PPSA SKILLS SESSION

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PPSA SKILLS SESSION

• PPSA and Leases ofPersonal Property
• by Andrew McFarlane

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Application of PPSA to LeasedPersonal Property

• PPSA, s. 2(a) - PPSA applies to every transaction
  without regard to its form and without regard to
  the person who has title to the collateral that
  in substance creates a security interest,
  including a lease that secures payment or
  performance of an obligation.
• True Lease v. Financing Lease Distinction

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Application of PPSA toAbsolute Assignments of
Leases

• PPSA, s. 2(b) - PPSA applies to a transfer of an
  account or chattel paper even though the transfer
  may not secure payment or performance of an
  obligation.
• PPSA, s. 1(1) - A chattel paper means one or
  more than one writing that evidences both a
  monetary obligation and a security interest in or
  a lease of specific goods.

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Absolute Assignments of Leases(cont.)

• PPSA, s. 1(1) - A security interest means an
  interest in personal property that secures
  payment or performance of an obligation, and
  includes, whether or not the interest secures
  payment or performance of an obligation, the
  interest of a transferee of an account or chattel
  paper.

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Assignments of Leases as Security

• Straightforward - PPSA applies to security
  interests granted in leases.
• However, the lease itself is chattel paper in
  the hands of the lessor/debtor - collateral
  classification is Other.
• Need to ensure that a security interest is
  granted in and registered against lessors
  interest in both the lease/chattel paper and in
  the leased property.

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Four Scenarios

• Straight lease of equipment.
• Sub-lease of equipment.
• Grant of security interest in lease (assignment
  of lease by way of security).
• Absolute assignment of lease.

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Lease
LESSOR
PPSA Registration Equipment(potentially Inven
tory)
Lease
Rent
LESSEE
Possession and use of property
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Sub-Lease
LESSOR
Event of Default
PPSA Registration Equipment(potentially Inven
tory)
PPSA Registration Equipment(potentially
Inventory) Lessor added as additional secured
party.
Lease
Security Assignment of Lease
Rent
New PPSARegistration Other, Inventory
LESSEE
SUB -LESSEE
Rent
Sub-lease
Possession and use of property
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Security Interestin Lease
SECURED PARTY
PPSA Registration Other, Equipment, Inventor
y
Security Assignment of Lease
Event of Default
LESSOR
PPSA Registration Equipment(potentially Inven
tory)
Lease
Rent
LESSEE
Possession and use of property
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Absolute Assignment of Lease
ASSIGNEE
PPSA Registration Other
Assignment of security interest
Absolute Assignment of Lease Sale of
Leased Property
LESSOR / ASSIGNOR
PPSA Registration Equipment(potentially Inven
tory)
Lease
Rent
Rent
Lease
LESSEE
Possession and use of property
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On to Movable Goods. . . .
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PPSA SKILLS SESSION

• Movable Goods
• by Andrew McFarlane

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Problem with Movable Goods

• They can move from jurisdiction to jurisdiction!
• The cost of borrowing would be increased
  substantially if the secured party had to
  register in potentially every jurisdiction where
  the goods might conceivably end up.
• If the goods are leased by the debtor to third
  parties, the secured party has no way of
  controlling where those third parties move the
  goods.

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PPSAs Conflict of Law Rules

• Section 7(1) The validity, perfection and
  effect of perfection or non-perfection,
• (a) of a security interest in,
• (ii) goods that are of a type that are
  normally used in
• more than one jurisdiction, if the goods are
  equipment
• or inventory leased or held for lease by a
  debtor to
• others,
• shall be governed by the law of the jurisdiction
  where the debtor is located at the time the
  security interest attaches.

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Solution Register in One Place

• The result of the section 7(1) rules for movable
  goods is that the secured party only has to
  register in one jurisdiction in order to perfect
  its security interest in the movable goods.
• Sounds straightforward, right?

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Issues Raised by the Section 7

• What are goods that are of a type that are
  normally used in more than one jurisdiction?
• How does one determine where the debtor was
  located at the time the security interest
  attached?
• What happens if the debtor subsequently changes
  its location?

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Goods Normally Used in More Than One Jurisdiction?

