Christopher C. Nicholls. Personal Property Security Act Update Conference-Friday January 9, 1998

Transcription

1 Transactions Governed by the Nova Scotia PPSA Christopher C. Nicholls FACULTY OF LAW, DALHOUSIE UNIVERSITY Personal Property Security Act Update Conference-Friday January 9, 1998 A whole generation of Americans remember precisely where they were on November 22, 1963 when President Kennedy was struck down in Dallas. Perhaps this generation of Nova Scotia solicitors will remember where they were on November 3, 1997 when the old secured credit regime in this province was struck down and the new Personal Property Security Act, S.N.S , c.13 ("PPSA") came into force. In many ways, the changes introduced by the new Act are dramatic. But they are also for the better. Nova Scotia now boasts one of the most modem personal property registration regimes on the continent. A year or so ago, Professor Catherine Walsh of the University of New Brunswick gave a paper at this conference. She was also speaking about transactions covered by the new act, and her paper is excellent. Although I will cover much the same ground as she did, my approach will be slightly different. Professor Walsh, for example, spent some time in her paper discussing Interjurisdictional Secured Transactions, that is, the "conflicts" provisions contained in sections 6 through 9 of the PPSA. I don't propose to touch on those issues today. I should also mention that the Act contains transitional provisions in Part VII that, among other things, extend application of the Act to certain

2 prior security agreements. I'm not going to discuss those today either. Finally, it should be noted that the PPSA provides that "[ w ] here there is a conflict between a provision of this Act and a provision for the protection of consumers in any other Act, the provision of that Act [ie., the consumer protection legislation] prevails." (Subsection 71(1)). But again, I do not intend to deal with the possible effect of consumer protection legislation on the operation of the PPSA. It is not that I regard these issues as unimportant. It is simply that I would like to keep this presentation more narrowly focused. Ie Overview In a very real way, my presentation this morning will deal with just two sections of the Nova Scotia Act: section 4 and section 5. Section 4 tells you what transactions are "in." Section 5 tells you what transactions are "out." More formally, section 4 lists the kinds of transactions in respect of which it will now be necessary for "secured parties" --that's a phrase that is specifically defined in section 2-to comply with the provisions of the PPSA to ensure the perfection of their security interests. Paragraph 4(l)(a) provides a general rule as to when the Act will apply.

3 Paragraph 4( 1 )(b) gives some illustrative examples of the types of transaction 4(1)(a) is referring to. And these are, indeed, simply examples. The 4(1)(b) list doesn't purport to be exhaustive. Subsection 4(2) is the more interesting provision. Subsection 4(2) lists four types of transactions that are subject to most provisions of the PPSA even though they aren't secured credit transactions at all. These are the items that Professor Walsh and others describe as "deemed security interests." And I will look at the subsection 4(2) provisions in some detail in a moment. Section 5 then lists eleven particular exceptions or exclusions. Section 5, in other words, contains a list of transactions that might appear to involve the creation of a security interest that would be covered by the PPSA. But, for various reasons, the legislature has chosen to exempt these transactions from the Act. Transactions Governed by the PPSA: Summary S.4(1)(a): General rule as to when PPSA will apply ("True" Security Interests) " 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" S. 4(1)(b): Examples of transactions covered by s. 4(1)(a) (Examples of Transactions that will create "True" Security Interests) S.4(2): S.S: Four (4) types of "deemed" security interests covered by the PPSA. Eleven (11) types of transaction excluded from the PPSA

4 That's the basic structure. Section 4 details when the Act will apply. Section 5 carves out exceptions: eleven types of transaction to which the Act will not apply. Now I want to look a little more carefully at each of these sections. II. Section 4: Transactions Subject to the PPSA Regime As I indicated above, it has become customary to break up the language of section 4 into two categories. The first category is "true security interests." (They're dealt with in subsection 4(1». The second category is "deemed security interests." (They're dealt with in subsection 4(2». Professor Walsh uses this distinction in her book An Introduction to the New Brunswick Personal Property Security Act. J It's a useful classification. And I'm going to use it today. (A) "True Security Interests" (Subsection 4(1)) Paragraph 4(1)(a) states the general rule of application. The language is deceptively simple. Yet, in a very few words paragraph 4(1)(a) recites the basic policy of the PPSA and all of its statutory "ancestors": "4 (1) Subject to Section 5, this Act applies to (a) 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;" [Emphasis added.]

