Lease: CcQ art. 1851 (Note different rules of enforcement)

o This is the classic renting situation – lessor owns the property and rents it to lessee:

art 1851 Lease is a contract by which a person, the lessor, undertakes to provide another person, the lessee, in

return for a rent, with the enjoyment of a movable OR immovable property for a certain time. The term of a lease is fixed OR indeterminate.

art 1852 The rights resulting from the lease may be published. Publication is required, however, in the case of rights under a lease with a term of more than one year in respect of a road vehicle or other movable property determined by regulation, or of any movable property required for the service or operation of an enterprise, subject, in the latter case, to regulatory exclusions; effect of such rights against third persons operates from the date of the lease provided they are published within 15 days. A lease with a term of one year or less is deemed to have a term of more than one year if, by the operation of a renewal clause or other covenant to the same effect, the term of the lease may be increased to more than one year. The transfer of rights under a lease requires or is open to publication, according to whether the rights themselves require or are open to publication.

Note that lease is only subject to publication if it is for a term longer than one year. It is subject to publication whether or not it functions as a security interest (see below, extension of publicity requirements in CCQ). • The only reason to draw a distinction between lease and leasing doesn’t have to do with the secured financing

aspect of the leasing transaction o It has to do with the obligations of the lessor with respect to the property o Lessor (in lease regime) has to warrant their ownership of the property, its quality o Lessor (in leasing regime) – the financial institution – isn’t saddled with all those obligations to the lessee à

if the lessee has any complaint, goes straight to the supplier for relief (art 1845) o Leasing may be entered into for business purposes only, so there are no consumer protection questions here

Comparison between PPSA and CCQ: • From a secured financing perspective, if the function of the lease is to secure an obligation, the PPSA will apply:

so PPSA applies in all leasing situations, and all ordinary leases equivalent to instalment sales • In the CCQ, there is NO CROSSOVER between the book on hypothecs and the provisions governing traditional

leases or leasing – these are subject to publicity in their own right (see immediately below, extension of publicity requirements in CCQ) o The instalment sale transaction, however, IS subject to the book on hypothecs in the CCQ o But leases that function as instalment sales are not

4. DEEMED SECURITY INTERESTS IN PPSA AND EXTENSION OF PUBLICITY REQUIREMENTS IN CCQ


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• There is a whole other set of transactions that fall within the PPSA, without functioning as security interests;

similar transactions are subject to publicity in the CCQ o See above, the definition of “security interest” in NB/ON PPSAs o See also:

s 3(2) NBPPSA

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

s 2 ON PPSA

2. Subject to subsection 4 (1), this Act applies to, […] (b) a transfer of an account or chattel paper even though the transfer may not secure payment or performance of an obligation; and (c) a lease of goods under a lease for a term of more than one year even though the lease may not secure payment or performance of an obligation.

A. Assignment • Most important

o The PPSA applies to assignment with respect to publicity, but not with respect to enforcement o The exact same approach is taken in the CCQ: an assignment of universality of claims needs to be published

in order to be set up against third parties:

• What does this entail. o Company X has accounts receivable (customers owe X money). X wants to use them to make money. Has two

options: o 1. Can borrow $$ using these accounts receivable as security

§ Will have to pay back the $$ plus interest o 2. Can sell (assign) the right to collect the receivables to a buyer (assignee)

§ The buyer (who is in the business of factoring) will pay the seller what the accounts receivable are worth, discounted to present value and risk of non-repayment – maybe 80%

o These are both forms of financing, structured differently • Why is it brought into PPSA?

o This is why assignment is explicitly brought into PPSA, because it is a type of financing similar to secured financing.

o It is also brought within the PPSA to resolve priority conflicts between assignees/financiers § A factoring company (the assignee) needs to publish; so a secured creditor will know if the accounts

offered as security have been factored beforehand B. Lease, Short Recap • PPSA covers 2 categories of leases: those that function as security (see above), and true leases that operate for

more than 1 year (and aren’t functioning as security interests), explicitly brought in by the PPSAs as “deemed security interests” o See NB s 3(2)(b); ON s 2(c) o Enforcement rules apply to leases that function as security, but not those that function as true leases o The main goal is the application of the publicity requirements – because possession and title are separated in

lease, creates an informational problem for third parties

art 1642 The assignment of a universality of claims, present or future, may be set up against debtors and third persons by the registration of the assignment in the register of personal and movable real rights, provided, however, that the other formalities whereby the assignment may be set up against the debtors who have not acquiesced in it have been accomplished.


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§ If the lease is published, third parties can find out who the real owner is, or check if the property is encumbered by a lease

• CCQ requires lease and leasing to be published in their own right under certain similar conditions (see arts. 1847, 1852 above) – i.e. if the lease is for a term greater than 1 year.

PPSA: Leases Functioning as Security Interests • In a straightforward lease transaction (not securing payment), all the lessee gets is a possessory interest over the

term of the lease. Ownership remains with lessor. • Imagine a transaction in which the lessee gets the functional equivalent to ownership

o Example #1 a lease with option to buy, which works the same way as an instalment sale o Example #2: lease of computer equipment for three years, no option to buy, no acquisition of title but this is a

situation where title is worthless after the lease anyway, because computer equipment, a depreciating asset, is obsolete after 3 years

o à These lessors might be subject to the PPSA regime, because these situations could qualify under the functional definition of the security interest (see NB s 3(1)(b); ON 2(a)(ii)) § This is not necessarily a good thing for a lessor: has more obligations, and is being deprived of the

stronger rights of the owner • The assimilation of lessors and owners in secured transaction regimes is very controversial • The CCQ has gone quite a ways towards this assimilation: C. Consignment • Commercial consignments are not in the CCQ or ONPPSA, but are brought into all the other common law

provinces’ PPSAs (see NB s 3(2)(a)) • Consignment arrangement is when someone else acts as your agent for sale

o Example. Consignments are common in the art industry – owner of the gallery will act as the artist’s agent of sale; artist is the seller (consignor), art collector is the buyer, and gallery owner is merely the conduit ( “consignee”)

• Consignment arrangement may create informational/publicity problems for third parties (lenders to the seller, to the consignee) so they are subject to the publicity requirements imposed on security interests

D. Sale Without a Change of Possession • Atlantic Provinces’ PPSAs also bring in sale without a change of possession (NB s 3(2)(d)) • This is because a sale without a change of possession of the property creates informational issues with ostensible

ownership – need to protect a second buyer and other third parties that do not know the property has been sold 5. SUMMARY: WHERE DO WE LOOK FOR THE LAW ON SECURED TRANSACTIONS? Quebec • Big controversy before the enactment of the new CCQ – if contracting parties tried to create a security interest

without using a hypothec, would it be deemed a hypothec? • Drafters rejected the idea of a deemed hypothec, by allowing several other mechanisms creating security interests • But the drafters tried to assimilate these mechanisms into the hypothec regime. Did so in two ways:

o Subjecting the other mechanisms to the hypothec regime on publicity o Subjecting the other mechanisms to the hypothec regime for enforcement (notice, etc.)

• So the CCQ is quite complicated, because one has to go beyond the rules for hypothecs, and see if the rules are the same for the specific type of security interest that the parties wish to create/have created

CCQ Transaction Publication Applies? Enforcement Applies? Hypothec Yes Yes SWAROR Yes Yes


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Security Trust Yes Yes Instalment Sale Yes Yes Lease Yes NO Leasing Yes NO Common Law Provinces • PPSAs apply to all transactions that generate security (“security interest”), including all the transactions recognized

under the CCQ, plus any others that function as secured transactions • Even if they are not functioning as security, leases greater than 1 year and assignment (plus commercial

consignment and sale without change of possession, everywhere but Ontario) are all subject to rules governing publicity in the PPSA

• A lease can therefore fall under PPSA in two ways: if it is functioning as a security interest (secures payment or performance of obligation), or if it’s a true lease for a period greater than one year

III. CREATION (“ATTACHMENT” IN CML) OF CONSENSUAL SECURITY RIGHTS

Introduction to the Creation of Conventional Security Rights • The common law provinces call the creation of a security right “attachment”

o In this section, it will be explored how to attach the security right to the property offered as security • Note: it would be entirely possible to leave the creation of a security right to the general law of contracts

o But CCQ/PPSA have decided that there should be some extra rules applying to contracts creating security interests § The general law of contract still applies, as modified by the secured transactions regime § The general law of property also applies to secured transactions

• In this section, the issue is the effectiveness of the contract (the security agreement) inter partes – between the two parties to the security agreement o The creation of a valid security right with the security agreement gives the creditor a right against the debtor,

who is the other party to the K o The right of the creditor against third parties are governed by publication/perfection (see below)

1. LIMITATIONS ON THE ABILITY TO CREATE SECURITY A. Who Can Grant Security? Limitations on the Parties • Whoever has the capacity to alienate the property can grant a security right in it, in order to secure their obligation,

or the obligation of another art. 2681 A conventional hypothec may be granted only by a person having the capacity to alienate the property

hypothecated. It may be granted by the debtor of the obligation secured or by a third person.

s. 1 NBPPSA

“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, […] (g) if the person referred to in paragraph (a) and the owner of the collateral are not the same person, (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

See also the definition of debtor in the ONPPSA, s 1(1): it is also defined to allow the person owing the obligation and the person having rights in the collateral to be different people. Example. I own an airplane. Can I give a security right in my airplane to my daughter’s creditor? • Yes. This is third-party real guarantee.


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• Personal guarantee v. real guarantee o Personal guarantee – a promise to pay if the primary debtor defaults à no property backing it up o Real guarantee – granting a security right in property which creditor can seize if primary debtor defaults à

obviously backed up by property B. What Can Security Be Granted in? Limitations on the Collateral CCQ: Limits on the Property Natural Persons Can Grant as Security Without Delivery art 2683 Except where he operates an enterprise and the hypothec is charged on the property of that enterprise, a

natural person may grant a movable hypothec without delivery only on road vehicles or other movable property determined by regulation and subject to the conditions determined by regulation. Where the act constituting the hypothec is accessory to a consumer contract, it is subject to the rules as to form and contents prescribed by this Book or by regulation.

• Limit on the types of movable assets that can be hypothecated by a natural person (without delivery). A natural

person can grant a non-possessory hypothec on: o Assets of an enterprise that natural person is exploiting as a sole proprietorship o Road vehicles o Other movable property determined by Regulation CCQ R. 5 “Regulation Respecting the Register of Personal

and Movable Real Rights”: § art 15.01: mobile homes, boats, caravan, aircraft § art 15.02: precious property, intangible property, investment property (not RRSPs or RESPs)

• Regulation arts. 15.01, 15.02 were introduced in light of policy concerns that CCQ rule was too restrictive o What would have been the policy reasons for not allowing natural persons to hypothecate movable property

without delivery? § Leaving something for unsecured creditors § Paternalism – we do not want people mortgaging their lives, or future assets

• But it is a bit absurd to say that you can grant security to a pawnbroker (because they take possession) but not a bank (because they don’t take possession)

• CCQ starts from the assumption that a natural person cannot grant security on movable property without delivery, and then makes that policy less restrictive by creating some exceptions

PPSA: Limits on Security Granted in Future Movable Property • PPSA starts from assumption that anyone can grant security on anything movable without delivery, and then

restricts that with exceptions • The exceptions are:

o Future-growing crops: NB s 13(2)(a), ON s 12(2)(a) (Saskatchewan allows this). o After-acquired consumer goods: NB s 13(2)(b) (unless the security interest is a PMSI on that consumer good),

ON s 12(2)(b) (unless consumer acquires title to the consumer good within 10 days of the secured party giving value). § Definition of “consumer good” (s 1): goods that are used or acquired for use primarily for personal,

family, or household purposes. • Rationale for the exceptions?

o For consumers, giving a security interest in all your future assets leads to giving too much of a monopoly to a single, powerful creditor

o The crops exception is to protect farmers who enter into secured loan agreements out of great need, perhaps on not the best of terms § Saskatchewan took away this exclusion because there was no corresponding limitation in federal Bank

Act, and it was just limiting farmers’ options for possible lenders • With the exceptions of the PPSA, and the new inclusions of the CCQ, their positions are not actually that different

anymore à their policy approaches are converging


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C. What Can Security Be Granted For? Limitations on the Purpose of Security • For example, art. 1842: a leasing arrangement can only be entered into for business purposes D. Exempt Assets from Seizure under the CCQ & PPSA • Some assets are exempt from seizure:

o NBPPSA s. 58(3)-(7) § Household furniture/furnishings (up to an amount) § Motor vehicle (up to an amount) § Medical/health aids § Consumer goods whose seizure would cause hardship

• Justification: Creditors shouldn’t have the ability to seize assets that would deprive the debtor of necessaries of life or their capacity to earn a living à this avoids the burden of supporting the debtor falling on the State

• These exempt assets obviously cannot be hypothecated or offered as security (art. 2668) art 2668 Property exempt from seizure may not be hypothecated.

The same rule applies to movable property belonging to a debtor which furnishes his main residence and which is used by and is necessary for the life of the household.

Don’t forget that the property offered as security must in fact be property, but could be different than common law definition of property: Saulnier v. Royal Bank of Canada, 2008 SCC Facts: S holds four commercial fishing licenses. He, and his company, each entered into a general security agreement (GSA) with RBC which gave the bank a security interest in “all present and after-acquired personal property including intangibles, and all proceeds and renewals thereof.” S went bankrupt, but refused to sign over his fishing licenses to the trustee in bankruptcy. Issue: Does a commercial fishing license constitute property within the meaning of the Bankruptcy and Insolvency Act and the Personal Property Security Act? Holding: Yes. Ratio: The definition of property in the PPSA is not necessarily that found at common law. It is very wide, and interpreted in light of commercial realities. 2. THE REQUIREMENTS FOR THE CREATION (“ATTACHMENT”) OF SECURITY RIGHTS

The question this section will answer: when does the secured party receive a right in the property offered as security, at least against the debtor? All relevant sections: see NB ss. 10, 12; ON s 11. Claire’s summary: how to attach/create PPSA (NB PPSA s.10,12; ON PPSA s.11)

1) value is given 2) Debtor has rights in asset or power to transfer 3) Evidentiary requirement: has to be some objective evidence of the existence of security interest in the asset

a. security agreement with minimum content (universal rule); OR b. (for corporeal assets) delivery/possession

• not a certificated security à SC in possession; • certificated security à SC has “delivered” as per Securities Transfer Act; OR

c. (for investment property) à SC has “control” CCQ


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1) There is an obligation that it is securing (2661) 2) When grantor acquires title to the hypothecated right (2670) 3) Evidentiary requirement

a. For movables with delivery (possessory security interest) i. Only need physical possession (2702)

b. For movables without delivery (only certain types of assets are allowed to do this per 2683) i. Written agreement (2696) [if not, nullity, even between parties]

1. Specifically designating hypothecated 2. Specifically designating the sum or method for calculating the sum of the obligation

c. For bonds, and for immovables, i. Written agreement by notarial act (2692, 2694)

1. Specifically designates hypothecated property 2. Specifically designating the sum or method for calculating the sum of the obligation

BASIC DIFFERENCES between PPSA and CCQ

-‐ CCQ requires written or delivery for hypothecs to exist, even between parties -‐ PPSA says, if you’re just trying to enforce against debtor, simple oral agreement is sufficient

o NB if other secured creditors with security in the same asset, it doesn’t exist vis a vis that creditor OR against unsecured creditors)

-‐ CCQ like article 9, requires written What are the requirements for satisfying the writing rule (generally applicable rule, possession and control are for specific situations)

-‐ PPSA ingredients of satisfactory written security agreement in 12: o Description of collateral in accepted form of description

§ NB: For movables, must describe BY item or Kind o Debtor’s signature (or electronic functional equivalents) o Must contain “charging clause” indicating the purpose of the agreement is to grant a right in property to

secure an obligation § à can sometimes satisfy writing requirement with cross referenced document (e.g. purchased

orders which refers to security interest) -‐ CCQ ingredients of satisfactorily written security agreement

o 1) sufficient description of hypothecated property (2697) § in the case of universality, indication of that universality suffices -‐ generic description

o 2) Cap or maximum amount of obligation (2689) A. First Requirement: the Existence of a Secured Obligation • The basic idea of a security right is that it secures an obligation. That is how you measure it, by the size of the

obligation owing. o So first requirement for a security right is an obligation that it is securing

CCQ: art 2661 A hypothec is merely an accessory right, and subsists only as long as the obligation whose

performance it secures continues to exist. art 2687 A hypothec may be granted to secure any obligation whatever. art 2688 A hypothec granted to secure payment of a sum of money is valid even if, when it is granted, the debtor

has not received the prestation in consideration of which he has undertaken the obligation or has received only part of it. This rule is applicable in particular to lines of credit and the issue of bonds or other titles of indebtedness.

Art 2691 2691. Where the creditor refuses to hand over the sums of money he has undertaken to lend and for which he holds a hypothec as security, the debtor or the grantor may, at the expense of the creditor, cause the hypothec to be reduced or cancelled, upon payment, in the latter case, of only the amounts that may then be due.


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• This accessory principle in art 2661 is a conceptual obstacle to obligations that are undertaken sometime in the

future (ex. line of credit), but art 2687-88 take care of the problem o art 2688 specifically takes care of future advances

PPSA: [NBPPSA] 12(1) A security interest, including a security interest in the nature of a floating charge, attaches when

(a) value is given, [cf. accessory principle in 2661 CCQ] 1 "value" means any consideration sufficient to support a simple contract and includes an antecedent debt or liability, and "new value" means value other than an antecedent debt or liability. [antecedent = earlier] 14(1) A security agreement may secure future advances [line of credit situation] 14(2) Unless otherwise agreed, an obligation owing to a debtor to make future advances is not binding on a secured party if

(a) a notice of judgment against the debtor has been registered in the Registry, (b) the collateral in which the secured party has a security interest includes non-exempt exigible personal property or attachable debts of the debtor within the meaning of the Creditors Relief Act, and (c) the secured party has knowledge of the registration of the notice of judgment before making the advances.

[ONPPSA] 11 (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, … [cf. accessory principle in 2661 CCQ] 1 (1) “value” means any consideration sufficient to support a simple contract and includes an antecedent debt or liability. (“contrepartie”) 13. A security agreement may secure future advances. • That is, the secured creditor has to give value to the debtor in order for the security right to exist

o “Value” is defined in s 1(1): includes a past obligation, and any promise/consideration sufficient to support the creation of a contract

• Although this language is sufficient to cover the line of credit situation, and all future advances, they are explicitly brought in by NB s 14(1); ON s 13.

B. Second Requirement: Grantor Must Have Title to or Real Rights in the Collateral • The security interest cannot attach until the debtor has real rights in the property offered as security • Premised on the nemo dat principle – cannot offer a security interest in a property until it is yours to offer CCQ: art 2670 A hypothec on the property of another or on future property begins to affect it only when the grantor

acquires title to the hypothecated right. • NB: hypothec only attaches when you acquire title; you can give security over future assets/assets you don’t own

(property of another), but security will not attach until you acquire title. o Future Property? Yes: the parties are able to enter into security agreements on future assets (or assets that

currently belong to someone else). Otherwise, commercial financing (especially in the context of inventory)


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would be impossible, since you would have to grant a security right on each piece of inventory. Thus, the CCQ facilitates the ability of grantors to create an agreement today on a proprietary rights on something that doesn’t even exist. This is an advance in the law of property. However, the security rights don’t attach until the grantor obtains their proprietary rights in the collateral.

o What Types of Property? All: Collateral can be any kind of property, and it can be specific property or a universality of property, or all of the properties included in the universality.

o Broad categories/”Universality”: generic category of assets (i.e. all claims you have against your customers); cover a “categority of assets”; also means future assets can be covered.

art 2666 A hypothec is a charge on one or several specific corporeal or incorporeal properties, or on all the

properties included in a universality. ** NB: in the event of a universality, inventory in the universality constantly changes, so such accounting is required.

PPSA: s 12(1) NBPPSA

A security interest, including a security interest in the nature of a floating charge, attaches when […] b) the debtor has rights in the collateral or power to transfer rights in the collateral to a secured party.

s 11(2) ONPPSA

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 […]

s 12(1) ONPPSA

A security agreement may cover after-acquired property.

C. Third Requirement: Objective Evidence of the Security Agreement • There are three accepted ways of proving the existence of a security agreement respecting movable property:

o 1. A Written Security Agreement (fulfilling all necessary formalities) § CcQ art. 2692-94, 2696-97, 2689-90, 2702; 2710; § NB PPSA s. 12(1)(c), s. 10(1)(b), § ON PPSA s. 11(2)(a)

o 2. Delivery (of the property offered as security to the secured creditor) § dispossession for tangible assets; CcQ. arts. 2702, 2710; Caisse populaire Desjardins de Val-Brillant v.

Blouin, [2003] 1 S.C.R. 666 o 3. Control over investment property

§ CcQ art. 2714.1, Quebec Securities Transfer Act, ss. 55, 56, 113; § ON PPSA s. 11(2)(c)-(d), s. 1(1) (definition of “control”), Ontario Securities Transfer Act ss. 23-26

(assume other PPSA jurisdictions are the same as Ontario on this issue) 1. A Written Security Agreement (fulfilling all necessary formalities) PPSA: Formalities Required to Create a Security Interest s 9 ONPPSA

Except as otherwise provided by this or any other Act, a security agreement is effective according to its terms between the parties to it and against third parties.

s 11(2) ONPPSA

(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; …


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s 12(1) NBPPSA

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.

s 10(1) NBPPSA

10(1) Subject to section 12.1, 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 another person on the secured party’s behalf, (ii) a certificated security in registered form and the security certificate has been delivered to the secured party under section 68 of the Securities Transfer Act pursuant to the debtor’s security agreement, or (iii) investment property and the secured party has control under subsection 1(2) pursuant to the debtor’s security agreement, or (b) the debtor has signed a security agreement that contains (i) a description of the collateral [… can be a statement that interest is taken in all present and after-acquired property …]

“Necessary Formalities” of Written Securities Agreement • A. The purpose of the agreement must be to create a security interest (i.e. there must be a charging clause) • B. The security agreement has to be signed by the debtor (not the creditor, because he is not burdened) • C. The security agreement must contain a description of the encumbered asset

o This description must be sufficient for the asset to be identified by objective third party § “All present and after-acquired assets” works to cover everything

o Ontario uses this term “sufficient to enable it to be identified” o Other provinces pre-authorize descriptions to fit what people might take security interests in o Policy is the same for both: for third party to know which assets are caught by the security right

• NOTE: IN THE COMMON LAW PROVINCES, A SECURED CREDITOR ONLY NEEDS TO HAVE A WRITTEN

SECURITY AGREEMENT IF HE IS SEEKING TO ENFORCE IT AGAINST A THIRD PARTY. AGAINST THE DEBTOR, ORAL SUFFICES o Inter partes, oral contracts will be enforceable – that is, between the creditor/debtor, do not need a written

security agreement; can enforce a security right created orally between the parties to it o N.B. This is different in Article 9 (there needs to be a written agreement for the security right to be

enforceable as against the debtor) and in the CCQ (see below) o PPSA said this is a consumer protection problem, and can be dealt with under consumer protection legislation;

do not require written agreement amongst sophisticated commercial parties • Why do we generally require written agreements? Increase certainty (evidentiary, dispute reduction function),

emphasizes seriousness of the transaction to parties (protective function), reduces the chances of fraud CCQ: Formalities Required to Create a Hypothec **Written agreement (unless there is physical delivery) with sufficient description 2696. A movable hypothec without delivery shall, on pain of absolute nullity, be granted in writing. • CCQ: Unless you deliver possession of the movable assets to the secured creditor, the hypothec must be in

writing, and if not, it’s null and void. Does a contract of sale have to be in writing? Only for immovables. No written requirement for movables. Why, in the context of security, is there a requirement for writing? Why is delivery of possession considered a substitute for the writing requirement? Here, how does it help a borrower?

2697. A sufficient description of the hypothecated property shall be contained in the act constituting a movable hypothec or, in the case of a universality of movables, an indication of the nature of that universality.


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• Purpose: to ensure that there is formal consent of the grantor to this specific property (i.e. it helps for identification purposes). If the grantor retains possession, it may difficult, without a written agreement, to identify which assets are part of the security agreement. This protects the grantor and the secured creditor, and it protects a third party. This rule is the same as in Art. 9 of the UCC. Sufficient description= must be able to identify the encumbered assets or the generic category

• Key Distinction between CML and CVL à Nullity: although 2696 makes a non-possessory security interest absolutely null without a written agreement (even between the parties), the PPSA make writing a pre-condition only for the purpose of enforcing a security right on third parties. Between parties, an oral agreement is sufficient (i.e. it is not null with regards to the parties themselves). Why? PPSA does not protect imprudent behaviour on the part of the secured creditor (i.e. he should know enough to get it in writing). This is a minimum formality à what has to be in writing, evidence of grantor’s consent to what the collateral is.

o CCQ: need writing, even for the debtor’s purposes 2683. Except where he operates an enterprise and the hypothec is charged on the property of that enterprise, a natural person may grant a movable hypothec without delivery only on road vehicles or other movable property determined by regulation and subject to the conditions determined by regulation. Where the act constituting the hypothec is accessory to a consumer contract, it is subject to the rules as to form and contents prescribed by this Book or by regulation. • Consumer Contract: If the hypothec is related to a loan agreement or purchase agreement that is a consumer

contract, this contract will be subject to certain content/formality rules. Apart from these requirements, the parties are free to say whatever they want in a security agreement.

