Ch.29 Security for Debt

Question 1

Secured creditor

Answer 1

creditor that may look to particular assets of debtor to ensure payment of debt

Question 2

Unsecured creditor

Answer 2

creditor who does not take a security interest in the assets of the debtor

Question 3

the debtor
Security interest

Answer 3

taking an interest in the personal property of the debtor to secure the debtor’s obligation to pay

Question 4

Chattels

Answer 4

moveable property, personal property as opposed to real property (land)

Question 5

Forms of Security for Debt
Most common forms with respect to chattels:

Answer 5

1. Chattel mortgage
2. Conditional-sale agreement
3. Bill of sale

Question 6

Other special forms of security available:

Answer 6

Assignment of book debts
Bank Act security
Bonds and debentures

Question 7

Chattel Mortgage
Historically

Answer 7

creditor took physical possession of goods until payment
- Transfer of possession but not title
- Creditor keeps goods or disposes of them if the debtor fails to pay
- Problem - debtor deprived of the use of the goods and creditor has to take care of the goods

Question 8

Chattel mortgage

Answer 8

• mortgage in which title to the chattel owned by the debtor is transferred to the creditor as security for the payment of a debt

Question 9

Chattel Mortgage
Operation:

Answer 9

Like real-property mortgage except for personal property (chattels)

Debtor transfers entire interest in property to the creditor, subject to the right of possession while not in default, and the right to redeem

Title transferred to creditor (chattel mortgagee) and debtor (mortgagor) retains possession

Agreement (mortgage) sets forth conditions

If debtor fails to pay, creditor takes possession of goods

Question 10

Chattel Mortgage
Redeem

Answer 10

right to take the goods back if debtor pays all amounts owing
- Including reasonable expenses of creditor

Question 11

Chattel Mortgage
Reinstatement

Answer 11

• having credit reinstated by paying outstanding amounts
• Including reasonable expenses of creditor
• Remaining balance is paid

Question 12

Chattel Mortgage
Creditor’s rights:

Answer 12

Upon default an sell goods to realize on security

Must pay any surplus to debtor but can sue for deficiency

Debtor needs creditor’s consent before selling the goods

Third parties should ensure goods are free from encumbrances and that seller is rightful owner

Question 13

Chattel Mortgage
Registration:

Answer 13

Method of providing third parties with notice of Creditor’s interest in the property

Public registration system
- Gives public notice of the creditor’s security interest

Failure to register may void the chattel mortgage

Question 14

Conditional Sale Agreement

Answer 14

• agreement for the sale of a chattel in which the seller grants possession of the goods, but withholds title until payment for the goods is made in full

Security interest arises out of a sale instead of a debt transaction

Early beginnings in English hire-purchase agreement (Example: Singer manufacturing company)
- Think of this like ‘rent-to-own’ except buyer has to ultimately own

Question 15

Conditional Sale Agreement Registration:

Answer 15

Falls under Personal Property
Security Acts (PPSA)
- Must be in writing and signed
- Must set out conditions and description of property
- Disclose true cost of sale, including interest

Registered to give notice to the public of the security interest in the goods
- Failure to register may render the transaction void against bona fide buyers

Question 16

Conditional Sale Agreement Assignment:

Answer 16

Conditional seller may assign title to a third party

Normal rules of assignments apply

Often sellers sell the financing to a finance institution

Assignee still takes subject to the equities (defenses)

Question 17

Conditional Sale Agreement Buyer’s Relief:

Answer 17

Common law and legislative relief

Avoid seller repossessing goods when substantial portion of price has been paid
- Consumer protection legislation
- Requirement of “notice of intent to repossess”

Once repossessed by seller goods may be sold according to legislative procedures

Buyer may have right of redemption

Question 18

Bill of Sale

Answer 18

Contract in which title to goods passes to the buyer
- Certain formalities must be followed when goods purchased, and possession remains with the seller
-Must register bill of sale with provincial registries within certain period of time
-Must be a bona fide sale and not one for the purposes of defeating creditors

Question 19

Bill of Sale Purpose of registration:

Answer 19

1. Protects the interest or title of the buyer in the goods in the event the seller should attempt to sell the goods
2. Notice to third parties that title has passed to buyer

