New Zealand Credit Law Bulletin - Vol 2, No 3, April 2002 - PPSA Special

A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe send a blank email to: nz-bulletin-join@mailman.hattaways.com

Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.

In this issue:

Smart lawyers use PPSA to secure payment
Vital to get the description right on the Register
The AFC case
The VCSCU case
Mother's day gift suggestion

1. Smart lawyers use PPSA to secure payment

MacDermid Lamarsh v D'Lugos SKQB QB97538 (12 December 1997)

Betwenn 1991 and 1997, Anna-Marie Hryhoriw (yes, that is the correct spelling) ran up legal bills of over $11,000 to MacDermid Lamarsh. She was suing for the custody of her children and an order that her sometime partner, Thane D'Lugos pay her child support.

In 1994, D'Lugos gave her a 1990 Chevrolet Cavalier. He claimed that Hryhoriw said she'd pay him back and that he retained an interest in the vehicle until he was paid. (It seems unlikely that she would agree with this claim, but that was an issue which wasn't covered in this decision.) In April 1996, he registered a financing statement on the Saskatchewan Personal Property Register.

The car was written off in an accident. It was insured by Saskatchewan Government Insurance (SGI). Hryhoriw told Macdermid Lamarsh that she would use the payout from SGI to pay her legal bill. MacDermid Lamarsh was aware of D'Lugos' security registration and that it was based on an oral security agreement with Hryhoriw. They got Hryhoriw to execute a written security agreement in favour of them, in which she granted them a security interest in all the funds due to her from SGI. They registered on the PPS Register.

MacDermid Lamarsh then asked the Court for a declaration that they had a validly registered and perfected security interest and that their registration sat in priority to that of D'Lugos.Secured creditors have to do two things - attach and perfect - to protect themselves under the Act. "Attachment" is a process which generally occurs when the debtor signs a security agreement and the creditor gives value. In this case, D'Lugos'had no written security agreement; agreement was oral.

Under the Personal Property Security Act (Saskatchewan) "attachment" and registration (or possession of the goods) are required in order to obtain a "perfected" security interest - a security interest that has priority over any other later security. Similar provisions exist under the New Zealand PPSA ( section 41).

Under the Saskatchewan and New Zealand Acts ( section 36 in New Zealand), an oral security agreement is not enforceable against a third party (such as Macdermid Lamarsh) unless the secured party (D'Lugos) has possession of the goods. Because he didn't have possession, he couldn't enforce against third parties. The security interest therefore did not "attach" to the property ( section 40 in New Zealand).

Because it hadn't attached it couldn't be perfected (section 41 in New Zealand). A perfected security agreement (Macdermid Lamarsh's) has priority over an unperfected security agreement (D'Lugos'). The insurer, SGI, was ordered to forward all funds related to the loss of the car to the lawyers, Macdermid Lamarsh.

2. Vital to get the description right on the Register

Alda Wholesale Ltd (Trustee of) 2001BCSC921 (27 June 2001)

Alda Wholesale was in the business of car and passenger van rentals and used car sales in British Columbia. After the business failed, Alda's trustee under Canadian insolvency law auctioned off all Alda's vehicles. One of the creditors, the Province of British Columbia, applied for a Court declaration that the registered security interests of the Vancouver City Savings Credit Union ("VCSCU") and of the Automotive Finance Corporation ("AFC") were not perfected under the British Columbia PPSA. If not perfected, ACF and VCSCU would be paid after other secured creditors.

3. The AFC case

On 9 April 1997, AFC had registered a financing statement on the PPS Register in which the collateral was described as:

Motor vehicles (including, without limitation, trucks, tractors, truck trailers, truck chassis or truck bodies), automotive equipment (including without limitation, trailers, boxes and refrigeration units) and materials-handling equipment leased by the debtor from the secured party …

There were a number of problems with this description. We'll cover two. The first was that it was not clear from the description whether AFC claimed to have a security interest in all the motor vehicles, automotive equipment and materials-handling equipment or only in those which had been "leased by the debtor from the secured party". For parties considering lending to Alda, the main purpose of their search of the Registry would be to find out what security interests had been registered and against what goods of Alda. So a reasonable person searching the Registry would have been seriously misled. Under both the British Columbia and New Zealand ( section 149) Acts, a registration is invalid if seriously misleading.

Secondly, there was no indication whether the agreement covered vehicles acquired after 9 April, 1997 or whether it only provided for a charge over leased vehicles which existed as at 9 April, 1997 and any proceeds from the sale of those particular vehicles. The Court decided that a reasonable searcher would conclude that after-acquired goods were not included within the description. AFC's security interest wastherefore not perfected by its registration of the financing statement. It lost its priority.

4. The VCSCU case

VCSCU had a charge over all of the present and after-acquired property of Alda. However, it had registered a financing statement on the PPS Register which contained the following terms:

The collateral subject to the security interest created herein is all equipment … and all proceeds thereof derived directly or indirectly therefrom … the debtor's property hereinafter described, wherever situate, complete with all present and future attachments, accessions, accessories, replacements and additions, and all proceeds thereof …

The word "equipment" was the problem. It was clear that the vehicles charged by the VCSCU financing statement were not used as "equipment" as defined under the PPSA. The term "equipment" excludes goods that are "inventory" or "consumer goods". Vehicles which are registered as equipment or consumer goods are "serial-numbered goods" and must be described by serial number (in New Zealand, section 142(e) and clause 9 of the first schedule of the Regulations). Here, VCSCU didn't enter the serial numbers.

VCSCU argued that even though the financing statement was confusing, any reasonable person would have requested a copy of the security agreement. This argument didn't succeed. The legislation doesn't intend for prospective creditors to have to do this. In fact, the British Columbia PPSA (in New Zealand, section 177) does not allow a person merely considering lending to receive such a copy.

VCSCU's failure to satisfy the description requirements was considered to be seriously misleading and so its security interest was also not properly perfected and lost priority against subsequent creditors with perfected security interests.

5. Mother's day gift suggestion

Two key things about the PPSA. 1. It's not simple to understand and to get right. 2. It's really important for all creditors, not just lenders. You can't just ignore it and hope it will all be easy or that it doesn't apply. We've written a book which tries to make it easy (Credit Revolution: A Guide to Surviving the Personal Property Securities Act) see www.hattaways.com . It's got lots of examples and pictures. We urge you to buy multiple copies.

The Psychology of Dealing with People seminar

R Glynn Owens DPhil (Oxon), Professor of Psychology, University of Auckland, former Professor of Health Studies, University of Wales. Author of eight books and over 50 research articles, has worked in numerous fields including general medicine, clinical psychology, sports psychology, forensics and industry. Member of editorial board of Psychology, Health and Medicine. Active researcher in a number of areas including psychological assessment, statistics, decision-making and research design.
Glynn Owens

Alan Liddell LL.B. B.A. presents legal seminars for Hattaway & Associates Ltd. He is the principal in Tauranga law firm Capamagian Liddell and has practised since 1973. He has particular interests in finance company law, commercial litigation, and legal training. His book on the Personal Property Securities Act, cowritten with Peter Hattaway, has received praise for being the most readable and understandable text written on this complex piece of law.
Alan Liddell