2692. A hypothec securing payment of bonds or other titles of indebtedness issued by a trustee, a limited partnership or a legal person authorized to do so by law shall, on pain of absolute nullity, be granted by notarial act en minute in favour of the person holding the power of attorney of the creditors. 2693. An immovable hypothec is, on pain of absolute nullity, granted by notarial act en minute. 2694. An immovable hypothec is valid only so far as the constituting act specifically designates the hypothecated property. 2689. An act validly constituting a hypothec indicates the specific sum for which it is granted. The same rule applies even where the hypothec is constituted to secure the performance of an obligation of which the value cannot be determined or is uncertain. 2690. The sum for which the hypothec is granted is not considered to be indeterminate where the act, rather than stipulating a fixed rate of interest, contains the necessary particulars for determining the actual rate of interest on the obligation. • Immovable hypothecs have to be created by notarial deed, on pain of nullity (art 2693) • CCQ distinguishes between the formalities required to create movable hypothecs with delivery (possessory

security interest) and without delivery (non-possessory security interest) • Movable hypothecs with delivery are created by the physical delivery of the property to the secured creditor (art

2702) o Same as PPSA: writing requirement is only required without delivery

• Movable hypothecs without delivery have to be created by a written agreement, on pain of nullity, even between the parties to the security agreement (art 2696) o ***This is different from the PPSA, which only requires a written agreement for third-party enforceability of

the security agreement with the debtor • Required content of the written agreement:

o 1. Has to include a “sufficient” description to enable the property offered as security to be identified (art. 2697)


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§ Doesn’t say what a sufficient description is § Description can be generic or specific § More or less corresponds to PPSA approach

o 2. Has to include the specific sum for which the hypothec is granted (art. 2689) § CCQ departs from PPSA and adds this requirement to the written security agreement § This rule applies even to hypothecs securing a sum that might be indeterminate or unknown § This has been interpreted as requiring the act creating the hypothec to state the maximum amount

for which the creditor can enforce his rights • The secured creditor is therefore only secured up to that amount • N.B. this amount is part of what the registry has to record • The reason for this requirement to state the maximum amount of the security is to facilitate access

to credit: so that the debtor can use what’s left in the asset as collateral for other financing o Concern is that this is ineffective, because creditors always have the bargaining power to

insist on an inflated maximum amount Rules for the Creation of Non-Hypothec Security Interests in the CCQ • Remember, there are other ways of creating a security interest under CCQ besides hypothecs • Arguably, the rules applying to hypothecs apply interpretatively to other security interests created by CCQ

o For example, lease: generally these Ks will be reduced to writing anyway • But contrast with instalment sale: often there won’t be a particular piece of paper signed by the buyer consenting to

the seller’s retention of title o But the creditor IS the person who retains the title o Debtor only has possession by result of the transaction o There is no problem of taking an object that would otherwise be available to all creditors and giving it to a

preferred creditor through fraud 2. Delivery / Dispossession for tangible assets (of the property offered as security to the secured creditor) ONPPSA 11(2)(b) 11. (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,

(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;

NBPPSA 12(1)(c) 12(1) A security interest, including a security interest in the nature of a floating charge, 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.

10(1)(a) 10(1) Subject to section 12.1, 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 another person on the secured party’s behalf, (ii) a certificated security in registered form and the security certificate has been delivered to the secured party under section 68 of the Securities Transfer Act pursuant to the debtor’s security agreement, or (iii) investment property and the secured party has control under subsection 1(2) pursuant to the debtor’s security agreement, or

CCQ


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Art 2702 A movable hypothec with delivery is granted by physical delivery of the property or title to the creditor or, if the property is already in his hands, by his continuing to physically hold it, with the grantor's consent, to secure his claim.

Art 2710 A movable hypothec on a claim held by the grantor against a third person or on a universality of claims may be granted with or without delivery. However, in either case the creditor may not set up his hypothec against the debtors of hypothecated claims as long as it may not be set up against them in the same way as an assignment of claim.

Caisse populaire Desjardins de Val-Brillant v Blouin, [2003] SCC In 2003, the Supreme Court of Canada rendered its decision in Caisse populaire Desjardins de Val-Brillant v. Blouin. The Court’s reasons and conclusion were a first step towards widening the concept of delivery of the CCQ. In this case, the Supreme Court had to determine the conditions to grant a movable hypothec with delivery on claims not represented by a negotiable instrument. The Supreme Court concluded that a movable hypothec—regardless of whether or not they are represented by a negotiable instrument (in this case, a certificate of deposit)—is validly granted when the debtor has transferred effective control of the claim to the creditor by giving the creditor the right to collect directly in the event of default, without further authorization from the debtor, and when the necessary steps have been taken so that the hypothec may be set up against the debtor of the claim in the same way as an assignment of claims. NEED NOTES ON THIS SECTION! 3. Control for investment property Investment Property Investment property under the PPSA includes a “security, whether certificated or uncertificated, security entitlement, securities account, futures contract or futures account.” (from definitions in PPSA) Attachment Control substitutes for a written security agreement for the purposes of satisfying the evidentiary requirement for the attachment and third party enforceability of a security interest.1 There must of course still be a security agreement. In practice, the security agreement will almost invariably be in writing but this is not a legal pre-requisite to attachment if control is obtained. Control i) Introduction “Control” is a key concept under the STA. It is essential to understanding the PPSA rules governing the attachment, perfection and priority of security interests in investment property, as well as the rights of secured parties and competing claimants under the STA/PPSA regime and its Quebec equivalent. The PPSA defines control by cross-reference to the STA.

In general terms, control signifies that a “purchaser” (defined to include both a buyer and a secured party2) has taken the requisite steps to put itself in the position to be able to dispose of the particular type of investment property without any further action by the seller or the grantor of the security interest.3 However, control is not a unitary concept. The mode of obtaining control varies with the type of investment property.

ii) Control of Certificated Securities A certificated security may be issued in bearer or registered form. A bearer certificate is fully negotiable in the sense that mere physical possession entitles the holder to all the rights associated with the security. For certificated securities 1 PPSA (A, BC, M, NB, PEI, Nu, NWT, S) s. 10(1); (NL, NS) s. 11(1); Y s. 8(1). 2 STA s. 1(1) defines “purchaser” to mean “a person who takes by purchase,” with “purchase” then defined to mean “a taking by sale,

discount, negotiation, mortgage, hypothec, pledge, security interest, issue or reissue, gift or any other voluntary transaction that creates an interest in property.”

3 UCC art § 8-106 cmt. 1.


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in bearer form, a purchaser obtains control by taking “delivery” of the certificates.4 For certificated securities in registered form, a purchaser obtains control if the certificate is delivered to the

purchaser, and the certificate is either properly endorsed5 to the purchaser or in blank,6 or the security is registered in the name of the purchaser on the records of the issuer.7

For the purposes of these rules, the purchaser need not itself take delivery of the certificate. Physical possession by another person (other than a securities intermediary) acting on behalf of the purchaser also constitutes sufficient delivery. 8

iii) Control of Uncertificated Securities For uncertificated securities, “delivery” also constitutes a mode of control.9 Clearly, delivery in this context cannot mean physical possession since an uncertificated security is not represented in material form.10 Rather, delivery occurs when the purchaser, or another person on behalf of the purchaser, is registered in the books of the issuer as the owner of the security.11

Alternatively, a purchaser can obtain control by obtaining the agreement of the issuer that it will comply with instructions originated by the purchaser without the further consent of the registered owner of the security.12 Unlike the first method of control, this second method does not require exclusive control by the purchaser. Control subsists even if the owner retains the right under the terms of the control agreement to deal with the uncertificated security (for example, until default where the purchaser is a secured party).13

An issuer may enter into a control agreement with a purchaser only with the consent of the registered owner of the security.14 Consequently, as a practical matter, this method of control envisages a tripartite agreement among the owner, the purchaser and the issuer. An issuer is not required to comply with a registered owner’s request to enter into a control agreement.15 Nor is an issuer who enters into a control agreement required to confirm the existence of the agreement to another person unless requested to do so by the registered owner.16 CML ONPPSA s. 11(2)(c)-(d)

(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, (c) the collateral is a certificated security in registered form and the security certificate has been delivered to the secured party under section 68 of the Securities Transfer Act, 2006 pursuant to the

4 STA s. 23(1). Under s. 1(1), “bearer form” is defined to mean “a form of certificated security in which the security is payable to the bearer of

the security certificate according to the security certificate’s terms but not by reason of an endorsement.” 5 STA s. 1(1) defines “endorsement” to mean “a signature that, alone or accompanied by other words, is made on a security certificate in

registered form or on a separate document for the purpose of assigning, transferring or redeeming the security or granting a power to assign, transfer or redeem the security.” If the endorsement is on a separate document, s. 73 provides that a transfer of the security does not occur “until the delivery of both the security certificate and the document on which the endorsement appears.”

6 STA s. 71(2) provides that an “endorsement in blank includes an endorsement to bearer.” 7 STA s. 23(2). Under STA s. 1(1), “registered form” is defined to mean “a form of certificated security in which: “(a) the security certificate

specifies a person entitled to the security, and (b) a transfer of the security may be registered on books maintained for that purpose by or on behalf of the issuer, or the security certificate states that it may be so registered.”

8 STA s. 68(1) determines what constitutes delivery. Under that provision physical possession of a security certificate by a securities intermediary acting on behalf of a purchaser does not constitute delivery unless the certificate is in registered form and is registered in the name of the purchaser, payable to the order of the purchaser, or specially endorsed to the purchaser by an effective endorsement and has not been endorsed to the securities intermediary or in blank.

9 STA s. 24(1)(a). 10 STA s. 1(1) defines “uncertificated security” to mean “a security that is not represented by a certificate”; "security certificate" in turn is

defined to mean “a certificate representing a security, but does not include a certificate in electronic form”; it follows that a certificate represented in electronic form only is an uncertificated security.

11 STA s. 68(2). 12 STA s. 24(1)(b). 13 STA s. 24(2). 14 STA s. 27(1). 15 STA s. 27(3). 16 STA s. 27(2).


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debtor’s security agreement; or (d) the collateral is investment property and the secured party has control under subsection 1

ONPPSA s. 1(1) “control”

Ontario Securities Transfer Act, s. 23

Purchaser’s control of certificated security 23. (1) A purchaser has control of a certificated security that is in bearer form if the certificated security is delivered to the purchaser. Same (2) A purchaser has control of a certificated security that is in registered form if the certificated security is delivered to the purchaser and, (a) the security certificate is endorsed to the purchaser or in blank by an effective endorsement; or (b) the security certificate is registered in the name of the purchaser at the time of the original issue or registration of transfer by the issuer.

OSTA, s. 24 Purchaser’s control of uncertificated security 24. (1) A purchaser has control of an uncertificated security if, (a) the uncertificated security is delivered to the purchaser; or (b) the issuer has agreed that the issuer will comply with instructions that are originated by the purchaser without the further consent of the registered owner. Same (2) A purchaser to whom subsection (1) applies in relation to an uncertificated security has control of the uncertificated security even if the registered owner retains the right, (a) to make substitutions for the uncertificated security; (b) to originate instructions to the issuer; or (c) to otherwise deal with the uncertificated security.

OSTA, s. 25 Purchaser’s control of security entitlement 25. (1) A purchaser has control of a security entitlement if, (a) the purchaser becomes the entitlement holder; (b) the securities intermediary has agreed that it will comply with entitlement orders that are originated by the purchaser without the further consent of the entitlement holder; or (c) another person has control of the security entitlement on behalf of the purchaser or, having previously obtained control of the security entitlement, acknowledges that the person has control on behalf of the purchaser. Same (2) A purchaser to whom subsection (1) applies in relation to a security entitlement has control of the security entitlement even if the entitlement holder retains the right, (a) to make substitutions for the security entitlement; (b) to originate entitlement orders to the securities intermediary; or (c) to otherwise deal with the security entitlement.

OSTA, s. 26 Securities intermediary’s control of security entitlement 26. If an interest in a security entitlement is granted by the entitlement holder to the entitlement holder’s own securities intermediary, the securities intermediary has control of the security entitlement.

CIVIL LAW Art. 2714.1 Movable hypothecs with delivery on certain securities or security entitlements

In the case of securities and security entitlements within the meaning of the Act respecting the transfer of securities and the establishment of security entitlements (chapter T-11.002), the requirement that the property be delivered to and held by the creditor in order for a movable hypothec with delivery to be constituted and set up against third persons may be met by the creditor obtaining control of the securities or security entitlements in accordance with that Act.

Quebec 55. A purchaser has control of a certificated security that is in bearer form if the certificated security is


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Securities Transfer Act, s. 55

delivered to the purchaser. A purchaser has control of a certificated security that is in registered form if the certificated security is delivered to the purchaser and the security certificate is endorsed to the purchaser or in blank by an effective endorsement or is registered in the name of the purchaser at the time of the original issue or registration of transfer by the issuer.

QSTA s 56 56. A purchaser has control of an uncertificated security if the uncertificated security is delivered to the purchaser or the purchaser enters with the issuer of the security into an agreement, called “control agreement”, under the terms of which the issuer agrees to comply with instructions that are originated by the purchaser without the further consent of the registered holder. Registered holder. A purchaser has control of an uncertificated security even if the registered holder retains the right to originate instructions to the issuer, to make substitutions for the uncertificated security or to otherwise dispose of the uncertificated security.

QSTA s 113 113. A purchaser of a security entitlement has control of the security entitlement if (1) the purchaser becomes the entitlement holder; (2) the purchaser enters with the securities intermediary into an agreement, called “control agreement”, under the terms of which the securities intermediary agrees to comply with entitlement orders that are originated by the purchaser without the further consent of the entitlement holder; or (3) another person has control of the security entitlement on behalf of the purchaser or, having previously obtained control of the security entitlement, acknowledges that the person has control on behalf of the purchaser. Special cases. A purchaser has control of the security entitlement even if the entitlement holder retains the right to originate entitlement orders to the securities intermediary, to make substitutions for the security entitlement or to otherwise dispose of the security entitlement.

IV. THIRD PARTY EFFECTIVENESS (PUBLICATION/PERFECTION) Purpose of Publishing Security Interests • Priority: protecting secured creditor’s priority of payment • Publicity: protecting third parties from transacting in assets encumbered by security interests 1. MODES OF PERFECTION/PUBLICATION • What steps do secured creditors have to take in order to make their rights effective?

o A secured creditor needs to publish (CCQ) or perfect (PPSA) their real right in the debtor’s property in order for it to be effective against third parties.

• What are the available modes of publication and perfection? o Immovable property: registration of a notice of security in the land registry is the sole mode of publication

accepted. o Movable property:

§ There are several options for the publication of security rights in movable property: • 1. Registration in the movable property register (this is the universal method: it works for any type

of movable property). • 2. Delivery of the movable property to the secured creditor (only works for some types) • 3. There are others modes of publication for different types of movable property (ex. securities)

A. Registration of notice of the security right


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CML s 23 ONPPSA

Registration perfects a security interest in any type of collateral.

Cf. s 25 NB PPSA

“Registration of a financing statement perfects a security interest in collateral”

CVL Hypothecs art 2934 The publication of rights is effected by their registration in the register of personal and movable real

rights or in the land register, unless some other mode is expressly permitted by law. […] Art 2941 Publication of rights allows them to [a] be set up against third persons, [b] establishes their rank and, [c]

where the law so provides, gives them effect. […] Art 2964 Absence of publication may be set up by any interested person against any person, even a minor or a

protected person, and against the State. CVL Non-hypothecary security rights Art 1263 Trusts

The purpose of an onerous trust established by contract may be to secure the performance of an obligation. If that is the case, to have effect against third persons, the trust must be published in the register of personal and movable real rights or in the land register, according to the movable or immovable nature of the property transferred in trust. […]

Art 1745 Instalment Sale

[…] A reservation of ownership in respect of a road vehicle or other movable property determined by regulation, or in respect of any movable property acquired for the service or operation of an enterprise, has effect against third persons only if it has been published; effect against third persons operates from the date of the sale provided the reservation of ownership is published within 15 days. As well, the transfer of such a reservation has effect against third persons only if it has been published.

Art 1749 A seller or transferee who, upon the default of the buyer, elects to take back the property sold is governed by the rules regarding the exercise of hypothecary rights set out in the Book on Prior Claims and Hypothecs; however, in the case of a consumer contract, only the rules contained in the Consumer Protection Act (chapter P-40.1) are applicable to the exercise by the seller or transferee of the right of repossession. If the reservation of ownership required publication but was not published, the seller or transferee may take the property back only if it is in the hands of the original buyer; the seller or transferee takes the property back in its existing condition and subject to the rights and charges with which the buyer may have encumbered it. If the reservation of ownership required publication but was published late, the seller or transferee may likewise take the property back only if it is in the hands of the original buyer, unless the reservation was published before the sale of the property by the original buyer, in which case the seller or transferee may also take the property back if it is in the hands of a subsequent acquirer; in all cases, the seller or transferee takes the property back in its existing condition, but subject only to such rights and charges with which the original buyer may have encumbered it at the time of the publication of the reservation of ownership and which had already been published.

Art 1847 Leasing

The rights of ownership of the lessor have effect against third persons only if they have been published; effect against third persons operates from the date of the leasing contract provided the rights are published within 15 days. As well, the transfer of the lessor's rights of ownership has effect against third persons only if it has been published.

Art 1852 Lease

The rights resulting from the lease may be published. Publication is required, however, in the case of rights under a lease with a term of more than one year in respect of a road vehicle or other movable property determined by regulation, or of any movable property required for the service or operation of an enterprise, subject, in the latter case, to regulatory exclusions;


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effect of such rights against third persons operates from the date of the lease provided they are published within 15 days. A lease with a term of one year or less is deemed to have a term of more than one year if, by the operation of a renewal clause or other covenant to the same effect, the term of the lease may be increased to more than one year. The transfer of rights under a lease requires or is open to publication, according to whether the rights themselves require or are open to publication.

Art 1750 Sales with a right of redemption

[…] A right of redemption in respect of a road vehicle or other movable property determined by regulation, or in respect of any movable property acquired for the service or operation of an enterprise, has effect against third persons only if it has been published; effect against third persons operates from the date of the sale provided the right of redemption is published within 15 days. As well, the transfer of such a right of redemption has effect against third persons only if it has been published.

Art 1752 Where the seller exercises his right of redemption, he takes back the property free of any charges which the buyer may have encumbered it with, provided the seller's right, if it required publication, was published in due time and in accordance with the rules regarding the publication of rights.

Art 2961.1 Other Effects

The registration of reservations of ownership or rights of redemption, or of any transfer thereof, in respect of a universality of movable property of the same kind that may be involved in sales or transfers in the ordinary course of business between persons operating enterprises preserves all the rights of the seller or transferee not only in that property but also in any property of the same kind involved in reservations of ownership, rights of redemption or transfers between those persons subsequent to the registration. However, such reservations, rights or transfers do not have effect against a third person who acquires any such property in the ordinary course of business of the seller's enterprise. Registration preserves the rights for a period of 10 years; the period may be extended if the registration is renewed. These rules also apply to the registration of rights of ownership under leasing contracts and of rights under leases with a term of more than one year, or of any transfer thereof, in respect of a universality of movable property of the same kind that may be involved in such contracts in the ordinary course of business between persons operating enterprises.

Art 2963 Notice given or knowledge acquired of a right that has not been published never compensates for absence of publication.

Art 2964

Absence of publication may be set up by any interested person against any person, even a minor or a protected person, and against the State.

B. Delivery/Physical possession of tangible collateral by the secured creditor COMMON LAW • Possession of the asset by the secured creditor perfects a security interest in specific subcategories of personal

property (those eligible for perfection via delivery): • The common denominator between all the types of property in the list = they are tangible, corporeal assets OR are

at least reified/materialized/represented by a piece of paper o Therefore, only security interests in something physical that CAN be transferred are eligible for perfection via

delivery o What is missing from this list is therefore purely intangible property (ex. claims), which are not amenable to

physical delivery s 24(1) NBPPSA s.22 ONPPSA has same

(1) Subject to section 19, possession of the collateral by the secured party, or on the secured party’s behalf by another person, perfects a security interest in (a) goods, (b) a negotiable document of title, (c) chattel paper, [(d) repealed] (e) an instrument, and (f) money.


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CIVIL LAW art 2702 A movable hypothec with delivery is granted by physical delivery of the property or title to the creditor

or, if the property is already in his hands, by his continuing to physically hold it, with the grantor's consent, to secure his claim.

art 2703 A movable hypothec with delivery is published by the creditor's holding the property or title, and remains so only as long as he continues to hold it.

art 2704 Holding is continuous even if its exercise is prevented by the act of a third person without the consent of the creditor or is temporarily interrupted by the handing over of the property or title to the grantor or to a third person for evaluation, repair, transformation or improvement.

art 2705 The creditor, with the consent of the grantor, may hold the property through a third person, but if so, detention by the third person effects publication only from the time the third person receives evidence in writing of the hypothec.

• Curious feature of the CCQ: it doesn’t have a list of assets that are eligible for publication by delivery of the

movable offered as security. However, it has a series of articles that anticipate the difficulties: Art 2708 A movable hypothec on property represented by a bill of lading or other negotiable instrument or on

claims may be set up against the creditors of the grantor from the time the creditor gives value, provided the title is remitted to him within 10 days from that time.

art 2709 Where the title is negotiable by endorsement and delivery, or delivery alone, its remittance to the creditor takes place by endorsement and delivery, or by delivery alone.

• à So is there an implicit limit in the CCQ that assets that can’t be represented with a physical instrument cannot be perfected with delivery?

Issue: Delivery for when security property is a claim??: art 2710 A movable hypothec on a claim held by the grantor against a third person or on a universality of claims

may be granted with or without delivery. However, in either case the creditor may not set up his hypothec against the debtors of hypothecated claims as long as it may not be set up against them in the same way as an assignment of claim.

art 2711 A hypothec on a universality of claims, even when granted by the remittance of the title to the creditor, shall be entered in the proper register.

• So the question here remains: can a hypothec granted on a specific claim (as opposed to a universality) be perfected

only by delivery (without the need for registration)? o YES à The answer is found in this SCC case: Desjardins de Val-Brillant v. Blouin (referred to in Caisse

Desjardian Drummond: paras. 46-49). § Issue: how is a non-negotiable claim delivered to the holder of the hypothec so that it may thereby be

published? § Answer: a movable hypothec with delivery on a non-negotiable claim is validly granted and published

where: • 1. Debtor has transferred effective control of the claim to the creditor by giving them the right to

collect the debt directly from the account debtor in case of default, without further authorization of the debtor

• 2. Where the claim is evidenced by the title, the title has been handed over • 3. Necessary steps have been taken so that the hypothec can be set up against the account debtor (i.e.

the creditor has sent notice to the account debtor, like with assignment – see art. 1641). o In Caisse Desjardins, there are only two parties, however – the secured creditor is also the account debtor (i.e.

they are the ones who owe the money to the grantor) § So there was no need of notification to the account debtor – it was themselves

o Reaction § Val-Brillant was not well-received.


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§ The legal profession would have preferred the SCC to interpret arts. 2710/2711 as having a drafting error, instead of saying that the rule in the PPSA applied equally in QC à wanted to have to register a hypothec on a claim in order for it to be perfected, and not perfected by delivery.

§ Why would people prefer registration? • Increased transaction costs for people taking general security interests in all accounts receivable of

the grantor: cannot go to the registry to see if they have previously been hypothecated, because there is an alternative mode of publication à notification (and if the account is a deposit with a bank, there won’t even be notification to find). o Would have to go to the customers to see if they’ve received notification o Would have to ask banks if they took a security interest in the deposits of the grantor o These people don’t really have to tell a secured creditor; no obligation to disclose

o Policy reasons for Val-Brillant § SCC wanted to expand the possibilities of movable security interests which an individual can grant (we

have seen that there are stricter regulations which limit movable hypothecs without delivery. So the SCC expanded the idea of delivery.)

o Amendment to CCQ post Val-Brillant § Dissent in Caisse Desjardins Drummond also notes that the CCQ has been amended since Val-Brillant;

art. 2702 was amended with the addition of the word “PHYSICAL” delivery. § But art. 2710 wasn’t changed. § Dissent says that it is no longer possible to publish a hypothec on a claim through notification (because

does not constitute physical delivery) – have to register it § Deschamps J. isn’t dissenting on this point; Rothstein J. doesn’t address it because he doesn’t have to –

so most people believe Deschamps J.’s view is the state of the law o Where are we now? So now we are pretty sure there is no difference between CCQ and PPSA – but we need

jurisprudential confirmation • What about publication requirements for non-hypothecary security devices in the CCQ (i.e. SWAROR, instalment

sale, lease, leasing, security trust)? § There is no mention in those provisions of possession being an alternative to registration – only deal with

registration § This is because these transactions assume that the grantor stays in possession of the property offered as

security – that is the whole point C. Control of Investment Property by the secured creditor

Control also perfects a security interest in investment property.17 Control is not the only available mode of perfection. The security interest can also be perfected by registration.18 If the collateral is a certificated security, delivery of physical possession of the certificate in accordance with the STA also constitutes perfection.19 Although a security interest in investment property may be perfected by multiple modes, the acquisition of control provides superior protection at the level of priority. The reasons why are summarized in the following sections. CML S 22.1, 1(2)

22.1 (1) A security interest in investment property may be perfected by control of the collateral under subsection 1 (2).

17 NB PPSA. s. 24.1 ON PPSA s. 22.1. 18 The PPSA permits registration as perfecting step for a security interest in any type of collateral: NB PPSA s. 25; O, s. 23. CCQ art 2934. 19 NB PPSA s. 24(3)-(4); ON PPSA s. 22(2)-(3). Perfection by delivery in accordance with STA 68 differs from perfection by control. Under

STA s. 23, a person who takes delivery of a certificated security obtains control only if the certificate is in bearer form. If it is in registered form, the secured party acquires control only if the security certificate is also endorsed to the secured party or in blank, or registered in the name of secured party. Thus, a certificated security need not be in bearer form for perfection by delivery to occur under the PPSA. It is for this reason that art. 2714.7 of the Quebec Civil Code confirms that “[c]ertificates representing securities within the meaning of the Act respecting the transfer of securities and the establishment of security entitlements (chapter T-11.002) do not have to be negotiable for hypothecary delivery to be validly effected through the physical delivery and holding of the certificates; hypothecary delivery results from the delivery of the certificates in accordance with [s. 50 of] that Act.”


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ONPPSA Also s 24.1, 1(2) NB PPSA

Same (2) A security interest in investment property is perfected by control under subsection 1 (2) from the time the secured party obtains control and remains perfected by control until, (a) the secured party does not have control; and (b) one of the following occurs: (i) if the collateral is a certificated security, the debtor has or acquires possession of the security certificate, (ii) if the collateral is an uncertificated security, the issuer has registered or registers the debtor as the registered owner, or (iii) if the collateral is a security entitlement, the debtor is or becomes the entitlement holder.

CVL Art 2714.1 Securities

In the case of securities and security entitlements within the meaning of the Act respecting the transfer of securities and the establishment of security entitlements (chapter T-11.002), the requirement that the property be delivered to and held by the creditor in order for a movable hypothec with delivery to be constituted and set up against third persons may be met by the creditor obtaining control of the securities or security entitlements in accordance with that Act.

D. Automatic Perfection (Investment Property) CML S 19.2 ONPPSA

A security interest arising in the delivery of a financial asset under subsection 11.1 (2) is perfected when it attaches.

