Transferees of Collateral

• 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: 419-464

419

CHAPTER 7

TRANSFEREES OF

COLLATER AL

A. THE CONTEXT

A security interest is 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 (no one can

give what one does not have), is not aected by a sale or lease of the debt-

or’s interest in the collateral.1 This principle, qualified by the require-

ment of perfection,2 underlies the PPSA and related rules applicable to

competitions between secured par ties and buyers or lessees of collateral.

In the absence of a special pr iority rule providing otherwis e, an interest

in collateral bought or leased after a pe rfected security interest attaches

is subject to the security interest.

However, an unqualified application of the nemo dat pr inciple in the

context of competing claims of secured parties and buyers or lessees is

commercially unacceptable. A balance is required. Since buyers or les-

sees acquire their interests in a variety of contexts, no single approach

can produce this balance in all situations. Consequently, the Act con-

tains a range of prior ity rules aecting the position of buyers and less ees.

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, t he security interest cont inues in the collateral un less the secured

party ex pressly or implicitly authori zes the dealing.

2 See Chapter 5.

PERSO NAL PROPERT Y SECURI TY LAW420

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

rules through which the d rafter of the Act sought to achieve this balance.

While, for the most part, the ana lysis focuses on buyers of collateral, the

priority rules examined also apply to lessees of goods. However, there

is an important di erence between the position of a buyer and that of a

lessee. A priority rule may provide that both a buyer and a lessee “take

free from” a security interest. In t he context of a buyer, this means that

the security intere st is cut o with the result that the buyer acquires the

debtor-seller’s ownership rights in the collateral free from the security

interest. In the context of a lease, this means that the security interest

cannot be asserted against the lessee. The security interest is not cut

o; it remains eective with respect to the reversionary interest of the

debtor-lessor.3

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

tel paper, instruments, documents of title, investment property, and

money. Because of the nature of the property involved and the circum-

stances in which interest s in it arise, for the most part the priority r ules

applicable to competing security interests 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 UNPERFECTED SECURITY

INTERESTS

One of the mechanisms contained in the Act designed to protect buy-

ers or lessees of collateral from the eects of the nemo dat principle is

a priority rule that, under prescribed circumstances, subordinates an

unperfected security interest to the interest of a transferee for value of

the collateral under a transaction that is not a security agreement. The

functional basis of this rule is that perfection, other than temporary

perfection, gives to potential buyers or lessees of collateral a prophyl-

actic measure to avoid taking the collateral subject to a prior security

interest. Disclosure of the existence of the security interest through

one of the perfection steps enhances t he ability of a potential tra nsferee

to assess the legal risk involved in acquiring the collateral. If, due to a

3 This feature is e xplicitly recognize d in OPPSA ss 28(2)−(2.2); it is implicit in

the other Acts. S ee Perimeter TransportationLtd (Re), 2010 BCCA 509 [Perimeter

Transportation (Re)].

Transferees of Collateral421

failure on the part of the secured party to perfect the security interest,

the transferee is denied the opportunity to employ this measure, the

security intere st is cut o through the sale of the collateral by the debtor

to the transferee.

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

title, an instrument, an intangible,5 or money6 is subordinate to the

interest of a transferee,7 other than another secured party, who gives

value and acquires the interest w ithout knowledge8 of the security inter-

est and before it is perfected.9 While the words “subordinate to” are used

in the section, the legal eect of the priority rule is that an unperfected

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 significance of the refe rence to chattel paper, see Section E(2),

below in thi s chapter.

6 The 2019 amendment to the equivalent SPPSA (SS,2019, c 15) s 20(3) does not

include a reference to a docu ment of title, an instru ment, or money or chattel

paper in the li st of types of property to w hich the provision applies. The rea son

for this is th at the amended SPPSA provides sep arate priority rules ap plicable

to transfer s of interests in these t ypes of property. Sections 31(1)−(2) and (4)

provide that a t ransferee of money or an instr ument who is not a secured part y

“takes free” f rom a perfected or unperfected sec urity interest if the t ransferee

acquired the money or i nstrument without knowle dge that it was subject to a

security i nterest or gave value, whether or not the tr ansferee acquired the money

without knowledge t hat it was subject to a security i nterest. Section 31(7) gives

priority to t he purchaser of an instr ument or negotiable document of title over a

perfected or unpe rfected security intere st in the instrument or do cument of title

if the purcha ser gave value, acquired the in strument or document of title w ith-

out knowledge of the secur ity interest, and took pos session of the instr ument or

document of title. For t he purposes of the prior ity rules of the Act, a tran sferee

of chattel paper i s deemed to acquire a securit y interest in the chattel p aper (s

3(2)). The result is that priorit y disputes relating to c hattel paper are determi ned

on the basis t hat the transferee is a s ecured party. See also th e 2017 CCPPSL

Report and the 2021 AL RI Report recommending en actment of this change.

7 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

recipient of propert y transferred pursu ant to a vesting order made under mat ri-

monial propert y legislation. In the opinion of t he authors, this was a mis appli-

cation of the provi sion. Clearly, the section contemplates a con sensual transfer

of the property f rom the debtor to a buyer or lessee.

8 As to what constitutes “knowled ge,” 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

registrat ion of a financing statement doe s not constitute constructive not ice:

PPSA (A, BC, MB, NB, NW T, Nu, PEI, S) s 47; (NL, NS) s 48; O s 46(5); Y s 52(3).

For an examin ation of the concept, see Chapter 1.

9 Section 20(1)(c) of the Ontario Act requir es in addition that the tr ansferee

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