SECURED CONSUMER FINANCING UNDER THE PERSONAL PROPERTY SECURITY ACT

I. Introduction

Our present system of personal property security is

based on the common law doctrine of the supremacy of legal title,

and on the maxim nemo dat quod non habet. The person who had

legal title to goods would defeat any person who claimed a

subsequent interest in the goods or who wished to seize the goods

under a writ of execution.

The ability of the common law to split legal title and

possession caused hardship for creditors of a person who possessed

many assets and appeared wealthy, yet "owned" no property which

could be seized to satisfy his debts. The registration statutes,

such as The Bills of Sale Act- and The Conditional Sales Ac-t,-

alleviated this situation somewhat by requiring a creditor who

claimed legal title to register his' interest, in order to be able

to assert it against creditors and subsequent purchasers.

The Personal property security Act sets up a notice

filing system, rather than a registration system. Priorities are

no longer based entirely on legal or equitable title, but rather

are awarded to certain types of security interests which it is

deemed necessary to preserve.

1

II. Priorities

1. General

The Personal Property Security Act creates a single

system of priorities hased on the attachment and perfection of a

security interest.

The priority scheme among perfected security interests

is based on the running shoe principle - the first secu_r.ed party,

to register, take possession or perfect has the f-irst right to

satisfy its debt out of the security. (s. 35).

Note that The Personal Property Security Act allows the

secured party to register and date its priority from the date of

registration if the security interest is later perfected. Thus,

under this general scheme, a secured party can register its

intention to take a security interest and later advance funds,

and date its priority from the date of registration rather than

the later data of perfection. This is similar to the system

established under s. 88 of The Bank Act.

If the competition is entirely among unperfected

security interests, priority goes to the first to attach .. _ (s.

35(1)).

2. Purchase Money security Interests (PMSI)

The Personal Property Security Act contains certain

"special" priorities. The most important of these in the context

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of consumer financing is the purchase money security interest.

If a secured party who gives value for the purpose of enabling

the debtor to obtain rights in the collateral registers its

security interest within fifteen (15) days of the date upon which

the debtor obtains possession of the collateral, that secured

party obtains priority over:

(1) any other security interest in the collateral given by'

the sarne debtor, (s. 34(1».

(2) a person who causes the collateral to be seized, a

sheriff who is entitled to the collateral under The

Creditors' Relief Act, or the trustee in bankruptcy,

(s. 21).

even if these people acquire their interest before the purchase

money security interest is registered. Note however that a bona

fide purchaser for value who acquires the collateral before the

purchase money security interest is actually perfected and who

takes delivery of the goods will defeat the security interest

even if it is registered within the fifteen (15) day period.

3. Bona Fide Purchaser of Consumer Goods

A bona fide purchaser or lessee for value without

notice takes free of a perfected security interest in goods

(other than motor vehicles or fixtures) acquired principally for

personal, family, household or farming use, if the goods are

3.

worth less than Five Hundred ($500.00) Dollars and possession

passes to the purchaser or lessee. {so 30(2} and (3». Registra­

tion of a security interest is totally irrelevant here.

4. Retail Purchaser

A person who acquires goods from a retail seller in the

ordinary course of his business takes free of any security interest

created by the retail seller, even if the purchaser _knew of the

security interest, unless the purchaser also knew that the sale

was a breach of security agreement. (s.30(1».

This provision is somewhat broader than the present

legislation. However, note that this section does not provide

protection for a purchaser from a retail seller if the security

interest in the goods was granted by some person other than the

retail seller, such as, for example, a previOUS owner of used

goods.

5. Fixtures and Accessions

A secured party can assert its claim over accessions or

fixtures, against every other interest in the principal chattels

or land, if the security interest attaches before the collateral

is affixed to the principal chattel or land and the security

interest is registered in the Personal Property Security Registry

4.

(for accessions) or filed in the Land Titles Office (for fixtures)

before subsequent interests arise.

upon a seizure of the collateral, the secured party

must reimburse any person with an interest in the land or principal

chattel for damage caused to that person's interest by the removal

of the collateral. These persons may also demand that the secured

party provide seourity for the cost of anticipated damage before.

the collateral is removed. (ss. 36 and 37).