Cf. s 19.2 NB PPSA CVL Art 2701.1

A movable hypothec constituted by a securities intermediary on securities or security entitlements within the meaning of the Act respecting the transfer of securities and the establishment of security entitlements (chapter T-11.002) is deemed to be published by the sole fact of its constitution, and does not require registration. If the securities intermediary has constituted two or more movable hypothecs on the same securities or security entitlements, the hypothecs rank concurrently among themselves, regardless of when they were published.

E. Automatic Temporary Perfection CML S 24(2) ONPPSA Cf. s 26(1) NB PPSA

A security interest perfected by possession in, (a) an instrument or a certificated security that a secured party delivers to the debtor for, (i) ultimate sale or exchange, (ii) presentation, collection or renewal, or (iii) registration of transfer; or (b) a negotiable document of title or goods held by a bailee that are not covered by a negotiable document of title, which document of title or goods the secured party makes available to the debtor for the purpose of, (i) ultimate sale or exchange, (ii) loading, unloading, storing, shipping or trans-shipping, or (iii) manufacturing, processing, packaging or otherwise dealing with goods in a manner preliminary to their sale or exchange, à remains perfected for the first ten days after the collateral comes under the control of the debtor.

CVL Art 2699 A movable hypothec on property represented by a bill of lading or other negotiable instrument or on


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claims may be set up against the creditors of the grantor from the time the creditor gives value, provided it is registered within the following 10 days.

Art 2704 Holding is continuous even if its exercise is prevented by the act of a third person without the consent of the creditor or is temporarily interrupted by the handing over of the property or title to the grantor or to a third person for evaluation, repair, transformation or improvement.

Art 2708 A movable hypothec on property represented by a bill of lading or other negotiable instrument or on claims may be set up against the creditors of the grantor from the time the creditor gives value, provided the title is remitted to him within 10 days from that time.

Automatic Temporary Publication or Perfection • The automatic status only happens for a limited period of time • Art. 2699: a movable hypothec on a bill of lading has ten days where it is not published by any means, but SC still

has perfected status o Why? Because the financing done on the basis of bill of lading is generally pretty short-term; bank doesn’t

want the bill of lading, because the debtor has to be able to go get the cargo and sell it, and pay the loan back! If this financing relationship stretches past ten days, need to register it.

• PPSA s. 26(1) NB, s. 24(2) ON cover this situation (give 15 days) 2. CONTINUITY OF PERFECTION/PUBLICATION: CHANGING MODES OF PERFECTION • Since there are alternative methods for publishing security interests in movable property (registration, possession,

control), what happens if you change modes of publication halfway through? CML s 23(1) NB PPSA s 21 (1) ON PPSA

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.

CVL Art 2704 Holding is continuous even if its exercise is prevented by the act of a third person without the consent of

the creditor or is temporarily interrupted by the handing over of the property or title to the grantor or to a third person for evaluation, repair, transformation or improvement.

art 2707 A movable hypothec granted with delivery may be published by registration at a later date, provided publication is not interrupted.

Example 1. • Laser machine is the property offered as collateral. • Jan. 1st – Transfer of possession of the laser machine from debtor to creditor • Jan. 15th – Transfer of possession of the collateral back to debtor Can the SC register the security interest WHILE they still have possession of the collateral (i.e. between Jan 1 and Jan 14)? • The transfer of possession of the collateral from the debtor to the creditor attaches and perfects the security interest

(arts. 2702, 2703) • The transfer of the collateral from the SC back to the debtor makes the security interest of the creditor unperfected • But the SC can register the security interest while they have possession of the collateral, and it will be deemed to

have been continuously perfected since Jan 1 (this is important, because date of perfection establishes priority) à NB s. 23(1), art. 2707


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Example 2. • Jan 1st 2003 – Registration of the security interest for three years • Dec 31st 2005 – SC takes possession of the collateral • Jan 1st 2006 – Registration expires Is this security interest continuously perfected? • Yes, this security interest is continuously perfected under s. 23(1) NBPPSA; s. 21(1) ONPPSA • But CCQ art. 2707 only contemplates continuity of publication from possession to registration (not the other way

around). So this sequence would not result in continuity of publication in QC. Example 3. • Jan 1st 2003 – Security agreement between the grantor & SC (never registered/defective registration) • Jan 1st 2007 – Grantor defaults • Jan 15th 2007 – SC seizes the encumbered asset • Jan 16th 2007 – Creditors of the grantor petition the grantor into bankruptcy Was the SC’s interest perfected by his seizure of the collateral? • In Ontario, SC can argue that he perfected before bankruptcy occurred because possession (via seizure) is an

available method of perfection. There is jurisprudence confirming the availability of this argument. • In New Brunswick, this argument is not available (s. 24(2)(b)) • Which do we prefer?

o NB’s rationale is encouragement of publication o ON’s rationale is that the secured creditor could just register on January 15th instead of seize, so it makes no

difference if they are permitted to do this • In Quebec, this situation can never arise, because the secured creditor needs to register to publish; also need to

register a notice of enforcement o So a seizure for the purposes of enforcement will never occur without registration

3. CONSEQUENCES OF FAILURE TO PERFECT/PUBLISH • Basic Difference in Approach between PPSA and CCQ:

o PPSAs (s. 9 ON/NB): assumption that a security agreement is effective against everyone upon attachment § EXCEPT: as otherwise provided in the PPSA § PPSA lists several people to whom the unperfected security interest is not opposable.

o CCQ: a security agreement is not effective against third parties until it is published (art. 2663).

• A security interest is only perfected when: it has attached, and all steps for perfection are completed (i.e. registration, delivery, notification, etc) [NB s. 19; ON s. 19]

s. 19 ONPPSA

19. A security interest is perfected when, (a) it has attached; and (b) all steps required for perfection under any provision of this Act have been completed,

regardless of the order of occurrence. • The possible contests and where to find the answers:

o 1. Unperfected Security Interests v. Other Interests (of Buyers, Judgment Creditors, Trustees in Bankruptcy)


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§ See NB s. 20 § See ON s. 20 § See CCQ art 2663

o 2. Perfected Security Interests v. Other Interests (Other Perfected Security interests, Unperfected Security Interests) § See NB s. 35 § See ON s. 30 § See CCQ art 2663, 2941.

o 3. Unperfected Security Interests v. Unperfected Security Interests § See NB s. 35 § See ON s. 30 § See CCQ art 2663

s. 20 NBPPSA

Subordination of unperfected security interests 20 (1) An unperfected security interest in collateral is subordinate to the interest of (a) a judgment creditor who has registered a notice of judgment in the Registry pursuant to subsection 2.2(1) of the Creditors Relief Act if the security interest is unperfected when the notice is registered, (b) all persons entitled by the Creditors Relief Act or otherwise to participate in a distribution of personal property subject to the interest of a creditor referred to in paragraph (a), and (c) a sheriff and a representative of creditors for the purpose of enforcing the rights of a creditor referred to in paragraph (a). 20(2) An unperfected security interest in collateral is not effective against (a) a trustee in bankruptcy IF the security interest is unperfected at the time of the bankruptcy, (b) a liquidator appointed under the Winding-up and Restructuring Act (Canada) if the security interest is unperfected when the winding-up order is made, or (c) a creditor, assignee or sheriff who has registered a notice of claim in the Registry pursuant to subsection 2.4(1) of the Creditors Relief Act for the purposes of any enforcement proceedings commenced under the Acts referred to in that subsection if the security interest is unperfected at the time the notice of claim is registered. 20(3) An unperfected security interest in collateral that is not investment property is subordinate to the interest of a transferee of the collateral if the transferee (a) acquires the interest under a transaction that is not a security agreement, (b) gives value, and (c) acquires the interest without knowledge of the security interest and before the security interest is perfected. […]

s. 35 NBPPSA

Residual (general) priority rules 35(1) Where this Act provides no other method for determining priority between competing security interests in the same collateral, the following priority rules apply: (a) priority between perfected security interests is determined by the order of the occurrence of the following:

(i) the registration of a financing statement under section 25 without regard to the time of attachment of the security interest, (ii) possession of the collateral under section 24 without regard to the time of attachment of the security interest, or (iii) perfection under sections 5, 7, 7.1, 26 (temporary), 29 (repossessed or seized) or 74, whichever is earliest;

(b) a perfected security interest has priority over an unperfected security interest; and (c) priority between unperfected security interests is determined by the order of attachment of the security interests. […]

s. 20 ONPPSA

Unperfected security interests 20. (1) Except as provided in subsection (3), until perfected, a security interest,

(a) in collateral is subordinate to the interest of,


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(i) a person who has a perfected security interest in the same collateral or who has a lien given under any other Act or by a rule of law or who has a priority under any other Act, or

(ii) a person who causes the collateral to be seized through execution, attachment, garnishment, charging order, equitable execution or other legal process, or

(iii) all persons entitled by the Creditors’ Relief Act or otherwise to participate in the distribution of the property over which a person described in subclause (ii) has caused seizure of the collateral, or the proceeds of such property;

(b) in collateral is not effective against a person who represents the creditors of the debtor, including an assignee for the benefit of creditors and a trustee in bankruptcy;

(c) in chattel paper, documents of title, instruments or goods is not effective against a transferee thereof who takes under a transaction that does not secure payment or performance of an obligation and who gives value and receives delivery thereof without knowledge of the security interest;

(d) in intangibles other than accounts is not effective against a transferee thereof who takes under a transaction that does not secure payment or performance of an obligation and who gives value without knowledge of the security interest. […]

s. 30 ONPPSA

Priorities 30. (1) If no other provision of this Act is applicable, the following priority rules apply to security interests in the same collateral:

1. Where priority is to be determined between security interests perfected by registration, priority shall be determined by the order of registration regardless of the order of perfection.

2. Where priority is to be determined between a security interest perfected by registration and a security interest perfected otherwise than by registration,

i. the security interest perfected by registration has priority over the other security interest if the registration occurred before the perfection of the other security interest, and

ii. the security interest perfected otherwise than by registration has priority over the other security interest, if the security interest perfected otherwise than by registration was perfected before the registration of a financing statement related to the other security interest.

3. Where priority is to be determined between security interests perfected otherwise than by registration, priority shall be determined by the order of perfection.

4. Where priority is to be determined between unperfected security interests, priority shall be determined by the order of attachment. […]

art. 2941 Publication of rights allows them to be set up against third persons, establishes their rank and,

where the law so provides, gives them effect. Rights produce their effects between the parties even before publication, unless the law expressly provides otherwise.

Art 2663 hypothecs

The hypothecary rights conferred by a hypothec may be set up against third persons ONLY when the hypothec is published in accordance with this Book or the Book on Publication of Rights.

Art 2664 hypothecs

Hypothecation may take place only on the conditions and according to the formalities authorized by law. A hypothec may be conventional or legal.

Non-hypothecary security rights - CCQ arts. 1263, 1745, 1749, 1847, 1852, 1750, 1752, 2961.1, 2964 4. PERFECTION AND TRANSFEREES Example 1. Jan 1st à SC – D (creation of a security agreement)


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Jan 2nd à D sells the asset encumbered by the security interest to the buyer, and tells the buyer about the security interest. Jan 3rd à SC publishes their interest by registration Can the SC enforce their security interest against the buyer? CCQ. No. • 2663. SC can only set up a hypothec against a third person if it has been published

o Since there was no publication at the time the buyer acquired the right, the security right is not opposable to the buyer.

• 2941. Publication of rights allows them to be set up against third persons • 2963. Absence of publication can never be compensated for by the third party acquiring knowledge of the right that

has not been published. o I.e. Just because the buyer knew, doesn’t mean the secured creditor is off the hook. They still should have

published. PPSAs. Yes. • NB PPSA, s. 20(3). The secured creditor’s right is effective against the third party buyer because the buyer had

knowledge of the security interest (have to read the provision negatively) o The secured creditor’s interest is only subordinate to that of a buyer who DID NOT KNOW about the security

interest • ON PPSA, s. 20(1)(c). Same rule. The SC’s right is effective, because buyer knew about it when they purchased. Does the CCQ or the PPSA have the better policy with respect to buyers?

CCQ PPSA + Protects third parties + Provides certainty: if there was no publication, there is no opposability to the buyer. Objective fact. + Fair: SC should have published if they wanted their right to be opposable.

+ Protects secured creditors from bad-faith buyers - Lack of certainty: what constitutes knowledge? - Subjective criterion of knowledge will create litigation, and therefore costs.

• Recommendation of the Ontario Committee on Personal Property Security is to eliminate the “without knowledge”

element in the PPSA – would align the ON PPSA with CCQ. • Justification? Diminished litigation. It would be more predictable and certain if you could just say that an

unperfected security interest is never opposable against a buyer. o This is Walsh’s preference.

Example 2. Jan 1st à SC – D (creation of a security agreement) Jan 2nd à D gives the asset encumbered by the security interest to a donee, and tells the donee about the security interest. Jan 3rd à SC publishes their interest by registration Can the SC enforce their security interest against the donee? • CCQ: the change of facts doesn’t change the outcome. A third person is a third person. No publication, no

effectiveness. • PPSA: the change of facts matters. The transferee has to have given value for the unperfected security interest to

be subordinate to theirs. (s. 20(3)(b)). o Policy? Donee has no reliance interest, suffers no loss from having to give the property back o Can challenge the PPSA’s policy on the basis that it assumes that donees are never prejudiced


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o Counterpoint: possibility of fraud. Difficult to challenge a transaction on the basis of fraud – high burden of proof. So this provision establishes a presumption in favour of the secured creditor.

Example 3. Jan 1 – SC registers Jan 2 – Buyer acquires the asset without knowledge of SC’s security interest Jan 3 – SC attaches (perhaps debtor hadn’t yet signed security agreement until now) Can SC oppose their security interest to the buyer?

• PPSA. No.

o s. 20(3) An unperfected security interest is not effective against the third-party buyer that had no knowledge of the security interest.

o s. 19 A security interest has to ATTACH and be REGISTERED to be perfected o There was no perfection of this security interest, because it had not yet attached; a buyer without knowledge

therefore takes free. • CCQ. This sequence isn’t possible.

o CCQ doesn’t permit advance registration: assumes security right already exists before publication o When you register the notice of a hypothec, have to refer to the juridical act that created it o We don’t really know what a court would do if there was a mistake, and the juridical act was only finalized

after the registration o As a practical matter, this scenario is unlikely to arise because the buyer would see the notice of hypothec

registered on the system and not buy the property o Technically, if it did arise, the buyer should take free because CCQ doesn’t contemplate this

5. PERFECTION AND OTHER SECURED CREDITORS Example 1. Jan 1 – SC1 attaches Jan 2 – SC2 attaches and publishes Jan 3 – SC1 publishes Who prevails on January 2nd? Who prevails on January 3rd? • January 2nd: the contest is between an unperfected (SC1) and a perfected (SC2) security interest

o NB s 19 + s 35(1)(b) / ON s 19 + s 20(1)(a)(i) = SC2 prevails because their interest is perfected, while SC1’s is not. An unperfected security interest is subordinate to a perfected security interest.

o CCQ art 2663: only SC2 exists as a security interest on Jan 2nd. • January 3rd: the contest is between two perfected security interests now

o ON s. 30(1) / NB. s. 35(1)(a)(i) = SC2 prevails (priority between security interests perfected by registration determined by order of registration)

o CCQ art. 2941 = SC2 prevails (publication establishes rank of registered rights) Example 2. Jan 1st à SC1 attaches Jan 2nd à SC2 attaches Who prevails, SC1 or SC2?


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• PPSA. SC1 wins.

o NB s. 35(1)(c) Order of attachment determines who has priority where neither security interest is perfected o ON s. 30(1)4. Order of attachment prevails when neither interest is perfected

• CCQ. Neither wins until they publish. o art. 2663 Neither SC can enforce their security interest against the other unless one perfects first o Each has an enforceable security interest against the grantor; but they can only enforce against the grantor

once they register a notice of enforcement, and can only register a notice of enforcement if they have registered the security interest first

o Would be a race to the registry! 6. PERFECTION AND UNSECURED CREDITORS OR JUDGMENT CREDITORS Example 1. Unsecured Creditors. Jan 1st – SC1 and D conclude SA Jan 2nd – Unsecured loan by Creditor #2 Jan 3rd – SC1 registers their security interest Who prevails, SC1 or creditor #2? • SC1 prevails. Security would not be worth much if a secured creditor’s interest were subordinate to all current

outstanding unsecured loans. • In PPSA, there is no mention of plain old unsecured creditors who haven’t gotten a judgment – it is assumed that a

secured creditor prevails over an unsecured creditor. • Unsecured creditors do not have a claim to a particular property/asset of the debtor – before they do have that

claim, they have to get a judgment. Example 2. Judgment Creditors. Jan 1st – SC1 and D conclude security agreement Jan 2nd – Unsecured creditor gets a judgment, becoming judgment creditor Jan 3rd – SC1 registers Who prevails, SC1 or JC? • NBPPSA, s. 20(1)(a). JC if they register their notice of judgment.

o The JC needs to register their notice of judgment for it to be effective against the secured creditor under the Creditors Relief Act (not the PPSA)

o Creditors Relief Act, once the judgment is registered under it, gives judgment creditor a general security interest in all present and after-acquired property of the debtor

o So on Jan. 2, JC has to register their notice of judgment to prevail over SC1 • ONPPSA, s. 20(1)(a)(ii). JC if they seize the property.

o The judgment creditor needs to SEIZE the property for their judgment to be effective o So in example, JC needs to seize on Jan. 2 to prevail over SC1

• Policy-wise, which system do we prefer? o NB, because it’s easier to register than to seize o In ON, if secured creditor perfects between judgment and seizure, SC1 prevails o Note: your debtor might not have assets at the time you get your judgment.

§ In NB, can just register your judgment notice and wait. When debtor tries to deal with the assets they do eventually acquire, will be encouraged to pay their judgment, because potential buyers or lenders will see the registered notice of judgment and refuse to deal with those assets.


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§ Unlike ON, where you need to seize to get rights. • There is a movement in ON to reform judgment enforcement law to modernize it

• CCQ, art 2724, 2730. JC if they register on January 2. o A legal hypothec arises when a judgment is given to a creditor (art. 2724) o JC needs to register it to acquire it (art. 2730)

7. PERFECTION AND PARTIES INVOLVED UPON BANKRUPTCY Example 1. Jan 1st – SC1 and D conclude the security agreement Jan 2nd – Bankruptcy intervenes Jan 3rd – SC1 registers On January 2nd, who wins? • PPSA. Representative of the creditors (including trustee in bankruptcy).

o ON s. 20(1)(b) / NB s. 20(2) An unperfected security interest is not effective against the representative of the creditors (ex. a trustee in bankruptcy)

• CCQ. Vexed Question. o art 2663 says that a secured creditor needs to publish for a security interest to be effective against third parties;

the question becomes whether a trustee in bankruptcy is a “third person” to whom the security interest needs to be opposed (see below in Lefebvre, Ouellet).

Introduction to the Interaction between the PPSA/CCQ and the BIA Personal Property Security Interests Through Bankruptcy • Nothing in the BIA says that a secured creditor is supposed to have registered in order to get paid out of the

bankrupt’s assets first; this is what the PPSA/CCQ says • Courts have said there is no conflict between the PPSA/CCQ and the BIA on this point – property principles set

out by provincial legislation are relevant for determining how the BIA applies The Trustee in Bankruptcy • The trustee in bankruptcy wears 2 hats:

o Steps into the shoes of the debtor à acquires all their property rights (no more no less). Has no greater rights to the assets than the debtor themselves had prior to bankruptcy.

o Representative of the creditors à holds the rights of the creditors of the debtor to enforce them PPSA: Priorities in Bankruptcy • s. 20 PPSA an unperfected security interested is not effective against a trustee in bankruptcy unless it is perfected

before the date of bankruptcy s. 20(2) NBPPSA s.20(1)(b) ONPPSA

20(2) An unperfected security interest in collateral is not effective against (a) a trustee in bankruptcy if the security interest is unperfected at the time of the bankruptcy, (b) a liquidator appointed under the Winding-up and Restructuring Act (Canada) if the security interest is unperfected when the winding-up order is made, or […]

The Date of Bankruptcy is Therefore Important. When Does Bankruptcy Occur? See the Bankruptcy and Insolvency Act. • A person enters into formal bankruptcy in 3 ways:

o 1. Petition (creditors petition the court – involuntary means)


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§ Date of bankruptcy = the date the petition has been filed with the official receiver o 2. Assignment (bankrupt assigns his assets to the benefit of his creditors – voluntary means)

§ Date of bankruptcy = the date the assignment is filed with the official receiver o 3. Proposal (bankrupt makes a restructuring proposal to the creditors to work it out – if the proposal is rejected

by creditors, the proposal proceeding turns into a bankruptcy proceeding) § The date the proposal proceeding fails and is turned into a bankruptcy proceeding (controversial)

• This is done under the Commercial Creditors Arrangement Act • Should this be the policy? Should the security interest have to be perfected before the conversion

of the proceedings, or before the reorganization proposal is made (US)? • Argument in favour of requiring perfection before the reorganization proposal is made:

o Need to know who is a secured creditor and who isn’t, because they have different voting rights in the reorganization process.

o Also, as a matter of principle, the security interest should have been published by this point, because this is generally nearing insolvency

Deemed Security Interests: Problems at Bankruptcy Stage Re Giffen – CML 1998 SCC Facts: Lessor leased a car to a company; they in turn leased the car to one of their employees, G. The term of the lease was for more than one year, with option to purchase. G went bankrupt, and neither the original lessor nor the company had registered their lease agreements with G under the BC PPSA. G assigned all her property to a trustee in bankruptcy. Issue: Can s. 20 of the BC PPSA extinguish the lessor’s right to the car in favour of the trustee’s interest? Holding: Yes. Reasoning (Iacobucci J.): • Who owns title to the collateral is not determinative in secured transactions

o In enacting the PPSA, the provincial legislature set aside the traditional concepts of title/ownership o The dispute here is one of priority to the car, not ownership of it

• The lease is a security interest for the purposes of the PPSA: a lease of a term greater than 1 year is explicitly subjected to the PPSA, and is defined as a security interest

• The lessor’s security interest in the car was unperfected o Security interest attached when G acquired her possessory rights to the car (upon delivery) o But was never perfected by registration – so is vulnerable to third-party claims which the PPSA allows to pre-

empt an unperfected security interest • G’s interest in the car vests in the trustee because all her property (the right to possess/use the car is property)

transferred to him upon the bankruptcy • The lessor’s security interest is ineffective against the trustee because s. 20 of the BC PPSA says it is

o What is the policy rationale for making the lessor’s interest ineffective against that of the trustee? § It is not public disclosure – that is, to prevent innocent third parties from granting credit to the debtor or

acquiring another interest in the collateral à this is not the position the trustee is in § Trustees are given the capacity to defeat unperfected security interests because of the representative

capacity of the trustee (of unsecured creditors) and the effect of bankruptcy on the enforcement rights of unsecured creditors

• Before bankruptcy, unsecured creditors could lift their interest to the level of perfected status by getting a judgment against the debtor

• Once the bankruptcy occurs, all claims are frozen and have to go through the trustee • So to maintain the pre-bankruptcy position of the unsecured creditors vis-à-vis secured creditors,

the legislation endows the trustee in bankruptcy to trump the creditor with the unperfected security interest

• Also explains why the trustee is not confined to the interest of the bankrupt • Effect of s. 20 here – making the lessor’s ownership rights ineffective against the trustee’s possessory rights – is to

grant the trustee full rights to the car even though G did not have such strong rights o This is in line with s. 20 and the jurisprudence – the trustee can have a greater interest in disputed property


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than the bankrupt o This is a policy choice made by PPSA – true owner forfeits title if they failed to register their interest such

that third parties dealing with the ostensible owner could not have discovered the true owner o For the purposes of priority, the PPSA replaces the common law principle of nemo dat (one cannot transfer

better title than one possesses) • Trustee can also transfer clear title. Ratio: A lessor who does not perfect their interest in the lease property as required by the PPSA will see their interest trumped by that of the trustee in bankruptcy who (has priority and) acquires the lessee’s rights. Walsh on Re Giffen: • We saw that any lease for a term greater than one year is deemed to be a security interest in the PPSA • The owner of the leased property is the lessor

o But the drafters of the PPSA do not care who the owner of the collateral is o If you are a lessor, and you fail to register, your OWNERSHIP rights are ineffective against third parties

designated by legislation • But does this conflict with the rule in the BIA that the trustee in bankruptcy receives no greater right in the asset

than the bankrupt has? Simply put, yes. o Lessor’s argument: all the lessee/bankrupt had was a right to possession of the car – so that’s all the trustee

gets. The trustee therefore needs to give effect to lessor’s ownership rights. o Trustee’s argument: provincial law changes this situation o Court agrees with the trustee. The provincial PPSA empowers the trustee to prevent the lessor from claiming

his ownership rights (allows trustee to oppose their rights to lessor), because it’s altering the traditional notions of property law § This is a policy decision. It explicitly disrupts the traditional logic of common law property.

• Cf. Saulnier and Re Giffen à in bankruptcy law, we take a more expansive view of what is property (and property of the debtor)

• The important part of Re Giffen is that the exact same facts arise in QC in two cases (see below) o The SCC comes to the opposite conclusion. The trustee loses. The lessor wins. Nemo dat prevails.