5 There are two critical parts to this provision. First, it establishes a "substance" test, not a form test. Second, it abolishes the significance of retaining title in collateral, at least when deciding if a particular financing transaction is subject to the PPSA. (1) Substance over Form This concept of emphasizing substance over form comes from Article 9 of the U.S. Uniform Commercial Code (the "UCC"). The language in Article 9 provides that the UCC applies "to any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures...,,2 I'm never sure whether Canadians are pleased or displeased to hear that our legislation follows a U.S. model. But in fact, in cross-border deals it's a great advantage. The PPSA regime is one that American counsel (and their clients) can understand. Now, it goes without saying that just because the form of a secured transaction is irrelevant for purposes of determining the application of the PPSA, we should not expect to see an end to creative financing devices any time soon. A vehicle lease, for example, is, in form, a secured credit transaction. It is no different, for PPSA purposes, from a transaction in which a car buyer takes out a loan secured by a charge or a lien in favor of the lender upon the car being purchased. But the fact that the lease and the secured loan are functionally equivalent for PPSA purposes does not mean there may not be other important considerations-tax, accounting or otherwise-- that may lead buyers, sellers, and lenders to prefer to structure their financings in one particular form rather than

6 another. (For some additional thoughts on this issue, see the discussion under the heading "Irrelevance of Title" below.) What the PPSA does do, however, is eliminate considerable uncertainty. It takes one variable out of the "choice of structure" equation. The PPSA makes clear that, whatever the structure of financing chosen by the parties, the same rules of perfection and priority of security interests will apply. And so, as you all know, one of the things that Bill 31 did-in addition to introducing the PPSA itself-was to repeal or amend a number of the other statutes that dealt with various kinds of security interests. The following acts, for example, were all repealed when the PPSA came into force: Assignment of Book Debts Act (s. 89(1» Bills of Sale Act (s.89 (2» Bulk Sales Act (s.89 (3» Conditional Sales Act (s.89 (4» Corporation Securities Registration Act (s.89 (5» Instalment Payment Contracts Act (s.89 (6».

7 (2) Irrelevance of Title The other important feature of paragraph 4( 1)( a) is that it makes the question of title in goods irrelevant for purposes of determining whether or not the PPSA will apply to a transaction. So, for example, if a conditional seller purports to retain title in goods that are sold pursuant to a conditional sale contract, the PPSA looks right through the form of that transaction and sees it for what it really is: a method of providing secured financing to the buyer. 3 One must be cautious here. Preserving title is irrelevant for the purpose of determining whether or not a transaction is subject to the PPSA. But that does not necessarily mean that preserving title is irrelevant for all purposes. For example, title may be very relevant in cases where there is a priority dispute between security interests subject to the PPSA, and security interests governed by other statutes, such as the federal Bank Act. 4 Courts have also suggested, in interpreting comparable provisions in other provincial personal property security act statutes, that title may occasionally have relevance within the PPSA itself. 5 So the PPSA has not eliminated the legal significance of title in personal property transactions. It has simply made it clear that whether a party does or does not have title in collateral has nothing to do with determining whether or not a security interest subject to the PPSA has been created.

8 (3) Creation of a "Security Interest" (as defined in s-s. 2(ar)) The machinery of the PPSA, then, is not triggered by any particular form of secured credit transaction. It is triggered whenever any transaction creates a "security interest". "Security interest" is a defined term. It is defined in section 2(ar) of the PPSA. The definition has two distinct parts. The first part deals with conventional or "true" security interests-the sort of security interests covered by sub-section 4(1). The second part of the definition extends the meaning of "security interest." This extended definition is needed to make sense of the "deemed security interests" created by subsection 4(2). That extended definition is discussed further below under the heading "Deemed Security Interests." For now, I want to focus on the elements of the definition that are important for purposes of conventional or "true" security interests as contemplated by sub-section 4(1). In that context, the definition of "security interest" has three basic elements: 1. A security interest is an interest in personal property; 2. A security interest is something that secures payment or peiformance of an obligation; 3. However, a security interest does not include the interest of unpaid sellers reserving a right of disposal under the circumstances described in

9 subsection 22(2) of the Sale of Goods Act. (The reason for this exclusion is discussed below under the heading, "(b) 'Personal Property': a 'document of title. "') (4) "Personal Property" A security interest is only governed by the PPSA if it is an interest in "personal property. " Not real property. And personal property is defined in the Act as well. It comprises seven items: "goods, a document of title, chattel paper, a security, an instrument, money or an intangible." (s-s. 2(ad» Each one of the seven items referred to in the definition of "personal property" including money-is itself specifically defined in section 2 of the Act (Ezekial saw a wheel in the middle of a wheel, and was greatly inspired. The reader of the PPSA encounters definitions within definitions and, I'm afraid, may have a rather different reaction. ) I won't deal in any detail with all of these "definitions within definitions." In a few cases I intend to follow the time-honoured practice of weary exam writers and a few seasoned judges and simply quote the statutory provisions with no attempt to provide meaningful analysis. But I do want to highlight certain aspects of these definitions that either seem to expand or to restrict what most lawyers may intuitively think of as "personal property."

