Secure Transaction Canada & USA, Research Paper Example

Introduction

Canadian and U.S. cases/legislation in respect to secure transaction law when assessed using a trans-systematic approach presents a wide range of legislative methods utilized to regulate financial transactions both domestically and internationally. The following provides a comparative analysis of the legislative policies through a trans-systemic approach, as it relates specifically to bijuralism and its use to secure transactions across states and respective regions interacting with federal law. The primary scope of the research focuses on distinct differences in the U.S. and Canada’s approach to bijuralism, securing transactions through the uses of cash collateral, as well as an assessment of the fundamental differences between the Uniform Commercial Code (UCC) and the Personal Property Security Act (PPSA). These specific elements are identified as significant due to the fact that they entail aspects of transaction security policy that highlight some distinct differences between U.S. and Canada and how they handle secure transactions. The author’s position that the United States has superior secure transaction protocols in respect to how it allows parties to utilize cash collateral and the way it implements bijuralism from state to state, and it’s recommended that Canada could benefit from reforming PPSA to be more in line with UCC. Finally, the report draws conclusions, identifies problems, and solutions to generate material for discussion that could lead to reform.

Bijuralism

Bijuralism is a policy approach that incorporates the use of two legal traditions within one state. The legislation put in place by the Canadian federal Parliament is bijural. This means it applies the civil law province of Quebec in addition to the common law provinces, which requires that the law adapts to two distinct legal systems in regulating secure transaction. There are some examples of Bijuralism also utilized within U.S. legislation. As Bornheim notes, “the economics of bijuralism analyzes the interaction of two legal systems. Classical theory in law and economics holds that a certain society or sub-group of people will reach a set of rules that minimizes the transaction costs for this sub-group and thus be the optimal legal system for this group” (Bornheim, 7). Bornheim further notes that this policy model does not take into account the necessary rules for optimal transactions when these respective groups trade with one another. A distinct feature of bijuralism in respect to secure transactions is that the more reliant a region is on external trade the less likely it is that they will focus their laws on optimizing internal trade and the more likely they will cater to external regulatory needs and prioritize it over their own.

US state legislation reveals something very different with respect to secured transaction managed through bijuralism.  For example, Louisiana, which primarily relies on internal state trade, is known to have the least uniform legal systems. On the other hand, California, which is one of the most self-reliant states in the U.S., economically drives itself to harmonize and become more uniform with the federal government. Bornheim attributes this aspect of U.S. trade in California to the fact that “within the US, this is partly due to the availability of contractual choice-of-law provisions, which allow agents in inter-jurisdictional commerce to avoid the extra transaction costs of other legal systems” (Bornheim, 9). The U.S., distinctly through their adoption of bijuralism, is able to create a correspondence between the federal government and states that enhances the capacity for optimum trade across states.

It should be further noted that specifically in the case of the U.S. in regards to the bijuralism policy model, the Constitution contributes substantially to minimizing the costs of interstate trade. The main reason this occurs can be attributed to the case of City of Philadelphia v. New Jersey, in which the US Supreme Court ruled that “states may not discriminate against inter-state commerce” (City of Philadelphia et al. v. New Jersey, 1). The core objective of the ruling is to emphasize that states cannot create impediments to the free trade of goods. This is how bijuralism creates an environment where it’s essential for member states to coordinate their legal systems in ways that don’t infringe on optimum trade. The benefit of bijuralism is that it creates legislative avenues for both state and federal regions to correspond and establish secure transaction. This can especially be seen in respect to the interaction between the Canadian federal government and Quebec.

Canadian bijuralism

Canadian bijuralism has played a substantial role in Canada being able to retain two constituent legal systems. As Bornheim notes, it is beneficial because “the retention of Quebec Civil Law in a unified Canada is a way of keeping Quebec within Canada,” and this goal “may outweigh certain economical and transactional disadvantages that result from the differences between the legal systems” (Bornheim, 9). The interaction between the two legal systems, through the use of bijuralism, is constructed to be most optimal and beneficial to state and federal concerns.  Essentially legislation drafted through bijuralism is constructed to be as efficient as possible. Therefore, the impact of differences between the legal systems has to be minimized if the disadvantages resulting from those differences outweigh the advantages of retaining a particular distinction. These minimization should take place at all three levels of bijuralism as they enhance the probability for policy improvements and the fact that all legislation will correspond with one another from member state to member state or between the Common Law system and the legislative system of Québec.

The two primary regulations that are utilized to oversee secure transactions specifically in respect to correspondence between Canada’s Common Law and Quebec are Personal Property Security Acts (PPSAs) and the Code civil du Quebec (C.c.Q.). These two legislative schemes enable differing legal systems to be coordinated in such a way that the origin of the core tenants of the respective legal systems are not sacrificed, while key compromises can be made to secure transactions. Bornheim notes that this collaboration between C.C.Q and PPSA is done through three different levels: provincial legislation regarding secured transactions, jurisprudence on provincial secured transactions law, and federal insolvency law. Bornheim refer to the first two levels as “sub-levels” and the third one as a “meta-level” which encompasses the two sub-levels (Bornheim, 9). Bornheim further argues the collaboration of state and federal laws through the use of bijuralism is that there are lessons in compliance and legislative collaboration that can be applied a wide range of diplomatic processes.

