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THE BACKGROUND TO AND OVERVIEW OFTHE PERSONAL PROPERTY

SECURITY ACT, 1993

Ronald Cuming, Q.C.College of Law

University of SaskatchewanSaskatoon, Sask. S7N OWO

Delivered at "Preparing for Changes to the PPSA 1993," a seminar sponsored by theSaskatchewan Legal Education Society Inc., October 28-29, 1994.

© Ronald C.C. Cuming

THE BACKGROUND TO AND OVERVIEW OFTHE PERSONAL PROPERTY SECURITY ACT, 1993

Table of Contents

I. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1

II. Harmonization of Personal Property Security Law . . . . . . . . . . . . . . . . . . .. 1

III. The Need for "Fine Tuning" of personal Property Security Law 2

1. Remote Access to the Registry 32. Section 2(3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 33. Section 4(f) 44. Sections 4(k) and 9(2)-(3) 45. Section 9(4) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 46. Section 21 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 57. Section 30(1) 68. Sections 30(6)-(7) and 35(4) , 79. Section 34(5) 810. Section 36(18) 1011. Section 37 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . " 1212. Section 40 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1213. Section 43(12) 1414. Section 50 " 1515. Section 52 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. 1516. Section 55(4)-(6) " 1517. Sections 64-65 17

IV. Clarification and Codification of Case Law 18

1. Section 31(2) 182. Sections 34(6)-(7) 193. Sections 43(6)-(7) 194. Section 58(2) . .. 20

V. Reversal of Case Law (Judicial Interpretation of 1980 Act) " 21

1. Section 2(1)(hh) 222. Section 10 and Regulations , 223. Section 34(10) 244. Section 65 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ., 24

VI. Consolidation of Personal Property Security Law . . . . . . . . . . . . . . . . . . .. 27

VII. In Summary 27

) THE BACKGROUND TO AND OVERVIEW OFTHE PERSONAL PROPERTY SECURITY ACT, 1993*

I. Introduction

The implementation of The Personal Property Security Act, 1993 (Sask.)

represents a second major development in the personal property security law of

Saskatchewan. The legislation replaces The PersonalProperty SecurityAct S.S. 1979­

80, c. P-6.1 (proclaimed in force May 1, 1981) which had been in operation for

several years. The Personal Property Security Act, 1993 is very similar to the model

Personal Property Security Act prepared by the Canadian Conference on Personal

Property Security Law (CCPPSL).

There is general agreement that the 1980 Personal Property Security Act

worked well. This being the case, one might ask why is it necessary to repeal it

entirely and replace it with a new Act. There are several reasons behind the decision

of the Saskatchewan Law Reform Commission to recommend a new Act.

II. Harmonization of Personal Property Security Law

While it is unlikely that the Ontario Personal Property Security Act R.S.O. 1990,

c. P.1°as amended 1990, c. 31; 1991, c.21, will be modified in the immediate future

to bring it in line with the CCPPSL Model Act and the Saskatchewan Act, other

jurisdictions have indicated a great deal of interest in harmonization of personal

property security law. The Alberta (S.A. 1988, c. P-4.95), British Columbia (S.B.C.

1989, c. 36), New Brunswick (S.N.B. 1993, c. 14), Manitoba (S.Man.1993, c. 14, not

yet proclaimed); Northwest Territories (1993, Bill 7, not yet proclaimed) and, to

* © Ronald C.C.CumingCollege of LawUniversity of Saskatchewan

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a lesser extent, Yukon (R.S.Y. 1986, c. 130) Personal Property Security Acts are very

similar to the new Saskatchewan Act. There are indications that the CCPPSA model

will be the basis for new legislation in Nova Scotia and P.E.1. Once the Manitoba,

Northwest Territories and New Brunswick Acts come into force, it will be possible to

say that there are essentially four distinct systems of secured financing law in

Canada: The PPSAs of Western Canada and New Brunswick; the Ontario Personal

Property Security Act; Title Three (Hypothecs) of the Quebec Civil Code, 1991; and

the old systems that still exist in Newfoundland, Prince Edward Island and Nova

Scotia.

Harmonization brings a number of important benefits. One of the most obvious

of these is simplification of secured financing of the business activities of debtors

which have assets in several jurisdictions in Western Canada including Saskatchewan.

While it is unlikely that uniformity will ever eliminate the need to retain indigenous

legal advice, it will reduce the difficulty associated with fashioning secured lending

transactions to meet the separate requirements of several jurisdictions. It will also

reduce the incidence of "legal traps" produced by peculiar registration requirements

or unusual priority rules of "foreign" law.

Interjurisdictional harmonization of personal property security law has another

important benefit. It hastens the process of judicial clarification. In other words, when

the same or substantially the same legislation exists in several jurisdictions, judicial

interpretation of provisions of the legislation rendered in one jurisdiction is likely to be

influential in the other jurisdiction. In this way ambiguities in the legislation are

removed much more rapidly than would be the case where the courts of a single

jurisdiction must be relied upon to remove the ambiguities.

III. The Need for "Fine Tuning" of Personal Property Security Law

The 1980 Personal Property Security Act was a very complex and multi-faceted

piece of legislation. It introduced concepts and approaches all of which were novel to

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Saskatchewan law and some of which had no precedents anywhere. Not only did the

Act reform the basic law of personal property security transactions, but it had an

important effect on a number of other provincial statutes. All this being the case, one

might expect, as was the case, that matters would be overlooked by the drafters of

the Act. In addition, other matters that were not overlooked were not adequately

addressed in the legislation. Experience with the Act over a twelve year period pointed

to the need for a considerable amount of "fine tuning" of the legislation. The

following are examples of this.