10 (a) "Personal Property": "Goods" The PPSA definition of "goods" includes not only "tangible personal property" which most of us would expect-but also "fixtures, crops and the unborn young of animals." (s-s. 2(u» One should be aware that the words "fixture" and 'crops" are both specifically defined in section 2. (See subsections 2(s) and 2(1) respectively. The definition of "fixture" says only that it does "not include building materials." The term "building materials"-as one might expect-is also specifically defined in subsection 2(e». And the Act has some special rules governing security interests in fixtures and crops. Among other things, the Act provides for the registration of a security interest in a crop or a fixture in a registry of deeds so as to provide notice to persons who may acquire an interest in the lands, or who hold a registered mortgage of the land on which the crops or fixtures are located. (See sections 37, 38 and 50.) It's also important to recall that the PPSA definition of "goods" is not identical to the Sale of Goods Act definition of the same word. (b) "Personal Property": a "document of title" A "document of title" is defined as a writing "issued by or addressed to a bailee (i) that covers goods in the bailee's possession that are identified or that are fungible

11 portions of an identified mass, and (ii) in which it is stated that the goods covered by it will be delivered to a named person, or to the transferee of that person, or to bearer or to the order of a named person." (s-s. 2(0» (i) Sale of Goods Act, s. 22(2) - Unpaid Seller's Right of Disposal There is a subtlety here. Although the PPSA applies to any transaction that creates a security interest in personal property; and although "personal property" includes a "document of title"-such as an order bill of lading; nevertheless, a seller's interest in a negotiable order bill of lading is not considered a security interest within the meaning of the PPSA, unless the buyer and seller have intended to create or provide for a security interest in the goods. To put the same thing in other words, the PPSA preserves the rights of unpaid sellers as set out in section 22(2) of the Sale of Goods Act, without actually crossreferring to that other statute. 6 You will recall that section 22(2) of the Sale of Goods Act provides as follows: "Where goods are shipped, and by the bill of lading the goods are deliverable to the order of the seller or the seller's agent, the seller is prima facie deemed to reserve the right of disposal." A seller might ship goods under an order bill of lading "to the order of the seller," as a way of making sure that the goods don't actually get delivered to the buyer until the

12 buyer pays. You might think that that arrangement involves the seller taking a security interest in the goods or in the bill of lading. And you might think, therefore, that the seller would be obliged to perfect that security interest under the PPSA. But, absent some evidence of a contrary intention, that's not the case. The PPSA specifically says that a seller in that situation has not taken a security interest. That is the effect of defining "security interest" so as to exclude: "the interest of a seller who has shipped goods to a buyer under a negotiable bill of lading or its equivalent to the order of the seller or to the order of an agent of the seller, unless the parties have otherwise evidenced an intention to create or provide for a security interest in the goods." Why does the PPSA carve out this exception? When sellers are trying to ensure they get paid by using an order bill of lading in this way, why doesn't the Act simply require them to perfect an interest under the PPSA? Professor Walsh has provided a nice explanation of the policy justification for this exception in her book. 7 In short, Professor Walsh puts it this way. If a seller were compelled to comply with the PPSA in this case, the neat, convenient remedy of retaining a right to dispose of goods where the buyer doesn't pay would be lost. The seller would have to go through all the steps under the PPSA to enforce its interest. So an unpaid seller would be considerably inconvenienced if this kind of right were covered by the PPSA. And who is hurt by excluding these transactions from the requirements of the PPSA? Is the buyer hurt? Not really. The buyer never had the

13 goods. The buyer never paid for the goods. The buyer really hasn't lost anything. Are other creditors hurt? Again, it's hard to see how. Since the buyer would never have gotten possession of the goods, it cannot be the case that other creditors may have been duped into lending money on the assumption that the buyer owned more assets than he really did. I(b) "Personal Property": "Chattel Paper "I as, The PPSA definition of chattel paper seems straightforward. The term is defined "one or more writings that evidence both a monetary obligation and a security interest in, or a lease of, specific goods or specific goods and accessions." (s-s.2 (f) The Act has several special provisions dealing with chattel paper. When working through these provisions, it's important to keep a number of distinct concepts in mind: Example J: When Chattel Paper Itself Constitutes a Security Agreement First, chattel paper may itself constitute a security agreement between two parties. A conditional sales contract, for example, is a form of chattel paper. The seller of the goods is, for PPSA purposes, the secured party. The buyer of the goods is the debtor. The sold goods constitute the collateral. The seller's interest would be subject to the PPSA regime by virtue of subsection 4( 1).

14 Example 2: When Chattel Paper Is Used As Collateral Now assume the same seller described in Example 1 (the "Original Seller") wished to borrow money from a lender (the "Lender"). The Original Seller decides to use his or her interest in the conditional sales contract (in other words, in chattel paper) as security for the loan from the Lender. The assignment of the conditional sales contract from the Original Seller to the Lender (by way of security) would constitute a transaction covered by the Act. This time, the Lender would be the secured party. The Original Seller would be the "debtor." The collateral would be chattel paper, namely the conditional sales contract itself, not the goods. Example 3: When Chattel Paper is Soldfor New Value Now suppose the Original Seller has decided not to borrow money from the Lender after all. Instead, he or she decides to sell the conditional sales contract outright for new value to a purchaser (the "Chattel Paper Purchaser"). That sale-although not a financing transaction-would still be covered by the PPSA because it would give rise to a "deemed security interest." ("Deemed security interests" are discussed further below.) In this case, the Act would deem the Original Seller to be a "debtor" and would deem the Chattel Paper Purchaser to be a "secured party." You should be aware that the PPSA gives a special priority to purchasers of chattel paper for "new value" who take possession of that chattel paper in the ordinary