CCQ: Priorities in Bankruptcy • Normally, under art. 2663, the trustee in bankruptcy prevails over a secured creditor that has not published their

security interest. They are a third party to whom that interest is not opposable. • But see these cases for the priority issues that arise in bankruptcy when non-hypothec security interests are not

published in due time:nnnnnn This is the Quebec Re Giffen: Lefebvre (Trustee of); Tremblay (Trustee of) – CVL 2004 SCC Facts: L and T each leased cars on long-term bases from dealerships. They each went bankrupt and assigned their property to a trustee in bankruptcy. After bankruptcy, the dealerships registered their leases as required by art. 1852 CCQ, but not within the required time delay. Issue: Are the lessors’ rights of ownership opposable to the lessee’s trustee in bankruptcy even though the lessor failed to publish in time? Holding: Yes. Reasoning (Lebel J.): • Art. 1852 CCQ says that leases of cars of a term greater than one year must be published • Art. 2941 CCQ says that publication of rights allows them to be set up against third persons The Legislative Context • In the new CCQ, QC Legislature organized secured transactions in QC around a single type of security, the

hypothec à applies to both immovable and movable property. Also recognizes other security rights. • This solution was preferred to the presumption of hypothec which would have grouped all forms of security under

this single concept o This decision maintained the difference between the legal concepts of security and ownership à right of

ownership confers full control over a property, while security is an incidental real right Lessees and Lessors


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• Nominate contract of lease does not convey ownership of the leased property from lessor to lessee o Leased property remains in lessor’s patrimony

• However, the QCCA has interpreted long-term leases as pure security interests from the point of view of the lessor – meaning they cannot be set up against third persons such as trustees in bankruptcy if unpublished à this reintroduces the concept rejected in 1994 – the presumptive hypothec

Requirement to Publish Rights • Publication or lack thereof has no effect on the lessor’s right of ownership over the leased property

o May affect the opposability of rights v. third parties • This is different from SWAROR, instalment sale à here, ownership is conceptualized primarily as a security

interest (but see Ouellet) Position of the Trustee in Bankruptcy • Is the TIB a third party? The legal tenor of their seisin is difficult to discern in the civil law à are they an owner,

an assignee, an administrator of the property of another (none of the above) • The TIB has two roles: represent the creditors (liquidation) and represent the debtor (control of property) • Because the TIB represents the debtor, he is not truly a third party as envisioned in art. 2941 • Furthermore, TIB acquires no more rights in property than debtor has (unless provided for by legislation) • In this case: TIB did not acquire ownership of the vehicles; that remained with the lessor. Since the TIB is

not a third party, the lessor’s right of ownership is opposable to him without publication. • N.B. Re Giffen dealt with a specific statutory context – is inapplicable to interpreting the CCQ. Ratio: In QC, the trustee in bankruptcy does not acquire the unpublished rights of long-term lessors to the bankrupt. The trustee cannot acquire more rights than the debtor has, and the trustee is not a third party, so the lessor does not have to publish to oppose their rights to the trustee in accordance with art. 2663. This is the same issue, but with instalment sales: Ouellet (Trustee Of) – CVL 2004 SCC Facts: O bought a mobile home and a car under an instalment sale contract. The seller’s reservation of ownership was not published until 2001. O went bankrupt in 2000 and assigned his property to a trustee. Issue: Does the reservation of ownership in favour of the seller have effect against the buyer’s trustee in bankruptcy, even though the seller failed to publish? Holding: Yes. Reasoning (Lebel J.): • See arts. 1745, 1749, 2941 • The Court of Appeal incorrectly equated the seller’s reservation of ownership with a security right, and treated the

trustee as a third party • Seller retains full ownership until the instalments are all paid; property subject to the sale remains in the seller’s

patrimony until it is fully paid for à seller has ownership, not a security right (art. 1745) • A trustee in bankruptcy only acquires the rights of the debtor, no more – they do not get the seller’s ownership

right • There are consequences of a failure to publish, but they only affect the seller’s ability to set up his ownership rights

against third parties • A trustee in bankruptcy is not a third party, for reasons given in Lefebvre (Trustee of) Ratio: The seller in an instalment sale K who does not publish still retains the ownership of the property sold therein – they can set up that right of ownership against their debtor’s trustee in bankruptcy because the trustee does not acquire ownership in the bankruptcy assignment, and they are not a third party because they represent the debtor. The seller therefore does not have to publish their rights in order to oppose their ownership to the trustee in bankruptcy. Commentary: Amendments subsequently made to the BIA change the outcome of this case – the definition of “secured creditor” includes a seller in an instalment sale K [but still not a lessor], and the seller’s right must therefore be published to be effective against a trustee. The new definition of “secured creditor” in the BIA is: “secured creditor” means a person holding a mortgage, hypothec, pledge, charge or lien on or against the property of the debtor or any part of that property as security for a debt due or accruing due to the person from the debtor, or a person whose claim is based on, or secured by, a negotiable instrument held as collateral security and on which the


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debtor is only indirectly or secondarily liable, and includes (a) a person who has a right of retention or a prior claim constituting a real right, within the meaning of the Civil Code of Québec or any other statute of the Province of Quebec, on or against the property of the debtor or any part of that property, or (b) any of

(i) the vendor of any property sold to the debtor under a conditional or installment sale, (ii) the purchaser of any property from the debtor subject to a right of redemption, or (iii) the trustee of a trust constituted by the debtor to secure the performance of an obligation,

if the exercise of the person’s rights is subject to the provisions of Book Six of the Civil Code of Québec entitled Prior Claims and Hypothecs that deal with the exercise of hypothecary rights; Walsh on Re Giffen, Lefebvre, Tremblay, and Ouellet: • Illogic of the QC cases: for the purposes of art. 2663, the trustee is fully able to oppose their rights, as a third party,

against a secured creditor with an unpublished hypothec • It obviously gets more complicated when the interest to be registered is not a security interest, but an ownership

interest (ex. publication of a long-term lease by the lessor, or publication of reservation of ownership by the seller in an instalment sale)

• Lefebvre (unpublished lease)/Ouellet (unpublished instalment sale): o Drafters of the Code explicitly did not assimilate lease or instalment sale into the general regime on security

interests (hypothec) – they wanted to preserve the ownership rights of the lessor/seller o The trustee is not permitted to challenge that ownership right, for the mere reason that it is unpublished

§ So the court decides that the trustee in bankruptcy is not a third person for the purposes of arts. 1852, 1745

§ But this creates the contradiction that the trustee is thought to be a third party for the purposes of art. 2663

o This does not hold together logically – there is no explanation for why a narrower interpretation of “third person” should hold sway when dealing with an ownership right rather than a hypothecary right that was not published

• The Upshot: o Lessors in QC do not have to register to get their property back from a bankrupt debtor via the trustee (but

must register if they want to protect their ownership rights from “true” third persons) o Lessors in CML provinces do have to register to make their ownership rights opposable to the trustee in

bankruptcy (see s. 20 and Re Giffen) o Instalment sellers everywhere probably should register (CCQ, contra Ouellet, contra contra s. 2 BIA)

Me: • What’s the difference explaining the different outcomes in QC and ONT?

o PPSA explicitly derogates from regular common law property – changes the effects of ownership § Effect of statute over common law

o CCQ cannot explicitly derogate from “regular” civil law property because of the nature of the CCQ as an integrated whole

• Does the CCQ perhaps not imagine – in a typical hypothec – that the ownership of the asset offered as security will not lie in the hands of the creditor? o Because it maintained, in 1994, all these other types of “security interests” such as lease, SWAROR,

instalment sale, in which ownership of the asset offered as security explicitly does not lie with the debtor, but with the creditor in lease, SWAROR, and instalment sale

• Why is the trustee in bankruptcy a third party in art. 2663 (publication means you can oppose your hypothecary rights to third parties) but not for the purposes of art. 1852? o These legal regimes were subjected to publication for true third parties – people who may lend the debtor

money, or take an interest in the property offered as security o The trustee in bankruptcy is not one of these


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o The rationale for subjecting these transactions to publication is to warn other secured creditors who would lend on the basis of the property, or buyers of the property: not so that other unsecured creditors can gain access to these properties to satisfy the debts owing to them.

V. REGISTRATION

1. LAND REGISTRIES • All provinces maintain a separate registry for immovables • It’s asset-indexed à are organized by civic address or number accorded to the parcel of land (lot #) • It’s title-based à records ownership • It functions by document registration:

o The system tries to ensure it is an accurate record of the true state of legal affairs, so the actual agreement with respect to the land is actually filed or at the very least presented

o This state of affairs in the registry is evidence of the legal state of affairs 2. MOVABLE REGISTRIES • Ontario’s movable registry is the PPSR (Personal Property Security Register) • Quebec’s movable registry is the RPMRR (Register of Personal and Movable Real Rights) Characteristics of Movable Registries a. Not Title Based • Movable registries are not title-based: a movable register doesn’t record ownership (except with assignments), it

is a record of security rights in movable property (and consignments, long-term leases) b. Notice Registration • Movable registries do not function by document registration, but by notice registration • There is no examination whatsoever of the underlying documentation of the security relationship when registering

a security interest in a movable o The SC only registers a notice, a document (based on the security documentation) which records the bare

essentials of the transaction § Identities of parties and addresses (grantor most important) § Description of the collateral

• Notice registration means that the registry is not evidence of the true legal state of affairs c. Grantor-Indexed • Not asset-indexed, but grantor-indexed: search not according to asset, but according to name of grantor

o Why? § There are too many movables to organize the registry around. § Most movables do not have a unique identifier. § Often, security is not taken on specific movables of a grantor (ex. security interest in inventory).

o So a movable registry allows a secured creditor to search their co-contractant (can be a company) to see if he/it has granted any security rights in anything he owns

• The drawback to a system that is not asset-based, but grantor-based: The A-‐B-‐C-‐D Problem. • Jan 1st – G à SC (grantor gives security in property to secured creditor) • Jan 15th – G à B1 (grantor sells the property to a buyer, who didn’t search the registry or didn’t care)


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• Jan 16th – B1 à B2 (buyer 1 sells the property to buyer 2, who checks the registry but doesn’t find anything because B1 hasn’t granted security on the property)

• This problem obviously does not arise in an asset-based system, because if B2 could search the registry according

to the asset, he would have discovered the original security interest encumbering it • But with the grantor-based system, B2 is a good faith purchaser, who has done their due diligence, but they are still

the owner of an encumbered asset • How do we counter the ABCD problem?

o Create a supplementary asset index for certain types of movable assets (ex. cars – have distinctive serial numbers, and there is a significant used-car market where the ABCD problem is likely to arise)

o We only do this for assets that have such a significant resale value that it would be worth it for a secured creditor to take interest in it, and execute

Sidenote: Other (Federal) Registries • At the federal level, there is also a ship registry

o Is like a land registry o Are designed to record ownership of the ship, and any mortgages on it

• Also federal, IP registries – recorded for the purposes of patent law • Also federal, Bank Act registry created to record security given under federal Bank Act

o Grantor-indexed, notice registration 3. ADVANCE REGISTRATION • Advance registration is made possible by notice registration: do not have to present the underlying security

agreement for the purposes of registration, just the basics • PPSA.

o Explicitly contemplates advance registration: § s. 19 NB/ON: A security is perfected when it attaches and is published, “regardless of order” § Part IV (“Registration”) expressly allows registration in advance of attachment (s 43(5) NB)

• CCQ. o By contrast, CCQ would seem not to allow advance registration o In registering under the RPMRR, secured creditor has to refer to the underlying document of the security

agreement in the notice of registration. So the security agreement has to have been concluded before the SC is entitled to register.

• The Policy Perspective on Allowing Advance Registration o There is a risk that the finalization of the security agreement will not occur

§ PPSA deals with this in two ways: • SC has a statutory obligation to remove their registration from the system if the security agreement

does not exist • Creates a summary procedure for the grantor to compel the SC to remove the registration, and

punishments for an SC that does not do so (fines) o There is a risk of false registration

§ False registration is not that big of an issue: it costs time and money to register. It is not likely a SC will register unless reasonably confident the security interest will attach soon

o Note: Ontario does not allow advance registration where the collateral is consumer goods (s 45(2)) § This has been criticized as unnecessary and cumbersome, because it is possible to have a security interest

in a set of goods that contains both consumer and non-consumer goods § This restriction is likely on the way out.

• Conceptual Considerations: conceptually, advance registration is controversial. Registration of a transaction is hard to do if the transaction hasn’t occurred yet.

4. MULTI-AGREEMENT REGISTRATION


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Example 1. • Jan 1st 2007 – security agreement concluded between G and SC, and registration • Jan 1st 2008 – second security agreement concluded between G and SC

o Note: parties are the same and the information required to be filed by the system is the same Does the SC have to register the second agreement? • PPSA.

o No need for new registration o The old registration perfects the new security agreement. So the 2008 SA has 2007 priority.

§ This is obviously permitted by advance registration § But there is also a rule that explicitly says that a single registration can perfect successive security

agreements (s 45(4) ON; s 43(6) NB) • This reduces the burden on secured creditors • But can only do this if nothing has changed in the security arrangement

• CCQ. o Because of the need to use advance registration to perfect successive security agreements, this possibility

doesn’t seem to be contemplated in the CCQ o There should be one registration per security agreement, because of the required reference to a specific

security agreement o The CCQ assumes a one-to-one relationship between security agreement and registration o Can, however, register a second security agreement by amendment of the first registration

5. THE DATA REQUIRED IN REGISTRATION A. The Identity of the Grantor • i) Name

o THE GRANTOR’S NAME IS *ESSENTIAL*, because it is a search criterion § The system differentiates between debtors who are entities (companies, etc) and debtors who are persons

o The Regulations specify which parts of the grantor’s name are required: § First name; Middle initial; Surname

o The grantor’s name stimulates a lot of litigation: if the secured creditor registers the wrong name, is the registration invalid for a defect? § This is a problem because a lot of people do not go by their real names § The regulations define what a person’s “real name” is (birth certificate/driver’s license) § The registry systems build in a bit of forgiveness for registering the wrong name: when you do a search,

it returns exact match hits and similar match hits o Unincorporated partnerships also pose problems; have to enter the name of the partnership into the entity

search, and the individual names of the partners into the individual search o Ontario also requires the grantor’s date of birth, because it is the most populous province, and the likelihood

of having two people with the same name is higher • ii) Address B. The Identity of the Secured Creditor • i) Name • ii) Address (is not a search criterion) • Sidenote: In the US, you can buy the ability to search the system by secured creditor. Who wants it?

o Competitors: access to the customers of a company


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o Investors in corporations C. Description of the Collateral • The required description of the collateral varies by the type of property the collateral is • There is a general database for general movables • And there are separate databases for certain types of identified movables (ex. serial numbered cars) • If registering a car, need to input both a general description, and the serial-number description • See more on this below. D. Duration • 2 approaches:

o 1. US System: § There is a default duration for a registration of a security interest § If the security interest extends beyond this duration, the SC has to renew the registration

o 2. Canadian System § Select the term of registration, depending on how long you anticipate it will take the debtor to pay you

back § Have to pay a certain amount per year extra over a certain amount: this discourages secured creditors

from registering for overlong periods of time from an excess of caution E. Maximum Value of the Obligation (only in Quebec) • CCQ.

o The SC must refer to the (estimated) maximum value of the interest they have in the asset offered as collateral (art 2689).

o Objective: allowing a grantor to give as security the residual value of an asset already offered as collateral to a first secured creditor.

o The grantor has control over how much the SC inputs as the “maximum value” insofar as they have bargaining power (if the credit market is competitive, grantor will have more bargaining power; if they are not a new borrower, are established, also increases their bp)

• PPSA. o Does not require the SC to refer to the monetary value of the obligation (neither does Article 9). o Why? Maximum-value system does not work: SCs will enter inflated amounts to protect themselves, so the

debtor is not granted access to further financing • Walsh prefers the QC approach. 6. THE EFFECT OF ERRORS IN REGISTRATION • The effect of a mistake can be fatal to registration, and thus the perfection of a security interest • Mistake in grantor’s name: if the error is so bad as to render the grantor unsearchable, there is no publication,

effectively. So this interest is not perfected. • Mistake in the description of the asset: if the mistake is in the description of the asset, for example an omission,

this is fatal to having a priority in that asset o If the description is unclear, this also doesn’t fulfil the purpose of publication.

s 43 NBPPSA

43(7) Except as otherwise provided in this section, the validity of the registration of a financing statement is not affected by any defect, irregularity, omission or error in the financing statement unless the defect, irregularity, omission or error is seriously misleading. 43(8) A registration is invalid if a search of the records of the Registry using the name, as prescribed, of any of the debtors required to be included in the financing statement other than a debtor who does not own or have rights in the collateral does not disclose the registration.


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43(8.1) Subject to subsections (10) and (10.1), a registration is invalid if a search of the records of the Registry by serial number, as prescribed, for collateral that is consumer goods of a kind that are prescribed as serial numbered goods does not disclose the registration. […] 43(9) In order to establish that a defect, irregularity, omission or error is seriously misleading, it is not necessary to prove that anyone was actually misled by it. 43(10) Failure to include a description of any item or kind of collateral in a financing statement does not affect the validity of the registration with respect to the description of other collateral included in the financing statement.

s 46(4) ONPPSA

46. (4) A financing statement or financing change statement is not invalidated nor is its effect impaired by reason only of an error or omission therein or in its execution or registration unless a reasonable person is likely to be misled materially by the error or omission.

Ontario: what happens if you get one of the grantor’s names and the serial number wrong? Re Lambert (OCA 1995) – CML Facts: L bought a car from GM under a conditional sales agreement. GM registered its security interest using the name L gave to buy the car, which was different from the name on his birth certificate. They also registered it with reference to the VIN (vehicle identification number). L went bankrupt, and his trustee searched the register for GM’s interest under name only (both specific and non-specific debtor inquiries) and did not find the security interest. Issue: When will an error in the contents of a financing statement render the statement invalid and the security interest it represents unperfected as against third parties? Holding: When multiple searches of the registry would not signal the existence of the registered interest. Reasoning (Doherty J.A.): • GM’s filing was faulty because it did not properly register the name of the debtor. Except for s. 46(4), this would

render his security interest unperfected, because he did not complete all the steps necessary to perfect (s. 19(b) PPSA, Regulations)

Section 46(4) of the ONPPSA • Applies to any error in a financing statement • Says that an error does not per se invalidate the statement or impair the security interest claimed • Sets out an objective test for when an error invalidates a security interest

o It is not a test for actual prejudice suffered by the opposing party in the case; there is no requirement for evidence that the error actually misled anyone

o This approach avoids litigation, and incentivizes registrants to ensure their filing is correct à this will result in a more reliable and useful system

• The purpose of s. 46(4) is to preserve the integrity of the registration system provided for by the PPSA o To better serve its 2 groups of users: registrants and searchers o This section distributes the impact of errors – cannot be too forgiving (burden on searchers), nor too

unforgiving (burden on registrants) • The test: would a reasonable person have been misled materially by this error?

o The reasonable person is: a reasonably prudent potential purchaser or lender seeking to locate prior encumbrances on the targeted property, and is a reasonably competent user of the search function of the system (aware of multiple searches)

o What information does the RP have? Name and birth date of debtor; and, in the case of a motor vehicle, the VIN (because this would locate encumbrances put upon car by prior owners)

o What would RP do in the case of a car? RP would conduct both searches, because it is in his/her interest to do so, and the cost of doing so is minimal. A debtor-only search would not reveal security interests granted by prior owners of the vehicle – a VIN search will.

• When is the reasonable person likely to be “misled materially” by an error? o When: error in financing statement results in RP not retrieving that statement from the system o Not when: the RP could have found the financing statement despite the error

• So, in the context of motor vehicles, the RP will be misled when: o The VIN and the debtor name are wrong o The VIN is wrong but the debtor name is right o AND NOT when the VIN is right but the debtor name is wrong (this case)


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• Kelln (SaskCA): when the VIN is right, but the debtor name is wrong, the security interest in unperfected • OCA rejects this because the RP would conduct both searches. Ratio: A substantial error in the debtor’s name will not necessarily invalidate the registration of a security interest in Ontario especially if there is a secondary means of identifying encumbrances, for example, by way of a VIN number. Walsh on Re Lambert: • The conclusion in Re Lambert is only accepted in Ontario; all the other PPSAs reject this conclusion!

o If you have right serial number but wrong name, your interest is still perfected o If you have wrong serial number but right name, your interest is unperfected o HAVE to get the serial number right to achieve perfection; do not have to get the debtor name right

• This case does not represent the policy in other provinces: in all other CML provinces, need to get BOTH the debtor name and the serial number right in order for your security interest to be perfected

• The Committee for review of the ONPPSA has recommended the Re Lambert rule be codified, despite what the other provinces say

• Which rule is preferable from a policy perspective? o Who is searching for the security interests in the register? Purchasers, secured creditors, trustee in bankruptcy,

judgment creditors § These last two might not have access to the VIN § So they would prefer the argument in favour of the accuracy of both search terms

o Ontario had these arguments before them, but decided against it • Sidenote. The only type of asset that can be registered via serial number in Ontario is a road vehicle

o In other provinces, can register via serial number for other types of assets than just a road vehicle • Note: the serial-number rule doesn’t apply to security interests in inventory (because stock rotates; if grantor of

security interest sells inventory in course of business, buyer takes free from encumbrance in favour of seller’s financier), only in consumer goods and equipment o This applies in CCQ too (read in by jurisprudence)

Quebec: what happens when you make a mistake in the maximum value of the obligation? Exode Automobile Inc. (Syndic d’) (QCA 2005) – CVL Facts: The Caisse Populaire lent Exode $200,000. They got a hypothec on the universality of Exode’s movable property to secure this loan on Sept. 14. It was notarized Oct. 6 and registered on Nov. 14, with two mistakes: the amount of the security was marked higher than $200,000, and the registration referred to the notarial act of Oct. 6 rather than the private writing of Sept. 14. Exode went bankrupt, and the Caisse Pop gave the trustee in bankruptcy its proof of security to get paid in priority as a secured creditor – the trustee rejected this claim because of the faults in the registration. Issue: Do these mistakes in the registration of the movable hypothec render it inopposable to third parties? Holding: No. Reasoning (Giroux J.C.A.): • It is not the case that any failure of the creditor to follow the rules set out in Reg. 25 will make publication

invalid and therefore the security interest inopposable to third parties • A mistake will only be fatal to the opposability of a security interest to a third party when it renders publication

nugatory à the only fatal mistakes are those that amount to lack of publication • With cars, you can make a mistake with the serial number, or a different element (for example, the date of birth of

the party offering security), as long as other things are right, because the serial number is a description by which the security interest may be found

• When there is a mistake with the name of the party offering security, registration is generally thought to be invalid because a search will not return the existence of the security interest

• In this case, the mistake in the amount was not going to hurt anybody, because it was higher than the real amount owed

• The mistake in the date of the creation of the security interest also didn’t or wouldn’t have any prejudicial effect such that publication in this case was rendered useless

Ratio: The only mistakes in publication which are fatal to the priority of the security interest are those that render publication nugatory, or amount to no publication at all. Walsh on Exode Automobile:


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• Two errors in this case: one related to the maximum amount (higher than amount agreed), and date of constituting act o Does this invalidate the registration? No. Both errors were forgiven.

• The amount registered as maximum value was higher than the real amount; so no one would be misled by this into any negative situation. o If it was lower, the answer probably would have to be the same (valid). Because SC is the only one adversely

affected by registering lower (can’t enforce for higher)

VI. COMPETING CLAIMANTS: PRIORITY AMONG SECURED CREDITORS 1. THE GENERAL RULE: FIRST TO PERFECT/PUBLISH PREVAILS

General Rule: 1st secured creditor to perfect (i.e. publish) acquires 1st claim to the encumbered asset. A. The General Rule for Priority among Secured Creditors in the PPSA (see s. 30 ON; s. 35 NB) s. 35 NBPPSA

Residual (general) priority rules 35(1) Where this Act provides no other method for determining priority between competing security interests in the same collateral, the following priority rules apply: (a) priority between perfected security interests is determined by the order of the occurrence of the following: (i) the registration of a financing statement under section 25 without regard to the time of attachment of the security interest, (ii) possession of the collateral under section 24 without regard to the time of attachment of the security interest, or (iii) perfection under sections 5, 7, 7.1, 26, 29 or 74, whichever is earliest; (b) a perfected security interest has priority over an unperfected security interest; and (c) priority between unperfected security interests is determined by the order of attachment of the security interests. […]

s. 30 ONPPSA

Priorities 30. (1) If no other provision of this Act is applicable, the following priority rules apply to security interests in the same collateral:

1. Where priority is to be determined between security interests perfected by registration, priority shall be determined by the order of registration regardless of the order of perfection.

2. Where priority is to be determined between a security interest perfected by registration and a security interest perfected otherwise than by registration,

i. the security interest perfected by registration has priority over the other security interest if the registration occurred before the perfection of the other security interest, and

ii. the security interest perfected otherwise than by registration has priority over the other security interest, if the security interest perfected otherwise than by registration was perfected before the registration of a financing statement related to the other security interest.

3. Where priority is to be determined between security interests perfected otherwise than by registration, priority shall be determined by the order of perfection.

4. Where priority is to be determined between unperfected security interests, priority shall be determined by the order of attachment. […]

Example 1.


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• Asset offered as collateral is worth $100,000 • SC1 = registers first for $100,000 • SC2 = registers second for $100,000

Who prevails between SC1 and SC2? • SC1 prevails: NB s. 35(1); ON s. 30(1) (n.b. these are residual priority rules, apply only if no other priority rules

apply) Example 2. • Dec 31st 2009 – SC2 security agreement attaches • Jan 1st 2010 – SC1 takes possession of the encumbered asset • Jan 2nd 2010 – SC2 registers Who prevails between SC1 and SC2? • SC1 prevails. NB s. 35(1); ON s. 30(1)1.(ii) do not take account of the order of attachment. • This example doesn’t say that SC1’s security agreement has attached. So what additional facts would we need to

say that it’s valid and enforceable? o A security agreement attaches when:

§ Grantor has a real right in the property § The secured creditor has given value § There is objective evidence of security agreement, either

• Possession taken by SC (based an oral OR written agreement creating a security interest) • Written security agreement signed by debtor (with or without delivery; necessary without)

o If there was registration without attachment by SC2, then SC2’s rights are not enforceable against third parties (ON s. 11/no strict NB equivalent)

• In order to even get to the rules which we’re discussing (NB s. 35, ON s. 30 priority between perfected security interests), the security interest needs to be perfected (meaning it has to have attached and have been published: s. 19 ON/NB)

B. The General Rule for Priority among Secured Creditors in the CCQ art 2941 Publication of rights allows them to be set up against third persons, establishes their rank and, where

the law so provides, gives them effect. Rights produce their effects between the parties even before publication, unless the law expressly provides otherwise.

art 2945 Unless otherwise provided by law, rights rank according to the date, hour and minute entered on the memorial of presentation or, in the case of an application for registration in the land register, in the book of presentation, provided that the entries have been made in the proper registers. Where publication by delivery is authorized by law, rights rank according to the time at which the property or title is delivered to the creditor.

Art 2949 A hypothec affecting a universality of immovables ranks, in respect of each immovable, only from the time of registration of the hypothec against each. Registration of a hypothec against immovables acquired subsequently is obtained by presenting a notice containing the description of the immovable acquired and a reference to the act creating the hypothec, and setting forth the specific amount for which the hypothec was granted.


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However, if the hypothec was not published in the land book for the registration division in which the immovable acquired subsequently is located, its registration is obtained by means of a summary of the act creating the hypothec, containing a description of the acquired immovable.

Art 2950 A hypothec affecting a universality of movables ranks, in respect of each movable included in the universality, only from registration thereof in the register, under the description of the grantor and under the indication of the nature of the universality.

• Art. 2945 says that the person who publishes first, wins.

o Para. 1 Immovables – the only publication available is registration, so first to register wins o Para. 2 Movables – if other forms of publication are available, the first to publish wins

• Compare arts 2949 (hypothec on universality of immovables) and 2950 (hypothec on universality of movables).

