Commercial Law Introduction

Administrative Text Text “In-house” materials “In-house” materials One Volume One Volume Evaluation Evaluation 100% open-book final examination during the regularly scheduled examination period 100% open-book final examination during the regularly scheduled examination period Open-book Open-book Computers and similar electronic aids are not permitted Computers and similar electronic aids are not permitted No library materials No library materials You are responsible for You are responsible for All material covered in class All material covered in class You are not responsible for material which is not assigned You are not responsible for material which is not assigned

Administrative The text of these slides is available online The text of these slides is available online will be used as a regular means of communication for course purposes will be used as a regular means of communication for course purposes Notice of cancelled classes etc Notice of cancelled classes etc

What is Commercial Law? Commercial law Commercial law Debt Debt Transactional Transactional Corporate law (business associations) Corporate law (business associations) Equity Equity Organizational Organizational

What is Commercial Law? Debt Financing Debt Financing Unsecured debt Unsecured debt Secured debt Secured debt Bankruptcy Bankruptcy Transfer of Debt Transfer of Debt Assignment of Debt Assignment of Debt Negotiable Instruments Negotiable Instruments

Course Topics Debt Financing Debt Financing Secured & Unsecured Debt Secured & Unsecured Debt Real & Personal Property (Secured) Real & Personal Property (Secured) Pre- & Post-Judgment (Unsecured) Pre- & Post-Judgment (Unsecured) Before & After Bankruptcy Before & After Bankruptcy

Course Topics Comparative approach Comparative approach Jurisdictional variation Jurisdictional variation Secured v unsecured Secured v unsecured Land v Personal Property Land v Personal Property Effect of Bankruptcy Effect of Bankruptcy

Issues Policy Policy Minimize ex ante cost of debt Minimize ex ante cost of debt Law Law Enforcement Enforcement Creditor v Debtor Creditor v Debtor Priorities Priorities Creditor v Creditor Creditor v Creditor Creditor v Third Party Creditor v Third Party

Policy Ex ante cost of debt Ex ante cost of debt You need to borrow money You need to borrow money To start a business To start a business To buy a house or car To buy a house or car Pretend you get to write the law before you borrow the money Pretend you get to write the law before you borrow the money What law do you want? What law do you want? Why not ask what law you want after you borrow the money (ex post)? Why not ask what law you want after you borrow the money (ex post)?

Policy Cost of debt = Cost of debt = Return to capital + Return to capital + Default risk + Default risk + Transaction costs Transaction costs Return to capital Return to capital Is set by financial markets Is set by financial markets Commercial law Commercial law Affects default risk & transaction costs Affects default risk & transaction costs

Law Enforcement Enforcement Creditor v Debtor Creditor v Debtor What remedies does lender have against D after default What remedies does lender have against D after default Priorities Priorities Creditor v Creditor Creditor v Creditor Creditor v Third Party Creditor v Third Party What rights to 3 rd parties have in D’s assets? What rights to 3 rd parties have in D’s assets?

Enforcement

Enforcement No enforcement against the person of the debtor No enforcement against the person of the debtor Imprisonment to enforcement payment no longer exists Imprisonment to enforcement payment no longer exists Enforcement against the assets of the debtor Enforcement against the assets of the debtor All creditors – secured and unsecured – ultimately have recourse against essentially all the assets of the debtor All creditors – secured and unsecured – ultimately have recourse against essentially all the assets of the debtor

Secured v Unsecured Enforcement difference is the mechanism for realizing against those assets Enforcement difference is the mechanism for realizing against those assets How are the assets turned into cash to satisfy the debt without the cooperation of the debtor? How are the assets turned into cash to satisfy the debt without the cooperation of the debtor? Two key differences between secured & unsecured debt Two key differences between secured & unsecured debt Self-help Self-help Role of judgment Role of judgment