15 course of their business. This priority is described in section 32(6). The type of transaction to which s. 32(6) is referring would generally be the type described in my third example (an outright sale of chattel paper). But it is not need not be so restricted. This is so because the word "purchase" in the PPSA has an expanded meaning which includes, not only sale transactions, but also "taking by... lease, discount, assignment, negotiation, mortgage, pledge, lien, issue, reissue, gift or any other consensual transaction creating an interest in property." (S.-s. 2(ah»8. The term "new value" is, once again, specifically defined in the PPSA. The definition is tucked within the Act's definition of the word "value" in subsection 2(av). This special priority given to certain purchasers of chattel paper is just one of a number of exceptions included in section 32 of the Act for the purposes of commercial expediency. (For a further example, see the discussion of the priority for holders of money, below.) I(c) "Personal Property": "a security "I The definition of "security" in the PPSA is not quite so comprehensive as the definition of the term in the Securities Act. Certainly it includes debt and equity securities-that is shares, bonds, debentures, and notes. But it expressly excludes "a writing that provides for or creates a mortgage or charge in respect of an interest in land that is specifically identified in the writing."(s-s. 2(ap» Ice) "Personal Property": "an instrument"l "An instrument" means:

16 "(i) a bill of exchange, note or cheque within the meaning of the Bills of Exchange Act (Canada), (ii) any other writing that evidences a right to payment of money and is of a type that in the ordinary course of business is transferred by delivery with any necessary endorsement or assignment, or (iii) a letter of credit or an advice of credit if the letter or advice states that it must be surrendered on claiming payment under it, but does not include (iv) a document of title, chattel paper or a security, or (v) a writing that provides for or creates a mortgage or charge in respect of an interest in land that is specifically identified in the writing." (s-s. 2(v)) I would invite you to consider closely the exclusion in clause (v) of this definition. I will have more to say about that below when I discuss one of the PPSA exceptions set out in section 5 of the Act. 1(0 "Personal Property": "Money "I Money, for PPSA purposes, means, "a medium of exchange authorized by the Parliament of Canada as part of the currency of Canada or adopted by a foreign government as part of its currency." (s-s. 2(aa)) foreign. Money, in other words, appears to mean... well, money. Either domestic or Security interests in money can arise in a number of ways under the PPSA. For example, suppose a secured party has registered a financing statement against a debtor

17 with respect to a security interest in goods. If those goods are subsequently sold by the debtor for money, the secured party's security interest extends to that money.(s. 29(3)(c)). However, it is possible for certain security interests in money to be defeated by a "holder" of such money who acquires it either for value, or without knowledge that it was subject to a security interest. (s. 32(1)). I(g) "Personal Property": "an intangible"l The PPSA definition of "intangible" is not altogether illuminating: '''Intangible' means personal property that is not goods, a document of title, chattel paper, a security, an instrument or money." (s-s. 2(w)) Recall, first of all, that "personal property" is defined to mean, among other things, "an intangible". So the first part of the "intangible" definition is circular. The remaining non-circular part of the definition of "intangible" tells the statute-user only what an intangible isn't. 1(5) Specific examples of covered transactions (paragraph 4(1)(b JA Section 4( 1 )(b) provides some specific examples of transactions covered by the PPSA. But these are simply examples. They are not, and do not purport to be, an exhaustive list. But they make it clear, for example, that the PPSA does apply to chattel mortgages, conditional sales, pledges and so on.

18 III. "Deemed Security Interests": (subsection 4(2» One of the most interesting aspects of the PPSA is that it does not simply apply to secured credit transactions. This is critically important to understand. The Act also applies to several types of transactions that aren't secured credit transactions at all. What this means is that parties to these types of transactions will be subject to the PPSA rules. These are the transactions that Professor Walsh and others describe as "deemed security interests." There are four such types of transactions: 1. Commercial consignments; "Commercial consignment" is defined in subsection 2(h). Among other things, the definition makes clear that the term when used in the PPSA applies only where both the consignor and the consignee deal with the sort of goods that are the subject of the consignment agreement in the ordinary course of their respective businesses. The reason for including all commercial consignments (and not simply consignments used as financing devices) is discussed briefly below. But one point to note here is that the interest of a consignor who delivers goods to a consignee under a commercial consignment is not only deemed to be a "security interest" under the PPSA (s. 2(ar)(ii)(A», but in fact that security interest constitutes a "purchase money security interest" (s. 2(ai)(iv» (a "pmsi").