III. sills of Sale Absolute

The Bills of Sale Act, with its provisions for registra­

tion of bills of sale absolute, will be repealed with the enactment

of The Personal Property Security Act. However, The Factors Act

and The Sale of Goods Act have been-amended to provide for registra­

tion in the Personal Property security Registry of the interest

of a purchaser who leaves the goods purchased in the possession

of the seller. This registration will provide a method for a

subsequent purchaser from the seller to obtain information about

the interest of the first purchaser.

The registered interest of a purchaser under a bill of

sale absolute will defeat any person who later purchases the

goods from the seller. However, only a serial number registration

will defeat a person who buys from such a second purchaser, as if

the goods are not registered by serial number, this third purchaser

5.

would have no means of discovering the existence of the bill of

sale.

IV. Other Legislation

The enactment of The Personal PropertY,Security Act

will result in consequential amendments to numerous pieces of

legislation. including, in relat.ion to consumer financing, the

following:

1. The Exemptions Act

The amendments to this Act essentially change the terms

used to make them consistent ~ith those defined in The Personal

Property Security Act. Note that the purchase money exception to

exemption from seizure now applies to any "purchase money security

interest", not only to chattel mortgages given to a vendor to

secure. payment of the purchase price of the,. collateral. (s.

5 (2» •

2. The Executions Act

Section 2.1 of the amended Act merely restates the

effect of the issuance of a writ of execution. writs of execution

issued prior to the coming into force of The" Personal Property

security Act bind the goads of th~ debtor when delivered to the

sheriff, and take priority over chattel mortgages or bills of

6.

sale only when the old Bills of Sale Act so provides. The writ

does not take priority over a sale, accompanied by an immediate

change in possession, to a bona fide purchaser for value without

actual notice of the writ.

Writs issued after The Personal Property Security Act

comes into force again bind the goods of the debtor upon delivery

of the writ to the sheriff. When registered under The Personal

Property Security Act, such writs take priority over unregistered

or subsequently registered security interests. but lose to:

(al a bona fide purchaser who takes immediate delivery and

who has no actual notice of the writ. (Note that the

registr~~ion of the writ, or any other registration,

for that matter, in the Personal Property Security

Registry is not notice. (s. 51 of the PPSA»I

(b) a secured party who takes possession before the writ is

registered;

(c) a secured party who registers its purchase money

security interest ~'lithin fifteen (15) days of the date

when the debtor gets possession of the goods. (s. 2.2

of The Executions A_ct) .

Section 20 of The Personal Property Security Act provides

another avenue for an execution creditor to get priority over

unperfected security interests and, to a certain extent, over

perfected security interests. An execution creditor who causes

7.

the collateral to be seized under legal process will defeat an

unperfected security interest. There is no requirement that the

writ of execution pursuant to which the seizure is made be

registered. Such an execution creditor will also take priority

over advances made by a secured party after the secured party

receives notice of the interest of the creditor seizing.

The new section 11.1 of The Executions Act clarifies

the procedure for seizing real estate mortgages and registered

security interests owned by the debtor. The sheriff can seize

these interests by delivering written notice of the seizure to

the appropriate registration office.

The amendments also provide for the registration of a

writ of execution in the Personal Property Security Registry.

3. The Limitation of Civil Rights Act

Section 18 of The Limitation of civil Rights Act will

provide that where a vendor reserves a purchase money security

interest in goods, its right to recover the purchase price is

limited to its right to seize the goods. under the present Act

only a vendor with a conditional sales contract, or with a

chattel mortgage and promissory note, was so restricted. Note

that section 18 will only apply to purchase money security

interests taken by a vendor, and will not apply to purchase money

security interests taken by a secured party other than a vendor.

8.

The remaining amendments to The Limitation of Civil

Rights Act essentially change terminology to be consistent· with

The Personal Property Security Act.

4. The Distress Act

The amendments to this Act remove the requirement that

a creditor obtain a warrant from the sheriff before seizing goods

covered by a chattel ~ortgage. When this Act comes into force,

seizures under all security agreements will be able to be effected

by the creditor alone. However, the reatrictions on the actions

of the creditor contained ih Part V of The Personal Property

Security Act will apply.

The Act sets out the costs exigible on a distress for

rent, and on an extra-judicial seizure of consumer goods under a

security agreement.

The procedure for seizure of a house trailer has been

changed somewhat. Thirty (30) days' notice of an intention to

seize a house trailer, which notice is to set out particulars of

the default, will be required.