What’s the difference? o Immovables: have to register against each parcel of land, even if they are all subject to a single master security

agreement § For immovables subsequently acquired, need to register against each as well (but can do so in advance)

(art. 2949 para. 2) o Movables: have to register the universality by saying in the description of the collateral that a security interest

has been taken in the universality of all present and after-acquired movables o So it’s a single registration for a universality of movables, as opposed to multiple registrations for a

universality of immovables, because of the different indexation methods of the movable/immovable registries (by grantor/by land lot)

C. Relevance of knowledge/notice of unpublished security right (CCQ 2963) Art 2963 Notice given or knowledge acquired of a right that has not been published never compensates for

absence of publication. Example 1. • Dec 31st 2009 – SC2’s security interest attaches • Jan 1st 2010 – SC1’s security interest attaches and it is registered

o But SC1 is aware of SC2’s interest • Jan 2nd 2010 – SC2 registers Who prevails, SC1 or SC2? • SC1 wins, because knowledge of a prior right does not compensate for absence of publication (art 2963) • Cf. the PPSAs, which makes no mention of knowledge in this respect; notice or knowledge is therefore irrelevant,

however, because where it is relevant, the Acts say so o There have been a couple court cases that confirm this

D. Priority With Respect to Successive Advances art 2689 An act validly constituting a hypothec indicates the specific sum for which it is granted.

The same rule applies even where the hypothec is constituted to secure the performance of an obligation of which the value cannot be determined or is uncertain.

s 35(5) NBPPSA

35(5) Subject to subsection (6), the priority which a security interest has under subsection (1) applies to all advances, including future advances.

s 30(3) ONPPSA

30(3) Subject to subsection (4), where future advances are made while a security interest is perfected, the security interest has the same priority with respect to each future advance as it has with respect to the first advance.


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Example 1. • The grantor has an asset worth $40,000 • SC1 is giving the grantor $10,000 right away, followed by two future advances of $10,000 • SC2 intervenes and takes a security interest of $20,000 in the same asset while SC1 is still advancing the

amount of the loan What do you need to know in order to find out who prevails? CCQ. • Need to know the maximum sum that SC1 specified in their registration of their interest (art 2689)

o If the maximum sum is $30,000, they prevail for that amount; if it’s $20,000, they prevail for that amount, and SC2 can step in and be secured with the rest ($10,000).

• In order to make sure they are secured, SC2 could also conclude an inter-creditor agreement with SC1 to make sure SC1 will defer their priority to SC2 (SC1 would only do this if they didn’t plan on advancing more money to the grantor).

PPSA. • The PPSAs do not have the rule that the maximum amount of the security interest needs to be registered. • The priority of a SC applies to all future advances made against the collateral (s. 35(5)NB, s. 30(3)ON)

o Our SC2 can never rely on the maximum amount stipulated in the security agreement (which doesn’t need to be registered); first creditor can still lend more, and be secured on that amount

o SC2 will have to rely on an inter-creditor agreement E. Policy Justifications for First-to-Perfect Rule • Encourages people to register/perfect

o Promotes transparency o Protects secured creditors

• It’s fair to creditors, purchasers, assignees, any third parties with a (potential) interest in the collateral 2. THE EXCEPTIONS TO THE GENERAL RULE OF TEMPORAL PRIORITY • Major problem with the general rule of “first to register wins” is that a debtor cannot get any other security once

they have granted a security interest to their first creditor (who has a “situational monopoly”) • So some exceptions were made to the general rule in order to encourage access to credit A. Purchase-Money Security Interest (Acquisition Financing) ‘super priority’ • A purchase money security interest (PMSI) is created when you go to a creditor for a loan to buy something

specific, and that creditor gets a security interest in that specific property (secured creditor is often the seller of the property, who offers financing) o N.B. The secured creditor is only the seller of the property in QC

• The holder of the PMSI will have what is colloquially called “super-priority” over any other prior secured creditor who has perfected their interest o This “prior creditor” is likely the holder of an allpaapp (a security interest in all present and after-acquired

personal property) whose terms cover the property subject to the PMSI o I.e. If SC2 is a holder of a PMSI, even if it is perfected after SC1 (who has taken security in everything

present and future), SC2 will take priority


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i) The PMSI in the PPSA s 1 ONPPSA

“purchase-money security interest” means, (a) a security interest taken or reserved in collateral, other than investment property, to secure payment of all or part of its price, (b) a security interest taken in collateral, other than investment property, by a person who gives value for the purpose of enabling the debtor to acquire rights in or to the collateral, to the extent that the value is applied to acquire the rights, or (c) the interest of a lessor of goods under a lease for a term of more than one year.

s 33 ONPPSA

Purchase-money security interests in inventory (1) A purchase-money security interest in inventory or its proceeds has priority over any other security interest in the same collateral given by the same debtor, if,

(a) the purchase-money security interest was perfected at the time, (i) the debtor obtained possession of the inventory, or (ii) a third party, at the request of the debtor, obtained or held possession of the

inventory, whichever is earlier;

(b) before the debtor receives possession of the inventory, the purchase-money secured party gives notice in writing to every other secured party who has, before the date of registration by the purchase-money secured party, registered a financing statement that describes the collateral as, or as including,

(i) items or types of inventory, all or some of which are the same as the items or types of inventory that will be subject to the purchase money security interest,

(ii) inventory, or (iii) accounts; and

(c) the notice referred to in clause (b) states that the person giving it has or expects to acquire a purchase-money security interest in inventory of the debtor, describing such inventory by item or type.

Purchase-money security interests other than inventory (2) Except where the collateral or its proceeds is inventory or its proceeds, a purchase-money security interest in collateral or its proceeds has priority over any other security interest in the same collateral given by the same debtor if the purchase-money security interest, (a) in the case of collateral, other than an intangible, was perfected before or within ten days after, (i) the debtor obtained possession of the collateral as a debtor, or (ii) a third party, at the request of the debtor, obtained or held possession of the collateral, whichever is earlier; or (b) in the case of an intangible, was perfected before or within ten days after the attachment of the purchase-money security interest in the intangible.

Corresponding provisions in NBPPSA are ss. 34 and 1. Note: for your interest to qualify as a PMSI, have to satisfy the conditions set out in these sections. • The PMSI definition distinguishes between a true security interest and a deemed security interest:

o True Security Interest PMSI (functionally used to secure an obligation) § 1. The bank (or other financier) finances the purchase of a particular piece of equipment/set of

inventory – bank has a PMSI. § 2. The vendor of the goods the buyer is purchasing extends the buyer credit, in exchange for a security

interest in the goods sold for the purchase price (in the old days this was called retaining title). o Deemed Security Interest PMSI

§ For lease more than a year/commercial consignment (with possession passed to debtor): PPSA treats these as PMSIs by getting the lessor, consignor to publicize. Otherwise, the owners of the property would lose their title under the first to register rule • PPSA envisions this and protects them through PMSI rule


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• PPSAs also distinguish between two types of PMSIs (depending on the types of assets they finance)

o 1. Non-Inventory (Equipment) PMSIs § The holder of the PMSI (SC2) has super-priority over any prior secured creditors as long as it registers its

PMSI within 15 days after the debtor acquires possession of the non-inventory asset • If you are outside the time limit, you would just get normal priority ranking

§ There is no need for the PMSI holder to give notice to the secured creditors, and they get a 15-day grace period to register

o 2. Inventory PMSIs § The holder of the PMSI (SC2) has super-priority as long as it, in advance of delivery:

• a. Registers its PMSI before the inventory is delivered • b. Gives notice to SC1 before the inventory is delivered

o Why the difference between inventory and non-inventory PMSIs? § In typical allpaapp, the obligation it is securing is a general operating loan under a line of credit § So the secured creditor on the allpaapp is probably relying on inventory as security for its loan

• If this SC1 sees inventory come in, and they do not know someone else has financed it, could extend more credit on the basis of this inventory

• But, as long as SC2 fulfilled the PMSI requirements, SC1 would therefore be subject to SC2’s super-priority

§ The same concerns do not apply to equipment: is not as much in flux, is easier to monitor • What is the policy rationale for PMSIs?

o Mitigate the monopoly the first creditor gains over the grantor o If the PMSI didn’t exist, sellers would only accept cash – there would be no available financing without the

seller retaining possession of the property o SC1 is not harmed by this interest: it wouldn’t be fair to let SC1 acquire a priority right in something which

they specifically did not finance (would be a windfall)

ii) The PMSI in the CCQ: Vendor Hypothecs art 2948 An immovable hypothec ranks only from registration of the grantor’s title, but after the vendor’s hypothec

created in the grantor’s act of acquisition. If several hypothecs have been registered before the grantor’s title, they rank in the order of their respective registrations.

art 2954 A movable hypothec acquired on the movable of another or on a future movable ranks from the time of its registration but after the vendor's hypothec, if any, created in the grantor's act of acquisition, provided it is published within 15 days after the sale.

• The PMSI in the CCQ is both narrower and broader than that found in the PPSA

o Narrower: it is only open to the vendor to have a hypothec that trumps prior-published hypothecs § In the PPSA, any person who finances the purchase of a particular piece of equipment or inventory can

get a PMSI on it o Broader: the vendor doesn’t need to qualify, is eligible for the PMSI automatically

• Immovable Hypothecs: art. 2948 o What situation is this describing? Bank finances the grantor’s purchase of a home from a vendor. o The bank’s priority is subordinate to that of the person who sold the house, who takes a security interest in

the house for the unpaid portion of the purchase price § So there are two hypothecs on the house

o Regardless of when the Bank registers, whenever the grantor’s title in the immovable is registered, the vendor’s hypothec will be immediately registered thereafter. § If first to register rule applied, then bank would have priority over vendor § So the PMSI protects the vendor


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o Bank could protect itself by: § Getting a subordination agreement § Advancing the grantor enough money to pay off the vendor, thus extinguishing their hypothec

• Movable Hypothecs: art. 2954 o This is the same idea as for immovables o The vendor gets a grace period similar to that in the PPSA to register their hypothec on the property for the

balance of the purchase price Is the PPSA or CCQ PMSI Regime Preferred? • Limiting the class of creditors who can beat out a perfected security interest (as in the CCQ) seems to minimize

risk more than the advance notice rule in the PPSA o Easier to monitor (since only people who would usurp your position are vendors) o Some say that as long as the rule is clear, it doesn’t matter which it is: parties can manage their risk

accordingly

iii) Alternatives in the CCQ: Retention of Title Sales • The vendor, instead of using the vendor’s hypothec (PMSI), could use the form of the installment sale: a sale in

which the seller retains title to secure payment of the purchase price • The seller will retain priority over any allpaap-type hypothecary creditor because a hypothec on future assets will

not be effective until grantor has title! o Grantor will not obtain title until seller has been paid in full

• This is not a priority issue – this is the effect of property law • Condition imposed on the installment seller is in art 1745: seller has to publish their reservation of title within 15

days from date of sale o This is the same grace period a person who holds a non-inventory PMSI would get to publish under the

PPSA • See also art. 2961.1: this is designed to enable a simple, one-time registration in the context of ongoing

reservations of title by a manufacturer regularly supplying inventory to a buyer on an instalment-sale basis o Under art 1745 regime, the manufacturer would have to continually re-register their reservation of title over

every set of inventory sold o Art 2961.1 says the manufacturer can register notice of a master agreement

See how an instalment seller’s reservation of title must be published within 15 days to be effective against a hypothecary creditor with a prior allpaap: Maschinenfabrik Rieter AG v. Canadian Fidelity Mills Ltd. – CVL (2005) Facts: La Financiere du Quebec loaned CFM $9 million; they secured this loan with a hypothec without delivery on the universality of present and future movable property of CFM. MR sold machines to CFM under an instalment sale contract, which was published more than fifteen days after it was concluded. CFM went bankrupt. MR moved to repossess its machines, and CFM opposed the move, saying it had priority to execute its judgment on that movable property. Issue: Who has priority? Holding: La Financiere, with dissent. Reasoning: • The Superior Court ruled that MR couldn’t repossess because it hadn’t published within the statutorily required

delay, and La Financiere had a hypothec on all present and future movable property Majority (Pelletier J.A. + 1): • This is a situation of bankruptcy – it is therefore governed by the BIA à MR is therefore a secured creditor, not an

owner, and their interest is subordinate to LF’s (unlike in Ouellet, where the amendments to the definition of “secured creditor” in the BIA did not affect the case at bar)

• The BIA still governs the situation, even if the trustee in bankruptcy is not involved in this matter (it is between two secured creditors) – so MR is an SC, and is subordinate to LF

• Even under the CCQ, MR’s interest is subordinate, because it failed to publish within the allotted fifteen days, so it


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does not benefit from the retroactive effect of its rights against third parties; once it did publish, LF’s valid interest already charged the machines

• In LF’s allpaapp, it created a legal fiction in which its hypothec was impressed upon the equipment as soon the contracts of sale were signed in favour of CFM.

• MR had 15 days in which to publish its reservation of title; if it had published during this time, its hypothec would have impressed itself upon the equipment just prior to LF’s

• But MR did not; so its rights are not effective against those of LF. Dissent (Nuss J.A.): • Ouellet (Trustee of): SCC held that the vendor’s reservation of ownership under an instalment sales K had effect

against the buyer’s trustee in bankruptcy regardless of the vendor’s failure to publish within the 15 days allotted in art. 1745

• The right of the vendor is not a simple security interest – it is ownership. Failure by vendor to publish the reservation of ownership with 15 days doesn’t prevent them from repossessing the property as long as it is still within the buyer’s hands. They take the property subject to any encumbrances the buyer has charged it with since it was delivered to the buyer. o These are the consequences of late publication; if the instalment seller has published on time, can take the

property back without encumbrances or any caveats • MR remained the owner under the sales K. CFM never became the owner of the machines. • La Financiere’s hypothec never covered these machines, because CFM never gained title to them • La Financiere does not suffer from this conclusion; it never relied on these machines as part of CFM’s patrimony.

The CCQ provisions are meant to protect new creditors, ones who lend to the buyer after the delivery of the property.

• MR can repossess the machines, because despite the late publication of their reservation of ownership, the machines are still in the buyer’s hands (court says trustee is not a third party), and they were not encumbered with any charge arising after delivery

• The Harmonization Act amending the BIA (making the instalment sale vendor a secured creditor vis-à-vis a trustee in bankruptcy) doesn’t change this outcome: the issue is here between two secured creditors

Ratio: An instalment sales vendor (and a long-term lessor) enjoy a super-priority over the interests of other secured creditors as long as they publish within the 15 days set out by the Code in article 1745. Walsh on Maschinefabrik Rieter AG v. PricewaterhouseCoopers Inc: • The dissent is completely wrong in this case.

iv) Alternatives in the CCQ: Ownership rights in leasing and lease transactions CcQ arts.1842, 1847 (leasing) art 1842 leasing

Leasing is a contract by which a person, the lessor, puts movable property at the disposal of another person, the lessee, for a fixed term and in return for payment. The lessor acquires the property that is the subject of the leasing from a third person, at the demand and in accordance with the instructions of the lessee. Leasing may be entered into for business purposes only.

art 1847 leasing

The rights of ownership of the lessor have effect against third persons only if they have been published; effect against third persons operates from the date of the leasing contract provided the rights are published within 15 days. As well, the transfer of the lessor's rights of ownership has effect against third persons only if it has been published.

CcQ arts.1851, 1852 (lease) art 1851 lease

Lease is a contract by which a person, the lessor, undertakes to provide another person, the lessee, in return for a rent, with the enjoyment of a movable or immovable property for a certain time.


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The term of a lease is fixed or indeterminate.

art 1852 lease

The rights resulting from the lease may be published. Publication is required, however, in the case of rights under a lease with a term of more than one year in respect of a road vehicle or other movable property determined by regulation, or of any movable property required for the service or operation of an enterprise, subject, in the latter case, to regulatory exclusions; effect of such rights against third persons operates from the date of the lease provided they are published within 15 days. A lease with a term of one year or less is deemed to have a term of more than one year if, by the operation of a renewal clause or other covenant to the same effect, the term of the lease may be increased to more than one year. The transfer of rights under a lease requires or is open to publication, according to whether the rights themselves require or are open to publication.

And recall: Lefebvre (Trustee of); Tremblay (Trustee of), [2004] 3 S.C.R. 326; Ouellet (Trustee of), [2004] S.C.R. 348; Bankruptcy and Insolvency Act R.S.C. 1985, c. B-3, s. 2 (definition of “secured creditor”) B. Money and Negotiable Collateral NB PPSA s. 31 (and note definition of “purchase”) NBPPSA 31

Priority of holders and purchasers of money, instruments, documents of title or chattel paper 31(1) A holder of money has priority over a security interest in it perfected by registration under section 25 or temporarily perfected under subsection 28(4) if the holder (a) acquired the money without knowledge that it is subject to a security interest, or (b) is a holder for value, whether or not that person acquired the money without knowledge that it is subject to a security interest. 31(2) A creditor who receives an instrument drawn or made by a debtor and delivered in payment of a debt owing to the creditor by that debtor has priority over a security interest in the instrument whether or not the creditor has knowledge of the security interest in the instrument at the time of delivery. 31(3) A purchaser of an instrument has priority over a security interest in the instrument perfected by registration under section 25 or temporarily perfected under subsection 26(1) or 28(4) if the purchaser (a) gave value for the instrument, (b) acquired the instrument without knowledge that it is subject to a security interest, and (c) took possession of the instrument. 31(4) A holder to whom a negotiable document of title is negotiated has priority over a security interest in the document of title that is perfected by registration under section 25 or temporarily perfected under subsection 26(2) or 28(4) if the holder (a) gave value for the document of title, and (b) acquired the document of title without knowledge that it is subject to a security interest. 31(5) For the purposes of subsections (3) and (4), a purchaser of an instrument or a holder of a negotiable document of title who acquires it under a transaction entered into in the ordinary course of the transferor’s business has knowledge only if the purchaser acquires the interest with knowledge that the transaction violates the terms of the security agreement creating or providing for the security interest. 31(6) A purchaser of chattel paper who takes possession of it in the purchaser’s ordinary course of business and for new value has priority over any security interest in the chattel paper that


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(a) was perfected by registration under section 25, if the purchaser does not have knowledge at the time of taking possession that the chattel paper is subject to a security interest, or (b) has attached to proceeds of inventory under section 28, whatever the extent of the purchaser’s knowledge.

NBPPSA 1(1)

“purchase” means taking by sale, lease, discount, assignment, negotiation, mortgage, pledge, lien, issue, reissue, gift or any other consensual transaction creating an interest in property;

ON PPSA ss. 28(3)-(4); 29 (and note definition of “purchase”) ONPPSA 28(3)-(4)

Purchasers of chattel paper (same) (3) A purchaser of chattel paper who takes possession of it in the ordinary course of business and gives new value has priority over any security interest in it, (a) that was perfected by registration if the purchaser did not know at the time of taking possession that the chattel paper was subject to a security interest; or (b) that has attached to proceeds of inventory under section 25, whatever the extent of the purchaser’s knowledge. Purchasers of instruments (4) A purchaser of collateral that is an instrument or negotiable document of title has priority over any security interest therein perfected by registration or temporarily perfected under section 23 or 24 if the purchaser, (a) gave value for the interest purchased; (b) purchased the collateral without knowledge that it was subject to a security interest; and (c) has taken possession of the collateral.

ONPPSA 1.(1)

“purchase” includes taking by sale, lease, negotiation, mortgage, pledge, lien, gift or any other consensual transaction creating an interest in personal property; (“acquisition”)

NEED NOTES! C. Investment Property related exceptions Claire’s summary of ranking for investment property:

-‐ Control over non-control perfection -‐ First control….with exceptions for security entitlement:

o Entitlement holder’s control trumps o Intermediary’s control

-‐ Control agreement Between Secured Party WITH control v. Secured Party WITHOUT control

-‐ GENERAL RULE à A secured party who obtains control of investment property has priority over all other secured parties who do not have control.20 Thus, a secured party who perfects by control takes priority over an earlier secured party who perfected by registration.

Between Secured Parties both with control

-‐ GENREAL RULE à Where two or more secured parties have obtained control, priority is accorded to the secured party who first obtained control.21 This is subject to two exceptions if the collateral is a security entitlement.

-‐ EXCEPTION #1 à (when secured party is intermediary, who automatically has control, they will have

20 PPSA NB s. 35.1(2); ON s. 30.1(2). 21 PPSA NB s. 35.1(4); ON s. 30.1(4).


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priority even if achieve control later) o The first exception applies where the secured party is an intermediary who has obtained a security

interest in its client’s securities account or security entitlement.22 A securities intermediary automatically has control in this scenario,23 and its security interest has priority over any other security interest, including a competing security interest perfected by control.24 Thus, a broker or other intermediary benefits from a super priority on the financial assets in its client’s account even if the intermediary previously concluded a control agreement with another secured party. In view of this priority risk, a secured party typically will not enter into a control agreement with an intermediary unless the intermediary agrees to subordinate its priority.

-‐ EXCEPTION #2 à (conflict between control by becoming entitlement holder (usually wins, even if second) and control by control agreement with intermediary)

o The second qualification arises in a competition between a secured party who obtains control of a security entitlement by becoming the entitlement holder25 and a prior secured party who obtained control by entering into a control agreement with the debtor’s intermediary.26 This type of competition is illustrated by the following scenario: SP1 enters into a security agreement with D and obtains control of D’s security entitlement by entering into a control agreement with D’s intermediary. Under the terms of the control agreement, D retains the right to issue directions to her intermediary with respect to the financial assets in her account. Subsequently, D enters into a security agreement with SC2 and directs her intermediary to transfer the financial assets in her account to an account in the name of SP2 or its nominee with the result that SP2 obtains control by becoming the entitlement holder.

o The crediting of the financial assets to SP2’s securities account in the above scenario results in the extinguishment of the security entitlement previously held by D and the acquisition by SP2 of a separate and distinct security entitlement.27 It follows that the security interest previously granted by D to SP1 is also effectively extinguished since the collateral no longer exists.

o The same result would follow even if the control agreement limited D’s right to issue entitlement orders to her intermediary but the intermediary, in breach of the control agreement, executed D’s direction to credit the financial assets to SP2’s account. However, in that scenario, SP1 would have a personal claim for damages against the intermediary.

o Relying on law outside the STA and the PPSA, SP1 may seek to trace the financial assets previously held in D’s account into SP2’s account. As a practical matter, tracing may be difficult unless D and SP2 share the same intermediary. Assuming the tracing hurdle can be overcome, SP2 is protected by the adverse claim preclusion rules of the STA provided it did not know that the acquisition of its security entitlement violated SP1’s rights.28.

22 Ordinarily the security interest in favour of the intermediary will have been created by the entitlement holder under a security agreement.

However, this special priority rule also applies to the statutory security interest recognized by the PPSA in favour of an intermediary who, before being paid, credits a financial asset to the client’s securities account pursuant to a purchase agreement calling for immediate payment: see above, note 62.

23 STA s. 26. 24 PPSA NB, s. 35.1(5)-(6); ON s. 30.1(5)-(6). 25 STA s. 25(a), (c). 26 STA s. 25(b), (c). 27 STA s. 95(1). STA s. 1(1) defines an “entitlement holder” as “a person identified in the records of a securities intermediary as the person

having a security entitlement against the securities intermediary. 28 Under STA s. 96 a person who acquires a security entitlement under s. 95 is protected against adverse claims if they take “without notice of

the adverse claim.” An “adverse claim” is defined in s. 1(1) as “a claim that the claimant has a property interest in a financial asset and it is a violation of the rights of the claimant for another person to hold, transfer or deal with the financial asset.” The application of the STA claim preclusion rule in this scenario is preserved by the PPSA which provides that the Act does not limit the rights of a person to the extent that the person is protected against the assertion of a claim under the STA: PPSA NB, s. 31.1(3); ON s. 28.1(3) no equivalent provision. Note that SP2 would also be protected against an adverse claim based on SP’1’s assertion that the crediting of the financial assets to SP2’s account violated a term of SP1’s security agreement with D. Under the PPSA, an adverse claim to a financial asset based on a security agreement may not be brought against a person who acquires a security entitlement under the STA for value without knowledge that there has been a breach of the security agreement: PPSA NB s. 30.1(3)-(4)); ON s 28(8)-(9).


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-‐ CCQ VERSION OF EXCEPTION #2 à o The Civil Code of Quebec articulates this exception to temporal priority among control secured parties

more directly. It provides that a hypothec granted in favour of a creditor who obtains control of a security entitlement by becoming the entitlement holder ranks ahead of secured parties who otherwise obtained control by way of an exception to the general rule.29

Between Secured Parties neither with control, created by intermediary à perfected on attachment, equal rank

-‐ A special priority rule applies if security interests are created by a securities intermediary in favour of two or more secured parties, none of whom have perfected by control. These security interests are considered automatically perfected upon attachment, without the necessity for registration or control.30 The competing security interests rank equally.31 This priority rule effectively means that a secured party will not extend financing to a broker or other intermediary without obtaining control.

Between Secured Parties, both perfected by registration à General residual priority rule: order of registration

For when collateral is certificated security à

-‐ Where the collateral is a certificated security, a security interest that is perfected by delivery32 has priority over a conflicting security interest that is perfected by a method other than control.33 Thus, a secured party who takes delivery of a security certificate has priority over the holder of a prior registered security interest in the security represented by the certificate. While the security interest remains subordinate to a competing security interest perfected by control, such a competition will be rare since taking delivery of the certificate will normally prevent competing secured creditors from obtaining control.34

i) PPSA: Priority rules for security interests in investment property ONPPSA S 30.1

30.1 (1) The rules in this section govern priority among conflicting security interests in the same investment property. Secured party with control (2) A security interest of a secured party having control of investment property under subsection 1 (2) has priority over a security interest of a secured party that does not have control of the investment property. Certificated security perfected by delivery (3) A security interest in a certificated security in registered form which is perfected by taking delivery under subsection 22 (2) and not by control under section 22.1 has priority over a conflicting security interest perfected by a method other than control. Rank by priority in time (4) Except as otherwise provided in subsections (5) and (6), conflicting security interests of secured

29 CCQ art. 2714.2. There is a possible difference in result between the two approaches. The Code rule appears to give absolute priority to the

secured party who becomes the entitlement holder whereas the STA approach conditions the priority of a secured party who assumes control by becoming the entitlement holder on taking without notice that its acquisition of the security entitlement violates the terms of a control agreement entered into with a competing secured creditor.

30 PPSA NB/ON s. 19.2(2). A similar provision governs a security interest in a commodities contract or commodities account that is created by a commodities intermediary.