19 The significance of holding a pmsi, for priority purposes, will be discussed later by Vaughan Black. (You may also note that s. 13(3) ofthe Act specifies that when a consignee obtains possession of the consigned goods, he or she is deemed to have "rights in the collateral" for purposes of determining when the "security interest" has attached.) 2. Any lease for a term of more than one year; Of course, only leases of personal property are covered here, not real estate leases-even if those real estate leases include items of household furnishings and appliances. And leases are not covered in cases where the lessor is not in the business of leasing goods, or if the goods leased are of a "prescribed kind" although there don't appear to be any regulations promulgated on this point yet. These are all important qualifications. But the critical aspect of this provision is this. It applies to true leases. Not leases intended as security. Recall that personal property leases intended as security are always subject to the Act, whatever their term. They're one of the specific examples of security agreements listed in paragraph 4(1)(b). But now, subsection 4(2) is extending coverage of the Act to leases not intended as security. As in the case of the interest of a consignor under a commercial consignment, the interest of a lessor of goods under a lease for a term of more than one year is defined to constitute a "pmsi" under the Act. (s. 2(ai)(iii». ((You may also note that s. 13(3) of the Act specifies that when a lessee under a lease for a term of more than one year obtains possession of the leased goods, he or she is deemed to have "rights in the

20 collateral" for purposes of detennining when the "security interest" has attached.) 3. A transfer of an account or chattel paper9; As emphasized in the discussion concerning leases above, it must be stressed again here that subsection 4(2) is referring to absolute transfers, not simply to transfers by way of security. Transfers of accounts or chattel paper by way of security would be brought within the Act by subsection 4(1). Thus, the important effect of s-s.4(2) is that an outright sale of accounts receivable to a purchaser may be subject to the PPSA. This feature of the PPSA may take clients by surprise. Incidentally, it is this provision (and its counterparts in other jurisdictions) that led to the practice of registering financing statements in respect of guarantees. A guarantee itself is not a security agreement. But most guarantees include postponement clauses that contain assignment language. 10 That assignment language, if it is to be taken seriously, constitutes an assignment of accounts, and accordingly creates a security interest subject to the PPSA. 4. A sale of goods without a change of possession. Not all sales of goods are subject to the PPSA. Sales in the ordinary course of the seller's business are exempt. (This result is achieved through the use of special definitions in the Act. See s-s. 2(an». So this "deemed security interest" only arises when sales are out of the ordinary course and where the vendor remains in possession. (The Act provides that the interest of a buyer under such a sale retains priority over the interests of persons referred to in subsections 21 (1) and

21 (2) of the Act, if the interest is perfected within thirty days after the sale of the goods. (s. 23(4)). In each of these four cases, transactions become subject to the PPSA even although they do not secure payment or performance of an obligation. Of course, the PPSA was essentially designed to govern secured credit transactions. The rights and obligations prescribed by the Act, for example, generally flow to "debtors" or "secured parties." Yet in a consignment agreement, a true lease, an absolute transfer of accounts, or a sale, there are no "debtors" or "secured parties" to be found. Accordingly, some drafting legerdemain was necessary to fit these four "nonsecurity" transactions within the PPSA framework. The trick is accomplished in the definition section of the Act. For example, the Act defines the term "debtor" to include "a person who receives goods from another person under a commercial consignment,... a lessee under a lease for a term of more than one year,... a transferor of an account or chattel paper," and "a seller under a sale of goods without a change of possession." (s-s.2(m)) Similarly, a "secured party" is a person who has a "security interest," and a "security interest" is defined to include, among other things: "the interest of (A) a consignor who delivers goods to a consignee under a commercial consignment, (B) a lessor under a lease for a term of more than one year,

22 (C) a transferee under a transfer of an account or a transfer of chattel paper, or (D) a buyer under a sale of goods without a change in possession that does not secure payment or performance of an obligation;" [S-s. 2(ar). Emphasis added.] I(A) An example: a seller of goods without a change of possessiolll By way of example, then, consider the case of a seller who sells goods outright (other than in the ordinary course of business). He or she has been paid in full. There is no money owing. There is no credit aspect to the transaction whatsoever. If the buyer takes possession of the goods, the transaction is not subject to the PPSA. But if the seller retains possession of the goods, the seller is deemed to be a "debtor" within the meaning of the PPSA. And the buyer, by virtue of the extended definition of a "security interest" is deemed to be a secured party. In this example, then, one finds a "debtor" who doesn't owe any money, and a "secured party" who has neither loaned money, nor taken a security interest in collateral (at least in the sense that the term "security interest" is commonly understood). Yet the interest of that "deemed" secured party-that is to say, the property interest of the buyer in the goods purchased-is subject to the PPSA. And the buyer must therefore be concerned about the effect of the PPSA on the validity and priority of his interest, just as an ordinary secured lender would be. (Not all of the PPSA provisions apply in these "deemed security interest" cases however. As discussed below, they are

23 excluded from the application of Part V of the Act, the part dealing with default rights and remedies.) Extending coverage of the Act to such non-credit transactions is surely the most counter-intuitive aspect of the PPSA. It seems reasonable to consider why it is that the PPSA has been drafted to apply to these transactions when they have nothing to do with secured lending. Consignments, leases for terms of more than one year, and transfers of accounts or chattel paper were all included for much the same reason: to avoid disputes about whether such transactions were or were not entered into for financing purposes. The inclusion of absolute transfers of accounts and chattel paper follows the scheme of DCC Article 9. I I The DCC treatment of consignment agreements is rather more cumbersome, but the basic policy concern was the same. Indeed, the pre-dcc regime for consignments-which could lead unsuspecting lenders and trade creditors to overestimate the assets of a creditor-- was often the subject of harsh criticism. 12 As for a sale of goods, most lawyers are well aware of the policy reasons underlying legislative concern about sellers that remain in possession of goods they have sold. The Bills of Sale Act dealt with this kind of sale. People who have physical possession of property that they don't actually own can mislead lenders and trade creditors into thinking that they have more substantial assets than they really do. And so