Secured Transaction through Cash Collateral    

U.S. policy has some distinct amendments and measures related to cash collateral which were implemented in Article 9 of the United States Uniform Commercial Code (UCC), which prohibits “perfection by registration of a security interest in a deposit account” (Druggan, 9). However, an investor can take control of an account which can allow the entity securing party to bypass the regulation and establish a security interest in a deposit account.  When security interests are taken by a secured party other than the bank, which tends to work as the deposit-taking organization, secured transaction of collateral cash is handled through the process where  the “secured party may obtain control either by becoming the bank’s customer in respect of the deposit (account) or, alternatively, by entering into a control agreement under which the bank agrees to comply with the secured party’s instructions directing disposition of the funds without the debtor’s further consent” (Druggan, 9). In cases like these, for guaranteed security, the bank becomes the controlling factor based primarily on the fact that it’s deposit-taking institution. Unlike Canadian legislation, Article 9 plays a pivotal role in regulating U.S. legislation.

Unlike Canadian legislation which is loosely drafted in regards to secured transactions, U.S. legislation relies heavily on Article 9. Over the course of the adoption of the law, the “revised Article 9, section 9- 327(1) was drafted to provide that a security interest perfected by control has priority over a conflicting security interest held by a secured party that does not have control” (Druggan, 9). The U.S. law further states that, “this rule applies even if the conflicting security interest is perfected by some other method and regardless of the order in which the conflicting security interests became perfected” (Druggan, 9). In Canada, security interests are often used as cash collateral. The bank opens a line of credit when the customer or a related party deposits a pre-approved amount of money that is agreed upon with the bank and in turn the bank secures the repayment of the amount by receiving a security interest in the deposit. Cash collateral is a method used not only within the Canadian banking system, but also by other institutions, such as utility companies. There is a key difference between the way Canada and the US handle cash collateral. The United States uses a modeled approach to secured transactions whereas Canada has no regulations in place to provide for security control. This is a major disadvantage for Canada in respect to securing cash collateral transactions as there is no clear distinction of who is in control of the security based primarily on who holds the account. Control serves to perfect security interests in investments. The PPSA and CCQ rules relating to control on investment property are modeled on UCC Article 9, but the primary difference is the fact that the PPSA/CCQ, does not offer “control” for the perfection of security interests/hypothecs on deposit accounts. In this regard, The United States has superior policy, but Ontario PPSA is currently working towards providing perfection by control on deposit accounts. Here it becomes clear that in respect to securing transactions through the use of Collateral cash models, the United States has a superior more secure process compared to Canada.

UCC vs. PPSA

Overall, there are some fundamental differences with how the U.S. deal with secured transactions through UCC and how Canada deals with them through PPSA. Despite the many similarities shared within the two acts, these differences are significant. For starters the core similarities are that both doctrine require parties seeking to create a security interest to have a signed security agreement composed of collateral descriptions and granting clauses; there must be some process to register or record the financing statement for public record, there is no need for the signature of the debtor, and prior secured creditors must be notified so that priority in inventory can be established. These factors are uniform across both doctrines (Wood, 6). The differences however that arises stems from how each doctrine deals with individuals, establishing priority in equipment, where to file, and the duration of the filing life. Under UCC, the U.S. government verifies the name of an individual using their driver’s license, while through PPSA the name is verified simply using the birthdate of the individual. Regarding equipment transactions, UCC requires filings be recorded within 20 days of the customer’s receipt, whereas PPSA has a 10 day requirement (Wood, 7). The lifespan of the filing is the most significant difference as the U.S. recognizes the validity of the filing for 5 years, but Canada allows filers a choice between 1-25 years or infinity (Wood, 6).

Conclusion

In sum Canadian and US cases/legislation has distinct differences in regards to secure transaction law when assessed using a trans-systematic approach and presents a wide range of legislative methods utilized to regulate financial transactions both domestically and internationally. The United States has superior secure transaction protocols in respect to how it allows parties to utilize cash collateral and the way it implements bijuralism from state to state. The above research reveals these arguments to be true based on the distinct differences related to security control measures within UCC verses PPSA or CCQ. It was also revealed that the U.S. has a superior use of bijuralism, most likely due to having more experience regulating trade across state lines, but more specifically it’s due to the judgment made in City of Philadelphia v. New Jersey, where the U.S. Supreme Court ruled that “states may not discriminate against inter-state commerce.” Canada has never emphasized a similar term or regulation within its legislation. In addition to addressing these discrepancies, it’s recommended that Canada would substantially benefit from amending PPSA to be more closely aligned with UCC for uniform trade purposes across borders.

Work Cited

Bornheim, J. Jan. The Coordination of Secured Transactions Law and Insolvency in Canada: A Successful Model of Bijuraism for the EU? Diss. University of Toronto, 2010.

City of Philadelphia et al. v. New Jersey, 437 U.S. 617, 98 S.Ct. 2531 (1978) (cited to 98 S.Ct. 2531)

Druggan A. Current Issues in Secured Transactions Law in Canada. Secured Transaction Law Reform Project. 2014.

Emsley, D.. Restructuring the management accounting function: A note on the effect of role involvement on innovativeness. Management Accounting Research, 16 (2), 157-177, 2005

Saulnier v Royal Bank of Canada, [2008] SCJ No 60, [2008] SCR 166

Wood, Roderick J. “Supplementing PPSA Priorities: The Use and Abuse of Common Law and Equitable Principles.”