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Part 1 Security Interests in Personal Property: The PPSA Section III Enforcement

Part 1 Security Interests in Personal Property: The PPSA Section III Enforcement. Outline. SP rights Rights against collateral Enforcement options set out in Part V of PPSA Rights on the debt Deficiency action Same rights as any unsecured creditor if SP so chooses. Outline.

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Part 1 Security Interests in Personal Property: The PPSA Section III Enforcement

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  1. Part 1 Security Interests in Personal Property: The PPSA Section III Enforcement

  2. Outline • SP rights • Rights against collateral • Enforcement options set out in Part V of PPSA • Rights on the debt • Deficiency action • Same rights as any unsecured creditor if SP so chooses

  3. Outline • Debtor rights • Right of redemption • Right of reinstatement • Right to surplus • Exemptions

  4. Introduction – S.55 • 55(1) This Part does not apply to • (a) a transaction referred to in subsection 3(2), or • Deemed security interests – treated as security interests only for priority purposes

  5. Introduction – S.55 • 55(1) This Part does not apply to • (b) a transaction between a pledgor and a pawnbroker. • Regulated by common law • Less stringent requirements than PPSA • Less regulation thought to facilitate law value credit transactions • More ‘consumer protection’ drives up cost of debt proportionately more in low value loans

  6. Introduction – S.55 • 55(3) The rights and remedies in this Part are cumulative. • Exercising one right does not exclude the others

  7. Introduction – S.55 • 55(8) A security interest does not merge merely because a secured party has reduced the claim to judgment. • A secured creditor has both a debt claim and a security interest • The SP may sue on the debt, as if it were an unsecured creditor, and doing so does not extinguish its security interest

  8. Secured Party Rights– s.56 • 56(2) Subject to subsection (4), if the debtor is in default under a security agreement, the secured party has against the debtor only • (a) the rights and remedies provided in the security agreement, • (b) the rights and remedies provided in this Part and sections 36, 37 and 38 [fixtures, crops and accessions], and • (c) when in possession of the collateral, the rights and remedies provided in section 17 [rights of SP in possession]. • No common law remedies • Only contract (2)(a) and statutory (2)(b),(c) remedies

  9. Debtor Rights – S.56 • 56(3) Subject to subsection (4), if the debtor is in default under a security agreement, the debtor has against the secured party • (a) the rights and remedies provided in the security agreement, • (b) the rights and remedies provided by any other Act or rule of law not inconsistent with this Act, and • (c) the rights and remedies provided in this Part and in section 17. • Contract & statutory rights • Plus rights given under any other Act unless inconsistent with PPSA • Main example – extended notice period prior to enforcement under the BIA

  10. Waiver of Debtor Rights • 56(4) Except as provided in sections 17, 59, 60 and 62, no provision of section 17 or sections 57 to 66, to the extent that the provision gives rights and remedies to the debtor or imposes obligations on the secured party, can be waived or varied by agreement or otherwise. • Statutory debtor rights cannot be waived

  11. Waiver of SP Obligations • 66(7) Except as otherwise provided in this Act, a provision in a security agreement or any other agreement is void if it purports to exclude an obligation or an onus imposed by this Act or purports to limit the liability of or the amount of damages recoverable from a person who has failed to discharge an obligation imposed by this Act. • Statutory SP obligations cannot be waived

  12. Rights of the Secured Party: Enforcement

  13. SP Enforcement Options • Right to possession of collateral • Preliminary to disposal • Right to dispose of collateral and apply proceeds to debt • Right to sue on deficiency • Right to retain collateral in satisfaction of debt • Excludes right to sue on deficiency • Corresponds to traditional remedy of foreclosure • Right to collect on intangibles • Right appoint a receiver

  14. Possession • 58(2) Subject to [exemptions, notice periods and special rules wrt collateral which is difficult to separately possess, e.g. fixtures], if the debtor is in default under a security agreement, • (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,

  15. Possession • Under prior law the right to possession depended on the form of the security device • Automatic under a mortgage • Required express contractual provision under a conditional law • Substance over form under the PPSA

  16. Method of Repossession • “by any method permitted by law” • Self-help, but not if it will provoke a breach of the peace • Otherwise, method used for recovery of possession of one’s own property (e.g. Rule 44 in N.B.)