(1) Remote Access to the Registry

In the world of computer hardware and software, twelve years is a very long

time. While the software designed for the Personal Property Registry was originally

"state of the art", developments since the Registry was established warranted a

careful re-examination of some of its features and the introduction of new features.

Of course the most significant of the new features is remote access from computer

terminals. (This will be examined in a separate paper presented to the seminar).

(2) Section 2(3)

Section 2(3) was designed to provide guidance in connection with the

categorization of goods. Categorization of goods as consumer goods, equipment or

inventory is an important feature of several aspects of the Act and the Personal

Property Regulations. These categories are not based on the characteristics of the

goods involved; they are based on the use to which the goods are being put by the

debtor at the relevant time. The purpose of this provision is to make it clear that a

change in the use by the debtor after attachment of the security interest does not

affect the validity of a registration or the legal status of the security interest.

Accordingly, if at the date the security interest attaches, the collateral is motor

vehicles held by the debtor as inventory (and, therefore, the collateral need not be

described in a registration by serial number), but, thereafter, the debtor takes one of

the vehicles and uses it for his or her own personal purposes (thereby converting the

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vehicle into consumer goods) the registration of the security interest in the vehicle as

inventory is not invalidated. There are a few sections which are not affected by this )

provision. See sections 10(4) and 30(3).

(3) Section 4(f)

This section of the Act is different from its counterpart in the former Act in a

very important respect. The new section 4(f) excludes from the Act the creation or

transfer of an interest in rental payments. (This feature is examined in another paper

to be presented to the seminar).

(4) Sections 4(k) and 9(2)-(3)

These sections have no counterpart in the 1980 Act. The problems that they

address result from the practice of chartered banks claiming that section 427 Bank

Act security interests held by them are also security interest governed by The Personal

Property Security Act and claiming to be entitled to have both the Bank Act and

PPSA systems available from which they can choose a regime that is most

advantageous to them at any particular time. (This feature is examined in another

paper to be presented to the seminar).

(5) Section 9(4)

There is an issue that arises in the context of the attempt of a bank to take a

security interest in a debt that it owes to a debtor-depositor. It is accepted law in the

United Kingdom and Australia that this is a conceptual impossibility. The matter has

not yet been argued in Canada. If this approach were adopted in Canada, it would not

be possible for a bank to take a security interest in investment certificates and other

debt obligations it has to its customers. This possibility was considered unacceptable

in Saskatchewan.

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(6) Section 21

This section was designed to clarify the rights of lessors and consignors under non­

security transactions that are brought within the registration and priority provisions

of the Act. The section places a lessor or consignor in a position that parallels that

of a secured party in the event that the debtor becomes a bankrupt.

Under section 20(2)(a), an unperfected security interest is not effective against

the debtor's execution creditors who have seized the collateral or the debtor's trustee

in bankruptcy. Where the holder of a true security interest is involved, the trustee will

exercise the rights granted by section 20(2)(a) and will take the collateral as part of

the estate of the debtor. While the secured creditor loses its collateral, as a creditor,

it will have a claim against the estate to the full amount owing by the debtor under

the security agreement and will receive a share of the estate calculated as a

percentage of this amount. However, where a lessor under a lease for a term of more

than one year or a commercial consignee is involved, considerable uncertainty exists

as to the amount, if any, recoverable from a lessee or consignee's estate in

bankruptcy. As is the case where a true security interest is involved, the trustee of

a lessee or consignee will assert his rights under section 20(2)(a) and take the leased

or consigned "collateral" as part of the estate of the lessee or consignee. The lessor

or consignor is then left in the position of proving as an unsecured creditor in the

lessee's or consignee's bankruptcy, for the loss resulting from the breach of the lease

or consignment contract. However, the lessor or consignor faces difficulties not faced

by a secured party claiming as an unsecured creditor for the amount owing by the

bankrupt debtor under the security agreement. In the first place, it is not clear that,

in the absence of specific provision in the lease or consignment, the lessee's or

consignee's bankruptcy is a breach of the contract. More significantly, the trustee

may well take the position that the causa causans of the loss suffered by the lessor

or consignee is not the bankruptcy of the lessee or consignee, but the failure on the

part of the lessor or consignor to perfect its "security interest." If the lessor or

consignor had registered his interest as required by The Personal Property Security

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Act, the damages recoverable in the bankruptcy proceedings would be reduced by the

residual value of the leased or consigned goods.

Under section 21 the lessor or consignor is deemed to have suffered

immediately prior to the date of bankruptcy the ordinary measure of damages for

breach of contract plus damages in an amount equal to the value of the leased or

consigned goods at the date of the bankruptcy. In other words, the section

circumvents the argument of the trustee that the lessor or consignor suffer damages

to the value of the lost property not as a result of the bankruptcy but as a result of

failure to perfect.

(7) Section 3D(1)

There is no equivalent to section 30( 1) in the former Act. The effect of section

30( 1) is to bring within the scope of section 30(2) transactions that otherwise might

not be sales in the ordinary course of business of the seller. The policy underlying this

aspect of section 30 is displayed in the following scenario.

A, who is the owner of land, enters into an agreement with C, acontractor, to build a house on the land. In the course of carrying out thecontract, C purchases a furnace from SP under a secured instalmentsales contract and installs it in the newly-constructed house on A'sproperty. A, pays C the full contract price for the construction of thehouse but C does not meet its obligations to SP.

Section 36, which deals with security interests in fixtures, does not provide any

protection for A. (See Manning v. Furnasman Heating Ltd. [1985] 3 W.W.R. 266

(Man.a.B.) aff'd [1985] 6 W.W.R. 1 (Man.C.A.)) Under that section, SP need not

register its security interest in the furnace in a land titles office in order to have

priority over A. If A had bought the furnace from C under a contract separate from

that under which C constructed the house, he would not need to rely on the special

definitions contained in section 30( 1) since C would likely be found to be in the

business of selling furnaces. However, since he did not do so, there is no contract of

sale between A and C and title to the furnace vested in him by operation of the

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common law of fixtures and not pursuant to a contract of sale.

