 Hello, it's Waylon Chow. This is Secured Lending Module 6 Part C. In this part, we will look at the priority of security interests. Before we talk about the actual public registration systems, let's try to first understand the two problems that these registration systems are meant to address. The first problem has to do with the enforceability of security interests against third party. So if we have a debtor here and a creditor, and the collateral is this bicycle. So let's say we have a security agreement between the debtor and the creditor. The creditor has provided a loan to the debtor, and the debtor has given a security interest over the bike. And let's say it's a chattel mortgage. And here's a third party. And let's say the debtor sells the bike to the third party. This third party is totally unaware of the creditor's security interest over the bike. And let's say then the debtor defaults on its loan from the creditor. The creditor tries to enforce its security interest over the bike. The problem that we have here is that the third party, the guy who bought the bike, was not a party to the security agreement. So is he bound by the security interest that the debtor gave to the creditor over the bike? So that's our first problem. Let's phrase the questions raised by problem number one. Is a security interest enforceable against someone who was not a party to the security agreement? And the second question is what if the collateral is sold to a third party? Can the creditor seize the collateral from the third party on a default? Problem number two has to do with competing security interests over the same collateral. Again, we have our debtor and we have a creditor who we will call creditor number one and the collateral is still this bike. So we have security agreement number one between the debtor and creditor number one. And the bike is the collateral under that security agreement. So let's say we also have another lender that we call creditor number two. And there's a security agreement between the debtor and creditor number two. And that security agreement number two also uses the same bike as collateral for that loan. So the problem raised here is if there's a default, which creditor's security interest has priority? Who has the legal right to take the bike in order to try to recoup on a loan that's gone into default? So where should the bike go? So the questions raised by problem number two are what happens if more than one creditor has a security interest over the same collateral? Who has priority in claiming against the collateral if there is a default? The solution to these problems is the public registration of security interests. There are three public systems for the registration of security interests. Where the collateral involves real property. In Ontario there's a land titles registration system called TerraView and each province will have their own separate land registry. Where the collateral involves personal property. There's a registry under the Ontario Personal Property Security Act or PPSA for short and every province will have its own personal property security legislation and registration system. Where the collateral involves a security interest under section 4027 of the Bank Act, there is one federal registry that applies to all of Canada. As mentioned earlier, the land titles registration in Ontario is called TerraView. That's an electronic database where documents related to interests in real estate are registered and that includes transfers of title or ownership and also mortgages are registered on TerraView. With respect to the issue of enforceability against a third party, a registered charge or in other words a mortgage that is registered on TerraView is binding on subsequent purchasers of the property. So that means that mortgage against the property is valid and binding regardless of who owns the property. Even though the current owner is not the person who borrowed money against that mortgage, the mortgage is still applicable to the property which means that the creditor can take action to sell the property in order to satisfy the outstanding debt. So the typical and usual thing that happens whenever you buy a piece of real estate is making sure that any outstanding mortgages registered against the property are paid off, are discharged before you take ownership of the property. With respect to the issue of priority, mortgages on the same property take priority in the order of registration, not the order that the mortgages were created. So priority means that the creditor under a mortgage has basically first dips in seizing or selling the property in order to pay off the outstanding debt that's owed to that creditor. So a first mortgagee would have the first right to sell a property in order to pay off their debt and if there is money left after that then only then would it go to the second mortgagee and that priority is determined based on whoever registered first, not whoever created their mortgage first. Under the Personal Property Security Act, the issue of enforceability against third parties is dealt with by having the security interest perfected in order to be enforceable against the third party who had no knowledge of the security interest. So the security interest has to be perfected in order to enforce it against the third party who was not aware of the security interest over the asset. Now, perfection means that the security interest has been registered in the PPSA registry by filing a document called a financing statement. A third party buyer of collateral property is subject to a perfected security interest except where, so these are the exceptions, the secured party has permitted the debtor to sell or otherwise deal with it. Let's look at the issue of priority against other security interests on the same collateral under the Personal Property Security Act. There is a particular order of priority specified by the PPSA. The highest priority is a Purchase Money Security Interest or PMSI registered within 15 days of the debtor taking possession of the collateral and we'll talk a little bit more later about Purchase Money Security Interest. The second in priority are perfected security interests ranked in order of time of registration. So we look at all the registered security interests and rank them in terms of the time of registration. The higher priority are the ones that were registered earlier in time. And a perfected security interest includes PMSI's or Purchase Money Security Interest that were registered after 15 days of the debtor taking possession of the collateral. So if that 15-day period is missed and it's registered after the 15-day period, then it's treated as like any other perfected security interest. The third in priority are unperfected security interests. So these are security interests that have not been registered. So we rank these in order of time of attachment. Attachment means when was the security interest created or when was the security agreement entered into. But these unperfected security interests are subordinate to claims by a trustee in bankruptcy and other representatives of creditors of the debtor, creditor with a judgment against the debtor and buyers of the collateral asset without knowledge of the security interest. A Purchase Money Security Interest or PMSI or it's also called a PIMSI. A PIMSI is created when credit is extended or loan is given to buy the property used as collateral for the debt. So the credit or the loan was used to buy the thing that is being used as collateral for the loan. If a PIMSI is registered within 15 days of the debtor taking possession of the collateral, that PIMSI has what we call super priority over any previously registered security interest, including a general security agreement. So even stuff that was registered before the PIMSI, the PIMSI if it's registered within 15 days has super priority over that as well. A PIMSI is registered after the 15 day period has only regular priority as a perfected security interest. Now just as a side note, the textbook and also I believe my Biz Law Lab states that the time period for registering a PIMSI for super priority is 10 days. But in fact the law in Ontario under the PPSA changed that time period from 10 days to 15 days in 2010. So the correct time period now is 15 days. Let's now do a couple of quick quiz questions to end this module. Please pause this video to have a look at this first question and try to pick the right choice. A security interest is perfected when a financing statement is registered under the Personal Property Security Act. Please pause this video at this point in time so you can have a careful look at this question and try to choose the correct answer. A purchase money security interest or PIMSI perfected 20 days after the debtor took possession of the collateral asset has priority over. The answer is C, a subsequent pledge of that asset that is registered under the Personal Property Security Act. So remember, so this PIMSI was perfected 20 days after. So that's beyond the 15 day period. The PIMSI does not have super priority. So it only has priority over subsequent, subsequently registered security interests.