24 we want to ensure that there is a notice system that will allow creditors to check up on people before they lend money or deliver goods on credit to them. Presumably separate registries could have been maintained to deal with matters that do not, in common parlance, constitute secured credit transactions. But it's more efficient to roll everything into one registry. It does create an anomaly: namely, that a statute called the Personal Property Security Act imposes requirements in the case of transactions in which people are neither giving nor taking security-as commonly defined-in personal property. But that appears to be a fairly modest price to pay. \(B) Definitional issues arising under section 4(2A The PPSA does so much of its work through the use of extended and restricted definitions, that it is important to confirm whether or not any word or phrase used in the Act carries some "PPSA-specific" meaning. For example, "a lease for a term of more than one year" is defined in section 2 of the Act to anticipate such things as continued possession and renewal terms. And the definition also excludes a number of lease transactions, including instances where the lessor is not regularly engaged in the business of leasing goods. "Commercial consignment" is also a specifically defined term.

25 possession." So, too, (perhaps surprisingly) is the phrase "sale of goods without a change of The definition of "sale of goods without a change of possession" contains one especially noteworthy exclusion. The phrase does not include "a sale of goods in the ordinary course of business of the seller." ((s.-s. 2(an» So sales in the ordinary course of a seller's business in which the buyer leaves the goods with the seller, are not within the scope of the PPSA. Such sales out of the ordinary course of the seller's business are. kc) Quantifying "Debts" in the case of "Deemed Security Interests "I The PPSA has special rules dealing with situations where lessors under a lease for a term of more than one year or consignors under a commercial consignment in effect have their interests defeated by a third party because of the operation of clause 21 (2)(a) or (b) or subsection 21 (1) of the Act. Specifically, a lessor or consignor in those circumstances is deemed to have suffered damages as against the lessee or consignee. (Section 22) The Act must contain such a provision. Without it, the consignor or lessor would have no provable claim against the estate of their counterparty. To understand why, consider first the case of a "true" secured party. Normally, a secured creditor that failed to perfect a security interest and therefore lost the priority of his or her interest in collateral would still be a creditor.

26 An unsecured creditor, perhaps; but still, a creditor. And as a creditor he or she could, for example, assert a claim-the amount of the debt-in a bankruptcy. But a lessor or a consignor is not a creditor, secured or otherwise. So if the Act did not provide that a consignor or lessor whose goods have been seized by a third party has suffered damages of a quantified amount, such a party would be worse off than a "real" secured creditor who had failed to perfect his or her security interest. Section 22 thus makes clear that the lessor or consignor has a claim. It further specifies that the quantum of that claim is the value of the goods and the amount of the loss resulting from the termination of the lease or consignment. (D) Part V of the Act (Default Rights and Remedies) Not Applicable to "Deemed Security Interests" The "deemed security interests" in subsection 4(2) are only brought within the Act for such purposes as determining priorities, and the perfection rules. Part V of the Act deals with default rights and remedies. Part V does not apply to the "deemed security interests" listed in subsection 4(2). These deemed interests aren't.subject to "defaults" in the way that "true" security agreements are, and could hardly be subject to PPSA-type enforcement rules. So, for greater certainty, the application of Part V to such transactions is specifically excluded. (See s. 56(1)(a))

27 IV. Section 5: Transactions Expressly Excluded (Tom the PPSA Regime Section 5 of the PPSA carves out 11 exclusions, that is, eleven circumstances in which-despite the broad wording of subsections 4(1) and 4(2)-- the PPSA will not apply after all. (One cautionary note. It is certainly crucial to understand when the PPSA does or does not apply, particularly in the context of delivering opinions, and advising parties in a realization scenario. But as a general matter, it will be prudent practice in most cases to register a financing statement in respect of transactions even if the application of the PPSA is somewhat in doubt. The Ontario PPSA is particularly helpful on this point. It specifically provides that registration under the PPSA "does not create a presumption that this Act applies to the transaction to which the registration relates.,,13 For a time, some secured parties took the view that, if they were not obliged to register under the PPSA to protect their security interests, they might not wish to do so, preferring not to be subject to the PPSA enforcement regime. 14) Some of the exceptions relate to liens or charges that are created under other laws,(s. 5(a» and security agreements governed by federal law. For example, Bank Act security is excluded under s. 5(k) along with any other security agreements "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..."