  17. Possession – Notice Obligations • 58(2) Subject to . . . any other Act or rule of law requiring a secured party to give prior notice of the intention to enforce a security interest

  18. Possession – Notice Obligations • “...rule of law...” • Possession by SP brings D’s business to a halt • Common law developed a notice obligation • See Ronald Elwyn Lister v Ltd v Dunlop Canada [1982] 1 SCR 726 • Notice obligation is preserved by s.58(2) “rule of law” • SP must give reasonable notice of the intention to take possession • “Reasonable” depends on circumstances

  19. Possession – Notice Obligations • “...other Act...” • BIA S.244 also imposes notice obligation • 10 days notice before seizing. . . • . . .substantially all. . . • . . .inventory, accounts receivable or other property

  20. Foreclosure • Traditional remedy – Not a remedy under the PPSA • Under the purely legal form of mortgage, collateral vests in mortgagee automatically on default by D

  21. Foreclosure • Modified by equity to protect debtor: D has right to “redeem” property even after default • “Equity of redemption” • Mortgagee has correlative right to “foreclose” equity of redemption • Exercise of right of foreclosure vests collateral in mortgagee • Protracted • Uncertain (can be reopened)

  22. Foreclosure • Foreclosure was not satisfactory • Protracted and expensive • Uncertain (can be reopened) • Contractual right of sale was implemented • Accepted by the courts and legislatures

  23. Disposal - Right • 59(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. • Basic right to sell collateral to satisfy debt. . .

  24. Disposal – Proceeds • 59(3) The proceeds of the disposition of collateral shall be applied consecutively to • (a) the reasonable expenses of seizing, repossessing, holding, repairing, processing or preparing for disposition and disposing of the collateral and any other reasonable expenses incurred by the secured party, and • (b) the satisfaction of the obligations secured by the security interest of the party making the disposition. • . . .and apply proceeds to debt

  25. Disposal – Surplus • 60(2) If . . . the secured party has . . .disposed of [the collateral], the secured party shall. . . pay any surplus in the following order to • (a) [subordinate SPs with perfected security interest] • (b) [JC with registered notice of judgment] • (c) [parties who have given written notice of their interest] • (d) [the debtor] • “...in the following order...” is poor drafting • Should read “...in order of their priority...”

  26. Disposal – Surplus/Deficiency • Sale price/method of sale is very important to debtor and other subordinate interest holders • 60(6) Unless otherwise agreed, or unless otherwise provided in this or any other Act, the debtor is liable to pay any deficiency to the secured party.

  27. Disposal – Method: Notice • 59(8) Not less than twenty days before disposition of the collateral, the secured party shall give a notice to • (a) the debtor and any other person who is known by the secured party to be an owner of the collateral, • (b) [subordinate SPs with perfected security interest] • (c) [JC with registered notice of judgment] • (d) [parties who have given written notice of their interest] • Must give notice to known parties whose interests are affected: why? • Recall – Possession prior to disposal, notice prior to possession

  28. Disposal – Method: Notice • Notice allows subordinate parties to monitor sale • 66(5) In an action for a deficiency, the debtor may raise as a defence the failure of the secured party to comply with obligations in section 17, 18, 59 or 60, but non-compliance shall limit the right to the deficiency only to the extent that it has affected the debtor's ability to protect the debtor's interest in the collateral or has made the accurate determination of the deficiency impracticable. • Allowing for the exercise of the right of redemption is, as a practical matter, secondary

  29. Disposal – Method • 59(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. • Flexibility in method of disposal • But subject to requirement of commercial reasonableness: s.65 • The statutory notice requirement does not exhaust SP’s responsibility

  30. Disposal – Method • Supplementary law and duties of good faith and commercial reasonableness • 65(2) 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 • Action for damages for breach of this duty: s.66(2)

  31. Disposal – Method • Net effect – SP has duty to take reasonable steps to secure fair market price • Method of disposal must be appropriate to the goods and the market

  32. Disposal – Method • Failure to comply with the duty of commercial reasonableness gives rise to an action for damages • 66(2) If a person fails, without reasonable excuse, to discharge any obligations imposed on the person by this Act, the person to whom the obligation is owed has a right to recover loss or damage that was reasonably foreseeable as liable to result from the failure.

