Possible Changes to the Canadian Personal Property Security Acts 2000

Sections 5-8 – Conflict of Laws Provisions

5(1) Subject to this Act, t The validity, the perfection, and the effect of perfection or non-perfection and the priority of:

(a) a security interest in goods other than goods referred to in clause 7(2)(a)(ii); or

(b) a possessory security interest in a security, an instrument, a negotiable document of title, money or chattel paper;

is governed by the law of the jurisdiction where the collateral is situated when the security interest attaches.

5.(2) For the purposes of subsection (1), an uncertificated security is situated where the records of the clearing agency are kept.

5(3) Where a A security interest in goods referred to in section 5(1) that is perfected pursuant to the law of the jurisdiction in which the goods are collateral is situated when the security interest attaches, and before the goods are collateral is later brought into [the enacting jurisdiction],

(a) subject to clause (c), the security interest continues perfected in [the enacting jurisdiction] if it is perfected in [the enacting jurisdiction]:

(a) (i) not later than 60 days after the day on which the goods are collateral is brought into [the enacting jurisdiction];

(b) (ii) not later than 15 days after the day on which the secured party has knowledge that the goods have collateral has been brought into [the enacting jurisdiction]; or

(c) (iii) before perfection ceases pursuant to the law of the jurisdiction in which the goods were collateral was situated when the security interest attached;

whichever is the earliest,;

(b) subject to clause (c), this Act determines the effect of such continued perfection or non-perfection, and priority between the security interest and any competing interest acquired in the collateral when the collateral is located in [the enacting jurisdiction]; and

(c) if the collateral is goods, the security interest is subordinate to the interest of a buyer or lessee of the goods who acquires an interest while the collateral is located in [the enacting jurisdiction] without knowledge of the security interest and before it is perfected in [the enacting jurisdiction] pursuant to section 24 or 25.

5(3.1) Where a security interest referred to in subsection (1) is perfected pursuant to the law of the jurisdiction in which the collateral is situated when the security interest attaches, and the collateral is later brought into another jurisdiction other than [the enacting jurisdiction], the law of that other jurisdiction determines the requirements for maintaining perfection of the security interest, the effect of continued perfection or non-perfection, and priority between the security interest and any competing interest acquired in the collateral when the collateral is located in that other jurisdiction.

6(1) Subject to section 7,wWhere:

(a) the parties to a security agreement that creates a security interest in goods, other than goods referred to in clause 7(2)(a)(ii), in one jurisdiction understand at the time when the security interest attaches that the goods will be kept in another jurisdiction; and

(b) the goods are removed to the other jurisdiction, for purposes other than transportation through the other jurisdiction not later than 30 days after the security interest attaches;

the validity, the perfection, and the effect of perfection or non perfection and the priority of the security interest are determined by the law of the other jurisdiction.

6(3) Where the jurisdiction to which the goods are removed is not [the enacting jurisdiction] and the goods are later relocated to another jurisdiction other than [the enacting jurisdiction], the security interest is deemed to be a security interest to which subsection 5(3.1) applies if it was perfected pursuant to the law of the jurisdiction to which the goods were removed.

7.(2) The validity, the perfection, and the effect of perfection or non-perfection and the priority of:

(a) a security interest in:

(i) an intangible; or

(ii) goods that are of a type that are normally used in more than one jurisdiction, if the goods are equipment, or inventory leased or held for lease by a debtor to others; and

(b) a non-possessory security interest in a security, an instrument, a negotiable document of title, money and chattel paper;

are governed by the law, including the conflict of law rules, of the jurisdiction where the debtor is located when the security interest attaches.

7(2.1) If a non-possessory security interest in a security, an instrument, a negotiable document of title, money or chattel paper comes into conflict with a possessory security interest acquired in the same collateral, priority is determined by the law of the jurisdiction where the collateral was located when the possessory interest attached.

