Class Notes Securities PDF

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Professor Jakub Adamski...

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Securities Recording Class 1, Recording Class 2, Recording Class 3, Recording Class 4, Recording Class 5, Recording Class 6, Review Cases of Class 6 about PMSYs, Recording Class 7, FINAL EXAM, Recording Class 8

Class 1 Secured vs Unsecured Creditor

A loan is a personal obligation. When can B do in case that A defaults on the repayment of the loan? B can obtain a judgement against A. Through the process of execution, B can seize some of the property of A to repay the debt. But what happens if A doesn't have any property to be seized? If you have a loan and it doesn't have any protection, then you run a risk. Equitable Subordination ⟶ Continental Bank

Security gives a propriety right in the property of the debtor that is prior to any other creditor. So B can seize the property in case that A is in default, without even needing a judgement, since B has a proprietary right in that property.

Security provides a protection for the creditor, reducing the risk that the creditor will not be paid in case that the debtor defaults on his obligation to repay the loan.

Can have a Security on a property or all of the property of the debitor.

Structure finance: a way to financing the acquisition of a property.

Art. 9 UCC Uniform Commercial Code) - Secured Transactions We don't have the UCC in Canada. Instead, we have the Personal Property Security Act - Ontario Inspired of S. 9 of the UCC

Banking S. 427 of the Bank Act S. 425 of the Bank Act Allows you also to create a security. But this is a federal, as opposed to the PPSA, which is a provincial law. So you can create a Security under 2 different regimes: One is federal S. 425 and following of the Bank Act) One is provincial PPSA - Personal Property Security Act of Ontario)

Class 2 - Loans 1 Here are the readings for this week's class: The readings for this week are designed to illustrate certain features and risk allocation inherent in loans.Please read,Solar Power Network Inc. v. ClearFlow Energy,2018 ONCA 727andMaxam Opportunities Fund v. Greenscape Capital Group Inc.,2013 BCCA 460, 368 D.L.R. (4th) 331.Sadly, neither case is very

easy.I am going to look at both of them from the perspective of how the risks inherent in the loan arrangement and how you can control as well as some statutory requirements of loans (outside the consumer context). I will also discussSmith v. Landstar Properties Inc.,2011 BCCA 44, 14 B.C.L.R. (4th) 48 for the value of security. Finally, given the ongoing pandemic, you might find this case of exceptional interest, even if it is not strictly a loan case:Fairstone Financial Holdings Inc. v. Duo Bank of Canada,2020 ONSC 7397. You can skim it, and I will explain in class its application to loans. Finally, if you are more interested in a theoretical overview of loan (or bonds) agreements, see the attached William W. Bratton, “Bond and Loan Covenants, Theory and Practice” 2016 114 Capitol Markets L.J. 461 paper (but that it is strictly optional). They are all to be read for the big ideas rather than the details.

Loans What characterizes a loan is the fact that one party owes money to the other, as a form of repayment. You can have loans that don't require to pay interest rates. The obligation of the borrower is just to repay the loan (without interest) Differs from a gift, where the beneficiary does not have an obligation to repay the gift If you want to charge a fee, there is a federal statue that applies: The Interest Act This Statute stipulates how to inform the borrow about the fee Essential elements of a loan:  How much is borred  When & how does it have to be repaid

(optional) Annual Interest rate or how to calculate the interest rate Demand Loan: I must demand that you repay me for you to incur the obligation of repaying me Time Loan: It was predetermined by the parties the date at which the loan must be repaid

Solar Power Network Inc. v. ClearFlow Energy To be able to charge a fee on a contract, you have to stipulate it on the contract as a percentage % per year, on an annual basis S. 4 Interest Act) If you don't do so, you only get 5% Issue: there was only a formula in the contract to calculate the fee, but there was not explicit stipulation of what the annual fee actually was Court of Appeal said it was okay if you just gave the formula to calculate the interest rate on an annual basis, you don't have to say what the explicit and exact number is

Criminal Code, S. 347 - Criminal Interest Rate Highest legal interest rate in Canada is 60% Interest includes the aggregate of all charges and expenses, whether in the form of a fee, fine, penalty, commission or other similar charge or expense or in any other form, paid or payable for the advancing of credit under an agreement or arrangement However, Loans with Interest Rates above 60% are not illegal enforceable, but only up to a rate of 60% This is however a very small incentive to force lenders not to make loans that incur interest rates above 60% (which include charges and expenses, ex: late fees)

Protections for Lenders Lenders usually try to limit what the borrower can do with the borrowed money, to limit the risk that the borrower ends up not repaying the loan.