The definitions in section 30( 1) are designed to ensure protection for A. A is

defined as buyer of goods even though title to the furnace vests in him as a

consequence of the goods becoming a fixture to the property. C is deemed to be

acting in the ordinary course of business of selling the furnace since it supplied the

furnace as part of a contract for services and materials.

Section 30( 1) takes the protection a step further. It protects A even though the

furnace was supplied by a subcontractor under a contract with C. For the purposes

of section 30(2), the subcontractor would be a "seller" and the supply of the furnace

would be in the ordinary course of business since the subcontractor supplied it as part

of a contract for services and materials.

(8) Sections 30(6)-(7) and 35(4)

These sections modify the former system for the registration of security

interests in equipment of a kind that must be described by serial number on a

financing statement. Under the former system, collateral in the form of a motor

vehicle, trailer, mobile home, or airplane held as equipment had to be described on a

financing statement by serial number. This requirement elicited complaints from

financers who take the position that this requirement placed on them the very difficult

task of ensuring that an accurate serial number is included on financing statements

relating to this equipment. Their primary concern is that failure to include the serial

number will result in loss of the collateral to the debtor's trustee in bankruptcy.

The approach contained in the above-noted sections represents a via media

between requiring serial number registration is all cases where specified types of

equipment are collateral and not requiring any serial number registration in such

situations (as in Ontario). Under this approach, a secured party who takes a security

interest in equipment is given the option to describe the goods in general terms or

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specifically by serial number. The choice of one method of registration over the other,

however, is not without consequences. If the secured party chooses to describe the

equipment specifically by serial number, the maximum level of protection against

competing interests is obtained. The security interest would have priority over the

interest of a subsequent buyer or lessee of the goods who acquired his or her interest

in a sale out of the ordinary course of the debtor's business. It would have priority

over any subsequent perfected security interest in the goods (unless some special

priority rule applies), and priority over a judgement creditor or trustee in bankruptcy

of the debtor. However, if the secured party chooses to describe the equipment only

in general terms, thereby making available only the debtor name as the registration­

search criterion, its security interest has priority only with respect to judgement

creditors and the trustee in bankruptcy of the debtor. It would not have priority over

a buyer who acquired the equipment for value and without knowledge of the security

interest (section 30(6)-(7)) and it would not have priority over subsequent perfected

security interests in the equipment (section 35(4)) except where a special priority rule

applies.

(9) Section 34(5)

This is a new provision which deals with a controversial issue. It is possible to

have two purchase money security interests in the same collateral. One of the

situations in which this can occur is where the purchase price of goods is financed in

part from a secured loan made by one secured party and in part under a secured

instalment sales contract (chattel paper) which is bought by another secured party.

The issue addressed in the subsection generally arises in the context of the following

situation:

D, wanting to buy an automobile, obtains a loan from a bank (SP1)sufficient for the down payment and obtains credit from the seller (SP2)for the balance of the purchase price. If D gives to both SP1 and SP2 asecurity interest in the automobile, each has a purchase-money securityinterest in it since each has supplied value to enable D to acquire rightsin it.

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Sections 34(2) and (3) give special priority status to a purchase-money security

) interest over "any other security interest in the same collateral given by the same

debtor". By themselves, these provisions are not helpful since in this context they

provide for a completely circular result: SP1 has priority over SP2 who has priority

over SP1. This being the case, priority between SP1 and SP2 is determined under

section 35(1).

A strong argument has been made that section 35( 1) does not provide a

commercially acceptable outcome where, as a result of its application, priority is given

to SP1. It is argued that priority should go to the seller, SP2. This argument is based

in part on the fact that such a rule would reflect pre-PPSA ·Iaw and commercial

practice. Under pre-PPSA law, SP2 (generally a seller under a conditional sales

contract) retained title to the goods until the full purchase price and credit charge

were paid. Consequently, it could never have lost priority to someone who held a

chattel mortgage on the goods, even though the mortgage may have been executed

before the date of the sales contract. The reason for this was that the mortgage could

only be an equitable mortgage on the interest of the buyer. That interest was only the

interest of a buyer in possession under a conditional sale contract. SP2 had priority

because it held legal title.

Section 34(5) gives priority to the seller secured party over the lender secured

party when both have purchase-money security interests. The section will produce

some inconvenience to secured lenders but is not likely to have any dramatically

detrimental effects on their legal position. Indeed, there is reason to believe that it will

have little practical effect in most situations since a lender providing a loan to

purchase a motor vehicle to be held by a debtor as consumer goods or equipment,

must include the serial number of the vehicle on its financing statement.

Consequently, it is often impossible to register a financing statement until after the

goods have been acquired since, in most cases, only then can the serial number be

determined. This being the case, it is difficult under current law for a secured

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purchase money lender to get a financing statement registered before a purchase

money seller. A purchase money lender which is concerned about having priority over

a purchase money seller will either insist on getting the seller to subordinate its

interest to the lender or will provide financing for the full amount of the purchase price

of the goods being bought. If a lender is financing the full purchase price of an item,

it can protect itself from any attempt of the borrower to use only a portion of the loan

as a down payment and the balance for other purposes by making sure that the full

amount of the loan gets into the hands of the seller.

