OCTOBER 2013

The following-described scenarios may, at first glance, seem to be questions which might be raised at a Law School to test the analytical capacity of law students.  In fact, they represent "real life" scenarios that the writer has recently encountered.

1. May one hold a security interest in a debtor's collateral without the debtor owning any obligations (of any type) to the security holder?

A extends credit to B (either by way of a sale or a loan) and to secure B's obligations arising out of the indebtedness, B creates a security interest in B's personalty (presently owned and after-acquired), but grants that security interest not to A, but rather to C with C holding the security for A.  Is this legally feasible, given the fact that a security interest cannot legally exist unless it secures payment or performance of obligations and given that in this situation, the debt obligation is owed to A, not the holder of the security, B?  Note that such an arrangement would not be one where A first got the security interest itself from B and then assigned the debt and the security interest to C.  Nor would this be a situation where A assigns the debt to C and then C takes the security interest directly from B.  A careful reading of the definition of "security interest" in The Manitoba Personal Property Security Act reveals that such an arrangement would indeed be legally possible.  The definition does not provide that the security interest has to be held by the person to whom the obligations secured are owed, merely that the security interest has to secure obligations.  Thus there is no legal - or for that matter policy - reason why a creditor can't have someone else hold a security interest granted by the creditor's debtor.  Such an arrangement will be advantageous to all concerned where multiple creditors band together to provide credit to a debtor, and rather than having the debtor provide separate security interests in its assets to each of the creditors, or having all of the creditors named as grantees of the security, all the creditors and the debtor agree that the debtor's security interest will be provided to either one only of the creditors, or to a separate entity which will hold as a "collateral agent".  Needless to say, there will have to be an agreement amongst the participants - especially amongst the creditors and with the "collateral agent" if there is one - that spells out the rights of the holder of the security and the obligations that holder will have to the other creditors with respect to the security, in particular, in a realization/enforcement situation.

1. Change of ownership of collateral subject to a general security agreement.

A grants a security interest in all of A's presently owned and after-acquired personal property to B's Bank X.  X properly register's a financing statement in the Personal Property Registry giving notice of its security interest in A's assets.  B grants a security interest in all of its presently owned and after-acquired personal property to its bank, Bank Y, and, Bank Y duly registers its security interest in the Personal Property Registry.  Subsequently, A sells its business and all (or virtually all) of its assets, including its personal property, to B.  Bank X's security interest, covering, as it does, all of B's after-acquired personalty, would, upon B's acquisition from A of A's personalty, extend to and charge A's personalty now held by B.  But wouldn't also Bank X's security interest "follow" A's assets into the hands of B and charge A's personalty, now in the hands of B?  Would Bank X's security, pursuant to the terms of its security agreement, also extend to the personalty that B acquires subsequent to its acquisition of A's personalty?  Who would have priority - Bank X or Bank Y over (i) the personalty now held by B which it has just acquired from A, and, (ii) B's personalty that it currently owns other than the personalty it has acquired from A, and, (iii) personalty that B acquires in the future?

The "threshold" question to ask here is whether or not Bank X consented to the transfer of A's assets to B.  Under the PPSA, if Bank X did consent to A's disposition, then Bank X's security interest in the transferred assets is extinguished.  Bank X would have a security interest in any proceeds obtained by A for its disposition to B, but Bank X would no longer have any security interest in the transferred assets.  Unless B had confirmed or regranted a security interest in B's other personalty and/B's subsequently acquired personalty, Bank X would (also) have no security interest in such other assets of B.