5. The Creditors' Relief Act

Certificates obtained by creditors under this Act (i.e.

in lieu of obtaining a judgment) are to be registered under

The Personal Property security Act.

9.

6. Sale of Goods Act and The Factors Act

In addition to the amendments referred to under Bills

of Sale Absolute above, The Sale of Goods Act and The Factors Act

provisions relating to buyers in possession have been amended by

the addition of section 26(4) of The sale of Goods Act and section

10(2) of The Factors Act. These sections provide that the

provisions of tbose Acts allowing a buyer in possession to pass .

good title do not apply to a buyer who has obtained possession of

the goods under a security agreement. Note however that if the

security agreement was not perfected under The Personal Property

Security Act at the time of the sale by the buyer in possession,

the transferee from the buyer in possession would defeat the

secured party by reason of section 20(1) of The Personal Property

Security Act. This right 'is somewhat broader than under the

present law, as it removes the necessity of an inquiry into

whether or not the buyer in possession sold the goods in the

ordinary course of its business as a mercantile agent, as was

required by reason of the Saskatchewan Court of Appeal decision

in Kozak v. J & DIS Auto Ltd. and Ford Motor Credit Ltd. f19?l}

3 W.W.R. 1.

The Factors Act provisions relating to consignment

sales will not apply to consignments to which The Personal Property

Security Act applies.

10.

)

7. The Garage Keepers' Act

The amendments to this Act essentially involve a change

in the terminology from a reference to conditional sales and

chattel mortgages to-a reference to security agreements.

section 32 of The Personal property Security Act states

that an artificer's lien has priority over a perfected security

interest unless the Act giving the lien expressly states that it

does not have such priority.

11.

GLOSSARY OF TERMS - CONSUMER SECURED FINANCING

1. "Accessions" are goods which are installed on or

affixed to other goods. (s. 2(a».

2. "Attachment" occurs when everything necessary to create

a security interest has taken place. Section 12 of 'The Personal

property Security Act states that the security intere.st attaches

when:

ta} value is given (by the secured party);

(b) the debtor has rights in the collate.i:al (upually

possession in the case of consumer transactions); and

(c) except for the purpose of enforcing· rights between the

debtor and the secured party, the security agreement

becomes enforceable against third parties.

Section 10 provides that the security interest becomes enforceable

against third parties when either:

3.

Ca) the secured party has possession (for example, a

pledge with a pawnbroker}; or

(b) a security agr.eement describing the collateral is

signed.

"Chattel Paper" is one or more documents which evidence

both an obligation to pay and a security interest. (s. 2(e}).

4. "Collateral" is a term used in The Personal Property

Security Act to describe the property that is subject to a

security interest. (s. 2(f».

12.

5. "Fixtures" are goods which are affixed to realty so as

to pass with the realty. (so 2(p».

6. "Perfection" occurs when the security interest has

attached and the secured party has done what is possible to

protect its security interest against third parties. The fact

that a secured party has perfected does not mean that it will

always have the first right to enforce its debt out of the

collateral. However, it is usually the best position that the

secured party can be in under The Personal Property Security Act •.

Perfection is accomplished by registration or by possession (i.e.

a pledge). The Act also provides for temporary perfection in

some circumstances. (ss. 19, 24 to 28).

7. "Proceeds" are identifiable or traceable items of

personal property which arise from any dealing with the collateral.

An example of the creation of proceeds is when the collateral is

traded in as part of the purchase price of a new item. The new

item is "proceeds" of the collateral. Insurance money payable as

a result of the loss of the collateral is another example of

proceeds, and is expressly referred to in "the definition of

proceeds in the Act. (s. 2 (e}) •

8. "Purchase money security interest" is a security

interest taken by a person who gives value to enable the debtor

to acquire rights in the collateral. In the context of consumer

financing, a purchase money security interest is either a security

interest taken by a seller to secure payment of the purchase

13.

price of the collateral, or one taken by a secured party to

secure repayment of money advanced to the debtor to enable the

debtor to purchase the collateral, to the extent the money is so

used. (s. 2(gg».

9. "Secured. party" is the person who has the security

interest. {so 2 (kk».

