Commercial LawCommercial LawIntroductionIntroduction

AdministrativeAdministrative TextText

““In-house” materialsIn-house” materials One VolumeOne Volume

EvaluationEvaluation 100% open-book final examination during the 100% open-book final examination during the

regularly scheduled examination periodregularly scheduled examination period Open-bookOpen-book

Computers and similar electronic aids are Computers and similar electronic aids are not not permittedpermitted

No library materialsNo library materials You You are responsible forare responsible for

All material covered in classAll material covered in class You are You are not responsible for material which is not responsible for material which is

not assigned not assigned

AdministrativeAdministrative

The text of these slides is available The text of these slides is available onlineonline

http://www.law.unb.ca/Siebrasse/Comm/http://www.law.unb.ca/Siebrasse/Comm/Comm.htmComm.htm

E-mail will be used as a regular E-mail will be used as a regular means of communication for course means of communication for course purposespurposes Notice of cancelled classes etcNotice of cancelled classes etc

What is Commercial What is Commercial Law?Law?

Commercial lawCommercial law DebtDebt TransactionalTransactional

Corporate law (business Corporate law (business associations)associations) EquityEquity OrganizationalOrganizational

What is Commercial What is Commercial Law?Law?

Debt Financing Debt Financing Unsecured debtUnsecured debt Secured debtSecured debt BankruptcyBankruptcy

Transfer of DebtTransfer of Debt Assignment of DebtAssignment of Debt Negotiable InstrumentsNegotiable Instruments

Course TopicsCourse Topics

Debt FinancingDebt Financing Secured & Unsecured DebtSecured & Unsecured Debt Real & Personal Property (Secured)Real & Personal Property (Secured) Pre- & Post-Judgment (Unsecured)Pre- & Post-Judgment (Unsecured) Before & After BankruptcyBefore & After Bankruptcy

Course TopicsCourse Topics

Comparative approachComparative approach Jurisdictional variationJurisdictional variation Secured v unsecuredSecured v unsecured Land v Personal PropertyLand v Personal Property Effect of BankruptcyEffect of Bankruptcy

IssuesIssues

PolicyPolicy Minimize Minimize ex ante ex ante cost of debt cost of debt

LawLaw EnforcementEnforcement

Creditor v DebtorCreditor v Debtor PrioritiesPriorities

Creditor v CreditorCreditor v Creditor Creditor v Third PartyCreditor v Third Party

PolicyPolicy

Ex anteEx ante cost of debt cost of debt You need to borrow moneyYou need to borrow money

To start a businessTo start a business To buy a house or carTo buy a house or car

Pretend you get to write the law Pretend you get to write the law beforebefore you borrow the moneyyou borrow the money

What law do you want?What law do you want? Why not ask what law you want after Why not ask what law you want after

you borrow the money (ex post)?you borrow the money (ex post)?

PolicyPolicy

Cost of debt = Cost of debt = Return to capital +Return to capital + Default risk +Default risk + Transaction costsTransaction costs

Return to capitalReturn to capital• Is set by financial marketsIs set by financial markets

Commercial law Commercial law • Affects default risk & transaction costsAffects default risk & transaction costs

LawLaw

EnforcementEnforcement Creditor v DebtorCreditor v Debtor What remedies does lender have What remedies does lender have

against D after defaultagainst D after default PrioritiesPriorities

Creditor v CreditorCreditor v Creditor Creditor v Third PartyCreditor v Third Party What rights to 3What rights to 3rdrd parties have in D’s parties have in D’s

assets?assets?

EnforcementEnforcement

EnforcementEnforcement

No enforcement against the person No enforcement against the person of the debtorof the debtor Imprisonment to enforcement payment Imprisonment to enforcement payment

no longer existsno longer exists Enforcement against the assets of Enforcement against the assets of

the debtor the debtor All creditors – secured and unsecured – All creditors – secured and unsecured –

ultimately have recourse against ultimately have recourse against essentially all the assets of the debtoressentially all the assets of the debtor

Secured v UnsecuredSecured v Unsecured

Enforcement difference is the Enforcement difference is the mechanism for realizing against those mechanism for realizing against those assetsassets How are the assets turned into cash to How are the assets turned into cash to

satisfy the debt without the cooperation of satisfy the debt without the cooperation of the debtor?the debtor?

