Part 1 Security Interests in Personal Property: The PPSA Section II Registration and Priorities

1. Part 1 Security Interests in Personal Property: The PPSA Section II Registration and Priorities

2. Registration

3. Personal Property Registry • 42(1) There shall be an electronic registry known as the Personal Property Registry for the purposes of registrations under this Act and under any other Act that provides for registration in the Registry.

4. Method of Registration • In the Atlantic provinces, registration is entirely electronic and user administered • Compare land law/other PPSA jurisdictions • The registrant may submit a form, but it is actually indexed by the registry staff • There is no delay between registration and searchability

5. Method of Registration • Direct electronic access • Pre-authorized for billing purposes • 43(2) The Registrar may enter into an agreement with any person to provide access to the Registry on terms and conditions that the Registrar considers advisable and may vary the terms and conditions from time to time as the Registrar considers advisable. • 43(3) A person who has entered into an agreement with the Registrar under subsection (2) may register a financing statement in the Registry in accordance with the agreement and the regulations.

6. Method of Registration • Registration may be undertaken by anyone at a Registry office: s.43(1) • Very uncommon • Can’t rely on the office staff for instructions • 52(2)Service New Brunswick is not liable directly or vicariously for loss or damage suffered by a person because of (a) verbal advice given by the Registrar, a Deputy Registrar or an officer, employee or agent respecting this Act • Why not?

7. Method of Registration • The Registrar is not liable for any errors in registration • 52(2) Service New Brunswick is not liable directly or vicariously for loss or damage suffered by a person because of . . . (b) the failure of the Registry to effect a registration or to effect a registration correctly. • Why not?

8. Method of Registration • Note: s.52(1) A person may bring action against Service New Brunswick to recover loss or damage suffered by that person because of an error or omission in the operation of the Registry if the loss or damage resulted from reliance on a printed search result issued by the Registry.

9. Method of Registration • Reg s.9(1) A registrant who effects a registration at an office of the Registry shall be issued a printed verification statement of the registration on completion of the registration. • Registrant protects themselves by comparing verification statement with what they intended to register

10. “Financing statement” • "financing statement" means the data authorized by the regulations to be entered in the Registry to effect a registration for the purpose of perfecting a security interest in collateral under this Act • Only a financing statement is registered: the security agreement itself is not registered

11. Notice Based Financing • “...the data...” • Paperless, electronic system • .“...authorized...” • Debtor name • Secured party name and address • Description of the collateral • This is all that is registered

12. Notice Based Financing • The financing statement is not necessarily a perfect reflection of the security agreement • It may be registered when no security agreement is in existence (e.g. pre-registration) • The description of the collateral in the f.s. may not match that in the security agreement • If the description in the f.s is narrower than the collateral in the agreement, the lender is unperfected with respect to the collateral which is not caught by the description • The debtor is entitled to have the f.s. amended or discharged to reflect the true state of the agreement

13. Notice Based Financing • D may require SP to provide information about the security agreement to any specified person • 18(1) The debtor, a creditor, a sheriff, a person with an interest in personal property of the debtor, or an authorized representative of any of them may require a secured party, by a demand in writing, to send or make available the information or documentation referred to in subsection (3) [incl. a statement of indebtedness and list of collateral] to the person making the demand or, if the demand is made by the debtor, to any person at an address specified by the debtor. • SP who fails to reply may be compelled to do so by Court order: s.18(11)

14. Notice Based Financing • SP is estopped from denying the validity of the information provided • 18(14) If a secured party replies to a demand under subsection (1), the secured party . . . [is] estopped, . . . from denying • (a) the accuracy of any of the information referred to in paragraph (3)(b), (c) or (d) that is contained in the reply, or

15. Notice Based Financing • Ensuring the f.s. reflects the agreement • 50(3) The debtor, or any person with an interest in property that falls within the collateral description included in a registered financing statement, may give a written demand to the secured party if [the f.s. does not reflect the agreement] • (a) [The debt has been paid off]; (b) [SP has released some of the collateral]; (c) [the f.s. describes the collateral too broadly]; (d) no security agreement exists between the secured party and the debtor. [e.g. pre-registration and negotiations fell through]

16. Notice Based Financing • 50(4) [Demand may require that within 15 days SP register a financing change statement which accurately reflects the nature of the agreement or discharging the f.s. if there is no agreement]

17. Notice Based Financing • Self-help remedy for overbroad f.s. • 50(5) If a secured party fails to comply with a demand under subsection (3) within fifteen days after it is given, or fails to give to the person giving the demand an order of the Court confirming that the registration need not be amended or discharged, the person giving the demand may register the financing change statement referred to in subsection (4).