7(3) Where a security interest is perfected in accordance with the law applicable as provided in subsection (2), and the a debtor relocates to another jurisdiction or transfers an interest in the collateral to a person located in another jurisdiction [the enacting jurisdiction],

(a) the a security interest perfected in accordance with the law applicable as provided in subsection (2) continues perfected in [the enacting jurisdiction] if it is perfected in [the enacting jurisdiction] the other jurisdiction:

(a) (i) not later than 60 days after the day on which the debtor relocates;

(b) (ii) not later than 15 days after the day on which the secured party has knowledge that the debtor has relocated or transferred an interest in the collateral to a person located in the other jurisdiction; or

(c) (iii) prior to the day on which perfection ceases pursuant to the law of the first jurisdiction;

whichever is the earliest, and

(b) this Act determines the effect of continued perfection or non-perfection, and priority between the security interest and any competing interest acquired in the collateral when the debtor is located in [the enacting jurisdiction].

7(3.1) Where a security interest is perfected in accordance with the law applicable as provided in subsection (2), and the debtor subsequently relocates to another jurisdiction other than [the enacting jurisdiction], the law of that other jurisdiction determines the requirements for maintaining perfection of the security interest, the effect of continued perfection or non- perfection, and priority between the security interest and any competing interest acquired in the collateral when the debtor is located in that other jurisdiction.

7(4) If the law governing the perfection of a security interest mentioned in under subsection (2) or (3.1) does not provide for public registration or recording of the security interest or a notice relating to it, and the collateral is not in the possession of the secured party, the security interest is subordinate to:

(a) an interest acquired in [the enacting jurisdiction] in an account payable in [the enacting jurisdiction] intangible; or

(b) an interest in goods, a security, an instrument, a negotiable document of title, money or chattel paper acquired when the collateral was situated in [the enacting jurisdiction];

unless it is perfected pursuant to this Act before the interest mentioned in clause (a) or (b) arises.

7(5) A security interest mentioned in subsection (4) may be perfected pursuant to this Act.

7(6) Notwithstanding subsection (2) and section 6, the validity, the perfection, and the effect of perfection or non-perfection and the priority of a security interest in minerals or in an account resulting from the sale of the minerals at the minehead that:

(a) is provided for in a security agreement executed before the minerals are extracted; and

(b) attaches to the minerals on extraction or attaches to an account on the sale of the minerals;

is governed by the law of the jurisdiction in which the minehead is located.

8(1) Notwithstanding sections 5, 6 and 7:

(a) procedural issues involved in the enforcement of the rights of a secured party against collateral are governed by the law of the jurisdiction in which the collateral is located when the rights are exercised;

(b) (subject to clause (c), procedural issues involved in the enforcement of the rights of a secured party against intangibles the collateral are governed by the law of the forum in which enforcement is pursued;

(c) subject to any applicable mandatory rules of the law of a jurisdiction which is more closely connected to the particular issue, substantive issues involved in the enforcement of the rights of a secured party against collateral are governed by the proper law of the contract between the secured party and the debtor.

8(2) For the purposes of sections 5, 6 and 7, a security interest:

(a) attaches pursuant to the law of a jurisdiction when the requirements of that law for creation of a security interest are satisfied, or, if the validity of the security interest is challenged, when the requirements would have been satisfied but for the invalidity;

(b) is perfected pursuant to the law of a jurisdiction if the secured party has complied with the law of the jurisdiction with respect to the creation and continuance of a security interest with the result that the security interest has a status in relation to other secured parties, buyers and judgment creditors and a trustee in bankruptcy of the debtor similar to that of an equivalent security interest created and perfected pursuant to this Act;

(c) means any interest which under this Act would constitute a security interest;

(d) includes any interest which under this Act would constitute a security interest in proceeds.

COMMENT

1. The proposed addition in sections 5(1) and 6(1) of the words “other than goods referred to in clause 7(2)(a)(ii)” is intended to signal more directly that security interests in mobile goods are governed by the special conflicts rules in section 7, and not the general conflicts rules for goods in section 5 or the special 30-day rule in section 6(1). This change also permits the proposed deletion of the reference to “subject to section 7" at the beginning of section 6(1) and “subject to this Act” at the beginning of s. 5(1).

1. The proposed incorporation of the words "and priority" in sections 5(1), 6(1), 7(2) and 7(6) is intended to eliminate any doubt that the law designated as applicable in these sections governs not just the priority consequences of the failure to perfect a security interest and the priority status of perfected security interests over unperfected security interests, but also determines the priority status of the security interest as against other competing third party claimants, including buyers and lessees of the collateral.