Difference between a Loan and a Bond Generally, a Loan is only between 2 parties or between a borrower and a small group of lenders. A Bond is created when the borrower issues rights to a great number of investors who act as lenders. Usually much shorter and simpler than a loan

Securities Gives a protection Gives a property right above other people on the assets of the borrower

Smith v. Landstar Properties Inc. This case shows the economic value of securities Securities are valuable Issue: B saved money by breaching his contract Even if you get repaid, having security is valuable protection, even maybe the best protection you can have Having security is better than not having security, even if there is repayment

When to issue a security?

When there is an imbalance in bargaining power between the borrower and the lender Structure Finance : give property rights to lenders over assets so that you may borrow money

Maxam Opportunities Fund v. Greenscape Capital Group Inc. Once you borrow the money, the only way you can deal with a breach is by accelerating the date of repayment How courts approach lending transactions Borrower can do what ever he wants with the money he borrows, unless there are clauses restricting his usage of that money that are clearly stated in the contract It is up to the lender to put limitations expressly written in the contract as to what the Borrower can or cannot do with the borrowed money

Class 3 - Property Rights, Application of PPSA & Non-Application of PPSA - S. 2 & 4 PPSA RECAP Loan: exchange of money in the promise of repayment. Loan is a personal obligation. Bailment: when you return the good that was lended to you. Term loan or on-demand loan ⟶ depends on the repayment date of the loan Lender can protect himself by refusing to lend the money : material adverse effect Applied in the form of a condition precedent

General rule: no specific performance of loans Cannot force a lender to lend the money Lender can protect himself by stipulating how the money can be used to increase the chances that the borrower will repay the money Use negative covenants saying what the borrower cannot do with the money Lender can also protect himself from the risk of not being repaid by benefitting of a security giving him a property right in an asset belonging to the borrower If borrower defaults on repayment of his loan, lender can then seize the asset in which it has a proprietary interest right in it so it can sell it and then repay himself Lender has 2 rights: Personal right, as a debt that the borrower has to repay Property right, with the security he has over one of the borrower's assets

Real Property Personal Property: everything that is not Real Property Individual rights Fundamental difference between Real Property and Personal Property is whether or not you can take possession of it If you cannot physical possess the item (lack physical dimension) ⟶ incapable of possession Possession: A good which you can seize and gain control over with physical capacity Create possession when 2 factors are satisfied: Physical Control Intention to exclude others

It is an actual state in the World tool for establishing, maintaining and transferring a legal right Act of possession creates a right Ownership = "Best Right to Possess" Right to possess has 2 dimentions: Against whom you can oppose your right of possession Time : is your right to possess is limited in time or not If it is limited in time, it means that someone else has a better right than you, since when your time expires, they will take possession Pledge: Security device creates property right by transferring possession Transferring possession into something to someone else until you have fully paid them Liens Best Right to Possess is the first right to possess, meaning the first person to exercise possession

Choses in Possession Things over which you can exercise physical possession Enforceable by exercising physical possession Can see the exchange in possession in the World I give you my phone. You now have possession of my phone.

Choses in Action Not capable of possession because lack of physical component

Ex: Shares in a corporation IP rights Money in a bank account Contractual rights Enforceable through legal action (only way) Assignment: system for transferring rights from one person to another Only way to transfer Choses in Action rights Wikipedia: assignment is the process whereby a person, the assignor, transfers rights or benefits to another, the assignee.2 An assignment may not transfer a duty, burden or detriment without the express agreement of the assignee. The right or benefit being assigned may be a gift (such as a waiver) or it may be paid for with a contractual consideration such as money. No need to actually transfer possession for a Choses in Action to be created

