Competitions Among Secured Parties

• 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: 465-547

465

CHAPTER 8

COMPETITIONS AMONG

SECURED PARTIES

A. THE STRUCTURE 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 priority rules

provide for particular types of situations, most notably competitions

involving purchase money security interests, possessory security inter-

ests in negotiable collateral, and security 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 types of priority rules does not resolve all possible varieties

of priority competition. The residual priority rule only covers compe-

titions among secured parties 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 security interest that is within

the scope of the PPSA, such as a dispute between a secured party who

holds a PPSA security interest and a cl aimant who has a non-consensual

security interest, such as a landlord’s right of distress. Nor can it be

invoked to resolve a dispute between a secured party and a bank that

holds a Bank Act security, at least in those province s that have excluded

the Bank Act security from the scope of the PPSA. In these cases, the

PPSA does not provide an answer, and, in the absence of a legislative

PERSO NAL PROPERT Y SECURI TY LAW466

priority rule, the dispute is resolved by applying general principles of

property law.1

The residual priority rule was primarily designed to cover a situa-

tion where the competing secured parties hold security interests in the

same collateral given by the same debtor. Where the competing secur ity

interests are granted by dierent debtors, additional legislative provi-

sions come into play.

In some cases, the spec ial priority rules contained in t he PPSA relate

exclusively to security interests. For example, the purchase money sec-

urity interest priority is available only to a secured party who obtains

that kind of secur ity interest. No other class of claimant is able to cla im

this priority.

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

to secured parties but may include other classes of claimants. Nota-

bly, the PPSA contains special priority rules 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 security

interest will t ypically be entitled to priority. These special priorit y rules

apply not only to absolute transfers (where the debtor transfers the col-

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

interest in the collateral.

This chapter exami nes the PPSA priority r ules that apply strictly to

competitions between secured parties. 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 similarity between the priority rules

governing competing security interests in investment property and

those that apply to competitions between a secured party and a buyer.

However, there is a sucient dierence between the rules in the two

contexts to justify separate treatment. Accordingly, while Chapter 7

primarily addresses competitions relating to investment property that

involve buyers and secured parties, this chapter primarily addresses

competitions among secured parties in this type of collateral.

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

Competitions Among Secured Parties467

B. THE RESIDUAL PRIORITY RULE

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

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

approach to resolve priorities among competing secured parties. How-

ever, 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

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

when the perfecting step or event in relation to the competing security

interests occurred . There is a substanti al dierence in the structure and

wording of the residual priority rule between the Ontario Act and the

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

any dierence in outcome, but on one important matter the wording

does produce a dierent result.

The residual priority rule in t he Ontario PPSA sets out four dierent

cases organized according to the method of perfection of the compet-

ing security interests.2 The first involves a competition between two

security interests, both of which have been perfected by registration.

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 that is perfected by registration and another security

interest that is perfected otherwise than by registration. Here, priority

is given to the registered s ecurity interest if registrat ion occurred before

the perfection of the other security interest. But if the other security

interest was perfected before the registration occurred, then the other

security interest w ill have priority over the registered security interest.

Thus, priority goes to the first to regi ster or perfect, whichever is earlier.

The third case involves a competition between two security interests,

neither of which is perfected by registration. In this case, priority is

given to the first to perfect. The fourth case involves a competition

between two unperfected security interests. Here, priority is given to

the first to attach.

The residual priority rules in the other Acts use a dierent formu-

lation. The provision sets out three dierent rules organized according

to the perfected or unperfected status of the competing security inter-

ests.3 The first rule covers di sputes between two security interests, both

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 some what dierent wording, although it oper ates in much the same

manner as t he non-Ontario Acts.