1. Section 5(3) has been similarly amended to confirm that when collateral subject to an extra-provincial security interest is relocated to the enacting jurisdiction, domestic law determines the effect of continued perfection or a lapse in perfection, as well as the priority of the security interest as against other interests acquired in the collateral after its relocation into the enacting jurisdiction. Under the proposed change, the application of domestic priority law under section 5(3) would continue to include the special priority rule in that section protecting buyers and lessees who acquire an interest in goods before the security interest is perfected under domestic law.

1. The proposed changes to section 5(3) would also extend its scope to cover the relocation of any collateral, not just goods, subject to a security interest referred to in section 5(1). This would make it clear that the holder of a possessory security interest in a security, an instrument, a negotiable document of title, money or chattel paper is required, if the collateral is relocated to the enacting jurisdiction (e.g. as a result of a relocation of the secured party’s business), to comply with the requirements of section 5(3) for continuing the perfected status of its security interest. Under the proposed change, domestic law would also govern the effect of continued perfection or a lapse in perfection and priority between the security interest and any competing interest acquired in the collateral after its relocation.

1. Current section 5 addresses the conflicts implications of relocation only if the collateral is relocated to the enacting jurisdiction. No guidance is given in the event that litigation takes place in the that jurisdiction involving collateral which was relocated to some other jurisdiction. Does section 5(1) continue to apply? If so, the validity, perfection and priority status of the security interest would be determined, notwithstanding re-location of the collateral, by the law of the jurisdiction where the collateral was originally located. This would be contrary to the common law position and inconsistent with the fact that all Canadian jurisdictions, including Quebec, have legislated a rule equivalent to section 5(3), requiring timely local perfection when collateral is relocated to the enacting jurisdiction, and dealing with the priority of the security interest against interests acquired in the forum following relocation.

1. The proposed new section 5(3.1) is intended to remedy any ambiguity resulting from the silence of the current Act on this point. Under the proposed section, the law of the jurisdiction to which the collateral is relocated would govern the requirements for maintaining the validity and perfected status of the security interest, the effect of perfection or a lapse in perfection, and priority between the security interest and an interest acquired after relocation. The proposed approach reflects both the common law and the results reached in PPSA cases (see Holy Spirit Credit Union v. McMullan (Trustee of), [1994] (QL) M.J. 105 (Q.B.) where a trustee in bankruptcy in proceedings in Manitoba successfully challenged the perfected status of a security interest in an automobile initially taken and perfected in Manitoba because of the secured party’s failure to re-perfect its security interest under the Alberta equivalent of s. 5(3) on the debtor’s subsequent relocation of his residence and his assets to Alberta).

1. Proposed new section 6(3) is a consequential change which would flow from proposed new section 5(3.1).

1. Current section 7 requires application of the law of the location of the debtor for security interests in mobile goods, intangibles, and non-possesory security interests in money and documentary intangibles. Current section 7(3) addresses the conflicts implications of a relocation of the debtor to any jurisdiction, not just the enacting jurisdiction. However, it requires re-perfection under the law of the new jurisdiction within the time limits specified in section 7(3) even if the new jurisdiction is not the enacting jurisdiction. This may be challenged as an excessive application of forum standards to extra-provincial events where the security interest does not bear any real or substantial connection to the enacting jurisdiction other than the fact that the litigation occurs there. The proposals set out above would confine current section 7(3) to cases where the debtor re-locates to the enacting jurisdiction, and would add a new section 7(3.1) to cover cases where the debtor relocates to some other jurisdiction. This would bring section 7 into line with the conceptual changes proposed in amended section 5(3) and new section 5(3.1), including application of the law of the debtor’s new location to govern the effect of continued perfection or non-perfection and priority between the security interest and an interest acquired after the relocation.

1. Under the special priority rule in current section 7(4) (for which there is no equivalent in the Ontario PPSA), a non-possessory security interest in collateral covered by section 7 must be perfected under the law of the enacting jurisdiction if the law of the jurisdiction where the debtor is located does not provide a public recording system for giving notice of the security interest. In the case of tangible collateral, failure to perfect under domestic law subordinates the security interest to an interest acquired in the collateral when it is situated in the enacting jurisdiction. In the case of intangible collateral, it is proposed to amend section 7(4) to subordinate the security interest to an interest acquired in the enacting jurisdiction in any form of intangible, not just in an account payable in the enacting jurisdiction as the section currently states. In the case of tangible collateral, the current special priority rule does not violate territorial limits on provincial legislative power because its operation is limited to competing interests in collateral which is situated in the enacting jurisdiction. In the case of intangible collateral, the proposed amendment would likewise require that the competing interest in the intangible have been “acquired in the enacting jurisdiction.” It is implicit in this wording that the local transaction under which the interest was acquired would bear a sufficient connection to the enacting jurisdiction to satisfy the territorial limits on provincial legislative power.