(10) Section 36(18)

The Ontario General Division in G.M.S. Securities & Appraisals v. Rich-Wood

Kitchens Ltd. (1991), 77 D.L.R.(4th) 18 considered the relationship between section

36 of the Ontario Act and the rules of the land registry. The essential facts of the

case were as follows:

-National Trust (NT) took and registered a mortgage of land. It thenmade advances under the mortgage.

-Rich-Wood Kitchens Ltd. (R) sold the cabinets to the owner of the landunder a secured instalment sales contract. The cabinets were affixed tothe land. However, R failed to register a fixtures notice in the landregistry office as required by the Ontario Personal Property Security Act.

-G.M.S. Securities and Appraisals Ltd. (GMS) took a second mortgageon the land.-The owner of the land defaulted on the obligations to NT, Rand GMS.All but one of NT's advances were made before the goods were affixedto the land.

NT was entitled to priority in respect of its last advance (by virtue of the Ontario

equivalent to section 36(4)(b)). However, the Court held that a circular priority

problem arose in relation to the remainder of its claim. R had priority over NT

(because a fixture financer has priority over a prior real property mortgage). GMS had

priority over R (because R failed to register a fixtures notice in the land titles system).

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But GMS was subordinate to NT (under land registry law by virtue of its prior

registration) .

The Court decided in favour of R. The Court was of the view that an outcome

where NT had priority over R would be "patently unjust and would in actuality make

a mockery out of the system of security registration adopted in Ontario." (page 30)

It concluded that once the fixtures provision was applied as between NT an R, its

operation was exhausted and it could not be used in relation to the dispute between

GMS and R.

There is a basic problem with the technique by which the Court came to the

conclusion that R should have priority. The Court held that section 36 is exhausted

after being applied to resolve a contest between NT and R. This explanation is wholly

inadequate. Sections 36(2)-(3) set out separate two priority rules. One deals with

priority contests between a fixture financer and a prior mortgage (R and NT). Another

deals with a priority contest between a fixture financer and a subsequent real property

interest holder (R and GMS). There is no reason in principle why the application of

the first rule as between R and NT should prevent the application of the second rule

as between Rand GMS.

Section 36( 18) has been included to signal a separation of the section 36

system from the priority rules of real property law. Section 36 was designed to give

a fixture financer a right to remove fixtures from the land. The right of removal is lost

against certain classes of real property claimants if a fixtures notice is not filed in the

land titles system. If a right of removal is lost, the fixtures must be characterized as

real property and the land titles system provides the rules for determining the priority

of competing interests. On this view, R lost its right to remove the cabinets upon its

failure to register a fixtures notice in the land titles system. The fixtures thereby lost

their characterization as goods for the purposes of The Personal Property Security Act.

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Priority between NT and GMS therefore falls to be determined by the application of

land titles law.

(11) Section 37

Under the 1980 Act, a security interest in crops was treated for all purposes

as a security interest in personal property. As a result the only requirement for

perfection was registration in the Personal Property Registry. Section 37 treats

security interests crops in a manner directly paralleling the treatment of security

interests in fixtures. In order to have priority over a subsequently-acquired interest in

the land on which the crop is growing, it is necessary to register a notice in the

appropriate land titles office.

(12) Section 40

Under a subordination agreement a party (the subordinating or "junior" creditor)

agrees to postpone its rights against the debtor until the claim of the other party (the

benefiting or "senior" creditor) is satisfied. The subordination may involve an

agreement under which the subordinating creditor agrees that the benefiting creditor

has the right to have all or part of the common debtor's obligation to the benefiting

creditor paid in priority to that of the subordinating creditor. Alternatively, the

agreement may provide for subordination of the subordinating creditor's security

interest to that of the benefiting creditor. This type of subordination is expressly

recognized in sections 40 and 45(6) of the Act.

While the matter has not received much attention in Canada, there has been

very considerable uncertainty in the case law of the United States as to whether or

not particular types of subordination agreements created security interests. A

subordination agreement under which a subordinating creditor agrees to allow the

benefiting creditor to collect first from the common debtor, without more, does not

create a security interest. A security interest arises only when the agreement gives

to the benefiting creditor an interest in the common debtor's obligation to make

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payment to the subordinating creditor. This interest secures the obligation of the

) common debtor owing to the benefiting creditor. In the event that the common

debtor's obligation to the benefiting creditor is not fully discharged through payment

by the common debtor, the benefiting creditor has a right to look to its collateral as

a source of funds to be applied to the unpaid balance of the common debtor's

obligation. Under the terminology of the Act, the benefiting creditor would be viewed

as a secured party and the subordinating creditor as a debtor. The obligation secured

is that of the common debtor. A security interest is an interest in personal property

that secures payment or performance of an obligation. There can be no doubt that the

subordinati'ng creditor's right to payment is a proprietary interest; it is a chose in

action or an "account" under the categorization system of the Act. The distinction

between the two types of agreement is that, under the latter, the benefiting creditor

acquires an interest in the account whereas under the former, no such interest is

given.

The determination whether or not a subordination agreement creates a security

interest is generally important in two situations. The first is where the benefiting

creditor's claim to be paid by the common debtor is opposed by someone who holds

an assignment of the debt owing by the common debtor to the subordinating creditor.

The second is where the subordinating creditor has become insolvent. If the

subordination agreement gives the benefiting creditor a security interest in the

account, the security interest if perfected can be asserted against the claims of the

holder of a subsequent security interest in the account and against the subordinating

creditor's unsecured creditors and trustee in bankruptcy. If, however, the benefiting

creditor has a contract right only, he has no basis for asserting priority over other

holders of interests in the account owing to the subordinating creditor or the other

unsecured creditors of the subordinating creditor. He will be relegated to the position

of an unsecured creditor of the bankrupt subordinating creditor.

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Because of the importance of this distinction, the decision was made to include

a presumption in the Act to guide parties and courts in making the determination.