31 PPSA NB s. 35.1(7); NL s. 36.1(7); ON s. 30.1(2). 32 PPSA NB s. 24(3)-(4); ON s. 22(2)-(3). 33 PPSA NB s. 35.1(3); ON s. 30.1(3). 34 The only possible scenario where such a competition could arise is where a third person is in possession of a certificate in registered form on

behalf of two different secured parties, one of whom has obtained control by having the security endorsed to it or registered with the issuer in its name.


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parties each of which has control under subsection 1 (2) rank according to priority in time of, (a) if the collateral is a security, obtaining control; (b) if the collateral is a security entitlement carried in a securities account,

(i) the secured party’s becoming the person for which the securities account is maintained (entitlement holder), if the secured party obtained control under clause 25 (1) (a) of the Securities Transfer Act, 2006, (ii) the securities intermediary’s agreement to comply with the secured party’s entitlement orders with respect to security entitlements carried or to be carried in the securities account, if the secured party obtained control under clause 25 (1) (b) of the Securities Transfer Act, 2006, or (iii) if the secured party obtained control through another person under clause 25 (1) (c) of the Securities Transfer Act, 2006, when the other person obtained control; or

(c) if the collateral is a futures contract carried with a futures intermediary, the satisfaction of the requirement for control specified in subclause 1 (2) (d) (ii) with respect to futures contracts carried or to be carried with the futures intermediary. Securities intermediary (5) A security interest held by a securities intermediary in a security entitlement or a securities account maintained with the securities intermediary has priority over a conflicting security interest held by another secured party. Futures intermediary (6) A security interest held by a futures intermediary in a futures contract or a futures account maintained with the futures intermediary has priority over a conflicting security interest held by another secured party. Interests granted by broker, intermediary (7) Conflicting security interests granted by a broker, securities intermediary or futures intermediary which are perfected without control under subsection 1 (2) rank equally. Priority determined under s. 30 (8) In all other cases, priority among conflicting security interests in investment property shall be governed by section 30.

ii) CCQ: Movable hypothecs with delivery on certain securities or security entitlements Art 2714.2 From the time a creditor secured by a movable hypothec with delivery obtains control of the securities

or security entitlements, that hypothec ranks ahead of any other movable hypothec on the same securities or security entitlements, regardless of when that other hypothec is published. If two or more movable hypothecs with delivery are granted on the same securities or on the same security entitlements in favour of creditors each of whom has obtained control of the securities or security entitlements, the hypothecs rank among themselves according to when the creditors obtained control. However, in the case of security entitlements, the hypothec granted in favour of the creditor who obtained control of the security entitlements by becoming the entitlement holder ranks ahead of the other.

Art 2714.3 A movable hypothec with delivery granted in favour of a securities intermediary on security entitlements to a financial asset credited to a securities account maintained by the securities intermediary for its grantor ranks ahead of any other hypothec on those security entitlements.

Art 2714.4 A movable hypothec with delivery encumbering securities represented by a certificate in registered form, even if granted in favour of a creditor who does not have control of the securities, ranks ahead of any movable hypothec without delivery encumbering the same securities, regardless of when the hypothec without delivery is published. (i.e. for certificated security in registered form, delivery over registration)

D. Voluntary Subordination of Priority


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• A secured creditor is free to subordinate their interest to that of another secured creditor (or, in NB, “any other interest”) o CCQ art 2956 (subject to publication)

Art 2956 Cession of rank between hypothecary creditors shall be published.

Where it occurs, the rank of the creditors is inverted, to the extent of their respective claims, but in such a manner as not to prejudice any intermediate creditors.

o NB PPSA s 40 / ON PPSA s 38

§ Expressly written that you can have an effective cession of priority without a formal contract between two secured creditors

§ Just need a unilateral undertaking by a SC to waive their priority E. Bank Act Security v. PPSA Security Innovation Credit Union v. Bank of Montreal – CML (2009) Facts: A Saskatchewan Farmer (Buist) granted an allpaapp security interest to ICU. The security agreement was entered into in 1991. ICU did not register its interest (until 2004, afterloan). In 1998, B got a loan from BMO, offering as security another allpaapp interest. This security interest was taken under the Bank Act, and registered under that statute’s regime. BMO had checked the PPSA registry before they had granted the loan to B, and did not find ICU’s security interest (because it was not there). In 2004, B defaulted, and the Bank seized and sold some of his personal property. The proceeds of that sale are here in dispute. Issue: Which security interest takes priority? The PPSA security interest or the Bank Act security interest? Holding: The PPSA security interest. Reasoning (Jackson J.A.): • The legal dilemma: what is the allocation of priority between two security interests, taken in the same collateral,

each taken pursuant to a fundamentally different secured transactions regime? • The trial judge: priority goes to BMO because ICU had not perfected.

o Two policy goals: achieve compatibility between the two systems, and to increase certainty and efficiency in commercial lending

• PPSA cannot derogate from the rights accorded to the Bank under the Bank Act (federal paramountcy) Survey of the Jurisprudence: • Rogerson: while PPSA cannot prejudice a SI taken under the BA, PPSA also confers no rights/priority on the bank.

The unregistered PPSA interest was not subordinated to the BA interest because bank security is not one of the interests falling within the protection of the provincial legislation.

• Pulsar: must inspect the BA to see if it gives a priority rule. If it gives none, must look to when the SIs were entered into. For an allpaapp, at the time of the creation of the SA, an inchoate SI is created which waits for the asset to be acquired so that it can fasten onto the asset. Once the asset is acquired, however, the SI takes effect from the date of the SA.

• International Harvester: court accorded priority to a prior but unregistered provincially created interest, holding that the Bank could not acquire (by SA, registration under BA/PPSA) more than what remained after the prior unperfected security interest had been given (nemo dat) (Rogerson held similarly)

• Agricultural Credit: 3 rules to follow to determine priority between PPSA/BA interests: 1. Set aside the PPSA. 2. Determine priority pursuant to the BA. 3. Where appropriate, apply the first-in-time priority rule

• The upshot: general framework for determining priority between Bank Act security and PPSA security: o 1. Set aside the priority rules of the PPSA o 2. Construe the BA to see if there is any priority rule that may apply o May involve an examination of the ordinary law of the province to determine what proprietary rights a debtor

retains after a prior SI has been granted. o May also require the application of a first-in-time rule.

Survey of the Legislation and Literature: • A bank only has the rights accorded to it by the BA; bank cannot gain access to the PPSA priority regime, which


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provides that a perfected security interest takes priority over an unperfected one o Why? The bank should not benefit from the protection of the PPSA without being bound by it o Accordingly, the PPSA will not allow a bank to simultaneously take a BA interest in property and a PPSA

interest in the same property Approach to Resolve this Case: • Sections 427(2) and 435(2) create what is called the “document of title fiction”: means, essentially, that a bank

only acquires whatever interest the debtor has in the property at the time the bank acquired its interest (leaves to the law of the province to determine what this means)

• So what interest did ICU take in the movable property of B? Had an attached SI, a proprietary interest in B’s property which is presumed to be effective against third parties (unless PPSA provides otherwise)

• BMO acquired its interest in the collateral subject to the proprietary rights of ICU which were already encumbering the collateral; these proprietary rights are effective against the bank regardless of registration

Ratio: The Bank Act security interest is defeated because when it was acquired, it was already subject to the prior interest created under the PPSA, regardless of the fact that that prior interest was unperfected. Walsh on Innovation Credit Union: • Basically, the rationale for the decision is nemo dat

o The Bank Act says that the SC (bank) only gets the interest the grantor holds (in the asset offered as security) at the time of the security agreement

o The grantor’s interest was already encumbered when he gave it to the bank • s. 20 PPSA specifies who an unperfected security is subordinate to, and a Bank Act secured creditor is not one of

the third parties listed Radius Credit Union Ltd. v. Royal Bank of Canada – CML (2009) Facts: RCU executed a general security agreement with the debtor in 1992 giving them security in all present and after-acquired property. This agreement was not registered under the PPSA as it should have been. In 1996, RBC executed a security agreement with the debtor giving them a security interest in all present and after-acquired property of the debtor, which they registered under the Bank Act. The debtor went bankrupt, and the RBC seized and sold some assets, the value of which is now in dispute between RBC and RCU. Issue: Who has priority between an unregistered PPSA security interest and a registered Bank Act security interest, each taken in the after-acquired property of the same debtor? Holding: The PPSA security interest (Credit Union wins). Reasoning (Jackson J.A.): The Appropriate Framework of Analysis • Agricultural Credit: in a priority dispute between Bank Act security and PPSA security, there are three basic rules

to follow for determining priority: o 1. Set aside the PPSA and determine priority as if the PPSA did not exist o 2. Determine priority pursuant to the provisions of the Bank Act o 3. Where appropriate, apply the first-in-time priority rule

• Note: this appeal is different from Innovation Credit Union because it concerns after-acquired property • Pulsar: dispute between a Bank Act security and a subsequent (perfected) PPSA security. Court applied the first-

in-time principle to the execution of the respective security agreements. When Did the Security Interests Taken Under the PPSA/BA Respectively Attach? • PPSA clearly provides in s. 12/13: the SI attaches when debtor acquires rights in the collateral • Bank Act is less clear. Could take:

o Time of ownership approach: SI attaches when debtor acquires rights in the collateral o Retroactive approach: SI attaches retroactively upon the date of delivery of the security document o The words of the BA seem to favour the retroactive approach, but the time of ownership approach makes

more sense (see SCC in Sparrow) § Since Parliament has not been clear, ordinary law applies: it makes more sense with ordinary law of the

province that the Bank Act SI attach when the debtor acquires rights in the collateral • Both of these security interests therefore arose at the time the debtor acquired rights in the collateral (time of

purchase) à arose simultaneously o Therefore this problem cannot be solved with the nemo dat rule


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Does the First in Time Rule Apply? • Unlike in Innovation Credit Union, the Bank Act is silent as to the appropriate means to resolve the dispute – so

the Court must look to the ordinary law of the jurisdiction to resolve it • Application of the first-in-time priority rule would:

o Encourage individual effort/productivity o Encourage certainty, finality with respect to who has a right in a given resource

• Application of the first-in-time priority rule, with the significant event being registration, however, would not be ideal: although would provide greater certainty for banks loaning money, it would also be contrary to the legislator’s intention not to allow Banks to benefit from the PPSA without being bound by it

• Awarding priority to the first party to enter into a security agreement depends on the principle that: a present though inchoate security interest arises when the SA is executed o An SA for after-acquired property is a present security; it creates an inchoate security interest which is waiting

for the asset to be acquired so it can fasten onto the asset (attach), but which then takes effect as of the date of the security agreement

Ratio: Where valid Bank Act and PPSA security interests are asserted in after-acquired property, priority is to be determined as of the date of execution of the respective security agreements. This rule applies even if the PPSA interest is unperfected. Walsh on Radius Credit Union: • This case concerns an unperfected PPSA security in after-acquired property, and a subsequent perfected BA

security • When does security interest attach in after-acquired property? Once grantor has real rights in the property. So no

matter when the SA was entered into, or the order of SAs entered into, the moment of attachment is when the grantor acquires title o So the Bank Act security and the PPSA security came into existence at the same time o So the nemo dat rule doesn’t apply

• The PPSA security prevailed. How did the court make this determination? o Under the BA, even though attachment doesn’t occur until asset is acquired, once the asset IS acquired, the

interest relates back to the time of the SA o Then they go to the PPSA, and make the exact same analysis

§ No attachment takes place until the grantor acquires an interest in the asset § The interest created by the SA is an inchoate security interest that only crystallizes upon the grantor

acquiring the property o So what matters is the time of execution of the security agreement

• Will this “inchoate” security interest in property cause problems in the future? What about after-acquired property interests in the insolvency context?

• This result is also problematic for Bank Act security, because it is less certain o Why take security under the Bank Act? There are advantages: BA SI is not subordinate to a PMSI o In Saskatchewan, there is a specific provision saying that if you take BA security, you can’t take PPSA

security – PPSA security taken will be void to the extent that it applies to the same collateral as the BA security

• The solution? Banks should lobby the federal government to amend the Bank Act to say that a BA perfected security interest is not subordinate to an unperfected PPSA security interest o Banks don’t want to do this, because might invite a Law Reform Commission inquiry into whether Bank Act

security should exist at all • Solution to these problems in Quebec? The Bank wins. Art. 2663, bank is a third person against which a hypothec

is not effective unless it is published.

VII. DROIT DE SUITE (“RIGHT TO FOLLOW”): GENERAL RULE AND EXCEPTIONS Note: the competing claimant in this situation is always the BUYER (same rules apply to SC and lessees).


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The Secured Creditor’s General Droit de Suite • The secured creditor has a right to follow the secured asset into whosoever’s hands it may fall in order to be

reimbursed with it • CCQ art. 2660: a hypothec “confers on the creditor the right to follow the property into whosever hands it may be” • NBPPSA s. 28(1)(a)/ONPPSA s. 25(1)(a): if the encumbered asset is dealt with (disposed of to third person),

security interest remains attached to the asset 1. EXCEPTION ONE: FAILURE TO PERFECT/PUBLISH CCQ. art. 2663 The hypothecary rights conferred by a hypothec may be set up against third persons only when the

hypothec is published in accordance with this Book or the Book on Publication of Rights. • Art 2663: publication is a pre-requisite to exercising any of the hypothecary rights, including droit de suite • If you do not publish your hypothec, you cannot exercise your droit de suite (right to follow the property) against

any third party, including a buyer

PPSA. • See ON PPSA s. 20(1)(c) ONPPSA 20(1)(c)

20. (1) Except as provided in subsection (3), until perfected, a security interest,

(c) in chattel paper, documents of title, instruments or goods is not effective against a transferee thereof who takes under a transaction that does not secure payment or performance of an obligation and who gives value and receives delivery thereof without knowledge of the security interest;

o Under the ONTARIO PPSA, an unperfected security interest is ineffective against a buyer with possession of the property and no knowledge of the security right.

o If the buyer does not have possession, OR has knowledge of the security interest, the unperfected security interest may still prevail

o For buyer to prevail, needs BOTH possession AND lack of knowledge NBPPSA 20(3)

20(3) An unperfected security interest in collateral that is not investment property is subordinate to the interest of a transferee of the collateral if the transferee (a) acquires the interest under a transaction that is not a security agreement, (b) gives value, and (c) acquires the interest without knowledge of the security interest and before the security interest is perfected.

• See NB PPSA s. 20(3) o Under the NEW BRUNSWICK PPSA, an unperfected security interest is ineffective against a buyer with no

knowledge of the security right o If the buyer has knowledge, is still effective o Possession is irrelevant – unknowing buyer is always protected

2. EXCEPTION TWO: AUTHORIZED SALES s. 28 NBPPSA

(1) Subject to this Act, if collateral is dealt with or otherwise gives rise to proceeds, the security interest a) continues in the collateral unless the secured party expressly or impliedly authorizes the dealing, and b) extends to the proceeds.

s. 25 ONPPSA

(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


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with the collateral free of the security interest; and b) extends to the proceeds.

• In authorized sales, the grantor requests permission from the secured creditor to sell the asset offered as security.

SC would grant it because if the proceeds were used to acquire equipment, gets a security interest in that equipment; or the proceeds could be used to reduce the debt owing to the SC. o SC must say explicitly that the grantor can sell it and sell it free from security interests o Normal buyer will want an undertaking from the SC (or grantor) that security right is lifted

• So there is no right to follow the property into a third party’s hands when the secured creditor has authorized the sale (“dealing”) in question

3. EXCEPTION THREE: SALES IN THE ORDINARY COURSE OF THE SELLER’S BUSINESS • If a buyer acquires an encumbered good in the ordinary course of business of the grantor (the seller), the buyer

takes it free of the security right. Why? o There is implicit authorization by the secured creditor. o SC knows that the grantor needs to sell those items that it is accustomed to selling in the ordinary course of

business in order to make income. CCQ. • CCQ does not state anywhere that a buyer in the ordinary course of business takes free of the hypothec

o But a number of articles assume that this is the rule o CW states that we can read in the general rule that a buyer in the ordinary course of business takes free of a

security interest from the fact that other articles assume the existence of such a rule o See, for example, art. 2700 (also art. 2732):

art. 2700 A movable hypothec on property that is not alienated in the ordinary course of business of an

enterprise and that is not registered in a file opened under the description of the property is preserved by filing a notice of preservation of hypothec in the register of personal and movable real rights. […]

This article assumes that if the property were alienated in the ordinary course of business, the security right would not follow the asset and there would be no need to preserve the hypothec. • arts. 1713-1715 make the buyer-takes-free rule explicit with respect to non-hypothecary security devices (ex.

instalment sale, sale with right of redemption – title-based security) art 1713 The sale of property by a person other than the owner or than a person charged with its sale or

authorized to sell it may be declared null. The sale may not be declared null, however, if the seller becomes the owner of the property.

art 1714 The true owner may apply for the annulment of the sale and revendicate the sold property from the buyer unless the sale was made under judicial authority or unless the buyer can set up positive prescription. If the property is a movable sold in the ordinary course of business of an enterprise, the owner is bound to reimburse the buyer in good faith for the price he has paid.

art 1715 The buyer as well may apply for the annulment of the sale. He may not do so, however, where the owner himself is not entitled to revendicate the property.

• The principal situation in which you get a sale in the ordinary course of business is the instalment sale • For example, a manufacturer of cars sells cars to car dealer under an instalment sale, who sells cars as their

ordinary business o Seller (manufacturer) à Buyer (dealer) à Public o Seller retains title to the inventory (the cars) o So the buyer is selling the property of another (the manufacturer’s property)


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• arts. 1713-1715 say this sale can be declared null o This is the equivalent of a droit de suite for the creditor (the seller)

• BUT: art. 1714 à if the property is a movable, and sold in the ordinary course of business, then have to BUY IT BACK (have to reimburse the buyer for the purchase price) o The only situation in which a seller might actually do this is if the original purchase price is lower than the

current purchase price (i.e. something has changed in the marketplace to make this type of movable scarce, and the seller can resell it for more, even taking into account the costs of revendication)

• This is the same result, effectively, as the droit de suite with a hypothecary interest, and the exception for ordinary course of business, but a different way of getting there

PPSA. s 30(2) NBPPSA

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.

s 28(1) ONPPSA

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.

Note that the PPSAs only protect against a security interest given BY THE SELLER. 4. EXCEPTION FOUR: MONEY OR NEGOTIABLE COLLATERAL See above: • NB PPSA s. 31 (and note definition of “purchase”) • ON PPSA ss. 28(3)-(4); 29 (and note definition of “purchase”) 5. EXCEPTION FIVE: INVESTMENT PROPERTY

Competitions between a secured party and a buyer of a security The PPSA addresses competitions between a buyer who obtains control of a security under the STA and a secured party who has a security interest in the same security but who has not obtained control. In this scenario, the buyer acquires the security free from the security interest if she gives value and not does know that the transaction constitutes a breach of the security agreement under which the security interest was created.35

The PPSA does not address the converse situation where the competition involves a secured party who has obtained control of a security and a buyer who has not obtained control. This would be an unusual scenario since a buyer of a certificated security normally would wish to obtain possession of the certificate and the buyer of an uncertificated security normally would require that she be registered as the owner of the security on the issuer’s records. In any event, should such a competition arise, the secured party would be protected under the STA36 from an adverse claim by the buyer unless it knew that the transaction violated the rights of the buyer.37

35 PPSA NB s. 30.1; ON s. 28(6). Out of an excess of caution, the Act expressly confirms that the buyer is not under a positive duty to inquire

as to whether a security interest has been granted in the security or whether the transaction constitutes a breach of a security agreement: PPSA NB s. 30.1; ON s. 28(7). Note that even in the absence of this provision, a buyer who obtains control would qualify as a “protected purchaser” under the STA and therefore would be immunized from an adverse claim asserted by a secured party who has not obtained control provided the buyer did not know that the transfer violated the rights of the secured party: see STA ss. 70, 1(1) (definitions of “protected purchaser” and “adverse claim.”).

36 The PPSA confirms that nothing in the Act limits the rights that a “protected purchaser” of a security has under the STA: PPSA NB s. 31.1(1)-(2); ON s. 28.1(1)-(2).

37 See STA ss. 70, 1(1) (definitions of “protected purchaser” and “adverse claim”). Note that under the definition of adverse claim, the buyer also would not qualify as an adverse claimant unless she could show that she had acquired a property interest, and not merely a contractual right, in the security.


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The PPSA also does not address competitions between secured parties and buyers who have separately obtained control of the same security. Concurrent control is possible only in respect of uncertificated securities. A secured party may have obtained control by entering into a control agreement with the issuer and a buyer may subsequently have obtained control either by becoming registered as the owner on the books of the issuer or by entering into a control agreement with the issuer. This scenario is likely to arise only if the terms of the control agreement between the issuer and the secured party left the security holder with the power to deal with the security, for example, until default. In that event, the subsequent buyer would acquire the security free of the security interest.38

In the unlikely event that the control agreement deprived the debtor of authority to sell or otherwise deal with its securities, and the issuer nonetheless complied with the debtor’s instruction to register the security in the name of the buyer or entered into a subsequent control agreement with a buyer, the secured party would generally be in a position to assert its security interest in the security against the buyer.39 The buyer would be left only with her remedy against the seller and any remedy she may have against the issuer as a result of any representations it may have made to her. Alternatively, the secured party may elect to pursue its remedy against the issuer for breach of the control agreement.40 6. EXCEPTION SIX: SERIAL-NUMBERED GOODS • As we have seen, the requirement to register via serial number in a database that is searchable via that serial

number is to address the ABCD problem o The last buyer (D) won’t be able to find the security interest encumbering the movable they purchased if they

search only by the name of the person (C) who sold it to them o But if they search it by serial number (ex. VIN), it will show A’s security right in that vehicle

• So some secured transactions regimes make it so that the buyer of a serial-numbered good takes free if the security interest in that property was not registered via its serial number (as well as the name of grantor)

NBPPSA. • Property held as consumer goods:

o NB PPSA requires as a condition for the perfection of a security interest in serial-numbered goods (identified by regulation) that are held as consumer goods, that the serial number be entered in the registration § See NB Reg. s. 23(1)-(2): if the serial number is not entered, the security interest is completely

unperfected. § A buyer of the encumbered property would take free if they satisfied the conditions in s. 20(3) for a

contest between a buyer and an unperfected security interest • Property held as equipment:

o NB Regulations (s. 23(2)(b)) do not make mandatory the inclusion of the serial number in the registration of a serial-numbered good that is held as equipment

o Security interest will still be perfected if the SC registers without including the serial number o So inclusion of the serial number is not necessary for perfection, but it’s a good idea. See ss. 30(6) & (7) NB

PPSA for why:

38 Under STA s. 69(1), a purchaser of an uncertificated security “acquires all rights in the security that the transferor had or had power to

transfer” (italics supplied). Here, the control agreement has left the debtor with the power to deal with the securities and the buyer therefore would acquire the debtor’s full ownership interest. The same result can be reached on the theory that by permitting the debtor to continue to deal with her securities, the secured party implicitly authorized the sale free of its security interest.

39 Under STA s. 69(1), the buyer only acquires rights in the security that the transferor had or had the power to transfer. In this scenario, the debtor did not have power to transfer the security free of the security interest, assuming the security agreement restricted the debtor’s power to deal with its securities to the same extent as the control agreement.

40 If the issuer, in breach of the control agreement with the secured party, registered the buyer as owner on its books, it would additionally be

liable to the secured party for wrongful registration and obligated to provide it with a like uncertificated security and pay any distributions that the secured party did not receive as a result of the wrongful registration STA s. 91.


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s. 30 NBPPSA

(6) A buyer or lessee of goods takes free of a security interest in the goods perfected by registration under section 25 if (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. (7) Subsection (6) applies only to goods that are equipment and that are of a kind that are prescribed as serial numbered goods.

• If SC doesn’t register the serial number, the buyer of the equipment will take free of the security interest • This is a priority rule, not a perfection rule – the security interest is still perfected, because the inclusion of the

serial number is not required. However, the buyer has priority. ONPPSA. • The Ontario Act has the same regime with consumer goods as does the New Brunswick Act (if you do not register

the serial number when registering a security interest in serial-number goods held as consumer goods, the security interest thereby registered is not perfected) (see s. 1, 3(7), (9)).

• But not with equipment. See s. 28(5). s 28(5) Where a motor vehicle, as defined in the regulations, is sold other than in the ordinary course of

business of the seller and the motor vehicle is classified as equipment of the seller, the buyer takes it free from any security interest therein given by the seller even though it is perfected by registration unless the vehicle identification number of the motor vehicle is set out in the designated place on a registered financing statement or financing change statement or unless the buyer knew that the sale constituted a breach of the security agreement.