28 Interests in annuity contracts or insurance policies are excluded except in cases where insurance is taken out by a debtor for purposes of insuring property that is already collateral for a loan. (Section 5(b)). Transactions in which insurance or annuity contracts per se are used as collateral were originally excluded from Article 9 of the VCc. The Draftsmen's Comments on the VCC 1972 official text explained that, "[ s ]uch transactions are often quite special, do not fit easily under a general commercial statute and are adequately covered by existing law.,,15 Certain interests in wages, salaries, pay, commissions or other compensation are not covered by the PPSA if the assignment or transfer of such an interest is prohibited by statute or by rule of law. (s. 5(c.) The idea is this. Certain wage assignments may simply be illegal. Section 89 of the Labor Standards Code l6, for example, provides that "an assignment of wages or any portion thereof to secure payment of a debt is unlawful." Where such assignments are illegal, the PPSA drafters also want to ensure that they are excluded from the PPSA. This may seem rather unnecessary. The VCC approach was to exclude all wage assignments, on the basis that such assignments "present important social problems whose solution should be a matter of local regulation.,,17 This broader exclusion is also the approach adopted by the personal property security acts in the. 18 western provinces. Certain contract assignments are excluded from the Act (s.5(d)) Simply put, the PPSA will not apply when the right to receive contract payments is assigned provided that the assignee also assumes the assignor's contractual obligations that must be fulfilled

29 to earn any such payments. Again, this exception comes from uee Article 9 (9-104(f)). The drafters felt that these transactions "[had] nothing to do with commercial financing transactions." 19 There is a further exception in the case of the "creation or transfer of an interest in land including a lease." This exclusion is consistent with the general scope of the PPSA. The Act is conl:erned with security granted in personal property, not real property. (s-s. 5(e)) But the "real estate" exclusion, arguably, is taken to an extreme in s-s. 5(f). That subsection provides that the Act does not apply to: "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."[emphasis added.] Put simply, this provision means that a security interest granted in real property rents or mortgage payments will not be governed by the PPSA unless the right to receive the rent (or mortgage payment) is evidenced by a "security" or "instrument." Once again, careful attention must be paid to the PPSA definition section. Neither a "security" nor an "instrument" -as defined in the PPSA-may "[provide] for or [create] a mortgage or charge in respect of an interest in land." In other words, a mortgage, for example, under which mortgage payments are made is not a "security" or an "instrument" within the meaning of the Nova Scotia PPSA. So the right to receive

30 mortgage payments will not normally be evidenced by an instrument or security. Thus, the assignment of such rights-in the absence of a separate instrument or security that does not also create a mortgage or charge in the land itself-- is not covered by the PPSA. This is an example of how my "Ontario lawyer" instincts might from time to time lead me astray here in Nova Scotia. In Ontario an interest in mortgage receivables is subject to the Ontario PPSA, provided that the interest does not assign the assignor's interest in the real property itself. zo This makes sense to me, since a right to such receivables-distinct from the interest in the real property-is surely personal property. But the Nova Scotia PPSA doesn't see it that way. Why not? Professor Walsh suggests that the Nova Scotia approach (which was based on the New Brunswick approach) "is less one of policy than perceived commercial practice."zi The idea is that when parties in New Brunswick (and presumably Nova Scotia) are dealing with land they will only conduct searches against the land, not personal property searches. The next exclusion relates to a "sale of accounts, chattel paper or goods as part of a sale of the business out of which they arose unless the vendor remains in apparent control of the business after the sale." (s. 5(g)) This is a "one time" exception. Where a sale of accounts or chattel paper is made as part of the sale of a business, the obligations of the PPSA do not apply. Of course, the only reason the PPSA applies to such transfers in the first place is that subsection 4(2) extends the coverage of the Act to absolute

31 transfers of accounts or chattel paper. (s.4(2)(b». Incidentally, the Ontario Act's comparable provision says that the PPSA applies to all transfers of accounts or chattel paper other than those to which the Bulk Sales Act applies. 22 The exception in section 5(g) for the sale of goods is a bit puzzling. If you look at paragraph 4(2)( d), sales of goods are only subject to the PPSA when the vendor of the goods remains in possession. Why, then, was it necessary to say in section 5(g) that the Act does not apply to the sale of goods "unless the vendor remains in apparent control."? The 5(g) reference doesn't seem to add anything. Worse still, the drafters appear to have described a concept specifically defined in the Act -"sale of goods without a change of possession"-using slightly different words that are not defined. It may be that there is some subtle purpose served by the inclusion of goods in section 5(g); but I must confess it is not immediately obvious to me. Section 5(h) provides another exception to the general rule that assignments of accounts-even absolute assignments not intended as security-are covered by the PPSA. Section 5(h) excludes from the PPSA a "transfer of accounts made solely to facilitate the collection of accounts for the transferor." This is sometimes called the "collection agency" exclusion. Section 5(i) excludes from the PPSA "the creation or transfer of a right to damages in tort." Again, following the vee theory that tort damages are not generally used as security in a financing, assigning an interest to such damages is not covered by

