Transferees of Collateral

AuthorRonald C.C. Cuming, Catherine Walsh, Roderick Wood
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.
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.
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.

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