Priority of Security Interests

Lizzie has a horse farm where she raises thoroughbred horses to race. Lizzie negotiated a loan in the amount of $300,000 from Canada Trust for the purpose of buying horses and equipment. Canada Trust took a security interest in all of Lizzie's present and future assets under a general security agreement. Canada Trust registered its security interest by filing a financing statement on July 15, 2015 under the Personal Property Security Act.

A year later, Lizzie needed a new pickup truck for her business. She negotiated a loan of $25,000 from Commerce Bank to buy a new truck. The bank took a chattel mortgage on the truck to secure the loan. Lizzie took delivery of the truck on August 1, 2016.The bank registered its security interest in August 30, 2016.

A few months later, Lizzie defaults on her obligations to Canada Trust and Commerce Bank. Both Commerce Bank and Canada Trust claim that its security interest has first priority to the pickup truck. Who is entitled to seize the pickup truck?

Required

1. What is the relevant legal issues (Under Canadian Law)?

Read and understand the facts to determine the legal questions that need to be answered.

2. Identify and discuss the applicable law relevant to the issue.

Cite the applicable law for Priority of Security Interests.

3. Apply the law to the facts and come to a conclusion or opinion.

Do not apply only common sense. Apply the law!

This is issue of Priority of Security Interests.

To give proper answer, summary of Priority of Security Interests is given in Below:

PPS legislation creates rules for determining the priority of security interests. For registered security interests, priority is determined by the date of registration. An important exception to this rule is the super-priority given to secured parties who supply goods to the debtor or directly finance their acquisition by the debtor. These purchase money security interests (PMSIs) have priority over all other security interests created by the debtor in the goods if certain requirements are met. Security interests usually follow the collateral into the hands of anyone who buys it from the debtor. To protect buyers, a security interest does not follow the collateral when (i) the sale is in the ordinary course of the debtor's business, (ii) the sale was permitted by the secured party, or (iii) the secured party's interest was unperfected, and the buyer was unaware of it.

Three steps are followed in the enforcement of a security interest by a secured party following default by a debtor: (i) the secured party takes possession of collateral, (ii) the secured party retains the collateral or disposes of it, or the debtor redeems it, and (iii) after disposition, any surplus is distributed in accordance with the priority of any other security interests in the collateral under PPS legislation. The debtor receives any remaining surplus and is liable for any deficiency. Creditors have an obligation to act in a commercially reasonable manner when they take possession of a debtor's assets. This obligation governs how creditors deal with these assets.