Competitions Among Secured Parties

• Author: Ronald C.C. Cuming, Catherine Walsh, Roderick Wood
• Pages: 417-493

417

CHA PTER 8

COMPETITIONS AMONG

SECUR ED PA RT IES

A. THE STRUCTUR E OF THE PPSA PRIORITY

RULES

The PPSA priority rules that govern competitions among competing

secured partie s divide into two categories: (1) the special priority r ules;

and (2) the residual or general priority rule. The special priorit y rules

provide for particular ty pes of situations, most notably competitions

involving purchase money security interests, posses sory security inter-

ests in negotiable collateral, and sec urity interests in investment prop-

erty. The residual priority rule applies where the Act does not provide

a special rule for determining priorities. The collective operation of

these two ty pes of priority rules doe s not resolve all possible varieties

of priorit y competition. The residua l priorit y rule only covers compet i-

tions among secured part ies with competing PPSA security interests

in the same collateral. It is of no use in resolving competitions where

one of the competing interests is not a secur ity interest that is wit hin

the scope of the PPSA, for example, in a dispute between a secured

party who holds a PPSA securit y interest and a claimant who ha s a

non-consensual secur ity interest, such as a landlord’s right of distress.

Nor can it be invoked to resolve a dispute between a secured par ty and

a bank that holds a Bank Act secur ity, at least in those provinces that

have excluded the Bank Act security from the scope of the PPSA. In

these case s, the PPSA does not provide an answer and, in the absence

PERSO NAL PROPERT Y SECUR ITY LAW418

of a legislative priority rule, the dispute is resolved by applying general

principles of prop erty law.1

The residual priority rule wa s primarily desig ned to cover a situa-

tion where the competing secured part ies hold security intere sts in the

same collateral given by the sa me debtor. Where the competing secur-

ity interests are gr anted by different debtors, additional legislative pro-

visions come into play.

In some cases, the special priority rules contained in the PPSA re-

late exclusively to security interests. For example, the purchase money

security interest pr iority is available only to a secured party who ob-

tains th at kind of security i nterest. No other class of claimant is able to

claim t his priority.

In other cases, the sp ecial priority rule in the PPSA is not restricted

to secured partie s, but may include other classes of claim ants. Nota-

bly, the PPSA contains special priority r ules relating to negotiable and

quasi-negotiable forms of collateral. A purchaser who obtains posses-

sion of these types of collateral without knowledge of a prior secur-

ity interest will t ypically be entitled to priority. These special priority

rules apply not only to absolute transfers (where the debtor transfers

the collateral by way of sale), but also to the creation of a possessory

security interest in the collateral.

This chapter examines the PPSA priority rules t hat apply strictly to

competitions between secured par ties. The priority rules that are of a

more general application (such as the priority rules governing negoti-

able or quasi-negotiable collateral) are discussed in Chapter 7.

There is also considerable simila rity between the priority rules gov-

erning competing security interests in invest ment property and those

that apply to competitions between a secured party and a buyer. How-

ever, there is a suff‌icient difference between the rules in the two con-

texts to justif y some degree of separate treatment. Accordingly, while

Chapter 7 primarily addresses competitions relat ing to investment

property that involve buyers and secured par ties, this chapter primar-

ily addresses competitions among secured parties in t his type of col-

lateral.

1 See Chapter 9, Section B a nd Chapter 13, Section A.

Competitions A mong Secured Parties 419

B. THE R ESIDUAL PRIORITY RULE

1) The First-in-time (Temporal) Rule

The residual priority rule of the PPSA uses a f‌irst-in-time (temporal) ap-

proach to resolve priorities among competing secured p arties. However,

this temporal rule does not, for the most part, look to the time when

the security agreement is executed or the time when the security inter-

est arises in determining priorities. Rather, it looks at the time when

the perfecting step or event in relation to the competing s ecurity in-

terests occurred. There is a s ubstantial difference in the structure and

wording of the residual priority r ule between the Ontario Act and the

Acts of the other jurisdictions. On most issues, this doe s not produce

any difference in outcome, but on one important matter the wording

does produce a different result.

The residual priority rule in t he Ontario PPSA sets out four differ-

ent cases organized according to the method of perfection of the com-

peting se curity interest s.2 The f‌irst involves a competition between two

security interest s, both of which have been perfected by regist ration.

In this case, priority is awarded to the f‌irst to reg ister, regardless of the

order of perfection. The second case involves a competition between a

security interest t hat is perfected by registration and another security

interest that is perfected otherwise than by registration. Here, prior-

ity is given to the registered security interest if regi stration occurred

before the perfection of the other security interest. But if the other se-

curity interest was perfected before the registration occurred, then the

other security interest will have priority over the registered security

interest. Thus, priority goes to the f‌ir st to register or perfect, whichever

is earlier. The third case involves a competition between t wo secur-

ity interests, neither of which is per fected by registration. In this c ase,

priority is given to the f‌ir st to perfect its security intere st. The fourth

case involves a competition between two unperfected se curity interests.

Here, priority is given to the f‌irst to attach.

The residual priority rules in the other Acts use a different formu-

lation. The provision sets out three different rules organized accord-

ing to the perfected or unperfected statu s of the competing security

interest s.3 The f‌irst rule covers disputes between t wo security interests,

2 OPPSA s 30(1). See Chapter 5 for a more detailed disc ussion of the concept of

perfection.

3 PPSA (A, BC, M, NB, NWT, Nu, PEI, S) s 35(1); (NS, NL) s 36(1). YPPSA s 34(1)

contains a some what different wording, although it op erates in much the same

manner as t he non-Ontario Acts.