Transferees of Collateral

AuthorRonald C.C. Cuming/Catherine Walsh/Roderick J. Wood
ProfessionUniversity of Saskatchewan, College of Law/McGill University, Faculty of Law/University of Alberta, Faculty of Law
Pages419-464
419
CHA PTER 7
TR ANSFER EES OF
COLLATER AL
A. THE CONTEXT
A security interest i s a property interest in collateral. A s 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, quali fied 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 lessee s 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 bal ance 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 pr iority
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 lessee s of goods. However, there
is an important di erence between the position of a buyer and that of a
lessee. A priority r ule 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 re spect to the reversionary interest of the
debtor-lessor.3
Special priority r ules apply to buyers (transferees) of accounts, chat-
tel paper, instruments, document s 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 r ules applies where the competition is between
the interest of a transferee and a prior, unperfected security interest.
B. PRIORIT Y OF TR ANSFEREES’ INTERESTS
OVER UNPER FECTED SECUR IT Y
INTER ESTS
One of the mechanisms conta ined in the Act designed to protect buy-
ers or lessees of collateral f rom the eects of the nemo dat principle is
a priority rule th at, under prescribed circum stances, subordinates a n
unperfected security i nterest to the interest of a transferee for value of
the collateral under a tran saction that is not a security ag reement. 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 t he collateral subject to a prior security
interest. Disclosure of the ex istence of the security interest t hrough
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 Collateral 421
failure on the part of the secured party to perfect the security interest,
the transferee is den ied the opportunity to employ this mea sure, the
security intere st is cut o through the sale of the collateral by the debtor
to the transferee.
The Act4 provides that a securit y interest in goods, a document of
title, an i nstrument, an inta ngible,5 or money6 i s subordinate to the
interest of a transferee,7 other than a nother 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 priorit y 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.

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