1. Proposed new section 7(2.1) is intended to deal with a minor but real problem, already present in the current Act, and brought into sharper focus by the proposed addition in sections 5 and 7 of an explicit reference to the choice of law for priority. The problem arises because sections 5 and 7 direct the application of different and potentially conflicting laws to determine the perfected and priority status of a security interest in a security, an instrument, a negotiable document of title, money or chattel paper. Under section 5, the law of the location of the collateral governs if the security interest is perfected by possession. Under section 7, the law of the location of the debtor governs if the security interest is non-possessory. But what law applies to priority if the debtor creates both a possessory security interest and a non-possessory security interest in the collateral? Proposed new section 7(2.1) would require application of the law of the jurisdiction where the collateral was situated when the possessory security interest attached. This is justified on the theory that legal regimes generally award priority to possessory interests in negotiable collateral in the interests of protecting commercial negotiability.

1. The proposed deletion in section 7(2) of the current reference to the conflicts of laws rules of the jurisdiction in which the debtor is located is intended to eliminate the undesirable complexities created by the doctrine of renvoi in the interests of promoting certainty in secured transactions. The proposed deletion would also resolve the complications which might otherwise arise from the fact that the criteria for determining the location of an enterprise debtor in some non-PPSA legal regimes differs from the chief executive office rule laid down in section 7(1) – e.g. under the Quebec Civil Code, the location of an enterprise debtor is determined by reference to its registered headquarters or statutory seat, not its chief executive office, and under revised Article 9, a similar rule applies for determining the location of U.S. enterprise debtors. In such cases, the proposed deletion would ensure that the reference in section 7 to the law of the jurisdiction where the debtor is located mean the law of the jurisdiction where the debtor’s chief executive office is located, and would preclude a further renvoi from that law to the law where the debtor’s registered office is located if this is different. Of course, a secured party will still need to perfect and to assess its priority status according to both laws in order to ensure it is adequately protected in all potential fora where the issue might be litigated. However, the proposed deletion would ensure that for the purposes of litigation in the enacting jurisdiction, a security interest will be considered validly perfected if it is perfected in the jurisdiction where the debtor is located as determined by section 7(1), and that the law governing priority will also be that law and only that law.

1. The proposed amalgamation of clauses 8(1)(a) and (b) into a single amended rule is intended to remedy an ambiguity in the current bifurcated approach. Under the current approach, procedural issues relating to the enforcement of the security interest in the collateral are governed by the law of the jurisdiction in which the collateral is located in the case of tangibles, and by the law of the forum in the case of intangibles. This bifurcation is contrary to the widely accepted conflicts doctrine under which enforcement procedure is invariably governed by the law of the forum. in which enforcement is pursued The current formula seems to have been employed to counter the risk that the courts might apply a procedural characterization to such substantive rules as “seize or sue” limitations on a secured party’s enforcement rights. However, the cases on the issue have made it clear that the procedural label is to be used restrictively and that it does not apply to any rule which would affect the substantive outcome or alter the substantive rights of the parties, a philosophy expressly affirmed by the Supreme Court in Tolofson v. Jensen (1995), 120 D.L.R. (4th) 289. In light of this, and to avoid confusion with general conflicts norms, it is proposed to amend clause (b) to refer all procedural issues to the law of the jurisdiction where enforcement is pursued.

2. For the same reason, it is also proposed to delete the words “subject to clause (c)” at the beginning of clause (b). These words inadvertently suggest that an issue relating to a secured party’s enforcement rights could be characterized as both procedural and substantive. This latter change would bring clause (b) into line with the equivalent provision in the Atlantic and Ontario PPSAs.

