Transferees of Collateral

• Author: Ronald C.C. Cuming, Catherine Walsh, Roderick Wood
• Pages: 376-416

376

CHA PTER 7

TR ANSFER EES OF

COLLATER AL

A. THE ConTExT

A security interest i s a property interest in collateral. 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 (one 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 and related rules applic-

able to competitions between secured part ies and buyers of collateral.

In the absence of a special pr iority rule providin g otherwise, an interest

in collateral bought after a perfected sec urity interest attaches is subject

to the security intere st.

However, an unqualif‌ied application of the nemo dat pri nciple in

the context of competing claims of sec ured parties and buyers is com-

mercially unacceptable. A bala nce is required. Since buyers acquire

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

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

priority rules 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 provide s that, where collateral i s dealt

with, the se curity interest continue s in the collateral unle ss the secured party

expressly or i mpliedly authorizes the de aling.

2 See Chapter 5.

Transferees of Collateral 377

Set out in this chapter is a description and analysis of the prior-

ity rules through which t he drafter of the Act sought to achieve this

balance. While, for the most part, t he analysis focuses on buyers of

collateral, the priority r ules examined apply also to le ssees of goods.

However, there is an important difference between the position of a

buyer and a lessee. A priority r ule may provide that both a buyer and a

lessee “take free from” a secur ity interest. In the context of a buyer, this

means that the security interest is cut off with the result that the buyer

acquires the debtor-seller’s ownership rights i n the collateral free from

the security intere st. In the context of a lease, this only means that the

security interest c annot be asserted again st the lessee. The security in-

terest is not cut off; it remains effective w ith respect to the reversionary

interest of the debtor-lessor.3

Special priority r ules apply to buyers (transferees) of accounts, chattel

paper, instruments, documents of title, investment property and money.

Because of the nature of the propert y involved and the circumstances in

which interests in it arise, for the most part, the priority r ules applicable

to competing security intere sts in the property apply as well when one of

the competing interests is a buyer of the property. However, a special set

of priority rules applies where the competition is between the interest of

a transferee and a prior, unperfected security interest.

B. PRIoRITY of TRAnsfEREEs’ InTEREsTs

ovER unPER fECTEd sECuR IT Y InTEREsTs

One of the mechanism s contained in the Act desig ned to protect buyers

of collateral from the effects of the nemo dat principle is a priority rule

that, under prescribed circumstances, subordinates an unperfected se-

curity interest to the interest of a transferee for value of the collateral

under a transaction th at is not a security agreement. The functional

basis of this r ule is that perfection, other th an temporary perfection,

gives to potential buyers of collateral a prophylactic mea sure to avoid

taking the collateral subject to a prior security interest. Dis closure of

the existence of the secur ity interest through one of the perfection steps

enhances the abilit y of a potential transferee to ass ess the legal risk in-

volved in acquiring the collateral. If, a s a result of a failure on the part

of the secured party to perfect its security interest, t he transferee is

denied the opportunity to employ thi s measure, the security i nterest is

cut off through the sale of the collateral by t he debtor to the transferee.

3 This feature is e xplicitly recognize d in OPPSA s 28(2); it is implicit in the othe r

Acts. See Perime ter Transportation L td (Re), 2010 BCCA 509.

PERSO NAL PROPERT Y SECUR ITY LAW378

The Act4 provides that a security interest in goods, a document of

title, an i nstrument, an i ntangible5 or money is subordinate to the inter-

est of a transferee,6 other than another secured party, who gives value

and acquires the interest w ithout knowledge7 of the security interest

and before it is perfected.8 While the words “subordinate to” are used

in the section, the legal effect of the priority rule is that an unperfected

security interest i s cut off by the sale of the collateral to the transferee.9

The result is that the tra nsferee acquires the debtor’s interest free from

the security intere st and can pass it on in a sale to another transferee.10

The term “transferee” is not def‌ined in the Act. However, it is clear

that it includes a lessee of goods. As noted above, in the case of a lease,

the security intere st is not cut off. The lessee takes free from it, but it

remains effective w ith respect to the debtor-lessor’s reversionary inter-

est in the collateral.

The term “value” includes any consideration suff‌icient to support a

simple contract,11 including a promise to pay the purchase price and a

forbearance to sue.12 Since there is no requirement that the transferee

give “new va lue,”13 the consideration for the sale can be cancellation

4 PPSA (NWT, Nu, O) s 20(1); (BC, M) s 20(c); (NB, S) s 20(3); A s 20(b); NL s

21(2); NS s 21(3); PEI s 20(3).

5 OPPSA s 20(1) excludes an account but includes chatte l paper in the list. For a

discus sion of the signif‌icant of the refere nce to chattel paper, see Section E(2),

below in thi s chapter.

6 In Carr v Shamrock Credit Union (1987), 7 PPSAC 66, the Saskatchewan Cour t of

Queen’s Bench concluded th at a “transferee” under SPPSA s 20(3) included a recipi-

ent of property tr ansferred pursua nt to a vesting order made under mat rimonial

property legi slation. In the opinion of the author s, this was a misappl ication of the

provision. Clea rly, the section contempl ates a consensual tr ansfer of the property

from the debtor to a buyer.

7 As to what const itutes “knowledge,” see PPSA (A, BC, NWT, Nu) s 1(2); (M, NB,

PEI) s 2(1); (NL, NS) s 3(1); O s 69; S s 2(2); Y no equivalent provi sion. Note

that regis tration of a f‌inancing state ment does not constitute constr uctive no-

tice: PPSA (A, BC, MB, NB , NWT, Nu, PEI, S) s 47; (NL, NS) s 48; O s 46(5);Y s

52(3). For an examinat ion of the concept, see Chapter 1.

8 Section 20(1)(c) of the Ontario Act require s in addition that the tra nsferee

receive deliver y of the property. This feature is ex amined later in this c hapter.

9 Section 20(1)(c) of the Ontario Act uses t he term “takes free fr om.”

10 For judicial conf‌ir mation of the application in th e PPSA context of what is

sometimes ca lled the “sheltering princ iple,” see Willi v Don Shearer Ltd (1992), 3

PPSAC (2d) 188 (BCSC), aff’d [1994] 2 WWR 312 (BCCA).

11 PPSA (A, BC, NB, NW T, Nu, O, Y) s 1(1); (M, PEI) s 1; NS s 2; (NL, S) s 2(1).

12 Toronto-Dominion Bank v Nova Entertainment Inc (1992), 7 Alta LR (3d) 132 (QB).

13 “New value” is def‌ined in PPSA (A, BC, NW T, Nu) s 1(1); M s 1; S s 2(1); in the

Atlantic prov inces Acts, “new value” is def‌ine d within the def‌inition of va lue:

PEI s 1; NB s 1(1); NS s 2; NL s 2(1); (O, Y) no equivalent provision.