• This section LOOKS the same as the NB section; BUT the buyer only takes free of a security interest given by

their seller • This does not protect against the ABCD problem, which is the very problem that serial-number registration was

developed to solve CCQ. • A secured creditor has to enter a descriptive file on serial-number goods identifying them by number unless the

goods are inventory (see art. 14-15 Regulations) • If the SC doesn’t enter it, their security interest is not published and will not be effective against anyone

o One rule for all goods, consumer or equipment • PPSAs tried to be more forgiving of the secured creditor. In being so nuanced, they obviously had to sacrifice

simplicity. 7. EXCEPTION SEVEN: LOW-VALUE GOODS (NB ONLY) • This is the so-called “garage sale” exception • If consumer goods are sold or leased in a private sale, but are under a set value ($1000), then the buyer takes free

of any security interest (s. 30(4)(b), read in tandem with s. 30(3)) o This is probably not necessary because if the good is of such low value, it won’t be worth it for the SC to

enforce

VIII. COMPETING CLAIMANTS: UNSECURED CREDITORS AND NON-CONSENSUAL SECURED CREDITORS


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• Security puts a creditor above the general category of creditors. Are there any interests that can compete with the security interest held by the secured creditor? à YES

• The CCQ creates two categories of claims that can compete with conventional hypothecary claims: o 1. Holders of prior claims (better term = “priority claim”) o 2. Secured creditors created by operation of law (holders of legal hypothecs)

• The common law provinces do not have a comprehensive piece of legislation setting out who receives the equivalent of “legal hypothecs”, although various statutory devices cause security interests to arise by operation of law, and generally in similar circumstances to the CCQ o The federal Bankruptcy and Insolvency Act

1. CCQ: PRIOR CLAIMS See arts. 2650-2659. • A prior claim is defined in art. 2650: art. 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. • A prior claim is not a claim to a particular asset. It is a claim to be paid first out of the proceeds of all the assets

that have been seized and sold. • Who is entitled to this treatment? See art. 2651.

o Para 1. People who have incurred expenses in the common interest § For example: the creditor that incurs the expense of filing with the court, pays the bailiff who seized and

sold the assets, should be reimbursed § Another example: whoever incurs the cost of preserving an asset that will be sold to the mutual benefit of

all the creditors will be reimbursed first out of the proceeds § See art. 2652 for further specification

o Para 2. Vendors have a prior claim to the purchase price of a movable sold to an individual not operating a business (even above hypothecary creditors) § This is not the super-priority of a PMSI – this needs to be contracted for. The prior claim here arises by

operation of law. o Para 3. Persons who have a right to retain movable property.41

§ This claim is generally associated with repairs/services done for movables, or warehouse owner. • Compare the common law “possessory lien”

§ These people are preserving the assets, so are providing a service to all creditors; should therefore be reimbursed

o Para 4. The State’s tax claims § See further: art. 2653.

o Para 5. Claims by municipality and school boards for other types of taxes (ex. property taxes) 41 Rights of retention under the Code include the following: (1) an innkeeper may retain the effects and baggage of a guest as security for

payment of the cost of lodging and services (art. 2302); (2) a depositary (essentially, a warehouse keeper) is entitled to retain the deposited goods until paid the agreed remuneration and expenses (art. 2283); (3) a mandatory is entitled to deduct what she is owed by the mandatory out of he sums she is required to remit (art. 2185); (4) a carrier may retain the property carried until the freight, carriage charges and any storage charges are paid (ar. 2058); (5) a charterer may retain cargo carried until paid what it is owed for the carriage (art. 2003); (6) any person who has detention of property with the consent of the owner may retain the property pending payment of his claim against the owner if the claim is exigible and relates to the detained property (art. 1592); (7) an administrator of the property of another may retain the administered property until paid what she is owed for the administration (art. 1369); (8) a person who is obligated to deliver property to another by reason of gift or will may retain the property until paid what is due to her (art. 1250); (9) where movables belonging to several owners are intermingled so as to lose their identity, a person who is bound to return the new asset that has been produced to the owner may retain it until paid the value of its labour or materials (art. 974); (10) the holder of a lost or forgotten thing may retain it pending payment of the costs of its administration and any work done by the owner (art. 946); (11) a heir who is obligated to return property received from the deceased by gift or will for the purposes of partition among the co-heirs is entitled to retain the property until he has been reimbursed the amounts he is owed (art. 875).


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§ See art. 2654.1 • Important point: prior claims may be set up against other creditors without being published (art. 2655)

o ONLY IF THEY ARE A REAL RIGHT o Generally speaking, however, most prior claims are not real rights.

§ So most prior claims are not effective against third parties; are only effective against the debtor. § So there is no right to follow (buyers are not affected). This is why publicity is not a concern.

• If a prior claim is a real right (ex. art. 2654.1 makes municipal claims a real right, thus creating a conceptual aberration) it takes its third-party effectiveness without publication

2. CCQ: LEGAL HYPOTHECS The Civil Code recognizes a legal hypothec, i.e. one arising by operation of law, to secure the following types of claims:

(1) claims of the State or governmental entities for sums due under fiscal and certain public laws; (2) claims of persons having taken part in the construction or renovation of an immovable; (3) the claim of a syndicate of co-owners of an immovable for payment of the common expenses and contributions

to the contingency fund; and (4) claims under a judgment.42

Construction hypothecs and condominium hypothecs attach only to the relevant immovable.43 The legal hypothecs of the State and of a judgment creditor may be charged on movable or immovable property.44

They take effect only upon registration in the relevant register (i.e., in the case of a movable, the register of personal and movable real rights).45

Registration entitles the holder of the legal hypothec to follow the movable assets described in the registration into the hands of third parties, as though it were the holder of a conventional hypothec, except in the case of movable property alienated in the ordinary course of business of an enterprise debtor.46

Priority is determined according to the same rules that apply to conventional (consensual) hypothecs.47

See arts. 2724-2732. • Legal hypothecs are hypothecs that do not arise out of a contract, but by operation of law. • Who benefits from a legal hypothec? See art. 2724.

o Para 1. Claims of the state under fiscal laws (tax) § This legal hypothec applies to all movable and immovable property of the debtor (art. 2725) § NOTE: the State’s legal hypothec only has effect from registration (art. 2725)

• So if a bank has a hypothec on property that was previously registered, it’s going to win § N.B. The State ALSO has a prior claim for taxes

• Why would you need both? o A prior claim is not a real right (is a personal right), and thus gives no droit de suite o A legal hypothec is a real right, and thus gives droit de suite

• So if the property in question has moved into the hands of a third party, the State will want to avail itself of its legal hypothec, not its prior claim

42 Art. 2724. 43 Arts. 2726, 2729. 44 Arts. 2725, 2730. 45 In the case of a hypothec in favour of the State, the application for registration is made by filing a notice specifying the statute creating the

hypothec, describing the property of the debtor on which the creditor intends to exercise its hypothecary rights, and stating the cause and the amount of the claim. The notice must be served on the debtor: see art. 2725. In the case of a hypothec in favour of a judgment creditor, the creditor must register a notice describing the property charged with the hypothec and specifying the amount of the obligation, and, in the case of an annuity or support, the amount of the instalments and, where applicable, the annual Pension Index; a copy of the judgment must be filed with the notice, and both must be served on the judgment debtor: see art. 2730.

46 Art. 2732. 47 The Code priority rules generally refer to hypothecs without distinction between conventional and legal hypothecs.


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For the state: advantages and disadvantages of their various avenues of claim Prior Claim Legal Hypothec + super priority, even over hypothecs + no need to register - no droit de suite

- subject to a first-to-register rule - need to register + droit de suite + special enforcement remedies available to hypothecary creditors

Don’t forget municipalities’ property tax claims get the best of both worlds – are a prior claim that are a real right, so get a right to follow WITHOUT publication. See above.

o Para 2. People that have participated in the construction/renovation of an immovable § Contractors get a legal hypothec on the immovable in proportion to the value of their work

• Limited number of parties get this right (art. 2726: only for the architect, engineer, etc.) § This hypothec exists and is effective against third parties without publication for 30 days after the work

is completed (art. 2727) • If the contractor wants this hypothec to continue after 30 days, has to register (it will only last six

months) (art. 2727). § This legal hypothec secures the increase in value added to the immovable by the materials/ services

rendered (art. 2728) § Why do contractors get this legal hypothec?

• Because subcontractors don’t have a contract with the owner of the building, but only a K with the general contractor, who is supposed to pay all the subcontractors out of what they get paid by the owner

• The legal hypothec on the building incentivizes the owner to make sure the subcontractors are getting paid

o Para 3. Syndicate of co-owners § If a condo owner defaults on fees, the syndicate gets a legal hypothec on the condo § See further art. 2729

o Para 4. Claims under a judgment § If an unsecured creditor gets a judgment, they are entitled to a legal hypothec § This is a way for an unsecured creditor to elevate his status to that of a secured creditor § The hypothec can attach to both immovable and movable property of the debtor (art 2730) § JC has to register a notice of the judgment, specifying the amount owed (art. 2730) § Gives the JC a right to follow the asset, unless it was sold in the ordinary course of business (i.e. unless

the property was inventory) (art. 2732). 3. COMMON LAW PROVINCES: NON-CONVENTIONAL SECURITY INTERESTS? Non-consensual security interests do not fall within the scope of the PPSA.48 Therefore the priority rules of the PPSA that govern disputes between competing security interests generally do not apply. There is only one limited exception. The PPSA provides that where a person in the ordinary course of business furnishes materials or services with respect to goods, any lien conferred upon that person will have priority over a competing security interest subject to any contrary provision in the statute applicable to the lien.49 • Otherwise, the common law provinces do not have a comprehensive piece of legislation that sets out the list of

people that have prior claims, or security interests arising by operation of law. • CML tradition of recognizing prior claims, a right to priority of payment, separate from property claims

48 PPSA (A, BC, M, NB, O, S) s. 4; (NWT, Nu, Y) s. 3; (NL, NS) s. 5. In addition, the Acts clearly contemplate that the security interest is

created by a security agreement, and this condition is not satisfied in the case of non-consensual security interests. See the definitions of “security agreement” and “security interest” in PPSA (A, BC, NWT, Nu, O, Y) s. 1(1); (M, NB, PEI) s. 1; (NL, NS) s. 2; S s. 2(1).

49 PPSA (A, BC, M, NB, NWT, Nu, PEI) s. 32; (NL, NS) s. 33; (O, Y) s. 31.


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• Rather, any security interest arising by operation of law (“charge” or “lien”) arises from specialized statutes pertaining generally to the same categories of people as under the CCQ o Tax liens, deemed trusts, charges o Construction lien o Condominium lien

The Rights of Judgment Creditors • Can an unsecured creditor, in a CML province, raise their status to that of a secured creditor? à yes NBPPSA. Register for priority. • ss. 20, 35(6) NBPPSA & the Creditors’ Relief Act (s. 2.2(1)) together allow a judgment creditor to register a notice

of judgment which applies to all the debtor’s property o As soon as creditor does this, has priority over all subsequently registered security interests, and all

unperfected security interests o This mechanism is very helpful, because once that judgment is registered, the grantor cannot deal with any of

his assets (because all potential co-contractants will see the security interest in all of his property), and so will be encouraged to pay his judgment

ONPPSA. Seize for priority. • s. 20 ONPPSA A judgment creditor has to seize the asset in order to “perfect” their interest (i.e. assure their

priority) o A JC in Ontario cannot register their notice of judgment and get (in effect) a legal hypothec

§ There is no procedure for registering judgments à to “perfect”, have to seize o If a secured creditor registers after the judgment creditor’s seizure, the SC cannot oppose his security interest

to that seizure (i.e. has no right to follow the property into the judgment creditor’s hands) • The priority-creating event is different in NB and ON à NB (registration), ON (seizure) Future Advances and the Position of Unsecured Creditors under the PPSA NOTE: The PPSA provides that advances made by a secured party after it acquires knowledge50 that the collateral has been seized to enforce a judgment (Ontario type system) or acquires knowledge that a judgment has been registered (New Brunswick type system) are subordinated to the interest of the judgment creditors.51 Example 1. • Asset is worth $200,000 • Jan. 1st – SC registers security their interest ($100,000) • Feb. 1st – JC registers his notice of judgment ($100,000) • Mar. 1st – SC loans a further $100,000 on original security interest What is the right of the judgment creditor versus the prior secured creditor? • See s. 35(6) NB PPSA s. 35(6) NBPPSA

(6) A perfected security interest has priority over the interest of a judgment creditor referred to in paragraph 20(1)(a) only to the extent of

50 As to what constitutes “knowledge,” see PPSA (A, BC, NWT, Nu) s. 1(2); (M, NB, PEI) s. 2(1); (NL, NS) s. 3(1) (c); S s. 2(2); O s. 69.; Note

that registration of a financing statement does not constitute constructive notice: PPSA (A, BC, MB, NB, NWT, Nu, PEI, S) s. 47; (NL, NS) s. 48; O s. 46(5);Y s. 52(3).

51 PPSA (A,BC, M, NB, NWT, Nu,) s. 35(6); (NL, NS) s. 36(6); O. 30(4);PEI s. 35(9).; Y no equivalent provision. The Saskatchewan Enforcement of Money Judgments Act, above, ss. 23(4)-(5).


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(a) advances made before the judgment creditor registers the notice of judgment referred to in paragraph 20(1)(a), (b) advances made before the secured party has knowledge of the registration of the notice of judgment referred to in paragraph 20(1)(a), […] (d) reasonable costs and expenses incurred by the secured party for the protection, preservation, maintenance or repair of the collateral.

See ONPPSA s. 30(4)(b). • SC’s first loan of $100,000 is registered first: they win that amount • The SC’s second loan of $100,000 is subordinate to the intervening JC’s security interest if they knew about the

JC’s registration of the notice of judgment • So the JC, on February 1st, is ALSO going to send a notice to SC saying they registered this interest • This rule does not exist in QC. Why not? Because SC has to put the maximum amount in a registration of their first

interest. What is the policy rationale for this rule? o Balance between the unsecured creditors and the secured creditors. o Also to protect against judgment-proofing. Do not want secured creditors to take a security interest in a

debtor’s property and then loan $1 (to fulfil the “value” requirement), and have priority over all the judgment creditors who are not getting paid

4. COMPETING CREDITORS CREATED BY THE BIA How does the federal Bankruptcy and Insolvency Act affect provincial priority rankings? • Note that the definition of secured creditor under s. 2 of the BIA includes: secured creditors, instalment sale

vendors, SWAROR buyer (Re Ouellet; Re Lefebvre) A. By Demoting the Crown (ss. 86-87) • Sections 86-87 as a general rule, deny legal effect to provincial legislative attempts (and federal legislative

attempts) designed to give to government claims the highest priority o As we have seen, Quebec gives the State a prior claim AND a legal hypothec on unpaid taxes o Under the BIA, Crown claims are demoted to the status of unsecured creditors o However, if the Crown registers its claim in the provincial registry, it can rank as of the date of registration,

for the amount owing at registration. § If the debtor keeps defaulting, Crown has to keep registering § Crown will still generally be last in line, even under the registration scheme § Exception: unremitted pension plan and employment insurance contributions

o The policy problem with these provisions: encourage the secured creditors to push the debtor into insolvency, so they can reverse the provincial priority status of the Crown § Some cases have said this motive for forcing insolvency is irrelevant, as long as the bankruptcy is legally

sound o Why is there this priority-reversing policy in the BIA?

§ Historically: • BIA set up a hierarchy of creditors: Secured creditors, Preferred creditors, General creditors,

Deferred creditors • Secured creditors challenged provincial prior-claim provisions with a statutory interpretation

argument: Parliament turned its mind to “preferred creditors” (putting them second) and therefore, province should not be able to thwart that intent by putting other creditors above the secured creditors

• But this was not the intent of Parliament: the prior-claim creditors did not even exist at the time they were placed second to secured creditors, so Parliament was actually enacting a policy of lifting the preferred creditors UP (not DOWN)


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• SCC rejected this argument when it was argued in favour of allowing provincial priority to hold sway

o Now: we do not want to discourage the lending of credit from private lenders. Private lenders lobbied the government to let them come ahead of the Crown in order to encourage economic development.

o So now there is this good incentive for secured creditors to push debtors to insolvency, because it strips off the layers of prior claims held by the government

• So, State’s prior claims under provincial regime will only have effect outside a bankruptcy context if assets are liquidated (rarely occurs).

• Section 136 sets out basic priority structure in the BIA:

o “SUBJECT TO THE RIGHTS OF SECURED CREDITORS”, property shall be divided as follows: § Preferred Creditors § General Creditors § Deferred Creditors (ex. shareholders – this is the risk of investment)

o Secured creditors do not have to prove their claim, just have to exercise their right on the asset and sell it (but must account to trustee in bankruptcy for any surplus realized)

o But the BIA creates some super-priority claims that trump the SC’s rights. B. By Trumping Provincially-Ranked Security Interests with Super-Priority Claims

Section 95: if a security interest is fraudulent, its preference will be set aside

Section 81.1: unpaid suppliers have a right to demand their goods back (n.b. this is not an instalment sale or a situation of retained title; this is just a regular unpaid supplier who has not retained title)

o “right of recapture” o Sounds like a good right, but is subject to procedural requirements: notice, time period expiries, and supplier

generally doesn’t have the requisite knowledge to exercise this right

Section 81.2: unpaid farmers, fishers, agriculturalists that supply stuff that makes the inventory more valuable. Ex. If I supply someone animal feed, get a charge on the cattle fed with that feed.

o Secured by a charge on the supplied produce, in priority to all other claims, including secured claims o Again, there are procedural requirements that limit the usefulness of this right.

Sections 81.3, 81.4: unpaid wages o The claims of workers are secured against the assets, cash, receivables, inventory of a company for any wages

that the company hasn’t paid to its employees o Limited to $2000 and to claims arising from 6 months before insolvency

So how does the federal BIA affect the provincial secured transactions regime? Summary: • Demoting the Crown • Creating some super-priorities C. By Barring Enforcement by Judgment Creditors • Under PPSA, judgment creditor can get equivalent of priority status of SC in one of two ways, depending on

jurisdiction: o ON seizure of the asset o NB registering notice of judgment o CCQ registering notice of judgment

• Under BIA, s. 69.3: the invocation of bankruptcy bars any remedy any creditor has against the debtor o s. 70(1) bankruptcy law takes precedence over any provincial enforcement measure that hasn’t taken place by

the time bankruptcy occurs


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• Judgment creditor cannot enforce its legal hypothec once bankruptcy has intervened (traditional interpretation is that the JC’s legal hypothec disappears) o JC becomes an ordinary unsecured creditor

IX. ENFORCEMENT OF SECURITY ON DEFAULT

1. INTRODUCTION TO ENFORCEMENT OF SECURITY UPON DEBTOR DEFAULT • As a general rule, secured creditors get a special right to enforcement remedies that flow automatically from the

very concept of a security interest/hypothec • Questions to be considered in this section:

o What happens if there is a default? o What are the remedies of the SC? o What notice must be given to the debtor? o How must the SC go about the sale of assets? o Must this be judicially supervised?

• There are a variety of rights/obligations in the enforcement process, on both the part of the debtor and on the part of the SC

What Constitutes Default? (Defined in the Security Agreement) • Default is defined in the security agreement. The definition is broad and detailed: many events or actions constitute

the default of the debtor. • However, it is not in the creditor’s interest to seize upon any default as an excuse to seize the property

o It takes resources to seize/sell off property o Can depress the market for the asset by flooding it with seized/sold assets o Reputational purposes

The Enforcement Possibilities • Ultimate general remedy = sale of the asset by the creditor • Alternative = taking in payment

o What is the difference between taking in payment and sale of the asset? Example 1. • Value of the collateral = $100,000 • Amount of the loan = $110,000 (unsecured for $10,000) How does sale of this asset differ from taking it in payment? • Sale of the asset:

o If the creditor sells the asset for $100,000, this remedy does not extinguish the part of the debt that is not covered by the proceeds of sale

o Secured creditor can get a judgment allowing them to exercise their right to the $10,000 on other elements of debtor’s property (but are an unsecured/judgment creditor for this portion, not secured)

• Taking in payment: o By taking the asset in payment of the obligation secured, the asset given over completely eliminates

(extinguishes) the debt, regardless of whether its value covers the amount of the debt or not • Alternative enforcement mechanism = collection of accounts:

o Secured creditor can collect the accounts of the business directly in order to reimburse their loan o SC can also sell the right to collect the accounts (assignment)


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• Alternative enforcement mechanism: receivership o If debtor is a business, SC might just take over the business entirely o This may be more fruitful than dismantling the business and selling off its parts

2. ENFORCEMENT REMEDIES UNDER PART V OF THE PPSA References in this section are mostly to the NBPPSA. NOTE. Some transactions do not fall under Part V (Enforcement) of the PPSA: the deemed security interests

o Lease for a term greater than 1 year o Assignment o Sale without change of possession (Atlantic provinces only) o Commercial consignment (non-Ontario PPSAs)

ALSO NOTE. All the provincial PPSAs are subject to applicable consumer protection legislation for the secured party’s enforcement rights. A. Default • All remedies are made available upon the DEBTOR’S DEFAULT • Default is defined in the PPSA (s 1): s 1 NBPPSA

“default” means a) the failure to pay or otherwise perform the obligation secured when due, or b) the occurrence of any event or set of circumstances whereupon, under the terms of the security

agreement, the security interest becomes enforceable • Default therefore is:

o Failure to pay the obligation secured o Occurrence of event of default: parties are free to specify whatever they want as constituting default

§ Is a matter of contract what event will constitute default § There is generally a huge long list of events that will constitute default:

• Failure to comply with any provision of the SA • Good faith belief by SC that prospects of repayment are weak • Good faith belief by SC that collateral is in danger • Debtor’s misrepresentation as to quality of collateral

o Of course, SC is not forced to treat any event as a default, even if it is defined as such in SA B. Reasonable Notice Doctrine • Reasonable notice doctrine says that: a creditor has to give the debtor a reasonable opportunity to pay before

initiating any kind of enforcement action against that debtor • The ‘reasonable notice doctrine’ is a product of jurisprudence that applies regardless of the agreement of the

parties, and regardless of whether or not it is recognized in the PPSA o But it has been codified in the NBPPSA s 58(2): enforcement rights are subject to “any … rule of law

requiring a secured party to give prior notice of the intention to enforce a security interest” • Note this doctrine is not as charitable to the debtor as it seems: “advance notice” can be a couple of hours

o The idea is to give the debtor a chance to get other funds to pay the debt, so do not have to damage the business unnecessarily by initiating enforcement procedures

• The importance of this jurisprudence has been greatly reduced by the BIA, which imposes a 10-day advance notice requirement before enforcing any security in bankruptcy (s 244(2) BIA)

s 244(2) (2) Where a notice is required to be sent under subsection (1), the secured creditor shall not enforce the


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BIA security in respect of which the notice is required until the expiry of ten days after sending that notice, unless the insolvent person consents to an earlier enforcement of the security.

C. Self-Help by Secured Creditors under the PPSA s 58(2) NBPPSA

(a) the secured party has, unless otherwise agreed, the right to take possession of the collateral or otherwise enforce the security interest by any method permitted by law

• No consent of the grantor is needed to seize the encumbered asset • Secured creditor has a unilateral right to simply seize the collateral à this is known as “self-help”

o Civil law regimes generally do not recognize the unilateral self-help idea o Also, Alberta doesn’t recognize self-help seizures on individual debtors (not businesses), but rather require the

use of a bailiff • The security agreement will likely give the SC a license to enter into the debtor’s property in their absence to

enforce their security rights o This right can include the use of reasonable force which might break the law (i.e. breaking the locks of a

business after-hours and entering in order to take over the assets) • Sidenote: the SC who helps themselves could be in some danger of civil liability for wrongful seizure if the seizure

attempt ends up creating a “breach of the peace” D. Remedy I: Sale (s. 59 NB) • The seizure of the asset is a means to an end: the secured creditor really wants its liquidated value to reimburse the

amount of the loan. So most often, the SC will sell the seized asset. • Section 59 – Right to dispose of collateral after seizure s 59 NBPPSA

(2) After seizing or repossessing the collateral, a secured party may dispose of it in its existing condition or after repair, processing or preparation for disposition. […] (5) Collateral may be disposed of (a) by private sale, (b) by public sale, including public auction or closed tender, (c) as a whole or in commercial units or parts, or (d) if the security agreement so provides, by lease.

• The SC is given an enormous amount of flexibility in how to proceed with enforcement • However, all enforcement rights and remedies have to be exercised in good faith and in a commercially

reasonable manner: s. 65(2) (NB) o The SC is not obligated to get the best market price; but is obligated to use commercially reasonable means to

obtain the best price possible s. 65(2) NBPPSA

All rights and obligations arising under a security agreement, under this Act or under any other applicable law shall be exercised and discharged in good faith AND in a commercially reasonable manner.

• The reason commercial reasonableness is mandated is the perverse incentive structure facing the secured creditor:

SC has no interest beyond getting its own debt repaid o So the SC will not be interested in getting any more value in the encumbered asset than what is needed to

repay what the SC what it is owed o For example, if the asset is worth $100,000, and the SC is only owed $50,000, will only care about selling it

for more than $50,000. • To bolster the likelihood of oversight of the SC’s seizure and sale, the PPSA requires the SC to send several

parties advance notice of enforcement: s 59(8) Not less than twenty days before disposition of the collateral, secured party shall give a notice to


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NBPPSA (a) the debtor and any other person who is known by the secured party to be an owner of the collateral, (b) a creditor or person with a security interest in the collateral whose security interest is subordinate to that of the secured party and (i) who has registered, before the notice of disposition is given to the debtor, a financing statement that includes the name of the debtor or that includes the serial number of the collateral if the collateral is goods of a kind that are prescribed as serial numbered goods, or (ii) whose security interest was perfected by possession when the secured party seized or repossessed the collateral, (c) a judgment creditor whose interest in the collateral is subordinate to that of the secured party and who has registered, before the notice of disposition is given to the debtor, a notice of judgment that includes the name of the debtor or that includes the serial number of the collateral if the collateral is goods of a kind that are prescribed as serial numbered goods, and (d) any other person with an interest in the collateral who has given a written notice to the secured party of that person’s interest in the collateral before the notice of disposition is given to the debtor.

• The notice must describe the collateral, how much the SC is owed, and the chosen means of enforcement (where,

when, how) (s 59(9)) • Who will object upon receipt of notice?

o Grantor is probably not in a position to go to court and object (no money) o Other creditors are in a good position, and have an interest in, checking up on one another, because the

surplus from the sale will go towards satisfying their claims • See s. 59(4): surplus proceeds have to be dealt with in accordance with s. 60 (which deals with surplus and

deficiency) à surplus has to be given to grantor or creditor of grantor o Deficiencies can be claimed from grantor via judgment

E. Remedy II: Taking in Payment (s. 61(1) NB) s. 61(1) NBPPSA

After default, the secured party may propose to take the collateral in satisfaction of the obligation secured by it […notice requirements…]

• The SC can propose to take the collateral in satisfaction of the debt • There are a lot of notice requirements attached to this proposed remedy:

o SC has to give notice to the debtor, other registered SCs, registered judgment creditors, or anybody that creditor knows has an existing interest in the collateral (not unsecured creditors) (s. 61(1))

• If these notified parties feel as though their interests would be adversely affected by the taking-in-payment of the collateral, can send back a notice of objection within 15 days

s. 61(2) NBPPSA

If the interest in the collateral of any person entitled to a notice under subsection (1) would be adversely affected by the secured party’s proposal, that person may give to the secured party a notice of objection within fifteen days after the notice under subsection (1) is given.

• If someone objects, has to furnish proof of their interest in the collateral upon the request of the enforcing party (s.

61(6)) • Under s. 61(7), the SC can go to court to get the objection overruled, on the basis that:

o The objection was made for an improper purpose, or o The amount owing to them by the debtor is more than the FMV of the collateral (i.e. no one else would have a

reasonable interest in forcing a sale of this collateral) • If no one notified objects to the proposed taking-in-payment, the secured creditor can go ahead and take the

collateral in payment (s. 61(4)). • Who would opt for this remedy?

o Financers who are not banks – for example, car dealers – and could actually use the asset in their business, might opt for the taking in payment

o Rough equivalence between FMV of collateral and amount of debt owing


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o FMV of collateral is LESS than amount of debt owing, but debtor will never be able to pay the amount of a judgment for the deficiency

o Is often simpler to take collateral in payment, because the creditor will not be subject to the requirement to act in “commercially reasonable fashion”

F. Remedy III: Receivership (s. 64 NB) • Receivership can be provided for in the security agreement. It is the SC’s contractual right on an event of default to

appoint someone to receive all the assets of a business and manage them. o Note, however: receivership doesn’t have to be in the security agreement. It is possible to apply to a court for

the right to appoint a receiver. • The equivalent under the CCQ is the administration of the property of another

o It is not used that much, because the administrator has greater liability for mismanagement under the CCQ than does the receiver under the PPSA.

