Possible Implications of Revised UCC Articles 9 for Canada Personal Security Acts 1999

A Report prepared and presented by:
Professor Ronald C.C. Cuming, College of Law, University of Saskatchewan
Professor Catherine Walsh, Faculty of Law, University of New Brunswick

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I.     INTRODUCTION

II.    ARTICLE 9 REVISIONS THAT REFLECT EXISTING POLICY IN PPSA JURISDICTIONS

III.     FEATURES OF ARTICLE 9 UNLIKELY TO MERIT CONSIDERATION FOR ADOPTION IN CANADA

IV.    INNOVATIONS THAT WARRANT CONSIDERATION

V.     SERIOUS DIFFICULTIES RESULTING FROM ARTICLE 9 (CONFLICT OF LAWS)
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I.  INTRODUCTION

[1 ] The Permanent Editorial Board for the Uniform Commercial Code, with the support of its sponsors, the American Law Institute (ALI) and the National Conference of Commissioners on Uniform State Law (NCCUSL), established in 1990 a study committee to report on the need for revision of Article 9 and related provisions of the Uniform Commercial Code. The study committee issued its report in December 1992, concluding that a variety of specific changes were called for and recommending the creation of a drafting committee to carry out the revision process. A drafting committee, convened in 1993 by the ALI and the NCCUSL, met frequently between 1993 and 1998 and prepared a Final Draft which received the approval of both sponsors in 1998. It is expected that the new Article 9 will be adopted quickly by most states of the United States.

[2]  Revised Article 9 preserves the general structure and approach of existing Article 9. But the revisions are extensive. In addition to substantive law changes, there has been extensive rewriting, clarification, and refinement of many provisions. The new Article 9 is a far more complicated creation than its predecessors and its complexity raises an important policy question as to whether the goal of simplifying secured financing law has been ignored.

[3]  The conceptual structure of the Personal Property Security Acts enacted in all Canadian common law jurisdictions except Nunavut is based on the 1972 Official Version of Article 9. While the Canadian legislation is different in substance and detail, both the PPSAs and Article 9 function in the context of similar secured financing markets. In addition, Canadian business activities are now much more integrated than they have ever been with those of the northern states of the United States. These factors justify careful examination of the new Article 9 to determine to what extent it contains approaches that might be considered for integration into Canadian personal property security law.

[4]  While there are many features of revised Article 9 that warrant careful examination, in many respects, it represents a "catch up" move on the part of its drafters. It contains many features that have been in Canadian PPSAs for many years. There are features of it that are still not as advanced as their counterparts in Canadian law.

[5]  The authors of this Report, Professors Cuming and Walsh, have undertaken a study of the new Article 9 (hereinafter referred to as Article 91 part of the Uniform Law Conference Commercial Law Strategy _ which will involve an assessment of its provisions in the light of current Canadian business practices in secured financing markets and public policies affecting those markets. Set out below is a very brief overview of the most significant differences between the Model Personal Property Security Act2 of the Canadian Conference on Personal Property Security Law and Article 9 that will be the focus of attention in this study. For the most part, the observations in this report apply as well to the Ontario Personal Property Security Act. The conclusions expressed in this report are tentative and may well be modified with respect to particular issues once those issues are examined in greater detail.
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II.  ARTICLE 9 REVISIONS THAT REFLECT EXISTING POLICY IN PPSA JURISDICTIONS

[6]  Many of the features of Article 9, though significant in United States law, will not be novel to a Canadian audience since they are aspects of current Canadian PPSAs. This is especially true with respect to many of the provisions dealing with filing (registration) and enforcement. What follows is a non-exhaustive list of those revisions for which equivalent provision is already made in all or most Canadian Acts.

1. Application to True Consignments

[7]  Sections 9-109 and 9-102(20) extend the scope of Article 9 to true consignments. Under § 9-103, a consignor's "security interest" is treated as a purchase money security interest in inventory. This is mirrored in all of the Canadian PPSAs except that of Ontario.

2.  Perfection of Security Interests in Instruments by Filing

[8]  Section 9-312 expands the type of collateral in which a security interest may be perfected by filing to include instruments. The Canadian PPSAs permit registration as a perfection step for all types of collateral including instruments. Unlike the Canadian PPSAs, § 9-312 does not permit a security interest in money to be perfected by registration.

