Topic 10: DEFAULT RIGHTS AND REMEDIES

Introduction
This topic concerns the enforceability of a security interest against a D himself: rights and remedies are dealt w in part V Overview of OPPSA, Part V Like the rest of the act, it takes a substance over form regime. It provides a uniform system based on the pre-PPSA law of mortgages, applied to all kinds of security agreements. Prior law (all ironed out by Part V of PPSA) y Recall: different form different rules Pre-PPSA Mortgages: an outright sale of chattel by D to C coupled w equity of redemption y If debt was under collateralized, Cs could seize collateral, and sue for deficiencies y If debt was over-collateralized, Cs could seize and account for excess y Foreclosure order: an extinguishment of the equity of redemption (C has absolute title; can keep or sell without accounting for surplus). However, D is off the hook for the debt. CSA: Cs remedies governed by contract law of sales: no payment contract terminated, C gets goods back; C would also have expectation damages right of action (loss of a bargain) Mortgage or charge: under equity y Equity would always award D one last chance to redeem collateral: collateral exchanged for satisfaction of debt. This was not available in a CSA. y y y Other relevant laws/ Scope: S.2(b) the Act applies to non-security transfers of accounts / chattel papers as well. s.2(c): Act applies to every lease with terms greater than 1 yr terms regardless of security obligation (this is to avoid litigation). However, this issue is revived by s.57.1: s.57.1: if the collateral is account or chattel paper, the scheme in Part V applies if the transaction is a security transfer, but does not apply to non-security/ outright transfers. y The reason for the exclusion is that Part V remedies pre-suppose an underlying debt obligation y It makes sense to have 2(c) and 57.1 seemingly pulling in different directions because the distinction b/w secured leases and true leases should only arise in the rights/ remedies stage. y How do you determine difference b/w true and secured lease? o Language used by parties themselves isnt determinative; substance matters

CB 519 true lease test: if terms of lease ensure that , come what may, lessor will be able to recover full price plus finance charge, then the transaction becomes indistinguishable from a CSA, then the transaction should treated as a security agreement Ex: car worth 40k; 48 term lease at 1k/ month with nominal option price at end of lease ($0) y heavy penalties for lease termination/ Ds default j duggan: smells like a security lease; nominal option price clearly implies that the 48 instalments are merely payments of the purchase price plus financing charge. In substance, D is buying the car for 40k + 8k financing charge. D is locked into the agreement ex 2: car worth 40k; 48 month term with $750/ month and 12k option price (based on residual value) y penalty for terminating lease, but no penalty for D not exercising option j duggan: close to the Chrysler case; looks like a true lease: come what may, the lessor is not guaranteed full payment. y If there was a substantial penalty for not exercising the option starts to look like a security lease Ex 3:

DaimlerChrysler Services Canada Inc. v. Cameron noted CB 517-520 (true lease) o D o

3. Notice before enforcement (march 24)

y Does debtor have to give secured party notice? Nothing in part V itself, but there is common law on point: o

Waldron v Royal Bank, CB p. 478-- notice R: debtor is entitled to reasonable notice before enforcement, which is typically a few days (citing Lister v Dunlop) y The rule is based on public policy; cant contract around it y Two exceptions: o Dishonesty/ suspected dishonesty o If collateral is at risk (eg concern that the debtor may make away with the collateral if given notice, or if collateral is perishable) y

Bankruptcy and Insolvency Act, s.244 (discussed CB 482) 244 applies where: 1. secured party has interest in all present and after acquired inventory, accounts, or everything, AND 2. insolvent y 10 day notice requirement: to give debtor a chance to consider whether it wants to file under the bankruptcy and insolvency act for restructuring under Part III Division I. Its effectively a 10 day stay Without 244, a secured party could swoop in immediately and the debtors business couldnt be saved under p.III div I application y

4. Repossession upon default

OPPSA, ss. 62, 17 s.62(1)(a) upon default, the SP has right to take possession of the collateral by any lawful method y y Breach of the peace is not lawful--- see Doucette Cant enter property w out debtors property w out consent o If you use unlawful means, the debtor may challenge the validity of the repo. In principle, the challenge should result in a return of the goods (SP would have to redo it properly). If there is damage, then the debtor can launch a trespass action (but prospect of trespass liability is not serious unless repo agents trash the place.

