Selected Aspects of the Personal Property Security Act - OAIRP
Selected Aspects of the Personal Property Security Act (Ontario) Richard M. Borins Andrea Lockhart Overview General Background Registering, Searching and Challenging Registrations Against Individuals Recent Amendments 2 General Background Introduction Governs secured transactions and the creation and perfection of security interests in collateral Broadly applies to all transactions that in substance create a security interest, including the following whether or not it secures payment or performance of an obligation:
Transfer of account or chattel paper Personal property leases of more than one year 3 General Background Conflicts of Laws Whether the PPSA applies to the validity, perfection and priority of a security interest is governed by internal conflicts of laws rules Applicable jurisdiction depends on nature of collateral and nature of security interest (whether possessory or non-possessory) PPSA provides for continuous perfection of security interests where collateral moves from one jurisdiction into Ontario, provided perfection occurs in Ontario within specified time period 4 General Background Conflicts of Laws SECURITY
INTEREST COLLATERAL* GOVERNING JURISDICTION All Goods Location of collateral Possessory Instruments Location of collateral Possessory Negotiable documents of title Location of collateral Possessory
Money Location of collateral Possessory Chattel paper Location of collateral *Investment Property not addressed in this chart. 5 General Background Conflicts of Laws SECURITY INTEREST COLLATERAL* GOVERNING JURISDICTION All Collateral to be kept In
another jurisdiction, where goods are removed to such jurisdiction within 30 days after security interest attaches Location of collateral All Intangibles Location of debtor All Goods of type normally used in more than one jurisdiction (if goods are equipment or inventory leased or held for lease by debtor to others) Location of debtor
*Investment Property not addressed in this chart. 6 General Background Conflicts of Laws SECURITY INTEREST COLLATERAL* GOVERNING JURISDICTION Nonpossessory Instruments Location of debtor Nonpossessory Negotiable documents of title Location of debtor Nonpossessory
Money Location of debtor Nonpossessory Chattel paper Location of debtor *Investment Property not addressed in this chart. 7 General Background Attachment A security interest is not enforceable unless it has attached Attachment occurs where: Value is given;
Debtor has rights in collateral or power to transfer rights in collateral to a secured party; Debtor has signed security agreement or possession of the collateral; and Debtor and secured party have not agreed to postpone time for attachment 8 General Background Perfection A security interest is perfected when: It has attached; and Secured party has registered its security interest or perfected its security interest by possession 9
General Background Priority Generally, first in time to register has priority General priorities rules depend on nature of competing perfected security interests Statute contains certain exceptions to the general rule (e.g. PMSIs) PERFECTION METHOD PERFECTION METHOD PRIORITY Registration Registration First to register
Registration Possession First to perfect Possession Possession First to perfect Unperfected Unperfected First to attach 10 Registering Against Individuals Review security documents to determine nature and scope of underlying security interest Jurisdiction of registration depends on type of collateral
and nature of security interest (possessory v. nonpossessory) Where collateral is consumer goods: Financing statement cannot be registered before debtor signs the security agreement Maximum registration period of 5 years For motor vehicle, registration should also be made against VIN 11 Registering Against Individuals Registration must be made against the correct legal name of the natural person: First Name, Middle Initial (if any) and Surname
Date of Birth Verify the debtors name and birthdate by obtaining: Notarial copy of birth certificate, if born in Canada; or Notarial copy of citizenship card, if born outside Canada Do not rely upon a drivers licence! 12 Searching Against Individuals PPSA permits two types of searches: Individual specific search Requires first name, middle initial (if any), surname and date of birth
Individual non-specific search Requires first name and surname Individual specific searches are not recommended as they will not pick up relevant individual nonspecific registrations (i.e., those lacking a middle initial) 13 Challenging Registrations Against Individuals An unperfected security interest is not effective against a trustee in bankruptcy (s. 20(1)(b)) However, the PPSA contains a saving provision (s. 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 Whether a reasonable person is likely to materially
misled is an objective test 14 Challenging Registrations Against Individuals See Ontario Court of Appeals decision in Re Lambert (1994), 20 O.R. (3d) 108: GMAC registered security against Gilles J. Lambert, the name on the conditional sales contract and the name used to register the owner of the vehicle in the MOT register Correctly identified date of birth and VIN However, legal name as shown on birth certificate was Joseph Phillipe Gilles Lambert Trustees solicitor relied on birth certificate to make individual specific inquiries using Joseph P. Lambert and Joseph G. Lampert and his birthdate, but did not conduct a VIN search 15 Challenging Registrations Against Individuals
Trustee moved for declaration that GMAC security interest was not perfected and therefore was not effective against the trustee Court held that a reasonable person who had access to the debtors name (and birth date) and VIN would have conducted both a specific debtor name search and a VIN search Court held that GMACs security interest in the motor vehicle was perfected - the Trustee did not establish that the error on the GMAC financing statement would have materially misled a reasonable person 16 Recent Amendments Overview Certain amendments to conflicts of law provisions came into force on December 31, 2015: New rules for determining the location of a debtor (s. 7)