Enforcement Secured Secured Self-help Self-help No judgment required after default No judgment required after default Unsecured Unsecured Enforcement by public officer (sheriff) Enforcement by public officer (sheriff) Judgment required Judgment required

Self-Help Secured creditor generally has self-help remedies Secured creditor generally has self-help remedies The creditor ‘owns’ the collateral The creditor ‘owns’ the collateral No self-help enforcement before or after judgment for unsecured creditor No self-help enforcement before or after judgment for unsecured creditor Has a personal right of action against the debtor: ie has the right to sue to judgment Has a personal right of action against the debtor: ie has the right to sue to judgment Extremely limited rights against debtor’s assets prior to judgment: must obtain judgment in order to seize debtor’s assets Extremely limited rights against debtor’s assets prior to judgment: must obtain judgment in order to seize debtor’s assets Enforcement by public officer – sheriff or trustee in bankruptcy Enforcement by public officer – sheriff or trustee in bankruptcy

Unsecured Creditor – Enforcement Unsecured creditor enforcement mechanism in many jurisdictions depends on the type of property Unsecured creditor enforcement mechanism in many jurisdictions depends on the type of property Memorials and Executions Act – tangible property Memorials and Executions Act – tangible property Garnishee Act – debts Garnishee Act – debts

Unsecured Creditor – Enforcement Why are there different enforcement systems? Why are there different enforcement systems? Functional differences Functional differences Historical accident Historical accident Reformed jurisdictions Reformed jurisdictions Nfld Nfld Alta Alta

Bankruptcy An enforcement mechanism An enforcement mechanism For unsecured creditors For unsecured creditors Trustee in bankruptcy replaces sheriff as enforcement ‘officer’ Trustee in bankruptcy replaces sheriff as enforcement ‘officer’ Secured creditors are (mostly) unaffected Secured creditors are (mostly) unaffected Priorities are (mostly) unaffected Priorities are (mostly) unaffected

Priorities

Priorities between Creditors When there is more than one creditor and insufficient assets, how are the assets divided? When there is more than one creditor and insufficient assets, how are the assets divided? Key difference between secured and unsecured Key difference between secured and unsecured Pro rata sharing Pro rata sharing Each creditor receives eg 25 cents on the dollar of debt Each creditor receives eg 25 cents on the dollar of debt Unsecured creditors Unsecured creditors Lexical ranking Lexical ranking Highest ranking creditors is paid out in full before any other creditor receives anything Highest ranking creditors is paid out in full before any other creditor receives anything Secured creditors Secured creditors

Third Party Priorities Third parties may also have or acquire rights in the debtor’s assets Third parties may also have or acquire rights in the debtor’s assets Eg Purchaser Eg Purchaser What is the priority of the third party? What is the priority of the third party? Especially when dealing with prior non-possessory security interest Especially when dealing with prior non-possessory security interest Separation of ownership & control Separation of ownership & control The problem of ostensible ownership The problem of ostensible ownership

Secured Creditors Enforcement affects only the debtor and the creditor Enforcement affects only the debtor and the creditor Priority of security interests affects third parties Priority of security interests affects third parties So, to obtain priority in property, you must “perfect” your interest – publicize it to the world So, to obtain priority in property, you must “perfect” your interest – publicize it to the world Secured lending law is hostile to secret prior interests Secured lending law is hostile to secret prior interests But cf ownership interests But cf ownership interests

Security Interests – Publicity Perfection is by Perfection is by Registration – most important Registration – most important Possession Possession Different types of property have different registration systems Different types of property have different registration systems Personal Property Security Act/Registry Personal Property Security Act/Registry Land Titles Act/Registry Land Titles Act/Registry

Security Interests – Registration Why are there different registration systems? Why are there different registration systems? Functional differences Functional differences Historical accident Historical accident Other ‘types’ of (federal) property with separate registration Other ‘types’ of (federal) property with separate registration Bank Act Bank Act Intellectual Property Intellectual Property Ships – Canada Shipping Act Ships – Canada Shipping Act