Failure to register would give innocent third parties better rights to goods

Question 20

Assignment of Book Debts

Answer 20

Creditor’s take an assignment in book debts (receivables) of the debtor

Collects what is owed to the debtor from customers

Rules of assignment apply
Registration:
- Can be registered under provincial laws
- Gives priority over trustees in bankruptcy

Question 21

Personal Property Security Acts (PPSA)

Answer 21

Applies within all provinces

Overhauls the older system and eliminates conflicting rules with respect to creditor’s rights

New legislation:
- Simplifies transactions associated with securing debts
- Provide simple system of registration for security
- Provide creditor with security interest in personal property
- Determines priorities between creditors

Question 22

PPSA Perfection:

Answer 22

Perfects - act of registration of a security interest under personal property security legislation
- Registration of the security interest
- Called a “financing statement”
- Establishes creditor’s priority right to the security interest in the property

Question 23

“After-Acquired” Property and Purchase Money Security Interests

Answer 23

“After-acquired” property - term in a security agreement that permits the security interest to attach to goods acquired later by the debtor

• Concern for priorities when firm borrows money or buys equipment
• Priority of first creditor prevents second creditor from providing credit

Question 24

PMSI

Answer 24

rules related to purchase money security interests

Later supplier has priority over earlier interest if:
- It is supplying credit for the purchase of this after-acquired property
- It perfects its interest through registration within set time limits (i.e. according to the legislation)
- Uses fund to pay for particular equipment

Question 25

PPSA Default:

Answer 25

Rights of secured party set forth in security agreement

Usually can seize collateral

Dispose of collateral by public or private sale

Surplus must go to the debtor

Right of redemption by debtor unless stated otherwise

Question 26

Credit cards:

Answer 26

Issues by chartered banks and financial institutions

Type of payment instrument commonly used in consumer purchases of chattels and services

Not security instruments

Credit card transaction is supported by two separate agreements
1. Between bank and merchant
2. Between bank and cardholder

Question 27

Bond

Answer 27

debt security issued by a corporation in which asset of corporation are usually pledged as security for payment

Question 28

Debenture

Answer 28

debt security issue by a corporation that may or may not have specific assets of the corporation pledged as security for payment
- Two terms used interchangeably since no precise legal definition exists

Question 29

Statutory protection:

Answer 29

Exists in certain provinces in addition to other secured rights a Creditor can take

1. Bulk Sales Act
   - Protected creditors when debtor business sold all its inventory to a third party - eliminated in 2017
2. Mechanics’ liens or construction liens
   - Protect rights of creditors in transactions where creditor may not be a party

Question 30

Mechanics’ or Construction Liens

Answer 30

Statutory right of a worker to claim a security interest in property to ensure payment for labor or material applied to land or to a chattel

Rights are set out by a statute and only available to those so listed

Two forms of liens:
- Lien against real property (construction/builders’ lien)
- Lien against chattels (mechanics’ lien)

Each distinct in manner claimed and enforcement

Some provinces have separate legislation for each

Question 31

Mechanics’ or Construction Liens Right to Lien:

Answer 31

Mechanics’ liens - allows person who repairs a chattel to lawfully retain possession of good until payment is made

• If not paid within a period of time, lien holder may sell goods by public auction
• Provide notice
• Debtor liable for deficiency or shortfall in amount payable for repairs

Question 32

Construction liens Right to Lien

Answer 32

“Owner” defined in legislation to include fee simple owner and persons with lesser interests in property

People entitled to claim lien is broad - includes wage earners, subcontractors, material suppliers, suppliers of rental equipment used for construction, principal or prime contractor, architect

Provides simplified procedure for enforcement

Must be filed within period of time from date work last performed and a claim initiated a certain number of days in order to perfect

Question 33

Lien Holdbacks:

Answer 33

Avoids disputes between contractors and subcontractors

Replaces the land for lien purposes

Some provinces require money paid to general contractor from owner be held by general contractor in trust for subcontractors

Question 34

Hold-back

Answer 34

retention of a part of the contract price by the owner as required under construction lien legislation to ensure payment of subcontractors and suppliers of material (usually 10%)