18. Notice Based Financing • What prevents the abuse of D’s right to register a financing change statement? • Reg s.10 Where a registration discharges, re-registers or amends a registration or globally changes multiple registrations, the Registrar shall send a printed or electronic notice verifying the discharge, re-registration, amendment or global change to the secured party, receiver, judgment creditor, claimant, employee or applicant spouse, as the case may be.

19. Notice Based Financing • What prevents the abuse of D’s right to register a financing change statement? • Deemed damages • 66(4) If a debtor . . .registers a financing statement referred to in subsection 50(5) without authority under those subsections and without reasonable excuse, the secured party referred to in those subsections shall be deemed to have suffered damages not less than the amount prescribed. • Currently $300 • In addition to actual damages

20. Error in the Financing Statement • 43(7) 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(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. • Objective test for whether an error is seriously misleading

21. Error in the Financing Statement • 43(8) Subject to subsection (10), a registration is invalid if there is a seriously misleading defect, irregularity, omission or error in • (a) the name 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, or • (b) the serial number of the collateral if the collateral is consumer goods of a kind that are prescribed as serial numbered goods. • If the registration is invalid, the interest is unperfected

22. Error in the Financing Statement • The ultimate test of whether a defect is seriously misleading is whether a search by the correct debtor name/serial number retrieves the erroneous debtor name/serial number • This is dependent on the PPR search algorithm

23. Financing Statement: Debtor Name • Strict rules regarding the debtor’s name for registration purposes • Reg s.20(5) Where the debtor is an individual, the name of the debtor shall be determined, for the purposes of this section, by the following rules: • (a) where the debtor was born in Canada and the debtor's birth is registered in Canada with a government agency responsible for the registration of births, the name of the debtor is the name as stated in the debtor's birth certificate or equivalent document issued by the government agency;

24. Financing Statement: Debtor Name • (b) where the debtor was born in Canada but the debtor's birth is not registered in Canada with a government agency responsible for the registration of births, the name of the debtor is • (i) the name as stated in a current passport issued to the debtor by the Government of Canada, • (ii) if the debtor does not have a current Canadian passport, the name as stated in a current social insurance card issued to the debtor by the Government of Canada, or • (iii) if the debtor does not have a current Canadian passport or social insurance card, the name as stated in a current passport issued to the debtor by the government of a jurisdiction other than Canada where the debtor habitually resides; • (c)where the debtor was not born in Canada but is a Canadian citizen. . .

25. Financing Statement: Debtor Name • Strict rules are needed for debtor name because PPR is indexed by debtor name • Rules are needed to ensure that registrant and searcher use the same name, or registration is not an effective means of publicity • Only the Atlantic jurisdictions have such strict debtor name requirements • The name rules are a significant practical impediment to secured lending

26. Financing Statement: Debtor Name • Problem: • D provides driver’s licence to SP1, which does not have correct legal name, and SP1 registers this name • A search by correct legal name does not return name as registered • Is the registration invalid? • What if the issue arises in context of challenge by trustee in bankruptcy? • The detailed name rules in the Atlantic jurisdictions are designed to resolve this issue

27. Effective Time of Registration • 43(4) Registration of a financing statement is effective from the time that a registration number, date and time is assigned to the registration in the Registry. • The number is unique so that security interests can be unambiguously ranked according to order of registration

28. Registration and Attachment • 43(5) A financing statement may be registered before or after a security agreement is made or a security interest attaches. • Recall s.19 • 19 A security interest is perfected when • (a) it has attached, and • (b) all steps required for perfection under this Act have been completed, • regardless of the order of occurrence.

29. Multiple Security Agreements • 43(6) A registration may relate to one or more than one security agreement. • E.g. a financing statement specifies “all the debtor’s present property” as the collateral • This will be effective to perfect separate security interests in a chair owned by the debtor and a bicycle owned by the debtor, even though the security interests are taken in separate agreements

30. Duration of Registration • 44(1) Except as otherwise prescribed, a registration under this Act is effective for the period of time specified as part of the financing statement by which the registration is effected • Longer duration is more expensive • Revenue issue

31. Constructive Notice Abolished • Registration not constructive notice • 47 Registration of a financing statement in the Registry by itself does not constitute notice or knowledge to any person of the existence or contents of the financing statement or of the existence of the security interest or the contents of any security agreement to which the registration relates

