Cross-border transactions are now commonplace. One of the issues often raised in these transactions is where to register a security interest in the collateral of the debtor. Where a debtor has assets in both Canada and the United States, each of which has slightly different rules for determining where to register and different choice of law rules, resolving the issue of where to register can be very confusing.
Let us take an example of a debtor that is an Ontario corporation with its head office in Ontario and inventory located in New York State. If we look at the Personal Property Security Act (Ontario) (the "PPSA"), section 5 tells us that the validity, perfection and effect of perfection or non-perfection is governed by the jurisdiction where the collateral is situated at the time the security interest attaches. Section 8.1 of the PPSA states that, for the purposes of sections 5 to 8, a reference to the law of a jurisdiction is a reference to the internal law of that jurisdiction, excluding its conflict of law rules. This provision prevents the application of the principle of renvoi in cases involving conflict of laws, which is applicable where a court determines that the law of another jurisdiction is applicable to the issue before it, but the conflict of law rules of the other jurisdiction differ from those of the forum determining the issue. So like a ping pong game, Ontario law says to apply New York law, which sends you back to Ontario law, which returns you to New York law, and so on. Back to our example, Ontario law will tell us that perfection is governed by New York law (without reference to its conflict rules), and so we must take the actions specified by New York law, namely to file a financing statement in New York.
Now let us see what New York law tells us to do. Section 9-301(a) of the New York Uniform Commercial Code (the "UCC") provides that the law governing the perfection of security interests in both tangible and intangible collateral, where perfected by filing, is the law of the jurisdiction of the debtor's location. The section further specifically states that it is the local law of that jurisdiction that governs. Official comment 3 to this section explains that "local" law refers to the substantive law of a particular jurisdiction and not its choice of law rules. Like section 8.1 of the PPSA, this prevents the ongoing ping pong game.
Section 9-307 provides the rules for determining a debtor's location. Under that, a debtor that is an organization and has only one place of business is located at its place of business. A debtor that is an organization with more than one place of business is located at its chief executive office.1 However, this only applies if the debtor's place of business or chief executive office, as applicable, is located in a jurisdiction whose legal regime provides for notice to be filed in a public registry to perfect a security interest.2 If this is not the case, that is, the foreign law affords no public notice of security interests, then the debtor is deemed to be located in the District of Columbia. Since Ontario has a system of registration to determine priority (and such system is in fact based on Article 9 of the UCC), Article 9 deems that in a case where the debtor has its chief executive office in the Province of Ontario, Ontario law will govern perfection. There is no need or reason to file in the District of Columbia.
Having concluded that in this case the debtor is located in Ontario, Article 9-301 then tells us to look only to the "local" or substantive law of Ontario and disregard Ontario's choice-of-law rules. Stripped of its conflict of law rules, Ontario's substantive law provides that financing statements should be registered with the Ontario registration system. Specifically, section 23 of the PPSA provides that registration perfects a security interest in any type of collateral, and section 45(1) of the PPSA states that in order to perfect a security interest by registration under this Act, a financing statement shall be registered. Section 41(a) of the PPSA provides for a registration system to be maintained for the purposes of this Act. Thus, if a New York court applies Article 9 to the transaction, an Ontario registration works to perfect; a New York filing does not.
In summary, if the secured party brings its action to enforce the security interest in Ontario, the court should find that, under New York's substantive law (applicable under Ontario's choice of law rules), the registration should be filed in New York. If the secured party brings its action to enforce the security interest in New York, the court should find that, under Ontario's substantive law (applicable under New York's choice of law rules), the registration should be made in Ontario. From a conservative view, it is likely worthwhile to register in both jurisdictions. Of course, if the Ontario debtor has assets in twelve U.S. states, then the same analysis would apply, and filings should be made in each of those states. Unfortunately, this is contrary to the spirit of the 2001 amendments to the UCC, which now provide that for a U.S. debtor, only a single registration is required (in the state of its organization) notwithstanding that the debtor has assets in multiple States. Although this result seems bizarre, official comment 3 specifically contemplates that it may occur, as it is a consequence of the different jurisdictions having different conflict rules – Ontario's making the location of the collateral determinative, and New York's making the location of the debtor determinative.
1. This does not apply in the case of an organization formed under a state's law – in that case the debtor is deemed to be located in that state.
2. The full text of the section states: "Subsection (b) applies only if a debtor's residence, place of business or chief executive office, as applicable, is located in a jurisdiction whose law generally requires information concerning the existence of a nonpossessory security interest to be made generally available in a filing, recording or registration system as a condition or result of the security interest's obtaining priority over the rights of a lien creditor with respect to the collateral."
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.