This is the function of section 40(2).

(13) Section 43(12)

A central feature of the Act is the great flexibility that it affords to secured

parties or prospective secured parties when it comes to registration of financing

statements. Under the Act, it is possible for a prospective creditor to register a

financing statement having a registration life of infinity and claiming a security interest

in all of a named person's present and after-acquired property. This can all be done

without the consent or knowledge of the person named as debtor in the registration.

This is permitted since the Act provides in section 50 an efficient method under which

the person named as debtor can require the registration to be discharged or corrected

so as to reflect the legal relationship, if any, between that person and the prospective

creditor.

Section 43( 12) requires that a secured party who has registered a financing

statement to give a copy of the financing statement or a copy of a verification

statement relating to the financing statement to the person named in the statement

as debtor. Where the registration is effected by electronic transmission of registration

data rather than through tender of a printed financing statement, the registering party

must provide a verification statement since there will be no "hard copy" of the

financing statement. The purpose of the section is to ensure that the person named

as debtor in the registration is informed of the existence and nature of a registration

that might affect his or her future ability to obtain credit. Such person can then take

the steps prescribed in section 50 to have the registration discharged or amended so

as to reflect accurately his or her legal relationship, if any, with the person who

registered the financing statement.

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(14) Section 50

This section contains some procedural features not found in its counterpart in

the 1980 Act. Most important of these is that it is the person named as debtor and

not the Registrar who amends or discharges the registration. See section 50(5).

(15) Section 52

The limitation period for bringing action to recover loss as a result of errors or

omission on the part of registry officials has been changed to the earlier of two years

from the date the injured person first knew of the loss or 10 years from the date of

issue of a search result or registration of a financing statement, as the case may be,

that is the basis of the claim.

(16) Sections 55(4)-(6)

Sections 55(4) to (6) provide greater clarity and guidance than their

predecessors under the former Act in cases where a single obligation is secured by a

security interest in both real and personal property. The secured party may proceed

against both the real and personal property separately, or may proceed against both

in one action. In the latter case, the real property procedure will prevail. This permits

an order for foreclosure or an order for sale of real property to apply as well to

personal property that secures the obligation. This may prove useful where a decision

to proceed against the land or personal property separately would result in the

extinguishment of the obligation.

When section 55(4) is applied in a situation where there are other security

interests in the personal property, issues not encountered in the purely inter partes

relationship between the secured party and the debtor may arise. The purpose of

section 55(5) is to address the most important of these issues. The section focuses

particularly on the rights of other secured parties with security interests in the

personal property taken before or after that of the secured party who elects to

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proceed under section 55(4). A secured party with a prior security interest cannot be

affected by the section 55(4) proceedings. Any disposition of the personal property,

whether by sale under a judicial sale or by transfer to the secured party under a

foreclosure order, is subject to any prior perfected security interest in the personal

property.

The problem is somewhat more complex in a situation where the rights of the

holder of a subsequent security interest are involved. This is so, since the election by

the holder of a prior security interest to proceed under section 55(4) could have

significant adverse consequences for the subsequent security interest. Section 55(5)

provides that such an election"does not limit the rights" of the holder of a subsequent

security interest. Accordingly, any rights that such holder has under The Personal

Property Security Act, common law or Equity are specifically preserved. For example,

the holder of a subsequent security interest must be given the predisposition notices

required by section 59 unless a court orders otherwise. In an appropriate case, the

holder would also be entitled to seek the intervention of the court to require the

secured party to marshall its security. In addition to these rights, the holder of a

subsequent security interest has standing in any proceedings taken to enforce the

security interest against the real property and personal property and has a right to

apply for a judicially supervised sale of the real and personal property.

No doubt there will be situations where the assertion of rights given by the Act

to the holder of a subsequent security interest will come into conflict with procedural

rights that the prior secured party is given by the law applicable to the enforcement

of security interests against land. When this occurs, a court can exercise the broad

jurisdiction that it has under section 63 to ensure that such a conflict is avoided or

that its effects are minimized

Endemic to the type of situation contemplated by section 55(4) is the problem

of allocation of the proceeds of the sale of the land and the personalty. Where a

16

single debt is secured by a security interest in personalty and in land and the

cumulative value of the personalty and the land exceeds the amount of the debt, it

becomes very important to the holders of subsequent security interests in the personal

property or the real property to have the proceeds of the disposition of the collateral

allocated in such a way as to avoid jeopardy to their position as secured creditors of

the debtor. If the prior secured party is free to allocate the proceeds of the disposition

of the collateral as it sees fit or as the debtor instructs, unfairness may result. The

effect of section 55(6) is to require that the proceeds be allocated to the debt in

proportion to the market value of each type of collateral.

(17) Sections 64-65

Under prior Saskatchewan law there are two sources of statutory rules

applicable to receivers: Part V of The Personal Property Security Act (1980) and

Division VIII (sections 89-95) of The Business Corporations Act. In addition, the rules

of Equity and the common law apply in some situations. This is a very unsatisfactory

state of affairs. Where the debtor was a corporation and the collateral was personal

property, the relevant provisions of both Acts applied. Where the debtor was a

corporation and the collateral was real property only, The Business Corporations Act

applied. Where the debtor was not a corporation and the collateral was personal

property, The Personal Property Security Act applied. Where the debtor was not a

corporation and the collateral was real property, neither Acts applied; the receivership

is governed by the rules of Equity, if a court appointed receiver was involved, and the

laws of the common law and Equity, if a document appointed receiver was involved.

The approach embodied in the new Act and related legislation is that all

significant statutory rules relating to the regulation of receivers are contained in a

single statute: The Personal Property Security Act, 1993. (Detailed discussion of the

receivership provisions of the Act are contained in another paper delivered at the

seminar).