32. Constructive Notice Abolished • The law surrounding old registration systems depended on concept of notice and constructive notice: s.47 makes these concepts irrelevant • The PPSA depends on express priority rules

33. Registry Searches • 48(1) A person may search the records of the Registry and obtain a printed search result • (a) at an office of the Registry, or • (b) in accordance with an agreement entered into with the Registrar under subsection 43(2). • Individual searching at the registry office is permitted (a) • But on-line searching from the searcher’s own office is standard (b) • Individuals may go to search firms

34. Registry Searches • 48(2) A search under subsection (1) may be conducted according to • (a) the name of the debtor, • (b) the serial number of goods of a kind that are prescribed as serial numbered goods, or • (c) a registration number. • Debtor name indexing is standard • Serial number indexing for prescribed goods

35. Evidence of search results • 48(3) A printed search result that purports to be issued by the Registry is receivable as evidence and is, in the absence of evidence to the contrary, proof of the registration of any financing statement to which the search result relates, including • (a) the date and time of registration of the financing statement, and • (b) the order of registration of the financing statement as indicated by the registration number, date and time set out in the printed search result.

36. Evidence of search results • Date and time of registration is rarely controversial • For convenience any printed search result • In cases of dispute, an official report from the Registrar is conclusive “proof to the contrary”

37. Priorities

38. Priorities • The priority rules depend on • The nature of the security interest • Perfected v unperfected • Purchase money security interest (pmsi) • The nature of the parties • Secured Party • Judgment creditor (trustee in bankruptcy) • Purchaser (lessee)

39. Priorities • The priority rules depend on • The nature of the goods • Serial numbered goods • Consumer goods • Inventory • Equipment

40. Knowledge • Knowledge of a prior interest is irrelevant to priority unless the Act specifically provides otherwise • The priority rules make no reference to knowledge • and • 65(3) A person does not act in bad faith merely because the person acts with knowledge of the interest of some other person. • Taking with knowledge of a prior unregistered interest is not constructive fraud and does not affect priority

41. Perfected SP v Unperfected SP • Residual (general) priority rules apply “Where this Act provides no other method for determining priority between competing security interests in the same collateral” (s.35(1)) • 35(1)(b) a perfected security interest has priority over an unperfected security interest; • This is true even if the unperfected security interest attached first • An unperfected security interest is vulnerable • nemo dat is not the law

42. Perfected SP v Perfected SP • 35(1)(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,... • If SP1 attaches first, SP2 attaches second, but SP2 registers first, SP2 has priority.

43. Perfected SP v Perfected SP • Order of registration, not order of perfection: • SP1 attaches, then SP2 registers, then SP1 registers, then SP2 attaches, SP2 has priority even though SP1 was perfected first. • Attachment is necessary for perfection, but is irrelevant to priorities between perfected interests

44. Perfected SP v Perfected SP • 35(1) (a) priority between perfected security interests is determined by the order of the occurrence of the following: • (i) [registration], [or] • (ii) possession of the collateral under section 24 without regard to the time of attachment of the security interest, or • (iii) [special cases] • whichever is earliest; • Taking possession is equivalent to registration where perfection by possession is permitted

45. Unperfected SP v Unperfected SP • 35(1) (c) priority between unperfected security interests is determined by the order of attachment of the security interests • Order of attachment is relevant to priority only in a competition between two unperfected interests

46. After-Acquired Property • 13(1) Subject to section 12 and subsection (2), a security agreement that provides for a security interest in after-acquired personal property attaches to that property in accordance with the terms of the agreement without any need for specific appropriation by the debtor. • S.13(2) [except crops and consumer goods]

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

48. Future Advances • Chronological order of events: • SP1 • Registers a financing statement in respect of all D’s property • No agreement is entered into between SP1 and D, and no money is advanced • SP2 • Inquires of SP1 and D and is told, correctly, that no agreement exists between them.

49. Future Advances • SP2 • Enters into an agreement with D taking D’s chair as collateral • Registers a financing statement to that effect and advances $ • SP1 • Enters into an agreement with D taking D’s chair as collateral and advances $ • Who has priority, SP1 or SP2?

50. Future Advances • Contrast PPSA with common law rule in Hopkinson v Rolt • A mortgage may secure future advances, but advances made after a 2nd mortgagee has • Registered a 2nd mortgage • Advanced funds under that 2nd mortgage • Given actual notice of the second mortgage to the 1st mortgagee • will be subordinated to 2nd mortgagee • Which rule is better? • See Proposed Land Security Act s.13 (Supp)