Saskatchewan PPSA Amended To Include Electronic Chattel Paper  

On June 22, 2020, The Personal Property Security Amendment Act, 2019 (the  “Amendments”) came into force in Saskatchewan. The Amendments bring significant changes to The Personal Property Security Act, 1993 (“PPSA”) that may affect the interests of secured creditors and debtors.

In a previous insight, we highlighted features of the Amendments. This insight will discuss the Amendments regarding electronic chattel paper in detail.

To facilitate electronic commerce and increase efficiency, the Amendments specifically recognize “electronic chattel paper” as distinct from “tangible chattel paper” and provide a mechanism for demonstrating control of electronic chattel paper to gain super-priority status. Saskatchewan is the second province, after Ontario, to recognize electronic chattel paper in its PPSA. Organizations in these jurisdictions that currently use chattel paper can take advantage of potential efficiencies by using electronic chattel paper.

The Amendments implement most of the proposed changes in the Report to the Canadian Conference on Personal Property Security Law on Proposals for Changes to the Personal Property Security Acts (the “Report”), prepared by a Working Group of the Canadian Conference on Personal Property Security Law (“CCPPSL”) and ratified at the CCPPSL Annual Meeting in June, 2017. Therefore, we drew upon the reasoning and recommendations in the Report while preparing this insight.

What is Chattel Paper?

Chattel paper is a unique type of personal property representing both a monetary obligation and an interest in specific tangible personal property. This unique composite makes chattel paper central to automobile and equipment financing because it allows the seller or lessor of the property to provide financing at the same time as the sale or lease.

For example, in an automobile financing transaction, the seller (usually a dealer) offers credit to the buyer. The purchase contract provides both the payment obligations of the buyer and the dealer’s security interest in the automobile. The dealer can then sell and assign its rights under the purchase contract to a financial institution. It is also possible for a financial institution to take the contract as security for the loan made to the dealer. Whether the financial institution purchases the chattel paper or takes it as collateral, the organization is referred to as a “purchaser” of the chattel paper and the interest transferred is referred to as a “security interest”. The PPSA treats the dealer who generated the chattel paper as the “debtor” and the purchaser of the chattel paper as the “secured party”.

Chattel Paper Before the Amendments

Before the Amendments came into force, the PPSA allowed the chattel paper purchaser to perfect its security interest in the chattel paper by registration or by possession. A chattel paper purchaser who gave new value and took possession of the chattel paper without knowledge that the chattel paper was subject to a prior security interest gained a super-priority status. As an alternative to possession, the secured party could have clearly marked its interest on the hard copy chattel paper to obtain a super-priority status.

For organizations dealing with high volumes of chattel paper, the cost of printing and storing paper contracts could be significant. Notably, before the Amendments came into force, the PPSA did not recognize electronic chattel paper, nor did it consider how a secured party could demonstrate possession of electronic chattel paper.

Chattel Paper After the Amendments

The Amendments specifically recognize “electronic chattel paper” as distinct from “tangible chattel paper” to help facilitate electronic commerce and increase efficiency. The Amendments also provide a mechanism for demonstrating control of electronic chattel paper to gain super-priority status.

Regarding tangible chattel paper, a secured party may still achieve super-priority by taking physical possession of, or clearly marking its interest on, the tangible chattel paper.

Regarding electronic chattel paper, the Amendments provide rules for perfecting a security interest by control, which is intended to be a substitution for possession. To establish control, each of the following criteria must be met:

2(1.2) A secured party has control of electronic chattel paper if the record comprising the chattel paper is created, stored, and transferred in a manner such that:

  • a single authoritative record of the electronic chattel paper exists that is unique, identifiable and, except as otherwise provided in clauses (d), (e), and (f), unalterable;
  • the authoritative record identifies the secured party as the transferee of the record;
  • the authoritative record is communicated to and securely maintained by the secured party or its designated custodian;
  • copies of or amendments to the authoritative record that add or change an identified transferee of the authoritative record can be made only with the consent of the secured party;
  • each copy of the authoritative record and any copy of a copy is readily identifiable as a copy that is not the authoritative record; and
  • any amendment of the authoritative record is readily identifiable as authorized or unauthorized.

The Amendments are silent with respect to the process by which the criteria are to be met. This is largely because the CCPPSL recognized that it would be unwise to specify in the legislation the mechanisms through which these standards can be met considering the rapid evolution that occurs in technology. However, the Amendments are based on United States law regarding electronic chattel paper, which has been in place for some time. Therefore, platforms and management processes currently used in the United States could be adopted in Saskatchewan to meet similar criteria.

Further, the Amendments dispense with the “without knowledge” requirement. Instead, a chattel paper purchaser, whether electronic or tangible, may obtain super-priority status “if the chattel paper does not indicate that it has been assigned to an identified assignee other than the purchaser.”

Priority Between Tangible and Electronic Chattel Paper

The Amendments address a priority competition that could arise when a chattel paper is fraudulently sold in both electronic and tangible forms to different chattel paper purchasers. In that situation, the interest of the purchaser of the tangible chattel paper, where it gave new value and took possession in the ordinary course of business, would get priority unless the tangible chattel paper indicated that it had been assigned to another party.

The lawyers at MLT Aikins have significant experience in personal property security law and would be happy to discuss how the introduction of electronic chattel paper could benefit your organization.

Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relief upon or taken as legal advice of opinion. Readers should consult a legal professional for specific advice in any particular situation.