Commercial Law Introduction Administrative n Text n

Commercial Law Introduction

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

Administrative n The text of these slides is available online n http: //www. law. unb. ca/Siebrasse/Comm. htm n E-mail will be used as a regular means of communication for course purposes n Notice of cancelled classes etc

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

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

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

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

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

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

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

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

Enforcement

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

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

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

Self-Help n Secured creditor generally has self-help remedies • n The creditor ‘owns’ the collateral 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 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

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

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

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

Priorities

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

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

Secured Creditors n Enforcement affects only the debtor and the creditor n n Priority of security interests affects third parties 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 n But cf ownership interests n

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

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

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

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

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

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

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

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

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

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

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