  33. Disposal – Method • Failure to comply with the notice does not disentitle the SP from seeking a deficiency • Does not give any proprietary remedy against the property

  34. Disposal – Method • The harm from failure to give notice may include inability to assess the value of the collateral or monitor the sale • But the deficiency action is still not prohibited

  35. Disposal – Method • 66(5) In an action for a deficiency, the debtor may raise as a defence the failure of the secured party to comply with obligations in section 17, 18, 59 or 60, but non-compliance shall limit the right to the deficiency only to the extent that it has affected the debtor's ability to protect the debtor's interest in the collateral or has made the accurate determination of the deficiency impracticable.

  36. Disposal – Method • In the case of consumer goods, deemed damages apply • 66(3) If a secured party fails, without reasonable excuse, to comply with obligations • (b) in section 17, 18, 59, 60 or 61 and the collateral is consumer goods, • the debtor . . .shall be deemed to have suffered damages not less than the amount prescribed. • But the SP can still pursue a deficiency

  37. Disposal – Method • Compare the PPSA with New Brunswick land law • In NB land law the statutory notice requirement does exhaust the seller’s responsibility • There is no duty (except on banks) to exercise reasonable care to secure a fair market price • Is there any justification for the NB land law rule?

  38. Disposal – Method • 59(14) The secured party may purchase the collateral or any part of it but only at public sale, including public auction or closed tender, and only for a price that bears a reasonable relationship to the market value of the collateral.

  39. Disposal – Method • In real estate law in most jurisdictions, SP is prohibited at common law from buying in for their own benefit • Why? • Why should personal property be different?

  40. Disposal – Effect • 59(15) 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. • Purchaser take clear of all subordinate interests

  41. Disposal – Effect • 59(15). . .whether or not the requirements of this section have been complied with by the secured party. . . • Purchaser take clear of all subordinate interests even if sale was improper • Why?

  42. Retain in Satisfaction • Right to retain collateral in satisfaction of debt • 61(1) After default, the secured party may propose to take the collateral in satisfaction of the obligation secured by it and shall give notice of the proposal to [the debtor and known subordinate interest holders] • Person who is given notice may object (to SP): s.61(2),(3) • In which case SP must sell collateral • Except that SP may object to objection (to court): s.61(7), to deter frivolous objections

  43. Retain in Satisfaction • “...in satisfaction of the debt...” • 61(4) If no notice of objection is given under subsection (2), the secured party • (a) shall be deemed, on the expiry of the fifteen day period or periods referred to in subsection (2), to have irrevocably elected to take the collateral in satisfaction of the obligation secured by it, and • [can then sell the collateral free of all subordinate interests] • No right to sue for any deficiency • Why not?

  44. Right to Collect on Intangibles • 57(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 or security to make payment to the secured party whether or not the assignor was making collections on the collateral before the notification, • (b) [and apply the money to the debt]... • Enforcement by notification

  45. Right to Collect on Intangibles -Notice • 57(3) A secured party who enforces a security by giving notice in accordance with paragraph (2)(a) shall notify the debtor within fifteen days after doing so.

  46. Right to Collect on Intangibles -Notice • 41(7) If collateral which is either an intangible or chattel paper is assigned, the account debtor may make payments to the assignor • (a) before the account debtor receives notice of the assignment in accordance with subsection (8), or • (b) after the account debtor receives notice of the assignment if the account debtor requests the assignee to furnish proof of the assignment and the assignee fails to furnish proof within fifteen days after the request.

  47. Right to Collect on Intangibles • 41(9) Payment by an account debtor to an assignee after the account debtor receives notice of the assignment in accordance with subsection (8) discharges the obligation of the account debtor to the extent of the payment.

  48. Right to sue on the Deficiency • Some jurisdictions (e.g. Alberta, California) prohibit deficiency actions against individual mortgagors of real property • Should SP have the right to sue on the deficiency? • Is there any reason why land and personal property should be treated differently? • Is there any reason why individual mortgagors of real property should be treated differently from businesses?

  49. Right to Appoint a Receiver • Receiver operates the business as a going concern • Wears “two hats” • Agent of the debtor • Agent of the SP • More detail in Part 3.II

  50. Rights of the Debtor

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