Transition rules for security agreements (SA) existing before December 31, 2015 (including where such SA are amended or renewed) 17 Recent Amendments Overview New rules introduced in 2006, but implementation was to be delayed until a substantial number of other provinces had enacted similar legislation No other provinces made analogous changes, so Ontario moved forward alone Changes designed to address practical difficulties of determining debtors location under existing PPSA provisions Location of debtor will now depend on debtors form of organization, including corporations, partnerships and other organizations 18
Recent Amendments Applicability S.7(1) - Jurisdiction where debtor is located at time security interest attaches governs validity, perfection and priority of: Security interest in: Intangible Goods of type normally used in more than one jurisdiction (if goods are equipment/inventory leased or held for lease by debtor to others) Non-possessory security interest in an instrument, negotiable document of title, money and chattel paper 19 Recent Amendments Applicability S. 7.1(5) Jurisdiction in which debtor is located governs: Perfection of security interest in investment property
by registration Perfection of security interest in investment property granted by broker/securities intermediary where secured party relies on attachment of security interest as perfection (under s. 19.2) Perfection of a security interest in futures contract or futures account granted by a futures intermediary where secured party relies on attachment of security interest as perfection (under s. 19.2) 20 Recent Amendments Former Rules PPSA formerly provided location of a debtor is determined by location of: Debtors place of business; or
Debtors chief executive office (if more than one place of business); or Debtors principal place of residence Practical issues: How much commercial activity constitutes having a place of business within a jurisdiction? How does one determine where the chief executive office is located? 21 Recent Amendments Current Rules TYPE OF DEBTOR LOCATION Corporation, limited partnership or
organization organized under the laws of a province or territory of Canada Province or territory of organization Corporation existing under a federal law of Canada Jurisdiction where registered office or head office of debtor is located (as set out in (i) the special Act, letters patent, articles or other constating documents, or (ii) bylaws, if (i) not applicable) Registered organization organized under laws of a U.S. state or territory U.S. state or territory of organization Registered organization organized under federal law of the U.S. U.S. state or territory designated by U.S. federal law (if so designated); (ii) U.S. state or territory designated by the organization (if authorized to do so under U.S. law); or (iii) D.C. if (i) and (ii) not applicable
Partnership (other than a limited partnership) with its partnership governed by the laws of a province or territory of Canada Province or territory whose law governs the debtors partnership agreement 22 Recent Amendments Current Rules TYPE OF DEBTOR LOCATION Trustees acting for a Trust Province or territory of Canada whose laws govern the Trust, if provided in the Trust document; otherwise, the jurisdiction in which the administration of the trust is principally carried out Individual
Jurisdiction of debtors principal residence None of the above Jurisdiction of debtors chief executive office Note: A debtor continues to be located in the jurisdiction specified above notwithstanding the death or incapacity of the Debtor (if an individual) or the suspension, revocation, forfeiture or lapse of a Debtors status in its jurisdiction of organization. 23 Recent Amendments Transitional Rules Transitional rules address continued perfection of security interests created by SA before December 31, 2015 (prior security interest): If SA is amended, renewed or extended after December 31, 2015, it remains a prior security interest
If SA is amended, renewed or extended after December 31, 2015 but includes additional collateral, the security interest in the additional collateral will not be a prior security interest 24 Recent Amendments Transitional Rules Pre-amendment PPSA provisions relating to debtor location govern validity of a prior security interest New PPSA provisions relating to debtor location govern perfection of a prior security interest, regardless of date of attachment However, a prior security interest that was perfected as at December 31, 2015 continues to be perfected until the earlier of: The day perfection ceases under the pre-amendment PPSA provisions, and
December 31, 2020 Provision applies regardless of whether the new rules would result in a change of the debtors location 25 Recent Amendments Transitional Rules PURPOSE OF ASCERTAINING DEBTOR LOCATION APPLICABLE PPSA RULES Validity of prior security interests Old PPSA Rules Perfection of security interests New PPSA Rules (regardless of date of attachment)** Effect of perfection or non-perfection and priority of security interests New PPSA Rules (regardless of date of
attachment) Effect of perfection or non-perfection and priority of a prior security interest in relation to an interest, other than a security interest, in the same collateral (e.g. execution creditors) arising before December 31, 2015 Old PPSA Rules (regardless of the date of perfection) Priority of a prior security interest in relation to any other prior security interest in the same collateral Old PPSA Rules Priority of an unperfected prior security interest which is subsequently perfected after December 31, 2015 New PPSA Rules **Remember, there is a five-year grace period for security interests perfected by registration under the old rules
26 Recent Amendments Conflicts of Law Issues As Ontario is the only province to change its PPSA location rules, conflict of laws issues may proliferate: British Columbia corporation with chief executive office in Ontario New PPSA rules say British Columbia law governs British Columbia rules say Ontario law governs Should PPSA filings be made in both jurisdictions? Need to be familiar with old PPSA rules for searching
purposes, as old PPSA rules continue to apply under transitional rules 27
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