• No additional clarification by PPSA.
• Very little judicial consideration in Canada.
• The Alberta Court of Appeal has suggested that
  Article 9 of the United States Uniform Commercial
  Code is a useful guide.
• See Gimli Auto Ltd. v. Canada Campers Inc.
  (1998), 219 A.R. 166 (Alta. C.A.) and
• Northwest Equipment Inc. v. Daewoo Heavy
  Industries America Corp. 2002 A.J. No. 327,
• 2002 ABCA 79 (Alta. C.A.)

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Uniform Commercial Code

• Article 9 of the Uniform Commercial Code provides
  statutory examples of goods that are normally
  used in more than one jurisdiction
• motor vehicles
• trailers
• rolling stock
• aircraft
• shipping containers
• road building equipment
• construction machinery
• commercial harvesting machinery

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What Is a Motor Vehicle

• The definition of motor vehicle under the PPSA
  Regulations means
• an automobile
• a motorcycle
• a motorized snow vehicle
• any other vehicle that is self propelled
• except for the equipment explicitly excluded from
  the definition. . . .

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What is Not a Motor Vehicle

• The definition of motor vehicle explicitly
  excludes the following
• a street car or other vehicle running only upon
  rails
• a farm tractor
• an implement of husbandry
• a machine acquired for use or used as a
  road-building machine
• a craft intended primarily for use in the air or
  in or upon the water
• These goods can still be equipment normally used
  in more than one jurisdiction - however, would
  only have to be registered as Equipment.
• I.E. WOULD NOT HAVE TO COMPLY WITH THE PPSAS
  REQUIREMENTS FOR REGISTERING MOTOR VEHICLES.

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Collateral Classifications

• Goods that are normally used in more than one
  jurisdiction which constitute equipment.
• Goods that are normally used in more than one
  jurisdiction which constitute inventory leased or
  held for lease by a debtor to others i.e. not
  inventory that is SOLD to others.
• Therefore, secured party must register against
  debtor under one or more of the following
  collateral classifications Equipment,
  Inventory and Motor Vehicles Included.

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Location of Debtor

• Section 7(4)
• For the purpose of this section 7, a debtor
  shall be deemed to be located at
• the debtors place of business if there is one,
• at the debtors chief executive office if there
  is more than one place of business, and
• otherwise at the debtors principal place of
  residence.

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Multiple Places of Business

• Very often when dealing with large corporations
  or businesses, they will have more than one place
  of business therefore, it is necessary to
  determine where their chief executive office is
  located in order to figure out where to register
  a security interest in movable property.
• There has been very little judicial consideration
  in Canada of what is meant by a debtors chief
  executive office. It is very much a
  case-by-case, factual determination.

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Chief Executive Office Indicia

• Where is the corporations head office located?
• Where are all of the substantial administrative,
  management and executive functions of the
  corporation located?
• Where is the registered office of the corporation
  located?
• Where are the substantial auditing and
  bookkeeping functions of the corporation located?
• Where are the principal books and records of the
  corporation located?
• Which location is given as the corporations
  address in its material agreements, contracts or
  other instruments?

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Location of Debtor Other Issues

• In Quebec, the conflict of law rule for
  determining perfection of security interests in
  movable equipment is based on the domicile of the
  debtor, which is deemed to be the jurisdiction in
  which its registered office is located. If the
  debtor moves its chief executive office to
  Ontario or another PPSA jurisdiction, this can
  create ambiguities.
• The UCC now has the same rule for corporations
  registered in the U.S. and therefore has the
  potential for the same problem.
• BOTTOM LINE WHEN IN DOUBT, REGISTER IN BOTH
  JURISDICTIONS.

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Change of Debtors Location

• Under section 7(2) of the PPSA, if a debtor
  changes its location from another jurisdiction to
  Ontario, then a perfected security interest in
  the movable goods continues perfected in Ontario
  if it is perfected in Ontario
• (a) within sixty (60) days from the day the
  debtor changes
• its location
• (b) within fifteen (15) days from the day the
  secured party
• receives notice that the debtor has changed
  location or
• (c) prior to the day that perfection ceases
  under the law of
• the jurisdiction in which the debtor was
  previously located,
• whichever is the earliest.

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THANK YOU