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Ontario PPSA Amendments – Is There Greater Harmony with the UCC?

Smarter Way to Cross Blog Archives
March 17, 2016

At the end of last year, I received bulletins from Ontario law firms alerting that the amendments to the Ontario Personal Property Security Act (“PPSA”) changing the definition of the “location” of the debtor in the PPSA choice of law rules had been proclaimed and would take effect on December 31, 2015 (the “PPSA Amendments”).

The PPSA Amendments on their face appear to better harmonize the PPSA choice of law rules applicable to perfection by registering a financing statement with the choice of law rules of the Uniform Commercial Code (“UCC”). Under the PPSA Amendments, the debtor’s “location”, if the debtor is, for example, a corporation organized under the law of a province of Canada or one of the states of the United States, will now be based, not on the debtor’s chief executive office location, as was previously the case, but on its jurisdiction of incorporation, as is the case for a “registered organization” under the UCC. But despite this apparent closing of the gap between the PPSA and the UCC, harmony is a long, long way away.

A significant lack of harmony results from the PPSA and UCC choice of law rules not being consistent with respect to perfection of a security interest in tangible property. Under the PPSA, there are differing choice of law rules for tangible and intangible property. When dealing with most classes of tangible property, the location of the property, not the debtor, continues to control where to register a financing statement. The “location” of the debtor only determines where to register a financing statement in intangibles, mobile goods, goods held for lease and non-possessory security interests in instruments, documents and chattel paper and mobile goods (collectively, for our purposes, “intangible property”). The PPSA Amendments create a more bright line test for determining the debtor’s location (place of incorporation instead of chief executive office), but do not eliminate this dichotomy under the PPSA for tangible and intangible property. That same dichotomy used to exist under the UCC but was eliminated under revised Article 9 of the UCC. The physical location of the debtor’s tangible assets generally has become irrelevant under the UCC for determining where to file. Instead, the local law of the state of the debtor’s “location” determines where to file to perfect a security interest in the debtor’s assets for nearly all types of assets.

There is also an additional inconsistency that results from the UCC choice of law rules not being in sync with the PPSA Amendments. The UCC “location” definition doesn’t treat Canadian entities as “registered organizations”. Under the UCC, the location of an Ontario corporation (because it is not a registered organization for UCC purposes) continues to be where its chief executive office is located -- the same as the rule under the PPSA before the PPSA Amendments. (For a more complete discussion of the UCC choice of law rules, see my earlier blog entry, For the Canadian Cross-Border Finance Lawyer or Lender, A UCC Financing Statement Hypothetical with FAQs.) By way of contrast, the PPSA Amendments and the UCC would now both treat a New York corporation as a “registered organization”. As a result, a New York corporation is “located” in New York under both the PPSA Amendments and the UCC, even if its chief executive office is in Ontario. The chart below outlines both this new inconsistency and consistency.

Filing under the PPSA Amendments and UCC – Intangibles Only

Jurisdiction of Formation

Chief Executive Office

Before/ After PPSA Amendments

Under PPSA file where?

Under UCC file where?

Consistent?

Ontario Corporation

New York

Before

New York

New York

YES

After

Ontario

New York

NO

New York Corporation

Ontario

Before

Ontario

New York

NO

After

New York

New York

YES

There are other differences in approach between the UCC and the PPSA that practitioners will need to keep in mind. For example, the location of a general partnership under the UCC is generally its chief executive office. Under the PPSA Amendments, a general partnership is located in the jurisdiction of the law stated to govern in its partnership agreement (and its chief executive office only if no law governs such partnership agreement).

These inconsistencies between the UCC and the PPSA would be diminished in one way if the UCC were also amended to bring Canadian entities into the definition of a “registered organization” under the UCC. However, correcting this one inconsistency would not resolve the more significant lack of harmony between the UCC and the PPSA choice of law rules relating to perfection of security interests in tangible property. In any event, I would not hold my breath for any harmonizing changes to the UCC (or, I imagine, the PPSA) any time soon!