Application of the PPSA - S. 2 PPSA Section 2 If something is in its substance a device to create a security, then in order for it to work, it must be consistent with the rules of the PPSA. PPSA governs over anything that aims at creating a security for a loan. What matters is the function of the right, which is to create a security. PPSA covers major items in transactions such as : Cars Boats RVs

Very expensive construction machine PPSA does not cover: Houses Mortgages)

Lien: It's like a pledge It's a security device created by taking and maintaining possession Ex: mechanic lien. The Mechanic can keep possession of the car until you pay him for the work he has done Security through possession Deemed trust: If you run a business an you collect taxes for the government, you have an obligation to hold that money as a Trustee until you give the money to the government That money belongs to the government

PART IAPPLICATION AND CONFLICT OF LAWS Application of Act, general 2Subject tosubsection 41, this Act applies to, (a) every transaction without regard to its form and without regard to the person who has title to the collateral that in substance creates a security interest including, without limiting the foregoing, (i) a chattel mortgage, conditional sale, equipment trust, debenture, floating charge, pledge, trust indenture or trust receipt, and (ii) an assignment, lease or consignment that secures payment or performance of an obligation;

(b) a transfer of an account or chattel paper even though the transfer may not secure payment or performance of an obligation; and (c) a lease of goods under a lease for a term of more than one year even though the lease may not secure payment or performance of an obligation. R.S.O. 1990, c.P.10, s.2; 2006, c.34, Sched.E,s.2. If I lease something for more than a year, I have to register it

Application to Crown 3This Act applies to the Crown and every agency of the Crown. R.S.O. 1990, c.P.10, s.3.

Non-application of Act - S. 4 PPSA 41 Except as otherwise provided under this Act, this Act does not apply, (a) to a lien given by statute or rule of law, except as provided insubclause 201(a)(i) orsection 31; (b) to a deemed trust arising under any Act, except as provided insubsection 307; (c) to a transfer of an interest or claim in or under any policy of insurance or contract of annuity, other than a contract of annuity held by a securities intermediary for another person in a securities account; (d) to a transaction under thePawnbrokers Act; it's a possessory security Note: On a day to be named by proclamation of the Lieutenant Governor,clause 4 1(d) of theActis repealed and the following substituted: See: 2019, c. 4, Sched. 2,s. 2) (d) to a transaction between a pledgor and a person who carries on the business of taking, by way of pawn or pledge, any article for the repayment of money lent on the basis of the pawn or pledge;

(e) to the creation or assignment of an interest in real property, including a mortgage, charge or lease of real property, other than, (i) an interest in a fixture, or (ii) an assignment of a right to payment under a mortgage, charge or lease where the assignment does not convey or transfer the assignor’s interest in the real property; (f) to an assignment for the general benefit of creditors to which theAssignments and Preferences Actapplies; (g) to a sale of accounts or chattel paper as part of a sale of the business out of which they arose unless the vendor remains in apparent control of the business after the sale; (h) to an assignment of accounts made solely to facilitate the collection of accounts for the assignor; or (i) to an assignment of an unearned right to payment to an assignee who is to perform the assignor’s obligations under the contract. R.S.O. 1990, c.P.10, s.41; 2006, c.8, s.124; 2017, c. 2, Sched. 3, 8 1. Rights underSale of Goods Act 2 The rights of buyers and sellers undersubsection 202andsections 39,40,41and43of theSale of Goods Actare not affected by this Act. R.S.O. 1990, c.P.10, s.42.

Class 4 - Validity and Enforceability of a Security Interest & Attachment - S. 9 → 11 PPSA TOPICS 1. Validity and Enforceability of a Security Interest Ellingsen Trustee of) v. Hallmark Ford Sales Ltd., 2000 BBCA 458 994814 Ontario Inc. v. RSL Canada Inc., 2006 CanLII 15893 ON CA

356447 British Columbia Ltd. v. Canadian Imperial Bank of Commerce, 1998CanLII6244 BC CA Eagle Eye Investments Inc v CPC Networks, 2012 SKCA 118 MacEwen Agricentre Inc. v. Bériault, 2002 CanLII 62436 ON SC 2. Attachment i Trade Finance Inc. v. Bank of Montreal, 2011 SCC 26 CanLII, 2011 2 SCR 360 CreditSuisse Canada v. 1133 Yonge Street Holdings Ltd., 1998CanLII6857 Royal Bank of Canada v. Sparrow Electric Corp., 1997 CanLII 377 SCC, 1997 1 SCR 411 1231640 Ontario Inc. (Re), 2007 ONCA 810

Attachements If your security functions by giving you a property right, then the question is when and if that property right is created? when does your interest becomes connected to some specific property?