10. "Security Interest" is an interest in personal property

which secures the performance of an obligation. The Act looks to

substance, not form, to decide if a document creates a security

interest. The person who has title is not an issue. There are

also certain deemed security interests which do not in fact

secure payment of an obligation, but are required to be registered

in the Personal Property Security Registry in order to avoid the

deception that arises when a person has possession, but is not

the owner. The most important of these, in the context of consumer

financing, is a lease for a term of more than one (1) year. (s.

2 (nn» .

14.

A.D. 19

BETWEEN:

SECURITY AGREEMENT - CONSUMER SECURED FINANCING

(Note: This security Agreement has been prepared for discussion purposes only. The author accepts no responsibility or liability for errors or omissions contained in it or in any communications associated with iL)

SECURITY AGREEMENT MADE THIS DAY OF

with head office at in the Province of Saskatchewan,

(Hereinafter referred to as the "CREDITOR")

- and -

of ________ _ in the p_rovince of Saskatchewan,

(Hereinafter referred to as the "DEB'l:OR")

WHEREAS the DEBTOR has applied for a loan. calculated

_____________ -"______________ in the

amount of ___________________________ -----------------

Dollars bearing interest at the rate of ____________ percent per

annum (hereinafter referred to as "the loan") from the CREDITOR;

AND WHEREAS to induce the CREDITOR to make the loan and

to better secure payment therefor the DEBTOR is willing to grant

to the CREDITOR a security interest in the personal property

described as follows:

15.

together with all proceeds thereof (all of which is hereinafter

referred to as "the collateral");

NOW THEREFORE THIS AGREEMENT WITNESSETH:

1. The DEBTOR grants to the CREDITOR and agrees that the

CREDITOR shall have a security interest in the collateral, on the

terms and conditions hereinafter set out, which security interest

is hereinafter referred to as "the security interest". 2. The

security interest shall attach immediately upon:

(a) consideration being given by the CREDITOR;

(bl the DEBTOR acquiring rights in the collateral; and

(c) this Agreement being executed by the DEBTOR.

3. The security intere,st secures repayment of all sums now

or hereafter owing by the DEBTOR to the CREDITOR, wnether owing

solely by the DEBTOR or by the DEBTOR jointly or severally with

some other person or persons including, but without limiting the

generality of the foregoing, all sums owing on account of the

loan and all sums payable to the CREDITOR hereunder.

16.

4. The DESTOR warrants:

(a) exclusive ownership and possession of the collateral,

free and clear of all liens, charges and encumbrances,

except as previously declared in writing to the CREDITOR;

(b) that no part of the collateral is affixed to another

item of personal property other than items of personal

property in respect of which the CREDITOR has a security

interest hereunder;

(c) that no part of the collateral is presently affixed to

realty sO as to constitute it a fixture.

5. The DEBTOR covenants and agrees:

(a) to care for the collateral in a reasonable and prudent

manner, and to maintain it in good repair. All replacement

parts which may be placed in or upon the cOllateral

shall be free and clear of all adverse claims, and

shall, immediately upon being placed in or upon the

collateral, form part of the CREDITOR's security

hereunder;

(b) to protect the CREDITOR's security interest in the

collateral, and in particular to keep the collateral

free from all other liens, encumbrances, security

interests, charges and claims;

(c) to not sell, dispose of or part with possession of the

collateral, or remove or permit it to be removed from

17.

the Province of Saskatchewan without the prior written

consent of the CREDITOR;

(d) to not affix the collateral or any part thereof or

permit it to be affixed so that it becomes part of

realty or becomes an accession to other personal property,

without the express written consent of the CREDITOR and

then only if the DEBTOR obtains a waiver in favour of

the CREDITOR from any landlord, encumbrancer, owner or

other person having any right in such realty or other

personal property;

(e) to keep the collateral insured against loss or damage

by fire, theft, and, in the event that the collateral

includes an automobile, collision. in an amount not

less than the full replacement cost thereof. The

proceeds of any insurance upon the collateral are

hereby assigned to the CREDITOR, to be applied toward

the repair or replacement of the said collateral or

payment of the indebtedness hereby secured. at the

option of the CREDITOR;

{fl in the event that the DEBTOR fai1s to maintain. repair

or insure the collateral, or allows any other liens.

encumbrances, security interests, charges or claims to

attach to the collateral, the CREDITOR may, but shall

not be required to, pay for the maintenance, repair or

18.

