Competitions between 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: 308-379

CHAP TER 8

COMPETITIONS

BET W EE N

SECURED PARTIES

A. THE STRUCTURE OF THE PPSA PRIORITY

RULES

It is conventional to divide the priority rules of the PPSA that govern

competitions between or among competing secured parties into two

categories: (1) the special priority rules; and (2) the residual or general

priority rule. The special priorit y rules provide for par ticular types of

situation s, most notably competitions i nvolving purchase money secur-

ity interests. The residual priority rule applie s where the Act provides

no other method for determining priorit ies among security i nterests.

The collective operation of these two types of priority rules does not

resolve all possible var ieties of priority competition. The residual prior-

ity rule only covers competitions bet ween parties with competing PPSA

security intere sts in the same collateral. It is of no use in resolv ing com-

petitions where one of the competing interests i s not a security interest

that is within the scope of the PPSA, for example, in 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 ban k that holds a Bank Act security, at least in those prov-

inces that have excluded the Bank Act s ecurity from the scope of t he

308

Competitions b etween Secured Partie s 309

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

absence of any legislation or speci al common law rule, the dispute is

resolved by apply ing general principles of property law.1

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

late exclusively to security interests. For example, the purcha se money

security interest priority is available only to a secured part y who ob-

tains th at kind of securit y interest. No other class of cl aimant is able

to claim thi s priority. In other cases, t he special priority rule in the

PPSA is not restricted to secure d parties, but may include other cl asses

of claimants. For exa mple, the PPSA contains specia l priority rule s re-

lating to negotiable forms of propert y. A purchaser who obtains pos-

session of the property w ithout knowledge of a prior security interest

will ty pically be entitled to priority. These provisions apply not only to

absolute transfers of the property (where the debtor transfers it by way

of sale), but also to transfers by way of securit y (where the debtor gives

a secured party a possessory security interest i n the collateral). This

chapter examine s the PPSA priority rules that apply strictly to compe-

titions between secu red parties. The priority rules th at are of a more

general applic ation (such as t he priorit y rules governing negot iable or

quasi-negotiable collateral) are discu ssed elsewhere.

B. THE RESIDUAL PRIORITY RULE

1) The First-in-time Rule

The residual priority r ule of the PPSA uses a f‌irst-in-ti me approach

to resolve priorities among competing secured parties. However, this

temporal rule does not, for the most part, look to the ti me when the

security agreement is executed or the time when the security interest

arises in determining priorit ies. There is a substantial d ifference in the

structure and wording of t he residual priority rule between t he Ontario

Act and the Acts of the other jurisdictions. On most is sues, 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 the Ontario PPSA sets out four dif-

ferent cases organized according to the method of perfection of the

1 See chapter 10, B “Prior ity Competitions with Non- consensual Secur ity Inter-

ests” and chapte r 14, A “Bank Act Security.”

PERSO NAL PR OPERTY SEC URI TY LAW310

competing security interests.2 The f‌irst involves a competition between

two security interests, both of which have been per fected by registra-

tion. In this case, priority is awarded to t he f‌irst to register, regardless

of the order of perfection. The second case involves a competition be-

tween a security interest that is perfected by registration and another

security interest that is perfected other wise than by registrat ion. Here,

priority is given to the registered security interest if regist ration oc-

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

other security intere st was perfected before the registration occurred,

then the other security interest will h ave priority over the registere d

security interest. Thus, priority goes to the f‌irst to register or perfect,

whichever is earlier. The third cas e involves a competition between t wo

security interests, neither of which is perfected by reg istration. In thi s

case, priority i s given to the f‌irst to perfect its security intere st. The

fourth case involves a competition between t wo unperfected securit y

interests. Here, priorit y is given to the f‌irst to att ach.

The residual priority r ules in the other Acts use a different formula-

tion. The provision sets out three different sub-rules organized accord-

ing to the perfected or unperfected status of the competing security

interests.3 The f‌irst sub-rule covers disputes between t wo security in-

terests, both of which have been perfected. Priority is determined by

the order of occurrence of registrat ion, possession of the collateral if the

security interest i s perfected by posses sion, or temporary perfection,

whichever is e arliest. The s econd sub-rule covers disputes between a

perfected security i nterest and an unperfected secur ity interest. In this

case, the perfected sec urity interest ha s priority over the unperfected

security intere st. The third sub-rule involves competit ions between

two unperfected security interests. In th is case, priority is determined

according to the order of attachment.

The critical point to note with res pect to both these formulations is

that a security interest can obtain pr iority even though it was neither

the f‌irst security interest to have attached, nor the f‌ir st to have been

perfected. Registration is suff‌icient to confer priority upon the secur-

ity interest, even though the secur ity interest may not have even been

in existence at the time the competing security interest was perfected.

The Ontario formulation differs from the formulation in the other Acts

2 OPPSA s. 30(1). See chapter 5 for a more detailed dis cussion 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 somewhat di fferent wording, although it oper ates in much the

same manner a s the non-Ontario Acts.