Secured Creditor Convenient to say that secured creditor has a “property” right in the debtor’s goods Convenient to say that secured creditor has a “property” right in the debtor’s goods But a secured party’s rights are determined by statute and equity, not primarily by property law But a secured party’s rights are determined by statute and equity, not primarily by property law Nemo dat quod non habet is NOT the law Nemo dat quod non habet is NOT the law D can give what it doesn’t have D can give what it doesn’t have

Types of Secured Creditor Consensual secured creditor - “secured party” Consensual secured creditor - “secured party” Mortgages, Chattel mortgages, Conditional Sales Agreement, Financing lease Mortgages, Chattel mortgages, Conditional Sales Agreement, Financing lease Now referred to as “security interests” Now referred to as “security interests” Personal Property – Personal Property Security Act Personal Property – Personal Property Security Act Land – Land Titles Act / Registry Act Land – Land Titles Act / Registry Act Non-consensual secured creditor - “lien holder” Non-consensual secured creditor - “lien holder” A security interest which arises by operation of law A security interest which arises by operation of law Mechanics’ Lien Act (builders) Mechanics’ Lien Act (builders) Liens on Goods and Chattels (mechanics) Liens on Goods and Chattels (mechanics) Government liens Government liens

Types of Collateral Enforcement and priorities depend on type of collateral Enforcement and priorities depend on type of collateral Personal property v Land Personal property v Land Why? Why?

Unsecured Creditor Pro rata sharing priority system between creditors Pro rata sharing priority system between creditors Unsecured creditors generally rank behind third parties who take prior to (registration of) judgment Unsecured creditors generally rank behind third parties who take prior to (registration of) judgment

Secured Creditor - Summary Self-help enforcement Self-help enforcement Can seize assets without prior judicial approval Can seize assets without prior judicial approval Judicial supervision of enforcement is ex post Judicial supervision of enforcement is ex post Lexical priority system Lexical priority system Highest ranking secured creditor paid out in full before second ranking creditor receives anything Highest ranking secured creditor paid out in full before second ranking creditor receives anything Secured parties generally rank before subsequent third parties Secured parties generally rank before subsequent third parties

Unsecured Creditor - Summary No self-help enforcement No self-help enforcement Enforcement by sheriff or trustee in bankruptcy Enforcement by sheriff or trustee in bankruptcy Pro rata sharing among unsecured creditors Pro rata sharing among unsecured creditors Rank below third parties who take prior to (registration of judgment) Rank below third parties who take prior to (registration of judgment)

Summary Secured creditor Secured creditor Self-help enforcement, no judgment required Self-help enforcement, no judgment required Lexical priority system Lexical priority system Strong rights against third parties Strong rights against third parties Unsecured creditor Unsecured creditor No self-help enforcement, judgment required No self-help enforcement, judgment required Pro rata sharing Pro rata sharing Few rights against third parties Few rights against third parties As a practical matter, an unsecured creditor gets almost nothing in bankruptcy As a practical matter, an unsecured creditor gets almost nothing in bankruptcy

Secured Debt - Acts Personal Property Personal Property Personal Property Security Act – PPSA Personal Property Security Act – PPSA Real Property Real Property Priorities Priorities Land Titles Act/ Registry Act Land Titles Act/ Registry Act Enforcement Enforcement Property Act Property Act Other types of property Other types of property Eg Bank Act, Copyright Act, Patent Act, Canada Shipping Act Eg Bank Act, Copyright Act, Patent Act, Canada Shipping Act

Unsecured Debt - Acts Priorities Priorities Creditors Relief Act Creditors Relief Act PPSA PPSA Bankruptcy Act (federal) Bankruptcy Act (federal) Enforcement – Real and Personal Property Enforcement – Real and Personal Property Memorials and Executions Act Memorials and Executions Act Enforcement – Choses in Action (Debts) Enforcement – Choses in Action (Debts) Garnishee Act Garnishee Act