3 Really Important Time-line Questions to always ask yourself:  When is the Security created?  When is the Security attached?  When is the Security perfected?

Secured Transaction Definition: at it's core, the purpose of the transaction is to give a property right to guarantee the performance of an obligation, usually an obligation of payment Ex: loan Often, the disputes are between 2 creditors who don't agree on who has a better right on a specific good.

Assignment It's the way you transfer an abstract right from one person to the other Remember: Property is either Choses in Possession or Choses in Action the only way to transfer Choses in Action is through assignment (see wikipedia if needed) If the property S. 21 is assigned for the reason of securing another obligation, then the transaction has to be done consistently with the rules of the PPSA ex: patents

1. Validity and Enforceability of a Security Interest Do you actually have a security interest that complies with the PPSA? Section 9 & 10 PPSA  You want to make sure you actually created the security through the transaction  Unless you have agreed to creating a security, there is no security that has been created  You want to make sure the transaction has actually transferred some property rights  It can involve assignments, but you have to be clear on that  MacEwan: fundamentally to read the validity requirement, you've got to be able to answer questions:  Are you creating a security?  The security is about what property/object?

Section 9

At it's core, whether or not a security interest is even possibly created is, at the end of the day, about interpreting what the parties did.

Section 10 You do not need a writing in order to create a security. By interpreting S. 10 If you have a writing, you have an obligation to deliver the contract within 10 days of execution Execution = act of creating the security *STATUTE OF FRAUDS: applies to securities. Therefore, if you create a security on a Real Property, must be in writing.

Series of problems around whether or not a security was created or not: Ellingsen Trustee of) v. Hallmark Ford Sales Ltd., 2000 BBCA 458 Constructive Trust - Agreement Create Si Facts: Guy who wanted to buy a truck but didn't have the money. Dealer → Possession → Buyer OR Finance Company → Money → Dealer + Dealer → Possession → Buyer + Buyer → Security → Finance Company However, for some circumstances, Dealer gave Possession to Buyer before the details have been figured out with the Finance Company Buyer filed for Bankruptcy before security was issue Fight between Dealer and Buyer other creditors Arguments of Parties: Dealer: says Tuck belongs to him, because he never really sold it to Buyer

Property Truck goes to the Dealer Other Creditors: property of Truck belongs to Buyer, therefore we have a right to share the product of sale of the truck between creditors. Court: No, property right of truck still belongs to Dealer Dealer did not do everything it was required to create a secured transaction that is valid according to Statute It's as if Dealer and Buyer agreed to transfer of property on the Truck, but on the condition that they would come to an agreement as to create a Security on that Truck No secured transaction actually occurred however Dealer has a right based on the Law of Constructive Trust Warning: meaning of Constructive Trust in Canada is very vague It is a remedy against unjust enrichment Court is enforcing a new property interest that is created by a Constructive Trust Court create the function of a security interest in the Truck, even though no actually security was created Equity remedy Requirement to Creation of a Constructive Trust as a Remedy: First Stage: must have a valid agreement about a security interest, and it must be in writing If you don't even have that, then there is no way a Court will create a Constructive Trust for you Second Stage: there must be presence of unjust enrichment (defendant's gain at the expense of plaintiff) Third Stage: lack of juristic reason

It is a Court that creates the Constructive Trust It is an Equitable Remedy It is a Discretionary decision by the Court So not all cases will receive this remedy Important: 994814 Ontario Inc. v. RSL Canada Inc., 2006 CanLII 15893 ON CA According to Terms of SA - S. 91 PPSA Facts: Someone acquiring a fancy machinery The machines could only be sold in Canada if they got Governmental Certificate Machines were sold but before the Certificates/Licences were issued Security Interest is created according to the terms of the agreement S. 91 PPSA If the security interest is an inventory, ...