Two key differences between secured & Two key differences between secured & unsecured debtunsecured debt Self-helpSelf-help Role of judgmentRole of judgment

EnforcementEnforcement

SecuredSecured Self-help Self-help No judgment required after defaultNo judgment required after default

UnsecuredUnsecured Enforcement by public officer (sheriff)Enforcement by public officer (sheriff) Judgment requiredJudgment required

Self-HelpSelf-Help Secured creditor generally has self-Secured creditor generally has self-

help remedieshelp remedies• The creditor ‘owns’ the collateralThe creditor ‘owns’ the collateral

No self-help enforcement before or No self-help enforcement before or after judgment for unsecured creditorafter judgment for unsecured creditor• Has a personal right of action against the Has a personal right of action against the

debtor: ie has the right to sue to judgmentdebtor: ie has the right to sue to judgment• Extremely limited rights against debtor’s Extremely limited rights against debtor’s

assets prior to judgment: must obtain assets prior to judgment: must obtain judgment in order to seize debtor’s assetsjudgment in order to seize debtor’s assets

• Enforcement by public officer – sheriff or Enforcement by public officer – sheriff or trustee in bankruptcytrustee in bankruptcy

Unsecured Creditor – Unsecured Creditor – EnforcementEnforcement

Unsecured creditor enforcement Unsecured creditor enforcement mechanism in many jurisdictions mechanism in many jurisdictions depends on the type of propertydepends on the type of property Memorials and Executions Act – Memorials and Executions Act –

tangible propertytangible property Garnishee Act – debtsGarnishee Act – debts

Unsecured Creditor – Unsecured Creditor – EnforcementEnforcement

Why are there different enforcement Why are there different enforcement systems?systems? Functional differencesFunctional differences Historical accidentHistorical accident

Reformed jurisdictions Reformed jurisdictions NfldNfld AltaAlta

BankruptcyBankruptcy

An An enforcement mechanism enforcement mechanism For For unsecured creditorsunsecured creditors

Trustee in bankruptcy replaces sheriff Trustee in bankruptcy replaces sheriff as enforcement ‘officer’as enforcement ‘officer’

Secured creditors are (mostly) Secured creditors are (mostly) unaffectedunaffected

Priorities are (mostly) unaffectedPriorities are (mostly) unaffected

PrioritiesPriorities

Priorities between Priorities between CreditorsCreditors

When there is more than one creditor and When there is more than one creditor and insufficient assets, how are the assets insufficient assets, how are the assets divided?divided?

Key difference between secured and Key difference between secured and unsecuredunsecured Pro rata sharingPro rata sharing

Each creditor receives eg 25 cents on the dollar of debtEach creditor receives eg 25 cents on the dollar of debt Unsecured creditorsUnsecured creditors

Lexical rankingLexical ranking Highest ranking creditors is paid out in full before any Highest ranking creditors is paid out in full before any

other creditor receives anythingother creditor receives anything Secured creditorsSecured creditors

Third Party PrioritiesThird Party Priorities

Third parties may also have or Third parties may also have or acquire rights in the debtor’s assetsacquire rights in the debtor’s assets Eg PurchaserEg Purchaser

What is the priority of the third What is the priority of the third party?party? Especially when dealing with prior non-Especially when dealing with prior non-

possessory security interestpossessory security interest Separation of ownership & controlSeparation of ownership & control The problem of ostensible ownershipThe problem of ostensible ownership

Secured CreditorsSecured Creditors

Enforcement affects only the debtor and Enforcement affects only the debtor and the creditorthe creditor Priority of security interests affects third Priority of security interests affects third

partiesparties So, to obtain priority in property, you So, to obtain priority in property, you

must “perfect” your interest – must “perfect” your interest – publicizepublicize it to the worldit to the world Secured lending law is hostile to secret Secured lending law is hostile to secret

prior interestsprior interests But cf ownership interestsBut cf ownership interests

Security Interests – Security Interests – PublicityPublicity

Perfection is by Perfection is by Registration – most importantRegistration – most important PossessionPossession

Different types of property have Different types of property have different registration systemsdifferent registration systems

Personal Property Security Act/RegistryPersonal Property Security Act/Registry Land Titles Act/RegistryLand Titles Act/Registry

Security Interests – Security Interests – RegistrationRegistration

Why are there different registration Why are there different registration systems?systems? Functional differencesFunctional differences Historical accidentHistorical accident

Other ‘types’ of (federal) property Other ‘types’ of (federal) property with separate registrationwith separate registration Bank ActBank Act Intellectual PropertyIntellectual Property Ships – Canada Shipping ActShips – Canada Shipping Act

