Buyers and Lessees of Collateral

• Author: Ronald C.C. Cuming/Catherine Walsh/Roderick J. Wood
• Profession: University of Saskatchewan, College of Law/McGill University, Faculty of Law/University of Alberta, Faculty of Law
• Pages: 278-307

CHAP TER 7

BUY ER S AND LESSEES

OF COLLATER A L

A. THE CONTEXT

A security interest i s a property interest in coll ateral. As such, it is

an encumbrance or limitation on the ownership rights of the debtor

that, under the common law principle, nemo dat quod non habet (on e

cannot give what one does not have), is not affected by a sale of the

debtor’s interest in the collateral to a buyer.1 This principle, qualif‌ied

by the requirement of perfection,2 underlies the PPSA rule s applicable

to competitions between secured parties and buyers of collateral. In

the absence of a special priority rule prov iding otherwise, an interest

in collateral bought after a perfected secur ity interest attaches is subject

to the security interest.

However, an unqual if‌ied application of the nemo dat principle in

the context of competing claim s of secured parties and buyers is com-

mercially unacceptable. A balance is required. Since buyer s acquire

their interests in a variety of contexts, no single approach can produce

this bala nce in all situations. Consequently, the Act contains a range of

priority rule s applicable to buyers.

1 This is made cle ar by PPSA (A, BC, M, NB, NWT, Nu, PEI, S) s. 28(1); (NL, NS)

s. 29(1); O s. 25(10); Y s. 26(1). This section prov ides that, where collateral i s

dealt with, t he security interest c ontinues in the collatera l unless the secured

party ex pressly or impliedly authori zes the dealing.

2 See chapter 5.

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Buyers and Les sees of Collateral 279

Set out in this chapter is a de scription and analysis of the priority

rules through which t he drafters of the Act sought to achieve this bal-

ance. While, for the most part, the an alysis focuse s on buyers of collat-

eral, the priority r ules examined apply also to lessee s. However, there

is an important di fference between the position of a buyer and a lessee.

A priority rule m ay provide that both a buyer a nd a lessee “take free

from” a security interest. In the context of a buyer, this means that the

security interest i s cut off with the result that the buyer acquires the

debtor-seller’s ownership rights in the collateral free from the securit y

interest. However, in the context of a lease, thi s only means that t he

security interest cannot be asser ted against the lessee. The security in-

terest is not cut off; it remains ef fective w ith res pect to the reversionary

interest of the debtor-lessor.3

Special priority rules apply to buyers of accounts, chattel paper,

securities, instruments, doc uments of tit le, and money. These rules are

addressed elsewhere in this book.

B. PRIORITYOF BUYERS’ ANDLESSEES’

INTERESTS OVER UNPERFECTED

SECURITY INTERESTS

One of the mechanism s contained in the Act designed to protect buyers

of collateral from the effects of the nemo dat principle is a priorit y rule

that, under prescr ibed circumst ances, subordinates an unperfected se-

curity interest to t he interest of a buyer. The functional basis of thi s

rule is that per fection, other than temporary perfection, give s to poten-

tial buyers of collateral a prophylactic measure to avoid taking the col-

lateral subject to a prior security interest. Disclosure of the e xistence of

the security interest through one of the perfection steps enhance s the

ability of a potential buyer to as sess the legal r isk involved in buying

the collateral. If, as a result of a failure on the part of the secured party

to perfect its security interest, the buyer is denied t he opportunity to

employ this measure, the security interest i s cut off through the sale of

the collateral by the debtor to the buyer.

3 This feature i s explicitly recogni zed in OPPSA s. 28(2); it is implicit in the other

Acts.