17

IV. Clarification and Codification of Case Law

The 1993 Act is different from the 1980 Act in many respects; however, for

the most part, these differences are cosmetic and not substantive. Many of the are

attributable to the decision to harmonize the wording of the Saskatchewan Act with

that of the CCPPSA model. It is my view that these change in wording will not nullify

most of the valuable case law that has been developed in Saskatchewan over the last

13 years. Indeed, some of the changes found in the new Act codify the more

important decisions. The following are examples of this.

(1) Section 31 (2)

As a result of the statements made by the Saskatchewan Court of Appeal in

Transamerica Commercial Finance Corp. v. Royal Bank of Canada (1990) 79 C.B.R.

(N.S.) 127, there is considerable uncertainty as to application of section 31 (2) where

the debtor pays a creditor using a cheque, electronic funds transfer or an authorized

debit. This has now been clarified in section 31 (3).

A related matter that is the focus of considerable controversy is whether the

Act should recognize as a payment "initiated by the Debtor" debits against Debtor's

account made by an unsecured creditor, which is the deposit-taking institution holding

the deposit account. While notionally a pre-authorized debit right given to a deposit­

taking institution might be viewed as a debtor initiated payment, it is clear that should

the law recognize this, standard "boiler plate" provisions would be put in every

deposit account agreement giving to the deposit-taking institution the right to debit

the account whenever it wants. Accordingly, section 31 (3) gives protection to

payments by debit only where authorization to make the debit was given when the

payment is made.

18

) (2) Sections 34(6) - (7)

In Transamerica Commercial Finance v. Royal Bank, (1990) 79 C.B.R. (N.S.)

127" the Saskatchewan Court of Appeal concluded that section 34(6) of the 1980

Act did not apply to a bank which is both a secured party with a security interest in

an account and the account debtor under the account (Le., the bank has a security

interest in the account which is in law a debt owing by it to the depositor (debtor)).

While the wording of the section would not appear to justify this conclusion, there is

a very convincing argument that the public policy of it does.

The 1993 Act has codified the Transamerica decision and has gone one step

further. Section 34(7) provides that section 34(6) does not apply to an account in the

form of a deposit with a deposit-taking institution. The effect of this provision is

displayed in the following scenario:

-June 1 Debtor gives a security interest in all its present and after­acquired personal property (including accounts) to Bank 1.-June 15 Debtor obtains a loans from Bank 2 to purchaseinventory.-June 20 some of the inventory is sold for cash which is"deposited" in the company's bank account with Bank 1.-June 25 some of the inventory is sold on 30-day credit.

Under section 34(7), Bank 1 has priority over Bank 2 with respect to the accounts

generated by the June 25 sales but not the account owing by Bank 1 to Debtor

resulting from the deposit with Bank 1.

(3) Sections 43(6)-(7)

One of the most controversial issues that has arisen in the context of section

66( 1) of the former Act was whether the test to be applied is a subjective test or an

objective test. In other words, must there be evidence that someone was actually

misled in order for a registration to be seriously misleading because of a defect,

irregularity, omission or error in it? The matter was settled by the Court of Appeal in

) 19

Kelln v. Strasbourg Credit Union (1992) 2 W.W.R. 310 which prescribed an objective

test. Section 43(8) codifies thisdecision.)

Section 43(7) has no counterpart in the former Act. However, it represents, in

part at least, a codification of another aspect of the decision of the Court of Appeal

decision in Kelln v. Strasbourg Credit Union, supra, and at the same time reverses

the effect of the Court's decision in Ford Credit Canada Ltd. v. Touche Ross Ltd.

[1986] 6 W.W.R. 569. It deals with two separate situations. The first feature of

section 43(7) addresses the issue of compliance when the collateral is the type that

under the registry regulations must be described in detail (that is, by make, model and

serial number). In such a situation, the system provides to a searching party two

search criteria: the debtor's name and the serial number of the collateral.

The second matter addressed in section 43(7) is the requirement that, where

there are two or more debtors, names of both debtors must be on the financing

statement. The provision states a rule that is fundamental to the proper functioning

of the registry system. If both A and B are owners of the collateral and are debtors

under the security agreement, it is not sufficient that only A is described in the

registration as the debtor when B offers to sell the collateral to C who is unaware of

the existence of A. In order for C to get the protection that the public expects from

the system, a search of the registry using B's name as the search criterion should

disclose the security interest. It is not enough to conclude that, had C used A's name

as the search criterion, he would have discovered the registration of the security

interest.

(4) Section 58(2)

Under the so-called rule in Lister v.Dunlop (see, Ronald Elwyn Lister v. Dunlop

Canada Ltd., [1982] 1 S.C.R.726), colloquially, but accurately described as the rule

against precipitous plug-pulling, a secured creditor with a right to demand at will full

performance by the debtor must give to the debtor "some reasonable notice on which

20

)

he might reasonably expect to be able to act... Failure to give such reasonable notice

places the debtor under economic, but nonetheless real duress, often as real as

physical duress to the person, and no doubt explains the eagerness of the courts to

construe debt-evidencing or creating documents as including in all cases the

requirement of reasonable notice for payment" (page 746). A large number of cases

have been decided involving the scope and nature of the rule and there exists a

considerable body of academic literature commenting on and exploring it.

Nevertheless, its scope remains to be definitively formulated. As far as the author can

determine, no court has yet explained how the rule fits into the regime of Part V of

The Personal Property Security Act.

The purpose of the reference to "any rule of law requiring prior notice" in

section 58(2) is to provide a "fit" between the rule and Part V of the Act. The section

adopted by implication the rule in appropriate cases. What are appropriate cases

depends upon the established case law.

