A recent decision of the Alberta Queen’s Bench1 has raised some questions about purchase-money security interest (“PMSI”) proceeds and cross-collateralization of assets secured by these types of security interests. It has been suggested that this decision is unique and establishes that using a PMSI as collateral for other indebtedness of the debtor is dangerous. But is this decision really so radical?

Facts:

In dealing with collateral provided by a third party to support the obligations of the prime debtor, lenders and their counsel need to remember the impact of the federal Bankruptcy and Insolvency Act.

Ontario’s Personal Property Security Act (PPSA) was amended to broaden the definition of the word “debtor.” However, the Bankruptcy and Insolvency Act’s (BIA) definition of a “secured creditor” is still restricted to a person holding a charge or a lien “as security for debt due or accruing to the person (lender) holding the debt.”

Philip Gaidy and Judy-Kae McLeod v. Chrysler Financial Services Canada Inc. CV-09-095088-00 (S.C.J.) (Lauwers, J.)

Gaidy leased a 2007 Dodge truck from Chrysler Financial (“CF”) as lessor. McLeod entered into a conditional sales contract for a 2006 Hummer with CF as vendor.

Both were chronically late in payment and hid the vehicles. CF recovered the vehicles. Both applied to court to force CF to allow them to re-instate their agreements under s. 66(2) of the Personal Property Security Act (“PPSA”).

GE financed two tractor trailers for Brampton Leasing & Rentals Ltd. (“Debtor”) under conditional sale contracts and perfected its security under the Personal Property Security Act (Ontario) (“PPSA”).

The Debtor leased the vehicles to lessees, who obtained vehicle insurance from ING. GE was not named as a loss payee by the Debtor or the lessees.

Innovation Credit Union v. Bank of Montreal [2009] S.J. No. 147; 2009 SKCA 35, on appeal from 2007 SKQB 471

October 1991:     Saskatchewan farmer James Buist (“Debtor”) granted a general security agreement to Innovation Credit Union (“CU”). The general security agreement was not perfected under the Saskatchewan Personal Property Security Act (“PPSA”) by registration.

As the saying goes, an ounce of prevention is worth a pound of cure. This expression is particularly apt when it comes to secured creditors and their registrations under the Ontario Personal Property Security Act (the “PPSA”). Although “getting it right the first time” has always been the mantra of secured creditors, the economic roller coaster ride of recent months has heightened the need to ensure a properly perfected secured claim.

In Royal Bank of Canada v. Head West Energy Inc., the Court of Appeal considered the priority of two security interest registrations against the same collateral, namely industrial camp trailers, and the obligations, pursuant to the Personal Property Security Act, R.S.A. 2000, c. P-7 (“PPSA”) of a security holder to amend its registration to reflect a name change when the security holder has knowledge of that name change.

The recent decision of the Supreme Court of Canada in Saulnier (Receiver of) v. Saulnier has changed the basis for determining whether a licence is property under a provincial Personal Property Security Act (“PPSA”) and the federal Bankruptcy and Insolvency Act (“BIA”).

Banks have a recognized right to set off amounts owing by the bank to its customer (i.e. a credit balance in the customer’s bank account) against the customer’s debt to the bank. However, banks frequently wish to have the additional comfort of obtaining a security interest in the customer’s credit balance in a designated bank account. Banks frequently refer to this security as a pledge of cash collateral.

For most lenders, taking security from their borrowers is pretty straightforward: take a general security agreement covering inventory, receivables and all other collateral, add some guarantees, and then look to see if there are any other loose ends that need tying up. But for businesses in regulated industries where some sort of government-issued licence is a threshold requirement, it's not that easy.