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

1. Part 1Security Interests in Personal Property: The PPSASection IIntroduction

2. Outline • History of PPSA • Basic Concepts • Enforcement • Priorities

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

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

5. Potted History of Mortgage LawPersonal Property • Myriad forms of security interest • Chattel mortgage • Conditional sales agreement • Financing lease • Consignment • Assignment of book debts • Corporate securities

6. Potted History of Mortgage LawPersonal Property • Substantive law depended on form • Registration requirements depended on form • Multiple filing venues

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

8. Canadian Law Reform on the US model • Ontario PPSA based on UCC Article 9 • Enacted in 1967 • All other Canadian common law jurisdictions have since followed • Atlantic provinces most recently – 1993 - 1998 • Overall structure of Article 9 and the PPSAs is the same • But there are significant substantive differences

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

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

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

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

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

14. Basic Concepts • Scope of the PPSA • Attachment & Perfection

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

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

17. Deemed Security Interests • 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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

34. Basic Concepts • Freedom of contract • Attachment • Perfection

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

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

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

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

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

40. Attachment • 12(1) A security interest attaches when • (c) except for the purpose of enforcing rights as between the parties to the security agreement, the security interest becomes enforceable within the meaning of section 10

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

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

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

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

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

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

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

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

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

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