V. Reversal of Case Law (Judicial Interpretation of 1980 Act)

A few of the differences in substance between the 1980 and 1993 Acts are

intended to displace some of the decisions of Saskatchewan courts thought by the

Law Reform Commission to be problematic for secured business financing in

Saskatchewan. Generally Saskatchewan courts have sought to implement the policies

of the 1980 Act. The approach used has been very constructive and reflective of a

desire to ensure that legal doctrines and approaches displaced by the Act are not

reintroduced through judicial interpretation of its provisions. However, in the opinion

of the Saskatchewan Law Reform Commission and the drafters of the Act,

Saskatchewan courts misconstrued a few, but important, features of the Act thereby

limiting the effectiveness of the legislation. The following are examples:

21

(1) Section 2(1)(hh)

The Saskatchewan Court of Queen's Bench in Wei/ler & Williams v. Ager

(1992) 4 P.P.S.A.C. (2d) 19 (affirmed by the Court of Appeal) held that calves are the

proceeds of cows that bear them. This decision is specifically displaced by the

definition of "proceeds" in section 2( 1)(hh). It was thought that this decision was

inimical to the cattle industry in the province. If a security interest in a cow

automatically carried over into the calves that the cow produced, it would not be

difficult for financers of embryos to ensure priority as to the calves borne from those

embryos over a holder of a security interest in the cow.

(2) Section 10 and Regulations

A major source of confusion and controversy arose in connection with the use

of the non-generic categories of goods collateral provided by the Act as descriptors

of collateral in security agreements and financing statements. The Saskatchewan

Court of Appeal held in one of the first cases involving the former Act to come before

the Court, Touche Ross Ltd. v. The Royal Bank of Canada [1984] 3 W.W.A. 259, that

it was sufficient compliance with the regulations dealing with collateral descriptions

on financing statements to use the term "equipment". It follows from this ruling that

it was acceptable to use the term "inventory" and, perhaps even the term "consumer

goods". Experience under the former Act since 1984 has suggested that this approach

compromises the underlying policy of the Act to provide useful and reliable

information to persons who are seeking to determine what property of a debtor is

subject to a security agreement.

The 1993 Act contains detailed instructions as to the circumstances in which

the non-generic categories of collateral under the Act can be used in a collateral

description in the security agreement (and, by implication, financing statements). The

terms "consumer goods" and "equipment" used by themselves are not sufficient; the

"kind" of goods must be described. However, the term "inventory" may be used by

22

itself as the collateral description in the security agreement, but only while the

collateral is held as inventory by the debtor. As soon as the use is changed from

inventory to consumer goods or equipment, the security agreement becomes

unenforceable and the security interest provided for in it becomes unattached.

The reason why the Act refuses to recognize the terms "consumer goods" and

"equipment" and gives only limited recognition of the term "inventory" as collateral

descriptions in security agreements and financing statements is that these terms are

not descriptive of kinds of goods, they are descriptive of the context within which the

goods are held at any particular time by the debtor. See section 2(3). As such they

provide in some circumstances very little useful information as to the kind of goods

taken as collateral under a security agreement. What the Act requires is a generic

description of the goods not a label that indicates the context within which the goods

were being held by the debtor at the date the security interest attached. Under the

Act goods are classified as consumer goods, inventory or equipment. Consumer goods

are goods that are "used or acquired for use" primarily for personal, family or

household purposes" (section 2( 1)(i)). Inventory is "goods held for sale or lease, goods

furnished under a contract of service, raw materials or work in progress or materials

used or consumed in a business" (section 2(1 )(x)). Goods that are neither consumer

goods or inventory are equipment (section 2(1 )(p)).

The use of these categories can be misleading. For example, the cows of a

dairy farmer are"equipment" under the categorization system of the Act. Since they

are not "consumer goods" or "inventory" they must be "equipment". At the same

time, a hay bailer and a milking machine used by the dairy farmer are also equipment.

Under the existing Act, as a result of the Touche Ross decision, a security agreement

and a financing statement relating to a security interest in the cows, milking machine

and hay bailer need contain only the word "equipment" as the collateral description.

Most users of the system would not appreciate these subtleties and some may be

misled by them. They would assume that the word "equipment" indicates a security

23

interest in the milking machine and the hay bailer, but would not appreciate that it

included the cows.

The limited concession with respect to the use of the term "inventory" is

dictated by practical considerations. It is very common for a security agreement to

provide for a security interest in a wide range of goods held by the debtor as

inventory. It might be thought unduly onerous to require the secured party in such a

situation to list all of the kinds of collateral in a debtor's inventory if, for example, the

debtor carried on the business of a retail department store. Consequently, the Act

allows the use of this term as a descriptor in both a security agreement and a

financing statement, but only so long as the goods are held as inventory. If goods,

originally held as inventory, are later held as consumer goods or equipment, a

collateral description of the goods as "inventory" in a security agreement or financing

statement becomes inadequate with the attendant loss of perfection.

(3) Section 34(10)

The sole purpose of the section 34( 10) is to avoid misapplication of the ruling

of the Saskatchewan Court of Appeal in Chrysler Credit Canada Ltd. v. The Royal

Bank [1986] 6 W.W.A. 338. It is possible to read that decision as extending a

purchase-money priority to collateral even though the credit supplied to acquire that

collateral has been discharged.