6.

insurance of the collateral, or discharge such liens,

encumbrances, security interests, charges or claims.

The DEBTOR shall promptly reimburse the CREDITOR for

all monies so paid, and the same shall be added to the

debt hereby secured and shall bear interest at the loan

rate and shall be payable with the principal sum.

In the event of default by the DEBTOR hereunder, all

sums secured hereby will immediately become due and payable. The

CREDITOR may thereupon take such measures to realize on its

secqrity hereunder as it may deem necessaJ:y or advis,a,ble including,

without limiting the generality of the foregoing:

(a) take immediate possess'ion of any or all of the collateral

and for this purpose enter upon the premises where the

said collateral may be and remove the same. The DEBTOR

shall be liable for any damage occasioned by such entry

and removal and shall indemnify the CREDITOR therefor;

(b) sell the collateral at public or private sale, in

return for a lump sum or deferred payments, or lease

the collateral. Any such sale or lease may be with or

without notice to the DEBTOR, and the CREDITOR shall

have the right to bid at any public sale. The CREDITOR

shall thereafter deduct from the proceeds of such

disposition all expenses for retaking, repairing and

selling or leasing the collateral, and apply the

19.

balance to the amount owing by the DEBTOR to the CREDITOR.

The DEBTOR covenants to pay any deficiency forthwith,

with interest at the loan rate,

(c) retain the collateral repossessed and in addition

retain any sum of money theretofore paid by the DEBTOR

as liquidated damages and not as penalty;

Cd) as the irrevocally appointed agent of the DEBTOR, tak~

possession of the collateral or any portion thereof and

sell, lease or otherwise deal with the collateral I and

apply any proceeds thereof, after deducting the expenses

incurred therebYI to the indebtedness secured hereunder.

All remedies and recourses available to the CREDITOR are cumulative

and may be exercised by the CREDITOR either concurrently or

successively.

7. The DEBTOR shall be deemed to have defaulted hereunder

upon the happening of one (1) or more of the following events:

(a) th.6 death, bankruptcy, insolvency, making of an assign­

ment for the benefit of creditors, or making of a

proposal for the composition of any liability, of the

DEBTOR;

(b) any indebtedness of the DEBTOR to the CREDITOR being

past due and unpaid;

(c) failure of the DEBTOR to perform any obligation required

by this Agreement or any other agreement, present or

future, between the DEBTOR and the CREDITOR;

20.

8.

(d) the CREDITOR finding that any fact covenanted by the

DEBTOR to be true is, was or has become false;

(e) the CREDITOR deeming the collateral to be in danger of

misuse, loss, seizure or confiscation, or the CREDITOR

deeming itself to be insecure;

(fl any execution, sequestration, attachment or other

similar process becoming enforceable against the DEBTOR,

or any distress or similar process being levied against

the DEBTOR;

(g) upon the CREDITOR being notified that another person

intends to take or has taken a security interest in the

collateral.

No waiver by the CREDITOR of any default in the performance

of any part of this Agreement by the DEBTOR shall be deemed a

waiver of any prior or subsequent default of any of the provisions

of this A9~e_e_rn~~1;. A~y _C;:()J:)._~_~_I1.~ ___ g:r;~nted hereunder shall apply

only in relation to the specific event in respect of which the

consent is given. In the event that the CREDITOR obtains a

judgment against the DEBTOR for any sums secured hereby, the

security interest granted hereunder shall not merge in the said

judgment.

9. Any term of this Agreement which is or is held to be

void, prohibited or unenforceable shall be severable herefrom

without in any way invalidating the remaining terms hereof.

21.

10. This Agreement shall.enure to the benefit of and be

binding upon the respective heirs, executors, administrators,

successors and assigns of the parties hereto. In the construction

of this Agreement, the masculine shall include the feminine and

the neuter, and vice versa, and the singular shall include the

plural, as the context may require.

11. If the DEaTOR is more than one (1) person, their

obligations shall be several as well as joint. If more than one

(I) person has covenanted to repay the indebtedness secured

hereby, the obligations among all such persons shall be several

as well as joint.

12. The proper law of this Agreement shall be the law of

the Province of Saskatchewan.

IN WITNESS WHEREOF the DEBTOR has executed this Agreement,

the day and year first above written.

SIGNED, SEALED AND DELIVERED ) in the presence of: )

) )

witness )

22.