• Is also possible to apply for a receivership remedy under the BIA o This remedy is only granted to SCs of an enterprise, not natural persons o So SCs in QC will likely use the BIA, because it permits them to have receivers, not administrators

G. Remedy IV: Collection of Accounts Receivable (s. 57 NB) s 57 NBPPSA

(2) If the debtor is in default under a security agreement, the secured party is entitled (a) to notify a debtor on an intangible or chattel paper or an obligor on an instrument to make payment to the secured party whether or not the assignor was making collections on the collateral before the notification, (b) to apply any money taken as collateral or paid to the secured party under paragraph (a) to the satisfaction of the obligation secured by the security interest, and (c) subject to section 59, to take control of any proceeds to which the secured party is entitled under section 28. (3) A secured party who enforces a security interest by giving notice in accordance with paragraph (2)(a) shall notify the debtor within fifteen days after doing so. […].

This remedy is only available where the encumbered assets are the receivables of the debtor. • The secured creditor has a right to collect the receivables owing to the debtor, and apply them to the satisfaction of

the secured loan o SC can collect directly from the account debtor

• This remedy is more attractive than assigning debts to another, who then goes out and collects the debts o If the SC collects themselves, they do not have to warn (send notice to) the grantor that they are collecting

straight from the account debtors o There are no notifications required because there is no danger of harm to third parties. If an SC is seizing

equipment and selling it, everyone else involved wants to make sure the SC gets the proper price for it. Here, the SC is just collecting what is owed.

• The SC does have to give an accounting of what they’ve collected to the debtor • N.B. Account debtors have rights against the SC (right to any defences they had against the grantor, good faith

payments to the grantor made before notification was received, etc). Note on Remedies: a bank will generally take security over everything. So they will have security interests in equipment, inventory, receivables, all the movable property of the grantor. As such, the bank will likely be exercising different remedies against different collateral. H. The Grantor’s Rights in Enforcement Proceedings under the PPSA

1. Right of Redemption – s. 62(2) NBPPSA


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s. 62(2) NBPPSA

At any time before the secured party has disposed of the collateral or contracted for its disposition under section 59, or before the secured party is deemed to have irrevocably elected to retain the collateral under section 61, any person entitled to receive a notice of disposition under subsection 59(8) or (11) may redeem the collateral, unless that person has otherwise agreed in writing after default, by tendering fulfillment of the obligations secured by the security interest, together with a sum equal to the reasonable expenses referred to in para. 59(3)(a) to the extent that such expenses have actually been incurred by the secured party.

• The grantor has a right to arrest the enforcement processes (undertaken under s. 59 [sale] or s. 61 [taking in

payment]) within the allotted time periods for notification, and take the collateral back o This is called a “right of redemption”

• In order to do so, the grantor must “tender fulfilment” of the obligation secured à i.e. PAY IT BACK o ALSO have to pay all the costs to date incurred by the creditor in trying to enforce the obligation

• Other secured creditors can also exercise this right (anyone entitled to receive notice in the proceedings can do so). They can pay off the grantor’s obligation and take the collateral. Note this does not mean they necessarily get to keep it.

2. Right of Re-Instatement – s. 62(4) NBPPSA s. 62(4) NBPPSA

At any time before the secured party has disposed of the collateral or contracted for its disposition under section 59, or before the secured party is deemed to have irrevocably elected to retain the collateral under section 61, the debtor, other than a guarantor or indemnitor, may reinstate the security agreement, unless the debtor has otherwise agreed in writing after default, by (a) paying the sum actually in arrears, exclusive of the operation of an acceleration clause in the security agreement, (b) curing any other default by reason of which the secured party intends to dispose of the collateral, and (c) paying a sum equal to the reasonable expenses referred to in paragraph 59(3)(a) to the extent that such expenses have actually been incurred by the secured party.

• This right of reinstatement concerns instalment-type security arrangements

o Instalment sales often have a clause saying that if the debtor misses just one payment, they are in default for the entire amount owing

o If the debtor miss one payment, and the creditor goes to enforce (i.e. take back the property), the debtor can reinstate the security agreement by paying the instalment payments that they missed, NOT the whole amount of the debt owing (cf. right of redemption)

o The debtor is only entitled to reinstate the security agreement twice a year (even that’s a bit much) • This right is only available in non-ON PPSAs – ON only has it for consumer debtors (not business) I. What Property Right Does a Purchaser of a Seized Asset Get? Example 1. Grantor has an asset, and it is subject to multiple security interests: • SC1 (registered Jan 1st) • SC2 (registered Feb 1st) • SC3 (registered March 1st) SC2 seizes and sells the asset to a purchaser. What security interests is the asset still subject to in the purchaser’s hands?


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PPSA. • The PPSA does not require that the SC who has top priority be the initiator enforcement proceedings

o SC2 is free to initiate the proceedings o SC1 can always get a court order to take over the enforcement proceedings

• But in this example, SC2 has initiated enforcement proceedings, and SC1 is not interested in taking over o SC2 seizes and sells the asset to a purchaser o What security rights is the asset still subject to?

§ SC1, but NOT SC2 or SC3 o See s 59(15) NB:

s. 59(15) NBPPSA

If a secured party disposes of collateral to a purchaser for value and in good faith who takes possession of it, the purchaser acquires the collateral, whether or not the requirements of this section have been complied with by the secured party, free from (a) the interest of the debtor, (b) an interest subordinate to that of the debtor, (c) an interest subordinate to that of the secured party, and all obligations secured by the subordinate interests shall be deemed to be performed for the purposes of sections 49 and 50.

• Note that SC2 has had to notify SC3 of the enforcement proceedings, because the action will extinguish their

interest (s. 59(8)) o SC3 is also entitled to any extra proceeds of disposition above and beyond the satisfaction of SC2’s interest

(and all prior interests) • Why doesn’t SC2 have to notify SC1 about the enforcement proceedings?

o Because SC1’s interest is not liable to be extinguished by the action; SC1 still has their right to follow the asset into the hands of the purchaser

o Walsh believes that SC2 should have to notify SC1, and all prior-ranking creditors so that they have the opportunity to come in and take over the proceeding (but SC2 has no obligation to do so under the PPSA, s 59) à this is the policy in US’s Article 9

• Problem with the PPSA policy: o Leaving SC1’s interest encumbering the asset drives down the price of the asset o Furthermore, SC1’s priority registration covers all future advances made under the security agreement à so

their interest in the asset could be getting bigger every day. Compare the CCQ’s Approach to Example 1. (see below for discussion of CCQ enforcement regime) • 1. Under sale by creditor: art 2790 art. 2790 The purchaser takes the property subject to the real rights charging it at the time of registration of the

prior notice, except the hypothec of the creditor who sold the property and the claims which ranked ahead of his rights. Real rights created after registration of the prior notice may not be set up against the purchaser if he did not consent to them.

• The seizure and sale of the asset by SC2 expunges the interests of SC1 and SC2, but NOT SC3

o This is the opposite to the approach taken by the PPSA • Consider another example to see the ramifications of the CCQ’s policy: Example 2. • Asset is worth $100,000

o SC1, o SC2,


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o And SC3 each have $50,000 security interest • SC2 enforces: seizes and sells the asset. a. How much will a purchaser pay for the encumbered asset? b. Who gets the purchase price? • A. A purchaser will pay no more than $50,000 for the asset because it is only worth $100,000, and the asset is still

subject to SC3’s $50,000 interest. • B. SC1 will get the $50,000 purchase price because they have priority. So SC2 gets nothing.

o So SC2 will never use the remedy of sale by the creditor. • The legislation actively discourages sale by the creditor in situations of multiple secured creditors all in

competition for an asset. • 2. Under sale by judicial authority: art. 2794 as applied to EITHER Example 1 or Example 2. art. 2794 Sale by judicial authority purges the real rights to the extent provided by the Code of Civil Procedure

(chapter C-25) in respect of the effect of the order to sell.

o The sale by judicial authority will clear the asset of all the hypothecs, and each will be paid in order of priority – the purchaser will get good title

o In principle, the purchaser will be willing to pay full market value for the asset, because their right won’t be subject to anyone else’s

3. ENFORCEMENT REMEDIES UNDER ARTS. 2748-2794 OF THE CCQ • There is more judicial involvement in the CCQ regime

o The PPSA relies more on creditor-driven processes: the creditor can generally operate outside judicial supervision unless the grantor raises an objection

o Why? The PPSA only applies to movable property; the CCQ regime on hypothecs (and enforcement thereof) applies to both immovable and movable property (unless it states otherwise) § This partially explains the bias in favour of judicial authority in the CCQ

• What are the remedies available to a hypothecary creditor under the CCQ, and under what conditions do they

become available to the creditor? art. 2748 In addition to their personal right of action and the provisional measures provided in the Code of Civil

Procedure (chapter C-25), creditors have only the hypothecary rights provided in this chapter for the enforcement and realization of their security. Thus, where their debtor is in default and their claim is liquid and exigible, they may exercise the following hypothecary rights: they may take possession of the charged property to administer it, take it in payment of their claim, have it sold by judicial authority or sell it themselves.

• If the SC wanted to contract for additional recourses against the debtor, this would not be permitted

o The SC has to follow one of the procedures set out in the CCQ for enforcement o Failure to do so could result in a claim for damages by the debtor for wrongful seizure o The only recourses given to the SC are:

§ Administration of the property § Taking it in payment § Having it sold by judicial authority § Selling it themselves

• The conditions for enforcement are: o Debtor must be in default o Claim must be liquid and exigible


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§ I.e. the debt must be able to be expressed in monetary terms and it must be due § Can you have a claim secured by a hypothec that isn’t liquid? Certainly, can have security on an

obligation to perform a service. But it needs to be measureable in money to be enforced. A. Preliminary Measure a Hypothecary Creditor Must Take before Enforcing: Prior Notice art. 2757 A creditor intending to exercise a hypothecary right shall file a prior notice at the registry office,

together with evidence that it has been served on the debtor and, where applicable, on the grantor and on any other person against whom he intends to exercise his right. Registration of such a notice is made in accordance with the Book on Publication of Rights.

art. 2758 In a prior notice of the exercise of a hypothecary right, any failure by the debtor to fulfil his obligations shall be indicated, together with a reminder, where necessary, that the debtor or a third person has a right to remedy the default. In addition, the amount of the claim in capital and interest, if any, and the nature of the hypothecary right which the creditor intends to exercise shall be included in the notice, together with a description of the charged property and a call on the person against whom the right is to be exercised to surrender the property before the expiry of the period specified in the notice. This period is of 20 days after registration of the notice in the case of a movable property, 60 days in the case of an immovable property, or 10 days if the creditor intends to take possession of the property; however, the period is of 30 days in the case of a notice relating to movable property charged with a hypothec constituted by an act accessory to a consumer contract.

Note all the information that needs to be included in the prior notice, as well as the different time delays before enforcement can occur. • The hypothecary creditor intending to exercise his rights must register PRIOR NOTICE in the registry

o Must also have already sent that notice to the debtor o Registrar then forwards that notice of intention to enforce to all other secured creditors that have an interest in

that asset • Hypothecary creditor has to register this notice a certain number of days before they exercise their rights:

o Movable property: the period is 20 days o Immovable hypothec: the period is 60 days

§ Why is it longer? If the immovable is the grantor’s primary residence, they will have to find a new place to live. Loss of immovable property is major and serious.

• This prior notice is different from PPSAs: creditor can initiate enforcement proceedings immediately by taking possession. o The only restriction on this is case law requirement of reasonable notice o Under the PPSAs, notice comes later. Advance notice must be given of the sale or the taking of payment but

not of the initial act of seizing the asset. B. Surrender of the Property by the Debtor • The surrender of the encumbered asset by the debtor can be voluntary or forced (art. 2763)

o “Voluntary” means the debtor gives it up (art. 2764) o “Forced” means the court orders it (art. 2765)

§ Court will order forced surrender if all conditions for seizure have been satisfied (ex. notice) • The CCQ does not endorse the creditor’s right to self-help found in the PPSAs

o CCQ is more protective of the grantor’s interests (possibly due to the CCQ enforcement regime being applicable to both movables and immovables)

o Just because the protection of the grantor is not found in the PPSA, however, does not mean it does not exist: these types of protections may be found in consumer protection legislation

o The question is really who bears the burden of going to court: grantor or creditor § The CCQ places the burden on the creditor § The PPSA places it on the grantor


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C. Remedy I: Sale by the Creditor (arts. 2784-2790) • CCQ, unlike PPSA, has 2 forms of sale after seizure: sale by the creditor, and sale by a judicial authority • A secured creditor may ONLY himself seize and sell the property of a grantor who is an enterprise

o I.e. if the grantor is a natural person, secured creditor must hire a bailiff • Once the creditor files their notice of enforcement, has discretion as to how to sell the asset (art. 2784)

o Creditor who sells the asset themselves is subject the requirements of being commercially reasonable and acting in the debtor’s best interests (art. 2785)

• Once sold, the creditor can apply the proceeds towards satisfying their own claims and those of others (art. 2789) o See above for the kind of title a purchaser of this property receives (art. 2790).

D. Remedy II: Sale by Judicial Authority (arts. 2791-2794) • Court oversees the sale, appoints someone to carry it out, indicates what mode of sale needs to be utilized (art.

2791) • This is the only mode of sale available for seizure and sale of the assets of a non-enterprise • This type of sale clears all the hypothecary interests in the asset (art. 2792, 2794). E. Remedy III: Taking in payment (art. 2778ff) • Taking an asset in payment fully extinguishes the obligation (art. 2782) • The quality of the creditor’s title in the asset taken in payment is that it is free of all subordinate interests (art.

2783) (this is the same approach as the PPSA) • Procedure for a hypothecary creditor wishing to use the remedy of taking in payment (art. 2779):

o Creditor who wants to take the asset in payment registers notice of enforcement with the registry o Others can object: BUT

§ The creditors forcing the sale need to reimburse the creditor for his prior costs, and § Advance him the money to make the sale, and § Furnish him with security guaranteeing that the sale will fully cover repayment of the amount of his

security interest • So if you as a secured creditor want to take property in payment, you want to be in Quebec, because you are

favoured more in the CCQ than in the PPSA. o Anyone who wants to object to the taking in payment under the CCQ needs to be serious o There are no conditions on objection to taking in payment in the PPSA; the onus is on the SC who wants to

take the property in payment to go to court and overturn the objection o CCQ’s protection of the creditor who moves to take a property in payment of his debt goes against the general

tendency in the CCQ to favour the protection of the grantor. F. Does This Enforcement Regime Apply to Other Creditors? • Only some of the other secured creditors in the CCQ are subject to Chapter V (Exercise of Hypothecary Claims)

o SWAROR, instalment seller, security trust à subject to enforcement rules (see the cross-reference in the codal articles to the hypothecary enforcement regime)

o Lease, leasing à not subject to enforcement regime (no such cross-reference) • Application of the PPSA Enforcement Regime

o If a transaction functions as a security interest, it will be subject to the enforcement regime in Part V. o Some deemed security interests are not subject to Part V (consignment, true leases – transactions referred to in

s. 3(2) NBPPSA) G. CCQ Enforcement Regime on Receivables: “Collection” (arts. 2743-2747) • Under the CCQ, if an SC has taken a security interest in the grantor’s receivables, they start collecting the

receivables immediately, even if the loan is not due yet (art. 2743).


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o Most of the time the secured creditor will not do that. They will allow the grantor to collect their own receivables until they default (art. 2744).

o Creditor may withdraw their authorization to the grantor to collect their own receivables (art. 2745) § This has to be registered, and the registry will send out notices to other SCs

• This regime is not in the chapter on the exercise of hypothecary rights because it is not a “remedy” for a situation of default: the SC has this right of collection from the conclusion of the security agreement.

• NOTE: the SC who collects is not necessarily the one that has priority to the receivables o This won’t happen in practice much; an SC who is second in priority ranking should not be collecting o But if it does happen, SC1 can go collect from SC2

X. CHOICE OF LAWS / CONFLICT OF LAWS

This is a major issue in North America: 50 jurisdictions in the US and 13 in Canada, with a highly integrated market. 1. IMMOVABLES Property rights in immovables have always been governed by the law of their location (lex situs or lex rei sitae). 2. MOVABLES For movables, a more complex set of choice of law rules applies. In identifying the law applicable to the validity, perfection, and priority of a security interest, the PPSA and CCQ generally employ one of two basic connecting factors: the location of the collateral or the location of the debtor. A. Ordinary Goods

i. General Rule – lex situs - ONPPSA/NBPPSA s. 5(1) & CCQ 3102 For (tangible) goods generally, lex situs applies,52 subject to a special destination rule for goods intended for export.53 That is, as a general rule, the validity, perfection, and effects of perfection or non-perfection of a security interest in goods is determined by the law of the jurisdiction where the goods are located.

• (eg, if Company X in Québec grants security in inventory located in all provinces, several states, and overseas countries, the secured creditor will have to register in each jurisdiction where the inventory is located, as per the laws of that jurisdiction).

ii. Re-located Goods – Reperfection – ONPPSA s. 5(2), NBPPSA s. 5(3) & CCQ 3104

There are special perfection rules where the collateral or the debtor, as the case may be, changes location to the enacting jurisdiction. The secured creditor is given a grace period to reperfect its security interest, and thus to preserve the continuity of perfection, in accordance with the perfection requirements of the enacting jurisdiction.54 The security interest “continues perfected” in the enacting province if it is registered or otherwise perfected in accordance with the enacting province’s PPSA before the expiry of the earliest of the following periods:

• sixty days after the goods are brought into the province under the PPSA and 30 days after the goods are brought into Quebec under the CCQ;

• fifteen days after the secured party has knowledge that the goods have been brought into the Province; or • before perfection lapses under the original lex rei sitae.55

iii. Special Intervening Buyer Exception – ONPPSA s. 5(2), NBPPSA s. 5(3) & CCQ 3104 (para. 2) 52 PPSA NB/ON s. 5(1). 53 PPSA NB/ON s. 6(1). 54 PPSA NB/ON s. 5(3), 7(3). 55 PPSA NB s. 5(3); PPSA ON s. 5(2).


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New Brunswick Section 5(3) of the NBPPSA establishes an important exception to the general rule that a security interest is considered to be continuously perfected if reperfected within the grace period. Buyers and lessees who acquire the collateral after its relocation, but before reperfection, take free of the security interest in the absence of actual knowledge. Ontario Section 5(2) of the ONPPSA, establishes that intervening buyers and lessees are protected only if the collateral qualifies as consumer goods in their hands. Quebec Pursuant to CCQ 3104, so long as the secured party complies within the applicable grace period, the published (perfected) status of the security right is opposable against all third parties including intervening buyers and lessees.56

iv. Goods Intended for Export – Law of the Destination Jurisdiction – ONPPSA/NBPPSA s. 6(1) & CCQ 3103 The law applicable to validity, perfection and the effects of perfection is the law of the jurisdiction to which the goods are to be exported provided two conditions are satisfied.57 First, the parties must understand that the goods are to be kept in another jurisdiction when the security interest attaches. Second, the goods must in fact be removed to that other jurisdiction within thirty days after the security interest attaches.

v. Goods in Transit – Law of the Destination Jurisdiction – CCQ 2093 (para. 2) The Civil Code adopts a special choice of law rule for goods in transit, directing application of the law of the place of destination.58 Under this approach, perfection is governed by the secured transactions law of the place of destination. The PPSA does not address goods in transit. Subject to the thirty-day rule discussed in the preceding paragraph, a secured party may therefore have to perfect in accordance with both the law of the situs at the time of attachment and the law of the intended destination. Indeed, it may be prudent to perfect under the law of any jurisdiction in which the goods may come to rest during the course of transit. B. Mobile Goods Common Law: For goods that are inherently mobile, such as goods used for the carriage or transport of persons or property across borders—including but not limited to motor vehicles, trailers, rolling stock, shipping containers, and airplanes as well as road building, construction, and commercial harvesting machinery—the law of the jurisdiction in which the debtor is located generally applies to equipment and inventory leased or held for lease.59 Mobile goods held by the debtor as consumer goods or as inventory for sale fall within the general lex rei sitae rule. Civil Law: Article 3105 (para.1) of the CCQ applies the law of the grantor’s location to all goods ordinarily used in more than one jurisdiction, even where the debtor holds the goods as consumer goods or as inventory for sale. C. Money, Chattel Paper, Instruments and Documents of Title For money and certain reified intangibles (chattel paper, instruments, and documents of title), the applicable law varies 56 This follows by negative inference from the fact that the only category of buyers protected by art. 3104 (para. 2) of the Civil Code are buyers

who acquire the collateral in the ordinary course of business. 57 PPSA NB/ON s. 6(1). 58 See, art. 2093 (para. 2) of the Civil Code: “real rights on property in transit are governed by the law of the country of their place of

destination.” 59 PPSA NB/ON s. 7(2).


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depending on whether the security interest is possessory (law of the location of the collateral applies pursuant to ONPPSA/NBPPSA s. 5(1) and CCQ 3102/3105)60 or non-possessory (law of the location of the debtor applies pursuant to ONPPSA/NBPPSA s. 7(2) and CCQ 3105).61 D. Pure Intangibles – Law of the debtor’s location – ONPPSA/NBPPSA s. 7(2) For intangibles, including accounts, the law of the jurisdiction in which the debtor is located generally applies pursuant to PPSA NB/ON s. 7(2).

• (eg, if Company X in Québec grants security in receivables from customers in California, China, and Africa, the secured creditor registers once in Québec).

E. Determining the Location of the Collateral or the Debtor Location of the Collateral: Where the lex rei sitae is the applicable law, determination of the location of the collateral at the relevant time is a purely factual inquiry. Location of the Debtor in the Common Law: Under s. 7(1) of the NBPPSA and s. 7(4) of the ONPPSA

• A debtor is deemed to be located at the debtor’s place of business or chief executive office (where the day to day decision-making is done) if there is more than one place of business as is often the case with national or multinational debtor corporations.

• A debtor who has no place of business is deemed to be located at his or her principal residence. Location of the Debtor in the Civil Law: The Civil Code uses the concept of domicile.

• In the case of natural persons, domicile equates with habitual residence pursuant to CCQ 75. • In the case of legal persons, domicile refers to the place in which the legal person maintains its head office

pursuant to CCQ 307. In practice, this is often referred to as the registered office test, in view of the fact that corporations are generally required to designate a head office in their publicly filed constitutive documents.

F. Post-Attachment Change in the Location of the Debtor Under the PPSA, the secured party is given a grace period to preserve continuity of perfected status in the event of a post-attachment change in the location of the debtor.62 The period is the same as that which applies to a change in the location of tangible collateral governed by the lex rei sitae rule. Reperfection must be effected before expiration of the earliest of the following time periods:

• sixty days after the debtor relocates to the other jurisdiction; • fifteen days after the secured party has knowledge that the debtor has relocated; or • before perfection ceases under the law of the jurisdiction where the debtor was located when the security interest

attached. The Civil Code has a similar rule where the debtor relocates to that province except that the maximum grace period for reperfection is only thirty days.63

G. Investment Property The substantive and choice of law rules governing the holding, transfer and grant of security interests in investment assets are codified in the STA and in complementary provisions in the PPSA. Quebec has adopted substantially

60 PPSA NB/ON s. 5(1). 61 PPSA NB/ON s. 7(2). 62 PPSA NB s. 7(3); ON s. 7(2). 63 Art. 3106 of the Civil Code provides that a security interest governed by the law of the original location of the debtor is deemed to be

published in Quebec, where the debtor subsequently relocates to Quebec, from the time of initial perfection so long as it is perfected before the any of the following events, whichever occurs first: (1) the cessation of the effectiveness of perfection under the law of the jurisdiction where the debtor was previously domiciled; (2) the expiry of thirty days from the time the debtor establishes his new domicile in Quebec; (3) the expiry of fifteen days from the time the secured party was advised of the new domicile of the debtor in Quebec.


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equivalent legislation, adapted to that province’s civilian drafting style and codal structure.64

• The validity, perfection and priority of a security interest in a certificated security is governed by the law of the jurisdiction where the certificate is located pursuant to ONPPSA/NBPPSA s. 7.1(1)(a), (2)(a) and CCQ 3108.8(1).

• For uncertificated securities, the applicable law is the law of the “issuer’s jurisdiction” pursuant to ONPPSA/NBPPSA s. 7.1(1)(b), (2)(b) and CCQ 3108.8(2). For the purposes of the above rules, the law of “the issuer’s jurisdiction” is defined as the law of the jurisdiction under whose laws the issuer is incorporated or otherwise organized.

• However, for security entitlements, the applicable law is that of the jurisdiction of the intermediary, as determined in the first instance by the law chosen in the account agreement between the intermediary and the holder of the security entitlement: see PPSA NB/ON s. 7.1(1)(c), (2)(c).

The choice of law picture for investment property is further complicated by the applicability of the law of the

debtor’s location to the issue of whether a security interest in investment property is perfected by registration, and to the issue of whether a security interest granted by a securities intermediary is considered to be perfected solely by the fact of its attachment.65 Where these qualifications apply, the result is to split the law governing the perfection of a security interest from that governing its validity and priority. A final layer of complexity is added by the necessity to also take into account the choice of law rules applicable to transfers of securities set out in the STA.

When it comes to enforcement, the basic dividing line is between issues relating to the procedural and the

substantive aspects of enforcement. For procedural aspects, the law of the jurisdiction where the enforcement rights are exercised applies. The proper law of the security agreement applies to the substantive aspects.66

64 See An act respecting the transfer of securities and the establishment of security entitlements, R.S.Q. c. T-11.00. The Act sets out the basic

substantive law framework for securities holding and transfer. The substantive rules governing the grant of security interests in investment assets are found in Book Six (Prior Claims and Hypothecs) of the Civil Code. The choice of law rules for both the transfer and grant of security are set out in articles 3108.1-3108.8 of Book Ten (Private International Law) of the Civil Code.

65 PPSA NB/ON s. 7.1(5). 66 PPSA NB/ON s. 8(1).

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