(4) Section 65

The approach to damage recovery for non-compliance with the former Act was

inadequate. Of particular concern were factual situations of the kind that arose in

Canada Permanent Trust v. Thomas [1983] 6 W.W.A. 131 (Sask.Q.B.). In this case,

a consumer debtor was unable to secure any legal redress even though the secured

party failed completely to notify the debtor as to his rights of reinstatement and right

of redemption. The case exemplifies the difficulty that debtors face in attempting to

quantify the loss suffered when rights given to debtors are ignored or inadequately

24

recognized by secured parties. In such situations, the inability of the debtor to

demonstrate recoverable loss results in there being no sanction for non-compliance

with the procedural requirements of Part V.

The effect of section 65 is to allow the debtor (or the person affected) to

recover an amount prescribed by regulations (without the need to establish actual

loss) if there is inexcusable non-compliance with the specified sections. It will be

noted that, unlike section 65(6)(b), section 65(6)(a) is not confined to situations in

which the collateral is consumer goods. The unexcused non-compliance with section

43(12) [the requirement that a debtor or person named as a debtor in a financing

statement be given a copy of the financing statement], 49 or 50 [obligation to

discharge a registration in Land Titles Act or Personal Property Registry] results in the

aggrieved party being entitled to recover deemed damages, regardless of the type of

collateral (if any) that may be involved. The section reflects the view that the rights

provided in these sections are of sufficient importance to the proper functioning of the

system that secured parties must be given an economic inducement to ensure that the

rights are recognized.

Prior to enactment of Personal Property Security Acts, courts in most Canadian

jurisdictions that had Condition"al Sales Acts concluded that non-compliance with the"

post-default procedural requirements of the Conditional Sales Acts automatically

resulted in the loss of the conditional seller's right to recover the difference between

the amount of the debt and the amount recovered on the sale of the collateral (the

deficiency). It was held in Canada Permanent Trust v. Thomas, supra, that this

approach is unwarranted under The Personal Property Security Act, 1980. Section

65(8) embodies the conclusion that, as a starting point, the approach taken in the

Canada Permanent Trust case is acceptable. Accordingly, the section provides that

non-compliance with sections 17, 18, 59 or 60 does not automatically result in the

loss of a right to a deficiency. However, the matter does not stop there. There were

two underlying reasons for the position taken by the courts in the context of

25

deficiency recovery under Conditional Sales Acts. The first was deterrence. As noted

above, section 65(6) addresses this. The second was the fact that non-compliance

with the procedural safeguards contained in the legislation may have a direct effect

on the deficiency recoverable from the debtor. If the non-compliance, (e.g. failure to

give the prescribed notice to the debtor) results in the loss by the debtor of his or her

ability to redeem the collateral or to reinstate the agreement, the right to a deficiency

should be lost. If the non-compliance results in a deficiency claim the validity of which

cannot be tested, no deficiency should be recoverable. Accordingly, section 65(8) of

the 1993 Act provides that the amount recoverable by the secured party as deficiency

is affected by the extent to which non-compliance has affected the ability of the

debtor to protect his or her interest in the collateral or has· made the accurate

determination of the deficiency impracticable.

Since it is the secured party who has failed to meet the statutory requirements

designed to protect the debtor, it would be unfair in some situations to place the onus

of proof on the debtor to demonstrate the consequences of this non-compliance.

Accordingly, under section 65(9), the secured party carries the onus of proof that the

failure to comply with section 17, 18, 59 or 60, in the context of a situation where

a consumer debtor is involved, did not affect the debtor's ability to protect his or her

interest in the collateral by redemption of the collateral or reinstatement of the

security agreement. Where the debtor is not a consumer, the onus to establish this

remains with the debtor. In most cases, the onus that is placed on the secured party

will not be difficult to discharge. If, for example, in a case with facts similar to those

in the Canada Permanent Trust case comes before a court the secured party might

be able to discharge the onus of section 65(9)(a) by leading evidence to establish that

the debtor was aware of his or her right to redeem or reinstate the security

agreement. In this way the secured party could establish that the failure to give to the

debtor the prescribed notice did not affect the ability of the debtor to protect his or

her interest in the collateral. A secured party that wants to avoid difficulties resulting

from an inadvertent failure to comply with the notice requirements of the Act can do

26

so by inserting a notice in its security agreements informing debtors of their rights of

redemption and reinstatement.

Where the non-compliance goes to the question of accurate determination of

the deficiency, section 65(9)(b) does not distinguish between consumer and non­

consumer debtors. In all situations of this kind, the secured party carries the onus of

proof that, in spite of the non-compliance, it is practicable to determine with accuracy

the amount of the deficiency. Again, however, this is not likely to be a heavy onus to

discharge. The secured party might be able to discharge the onus through expert

evidence as to the actual market value of the collateral at the date of the sale. In such

a situation, even though the amount of the deficiency thus determined is less than

that claimed, the non-compliance would not preclude recovery of the proper amount

of the deficiency.

VI. Consolidation of Personal Property Security Law

One might legitimately wonder why the Legislature neglected to take the

opportunity when a new PPSA was being enacted to consolidate into the Act all of

the disparate provisions dealing with personal property security matters contained in

other Acts. In fact, the Law Reform Commission recommended that the personal

property security provisions contained in The Limitation of Civil Rights Act, The

Distress Act and The Executions Act (but not The Saskatchewan Farm Security Act)

be updated and included in Part V of The Personal Property Security Act, 1993. This

recommendation has not yet been accepted by the Department of Justice. One can

only hope that this important feature of the modernization of Saskatchewan personal

property security is not overlooked in the next few years.

VII. In Summary

The Personal Property Security Act, 1993, provides refinements to the 1980

Act which not only addresses the ambiguities and problems that were encountered

over the last 13 years in the context of the 1980 Act, but, in addition, brings

27

Saskatchewan law in harmony with that of the jurisdictions that have enacted the

CCPPSL model. This is an important consideration in view of the fact that this model

is likely to be the pattern for personal property security legislation in most of Canada.

28