1. The proposed addition of the words “subject to any applicable mandatory provisions of the law which is more closely connected to the particular issue,” is intended to explicitly confirm that the parties freedom under clause (c) to choose the law to govern substantive issues involved in the enforcement of the rights of a secured party against collateral is subject to any overriding provisions of a more closely connected law, be it that of the forum or of some other jurisdiction. This ensures that a secured party cannot evade the non-waiveable debtor-protection rules of a more closely-connected jurisdiction – e.g. the jurisdiction where the debtor and/or the collateral are located – by incorporating a choice of law clause in the security agreement in favour of a more remotely connected law which does not offer equivalent protection. This proposal is in line with the caselaw on the point – see e.g. Cardel Leasing Ltd. v. Maxmento (1991), 2 PPSAC (2d) 302 (Ont Gen Div) – and would eliminate any residual doubt on the overriding application of the mandatory applicable enforcement rules of a closely-connected law notwithstanding the inclusion of a choice of law clause in the security agreement.

1. Proposed new clause 8(2)(a) is intended to address a logical conundrum in the current Act. Under sections 5 and 7, the law governing the validity of a security interest is determined by reference to the location of the collateral or the debtor, as the case may be, when the security interest attaches. But what if the validity of the security interest is challenged on the basis that the requirements of the lex situs for creation (attachment) of a security interest have not been satisfied (as where, e.g. the lex situs prohibits attachment of a security interest in after-acquired consumer goods)? To address this conceptual difficulty, the proposed new clause confirms that when the validity of a security interest is challenged, the time at which the security interest attaches for the purposes of sections 5-7 is determined by reference to the location of the collateral or the debtor, as the case may be, when the security interest would have attached but for the alleged invalidity. The proposed new clause also confirms that the term “attaches” as used in sections 5-7 does not bring into play the domestic attachment rules of the PPSA of the enacting jurisdiction, but refers instead to the attachment rules of the lex situs at the time the security interest is created (or would have been created in the event validity is challenged).

1. Proposed new clause 8(2)(c) is intended to explicitly confirm that the term “security interest” for the purposes of sections 5-7 means any interest which under the domestic law of the enacting jurisdiction would constitute a security interest. This proposal ensures that the choice of law rules in sections 5-7 are applied even when the relevant lex situs would not characterize the interest in question as a security interest (e.g. as where the lex situs does not characterize a true lease, or commercial consignment, or sale of accounts or chattel paper as a deemed secured transaction). This proposal would eliminate any residual confusion stemming from the contrary analysis in Re Intex Moulding Ltd. (1987), 38 D.L.R. (4th) 111 (Ont S.C.), widely considered to be wrong on this point.

1. Proposed new clause 8(2)(d) is intended to deal with an issue not explicitly addressed in the current Act. This is the appropriate law to govern the validity, perfection, and priority status of a security interest in proceeds of original collateral. The proposed new clause, which reflects the implicit result under the current Act, confirms that the applicable law is the law which would govern a security interest in the proceeds if they were original collateral. Of course, the connecting factor for determining the applicable law – the location of the collateral or the location of the debtor as the case may be – will necessarily be determined as of the time the security interest in the proceeds attaches (or is alleged to have attached) rather than when the security interest in the original collateral attached.

1. The operation of the proposed new clause is illustrated by considering the case of a security interest in inventory located in Saskatchewan created by a corporate debtor headquartered in Quebec. Although, under section 5, Saskatchewan law would govern the perfected status of a security interest in the inventory (other than mobile goods), proposed clause 8(2)(d) would make it clear that the secured party will need to also perfect in Quebec pursuant to section 7 to be assured of a perfected security interest in any intangible proceeds generated by the sale of the inventory. Under section 7 (as brought into play by proposed clause 8(2)(d)), Quebec law would also govern the validity and priority of the inventory financier’s security interest in the intangible proceeds. Clarification of this latter point is particularly useful in view of the fact that a security interest may not automatically attach to the proceeds of a dealing in original collateral under the law of Quebec. It follows that where a security interest is created in inventory located in one of the PPSA provinces by a national debtor located in Quebec, the secured party should ensure that any anticipated proceeds are expressly included in the security agreement as original collateral. Otherwise, no security interest will attach under Quebec law, the law which, under section 7, would determine the validity of any claim to an automatic security interest in the intangible proceeds on these facts.

Next Annual Meeting

2018 Conference (Centennial)

Delta Hotel

Québec City, QC

August 12 - 16, 2018