Secured CreditorSecured Creditor

Convenient to say that secured Convenient to say that secured creditor has a “property” right in the creditor has a “property” right in the debtor’s goodsdebtor’s goods

But a secured party’s rights are But a secured party’s rights are determined by statute and equity, determined by statute and equity, not not primarily by property lawprimarily by property law Nemo dat quod non habet Nemo dat quod non habet is NOT is NOT

the lawthe law D D cancan give what it doesn’t have give what it doesn’t have

Types of Secured Types of Secured CreditorCreditor

Consensual secured creditor - “secured party”Consensual secured creditor - “secured party” Mortgages, Chattel mortgages, Conditional Sales Mortgages, Chattel mortgages, Conditional Sales

Agreement, Financing leaseAgreement, Financing lease Now referred to as “security interests”Now referred to as “security interests”

Personal Property – Personal Property Security ActPersonal Property – Personal Property Security Act Land – Land Titles Act / Registry ActLand – Land Titles Act / Registry Act

Non-consensual secured creditor - “lien Non-consensual secured creditor - “lien holder”holder” A security interest which arises by operation of lawA security interest which arises by operation of law

Mechanics’ Lien Act (builders)Mechanics’ Lien Act (builders) Liens on Goods and Chattels (mechanics)Liens on Goods and Chattels (mechanics) Government liensGovernment liens

Types of CollateralTypes of Collateral

Enforcement and priorities depend Enforcement and priorities depend on type of collateralon type of collateral Personal property v LandPersonal property v Land

Why?Why?

Unsecured CreditorUnsecured Creditor

Pro rata sharing priority system Pro rata sharing priority system between creditorsbetween creditors

Unsecured creditors generally rank Unsecured creditors generally rank behind third parties who take prior behind third parties who take prior to (registration of) judgmentto (registration of) judgment

Secured Creditor - Secured Creditor - SummarySummary

Self-help enforcementSelf-help enforcement Can seize assets without prior judicial Can seize assets without prior judicial

approvalapproval Judicial supervision of enforcement is Judicial supervision of enforcement is ex postex post

Lexical priority systemLexical priority system Highest ranking secured creditor paid out in Highest ranking secured creditor paid out in

full before second ranking creditor receives full before second ranking creditor receives anythinganything

Secured parties generally rank before Secured parties generally rank before subsequent third partiessubsequent third parties

Unsecured Creditor - Unsecured Creditor - SummarySummary

No self-help enforcementNo self-help enforcement Enforcement by sheriff or trustee in Enforcement by sheriff or trustee in

bankruptcybankruptcy Pro rata sharing among unsecured Pro rata sharing among unsecured

creditorscreditors Rank below third parties who take Rank below third parties who take

prior to (registration of judgment)prior to (registration of judgment)

SummarySummary Secured creditorSecured creditor

Self-help enforcement, no judgment requiredSelf-help enforcement, no judgment required Lexical priority systemLexical priority system Strong rights against third partiesStrong rights against third parties

Unsecured creditorUnsecured creditor No self-help enforcement, judgment requiredNo self-help enforcement, judgment required Pro rata sharingPro rata sharing Few rights against third partiesFew rights against third parties

As a practical matter, an unsecured As a practical matter, an unsecured creditor gets almost nothing in creditor gets almost nothing in bankruptcybankruptcy

Secured Debt - ActsSecured Debt - Acts

Personal Property Personal Property Personal Property Security Act – PPSAPersonal Property Security Act – PPSA

Real PropertyReal Property PrioritiesPriorities

Land Titles Act/ Registry Act Land Titles Act/ Registry Act EnforcementEnforcement

Property ActProperty Act Other types of propertyOther types of property

Eg Bank Act, Copyright Act, Patent Act, Eg Bank Act, Copyright Act, Patent Act, Canada Shipping ActCanada Shipping Act

Unsecured Debt - ActsUnsecured Debt - Acts

PrioritiesPriorities Creditors Relief ActCreditors Relief Act PPSAPPSA Bankruptcy Act (federal)Bankruptcy Act (federal)

Enforcement – Real and Personal Enforcement – Real and Personal PropertyProperty Memorials and Executions ActMemorials and Executions Act

Enforcement – Choses in Action (Debts)Enforcement – Choses in Action (Debts) Garnishee ActGarnishee Act