32 the PPSA. Professor Walsh has noted in her book that "[ilt is controversial whether the exclusion extends to the assignment of a right to payment that derives from a tort claim such as a right to payment under a settlement agreement.,,23 And she suggests that "[ilt is better to err on the side of caution and assume that the Act applies." 24 That last piece of advice may be wise counsel in a number of circumstances. The final exclusion I want to mention appears in section 50) which excludes a "mortgage or sale registered pursuant to the Canada Shipping Act." On this point, Professor Walsh notes that in the case of smaller commercial vessels and pleasure craft, security interests should be registered under the PPSA despite section 5(j). This is so because such vessels are not registered under the Canada Shipping Act itself. Rather they are licensed under the Small Vessels Regulations under the Act, and that is a different regime. Among other things, evidently, there is no searchable federal register for those smaller vessels. 25 v. Conclusion This has been a very cursory outline of some of the principal types of transactions covered by the PPSA. I have, very deliberately, concentrated almost exclusively upon the text of the legislation itself. The PPSA has only been "live" in Nova Scotia for a little over two months. And even in this brief review, it should be apparent that there are a number of definitional and other issues that may come to be better clarified as practice under the Nova Scotia PPSA regime evolves.

33 I Catherine Walsh, An Introduction to the New Brunswick Personal Property Security Act (Fredericton: New Brunswick Geographic Information Corporation, 1995). 2 UCC, Article 9, s (1)(a), cited from VCC Reporting Service (Callagahan & Company) at The concept of title retention is not, as a matter of law, a trivial one. And so lawyers are sometimes troubled by the notion that the Act seems to sweep the issue away so broadly. However, Professor Walsh has noted the following: "Technically, the common law does not regard a conditional sale as giving rise to a security interest; security is conceived as necessarily derived from grant rather than reservation of title, reflecting the fundamental distinction between ownership and security, a distinction recently confirmed by the Supreme Court of Canada in Alberta Treasury Branches v. MNR...In fact, the PPSA does not offend against this principle notwithstanding the inclusion of conditional sales and like transactions such as financing consignments and financing leases within its scope. This is because such transactions are reconceptualized for the purposes of the Act as involving a grant of the general property in the collateral by the seller, lessor, consignor or other putative secured party to the debtor followed by the grant back of a security interest. In other words, the test for whether the transaction gives rise to a security interest is whether the debtor is... ultimately meant to end up with the beneficial property in the collateral on satisfaction of the secured obligation." (Catherine Walsh, "Transactions Covered by the New Nova Scotia PPSA," The Continuing Legal Education Society of Nova Scotia PPSA Conference, 6 Sept. 1996, at I n. 2.) 4 See, e.g., Kawai Canada Music Ltd. v. Encore Music Ltd., [1993] 6 W.W.R. 173 (Alta. C.A.). There the court held that a "secured creditor... who has expressly reserved title to merchandise supplied to a conditional purchaser, maintains priority over a bank which has taken [Bank Act] security from that purchaser. That priority will be upheld where the conditional vendor... has validly registered his security pursuant to the Conditional Sales registration regime in place in his jurisdiction." (at 180) See also Rogerson Lumber Company Limited v. Four Seasons Chalet Limited et ai, (1980) 36 C.B.R.(N.S.) 141 (Ont. c.a.) 5 See, e.g., Re Key National Leasing (1989),1 CBR (3d) 217 (Ont. c.a.) There, the Ontario Court of Appeal held that the fact that title interests to, but not physical possession of, certain vehicles were held "for lease" brought them within a provision of the Ontario PPSA which permitted financing statements to be registered before a security agreement was signed. (The Ontario PPSA has since been amended to permit financing statements in all cases to be registered before a security agreement is executed. (Cf Nova Scotia PPSA s. 44(5)) In making its decision, the Court specifically held that the language regarding title irrelevance in the Ontario PPSA comparable to that in section 4(1)(a) of the Nova Scotia PPSA, "does not mean that title is irrelevant under the PPSA for all purposes." (at 219) 6 In the equivalent provision of the Ontario PPSA, the drafters specifically provide that the rights of unpaid sellers under certain sections of the Ontario Sale of Goods Act (including the Ontario equivalent to Nova Scotia's Sale of Goods Act, s. 22(2)) are preserved. (See Personal Property Security Act (Ontario), R.S.O. 1990,c. P.l 0 (as amended), s. 4(2)). In a 1993 case, Barclays Business Credit v. Fletcher Challenge (1993), 13 OR(3d) 118, the court confirmed that the purpose of this section was to preserve the rights under the Sale of Goods Act in priority to any rights that might prevail under the PPSA. 7 See Walsh, supra, note 1 at Although the PPSA has an expansive definition of the word "purchase," it does not explicitly define the word "purchaser" to mean a person who takes by way of purchase. Personal property security legislation in certain other provinces, including the Ontario PPSA, does include such a definition of purchaser. Thus, in the Ontario PPSA, for example, there is generally a clear distinction between "buyers" (those who take in a sale transaction) and "purchasers" (those who take by way of "purchase" which, as defined, would include many secured parties.) It is not clear why the word "purchaser" was not specifically defined in the Nova Scotia PPSA to link it clearly with the expanded definition of "purchase." However, it would appear that the intent of the Act is that purchaser be read in this way. Professor Walsh implicitly assumes this to be the