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PPSA MOCK EXAM Javier is a car salesman with Spectacular Motors. Javier has recently dealt with a customer Max Smith. Max has traded in his Lexus for a value of $80,000 and purchased a new Lexus from Spectacular Motors for $100,000 (with $80,000 coming from the trade in and the balance provided by f...

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PPSA MOCK EXAM Javier is a car salesman with Spectacular Motors. Javier has recently dealt with a customer Max Smith. Max has traded in his Lexus for a value of $80,000 and purchased a new Lexus from Spectacular Motors for $100,000 (with $80,000 coming from the trade in and the balance provided by finance from Spectacular Motors) Javier runs a PPSR search using the VIN for the trade in car and for Max Smith as grantor and nothing shows up.

In fact, the vehicle is collateral for finance obtained by Max from LeaseCo. However, LeaseCo made an error when it recorded its interest on the PPSR for the vehicle by mixing up 2 numbers in the VIN. (Note: Spectacular Motors does not need to record a security interest against the trade in car because Spectacular Motors now owns the vehicle). Spectacular Motors registers a security interest against Max’s new car and records the VIN correctly. Max then gives the car to Aaron (his son) as a gift, and Aaron has an outstanding bank loan covering all present and after acquired property with Eastbank Ltd (which a proper PPSR registration). When Aaron defaults on his bank loan Eastbank seizes the new car.’

Spectacular Motors sells Max’s trade in vehicle to Vivian for $90,000, and provides Vivian with finance for the purchase. Spectacular Motors records a security interest in Vivian’s car on the PPSR. Vivan then loses the car in a bet with Walter (Vivian has a chronic gambling problem) at an illegal casino.

Who has priority to the 2 cars (new $100k Lexus and Max’s original trade in vehicle) under the Personal Property Securities Act?

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The Personal Property Security Act (PPSA) ‘provides for a priority regime, not a title regime’ (s 273; Warehouse Sales [2014]), so in order to determine who have priority over what personal property, it is necessary to see whether the PPSA is applicable to each parties interests. It must be notes that each of the below transactions were consensually entered into (Dura) and relates to only personal property defined in s. 10 that is not excluded by the Act (s. 8). Where there is a Security interest (SI) defined within s. 12, it must be perfected under s.21 to obtain full priority interest.

New Car Spectacular Motor (SM) will have a security interest over the new car which it financed to Max. The transaction, in substance, secures Max’s obligation to repay the remainder amount for the property (s. 12(1)). Additionally, their SI resembles a finance lease which is a recognised SI (s.12(3)(i)).

SM have perfected their SI under s. 21(2)(a). Their SI is attached since SM has provided value through the line of credit to Max (s. 19(2)(ii)). Assuming that the SI is attached (s 20(1) (a), it is also enforceable against third parties since their security agreement covers the collateral (s. 20(1)(b)(iii)) which was adopted by Max (s. 20(2)(a)(ii)) evinced through his actions of taking the car. Finally, the SI was registered on the PPSR (s. 21(2)(a)).

Additionally, assuming that SM complies with the 15 day registration rule under s 62(3)(b)(i), SM will have a PMSI interest since their SI covers part of the purchase price (s. 14(1)(a)). Thus, SM will have a perfected PMSI.

EastBank EastBank has an ALLPAP SI over Aaron. The transaction, in substance, secures debt repayments by Aaron (s. 12(1)). It resembles a fixed (s. 12(2)(a)) and floating (s. 12(2)(b)) charge.

EastBank have also perfected their SI by registration (s. 21(2)(a)). Their SI is attached to the collateral as EastBank has given value (s. 19(2)(b)(ii) evinced through the loan for their SI. Their SI is enforceable against third parties through the security agreement (s 20(1)(b)(iii)) which contained a statement that the SI takes an ALLPAP interest over Aaron (s. 20(2)(b) (ii)). Thus, EastBank has a perfected SI.

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Priority regime over New car Since SM has a perfected PMSI and EastBank has a perfected SI, the rule that applies is that a earlier or later PMSI will prevail over a perfected SI (s. 62). Thus, SM has rights over the new car. However, if EastBank is an ADI (s.25), they will have priority over the proceeds within the Aaron’s account (s. 75) and any proceeds.

Old Car SM will also have a SI over the old car which it financed to Vivian. The transaction, in substance, secured Vivian’s debt obligations to SM for the finance (s. 12(1)); 12(2)(i)).

SM will have perfected their SI through registration (s. 21(2)(a)). They have given value to attach their SI to the collateral (s. 19(2)(b)(ii)). It is enforceable against third parties through the security agreement (s. 20(1)(b)(iii)) which was accepted by Vivian through her conduct (s. 20(2)(a)(ii). Assuming that they have complied with the timing rule under s. 62(3)(b)(i), they will have a PMSI as their SI secures part of the purchase price of the old car (s. 14(1) (a)). Thus, SM will have a perfected PMSI.

Walter Walter will not take free of the SI since he obtained it through illegal gambling, the nemo dat rule applies and Walter will have no SI.

Vivan Vivian will also have no SI, her contract will SM will be terminated as she has breached the terms.

LeaseCo v SM Since LeaseCo has errors in registration, their SI will be unperfected. Under s. 55(4), where an unperfected and perfected SI compete, the perfected SI will prevail.

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