62(1)(b) if collateral is equipment and the security interest has been perfected by registration, the secured party may, in reasonable manner, render such equipment unusable w out removal from debtors premises 62(1)(c) prohibits repossession of goods that would be exempt from seizure under the Execution Act The repossession provision is triggered when the debtor is in default. Default s.1 /p. 40 materials) means failure to pay or otherwise perform the obligation when due Failure to pay, failure to look after collateral, failure to keep collateral secured, etc are examples of possible default. S.61(1) Collection rights of secured party: (Mainly aimed at intangible property/ Secured accounts): SP is entitled to y

A)notify customers to make payment to the secured party (this by-passes D: customer pays secured party directly) B)take control of any proceeds to which the secured party is entitled under s.25 o S.67(2) compensation for loss or damages: if repossession failed to adhere to duties/ obligations, the debtor has right to recover the greater of $500 or the actual loss/ damage. 40(2) Payment by Account debtor Recourse v Non-recourse: recourse means that Debtor guarantees to C the payment owed against the risk that one or more of the customers default. This gives rise to moral hazard problem: y Recourse arrangements give rise to an incentive to shirk to C: why bother trying to recover from customers if D has guaranteed payment? o However, this hazard is addressed by 61(2), which requires a commercially reasonable manner when attempting to collect from customers. o If SP fails to act commercially reasonably, then - 67(2) compensation for loss or damage y R. v. Doucette, CB 483 F: SP hired repo agents to claim the debtors TV; agents got in a fight when debtor resisted I: what is unlawful means for purpose of 62(1)(a)? R: cant enter property w out consent, if debtor asks you to leave, you must. N: what is the SP to do if debtor refuses entrance? Get a court order to enter premises y y

5. Disposal of collateral
OPPSA, ss 63, 67(2) repossession.

like 62, it is drafted w goods in mind. It gives SP the right to sell collateral upon

(a) The notice requirement 63(1) disposal of collateral: Debtor has right to reclaim collateral upon repayment of collateral within 15 days of repossession (b) Method of disposition 63(2) methods of disposition: SP must sell for best price according to commercially reasonable y This is because If SP fails to act reasonably and sells for too little, then debtor is on hook for the deficiency. In addition, the debtor would not realize its right to surplus if collateral is sold for less than FMV.

o o

Again, s.67(2) allows for damage claim

(c) Distribution of sale proceeds 64(1): distribution of surplus: proceeds surplus are distributed according to a pecking order : 1. other secured parties according to priority 2.other parties who gave written notice to SP of their interest before the distribution of the proceeds 3. debtor 64(3): Deficiency: debtors still on hook for proceeds deficiency

8. Voluntary foreclosure
OPPSA, s.65 If you achieve the remedy, you get the collateral free and clear, but the debtor is no longer on the hook for the debt Requirements: y 15 day notice of intention to foreclose (subject to court order extension of notice period) y If there is an objection SP can give up foreclosure action, or must take court proceedings to declare the objection ineffective if: 1. court determines the objection is made for ulterior purpose [eg, taking advantage of surplus]; or 2. court concludes that FMV of collateral is LESS than what the debtor owes y When might a foreclosure action be attractive? If SP is sure that it wont recover the deficiency from suing the debtor. Foreclosing allows the SP to sell the collateral whenever it likes: for instance, if you anticipate a market improvement. y

9. Redemption and reinstatement

OPPSA, s.66

10. Receivers
OPPSA, s.60 Receiver s.1: Obligations of secured parties provided in the act are owed by receivers as well. Private law receivers at common law owed obligations only to party who appointed them. Court appointed receivers owe additional obligations.

Quite often it will be in the SPs best interests to keep Ds business going. Given this, SAs will often grant managerial powers to receivers. s.60(1): nothing in this act prevents an agreement wrt how receivers are appointed 60(2): grants receivers powers; apply both to private and court-appointed receivers: y Court can remove or direct receivers, fix accounts, fix remuneration of receivers, or anything else it feels appropriate

Standard Trust Co. v. Turner Crossing Inc., CB 508 F: SP appointed a receiver unilaterally; no court order, nothing in SA establishing right of SA to appoint private receiver I:60(1) R: 60(1) does not create new rights, it only confirms pre-existing rights

Ostrander v. Niagara Helicopters Ltd., CB 512

11. Contracting out OPPSA, s.59. pp102-3 59(1):rights and remedies: in instance of Ds default, SA has rights and remedies provided in security acgreement and this part, and when in possession and control of collateral,, the rights, remedies and duties in s.17 or 17.1 59(5): despite 59)1), 17, 17.1 and 63-66 shall not be waived to the extent that they give rights to debtor and impose duties on SP.