3.  Production Money Security Interests

[9]  An appendix to revised Article 9 contains model definitions and priority rules relating to production money security interests held by secured parties who extend new value used in the production of crops. Because no consensus emerged in the Drafting Committee on this issue, the model provisions were included as an appendix rather than as part of the proposed uniform statutory text of revised Article 9. The Canadian PPSAs, other than that of Ontario provide for production money security priority in respect of not just crops, but also farm animals and fish.

4.  Media Neutral Language for Registration Provisions

[10]  The Article 9 filing provisions are cast in media neutral terms so as to allow for electronic filing and searching. Since electronic registration and searching has been a feature of Canadian PPSAs for several years, media neutral language is used in both the Acts and the regulations.

5. Sufficiency of Debtor Name Information


[11]  Article 9 clarifies what constitutes a sufficient debtor name (and secured party name) for the purposes of a financing statement (§§ 9-503, 9-506).3 The CCPPSL has adopted uniform conventional rules for ascertaining individual debtor name, and the regulations under all of the Canadian PPSAs specify the rules for ascertaining the names of business debtors (or enterprise debtors as they are called in some jurisdictions). However, not all jurisdictions have adopted the CCPPSL model rules as law. Article 9 also tests the sufficiency of filing against a debtor name by reference to the search logic of the particular filing system. A similar uniform provision would be welcome in the PPSAs given some inconsistency in judicial interpretation on this point.

6. Collateral Description Requirements

[12]  Article 9-504 confirms the acceptability of a super-generic collateral description in a financing statement, e.g., "all assets" or "all personal property." This is a feature of all Canadian PPSAs. This type of description is also permissible under the PPSAs for security agreements. In contrast, §9-108 expressly prohibits the use of "all the debtor's assets" or similar descriptions in security agreements, requiring the parties to instead describe the collateral according to genre or by item or any other method permitting objective determination of the collateral. Even a generic description of collateral is inadequate where the collateral is a commercial tort claim, and for consumer transactions, consumer goods, a security entitlement, a securities account, or a commodity account.

7. Control of Misuse of the Registry - Inaccurate Information in a Registration

[13]  Article 9 eliminates the existing Article 9 requirement for debtor signatures on financing statements as incompatible with electronic filing and as an inadequate foil against fraud. The ineffectiveness of requiring the debtor's signature as an anti-abuse measure was recognized in most Canadian jurisdictions when the PPSAs were first enacted. Sections 9- 509, 9-625 prohibit an unauthorized financing statement and subject violators to statutory damages of $500 and to civil liability for any resulting losses. The need for an explicit prohibition of this kind has never been demonstrated in PPSA jurisdictions. The ability of debtors under the PPSAs to compel the secured party to discharge an unauthorized or expired financing statement, with damages recoverable for non-compliance, has generally been seen to give the debtor sufficient protection. The drafters of Article 9 have adopted a watered- down version of this aspect of the Canadian system. Section 9-509(c)(2) gives the debtor the right to file a termination statement when there is no obligation secured by the collateral covered by the financing statement and no commitment to make an advance, incur an obligation or give value and the secured party has failed to respond to a demand.

[14]  Section 9-518 permits a debtor who believes a filed record is inaccurate or unauthorized to indicate this fact in the files by filing a correction statement but this "correction" does not affect the effectiveness of the registration. The drafters of most of the Canadian systems took the position that persons searching the registry should have available unambiguous information as to the matters that are disclosed in a registry search.4 The most dramatic example of the application of this approach is found in the context of discharges. The registrar must register a discharge that is in a form that complies with the registry regulations. This is so even though, unknown to the registrar, the discharge may have been submitted by an unauthorized person. Of course, the system provides backup measures designed to protect a secured party from most of the negative consequences of an unauthorized discharge.

8.  Definition of Inventory

[15]  The definition of inventory in § 9-102 confirms that the term includes goods leased by the debtor to others as well as goods held for lease. This extension is contained in the definition of inventory in the Canadian PPSAs.

9. Good Faith and Commercial Reasonableness

[16]  Section 9-102 contains a new definition of good faith that includes not only honesty in fact but also the observance of reasonable commercial standards of fair dealing. Similar overarching provisions are contained in the Canadian PPSAs derived from the CCPPSL model.

10. Deemed Damages for Non-Compliance

[17]  Section 9-625(e) provides that where the secured party has not complied with specific provisions of Article 9, the debtor may recover deemed damages in the amount of $500. This is a feature of Canadian PPSAs.

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