by Ronald C.C. Cuming

I. THE CONTEXT

A. The Need for a System

A modern secured financing system accommodates security agreements that provide for security interests in all forms of tangible and intangible moveable property. However, the use of moveable property as collateral creates certain problems not found in real property secured transactions. For example, tangible moveable property may take the form of highly mobile items such as cars, trucks, air planes and boats which are moved by their owners from one jurisdiction to another. The owner may sell or give a security interest in such property to someone else while the property is located in a jurisdiction other than the one in which the initial security interest was created and registered. In addition, intangible property, such as a debt (account), does not have a location; by definition, it is property that does not have a physical presence. Consequently, the person owing the debt may live in one jurisdiction and the person to whom it is owed may live in another. The party who takes a security interest in the account may live in still a third jurisdiction.

One possible approach to the foregoing problems would be for the courts of a state simply to refuse to recognize the rights of secured parties when those rights were not created under the laws of that state, at least in cases where those rights conflict with the rights of residents of the state. In general terms, this is the approach that exists throughout the world except as between Canada and the United States. Given the dramatic increase in the internationalization of business activity and the increased mobility of motor vehicles and valuable equipment, this approach is no longer acceptable. Measures must exist under which foreign security interests will be recognized and enforced by all states in a region. These measures must, however, adequately protect persons who acquire, in one state, interests in property subject to a foreign security interest created under the laws of a different state.

B. Canada and the United States

Both Canada and the United States have federal constitutions under which primary jurisdiction over secured financing law is vested in the provinces or states. In strict legal terms, this means that each province or state is, for the purposes of the law dealing with secured financing, a separate legal entity (hereafter referred to as a "jurisdiction"). This feature produces several important consequences. Most importantly, each jurisdiction is free to enact its own laws dealing with secured financing. While inter-jurisdictional measures designed to encourage uniformity among the secured financing laws of the jurisdictions within each county have been largely successful, particularly in the United States, some important differences between the jurisdictions remain. In fact, even if the law in all of these jurisdictions were completely uniform, problems would exist when security interests created in one jurisdiction come into conflict with interests in collateral taken in another jurisdiction.

A by-product of this structure is the need to have rules that provide for the recognition and registration in one jurisdiction of a security interest taken in a different jurisdiction. Technically, these rules are treated as a separate category of law labelled "conflict of laws" in common law jurisdictions and "private international law" in civil law jurisdictions.

Canadian and U.S. jurisdictions have had extensive experience with the problems arising from the recognition of security interests created in other jurisdictions. Over the years, private international law rules have been developed which are largely uniform throughout Canada and the United States. The major exception to this international uniformity is found in the certificate of title systems which have been adopted in the United States for certain types of goods. Similar systems have not been adopted in Canada. Further disharmony will result if the current re-examination of Article 9 leads to a significant change in existing private international law rules for the United States.

C. Mexico

While the situation in Mexico is not completely clear, one feature of current Mexican secured financing law is evident. The great bulk of commercial secured financing law is federal. As a result, for the most part the substantive law in this area is uniform throughout the nation. This being the case, there is no significant need, as there is in Canada and the United States, for the enactment of private international law rules governing the recognition in one Mexican state of substantive secured financing laws of another Mexican state. However, this does not necessarily suggest that Mexico need not concern itself with private international law problems. The economic integration that can be expected to increase dramatically under NAFTA will result in transborder secured financing arrangements and the movement into and out of Mexico of high-value goods subject to security interests. No doubt, the incidence of problems associated with the recognition of foreign security interests will dramatically increase in the very near future.

There is, in addition, a domestic aspect of the problem that must be addressed as part of the process of modernizing Mexican secured financing law. The registration of security interests in Mexico falls within the jurisdiction of state governments. Until there exists a system under which all security interests are registered in a single registry, it is necessary to have rules for determining the appropriate registry in which to register any particular security interest. For example, assume that a bank takes a security interest in debts (in the form of non- documentary accounts receivable) owed to its borrower by the borrower's customers who are located in four states, not including the state in which the borrower lives. Where must this security interest be registered? There are at least two logical possibilities: (i) the registry of the state in which the borrower (and the bank) are located; or (ii) the registry of each of the states in which the customers live. The choice of one registry over the other will be dictated by commercial convenience and the need to protect third parties who may also buy or take security interests in one or more of the same accounts. What is most important is not so much the rule that is ultimately chosen, but rather that there be a single rule applicable in all Mexican states.

h3>II. THE CURRENT CANADA-UNITED STATES APPROACH TO RECOGNITION, REGISTRATION AND PRIORITIES

Simply stated, the issue of recognition involves the following question: Under what circumstances are the courts of State B required to recognize, as valid and enforceable in State B, a security interest that was created under the law of State A? It is one thing for State B to recognize that a security interest created under the law of State A is valid; it is quite another thing to accept that the foreign security interest is enforceable against third parties (buyers or other secured parties) who acquire an interest in the collateral under the law of State B. Registration and priority rules address the issues that arise in this context.

The modern era in the development of private international law rules for security interests in North America began in the United States with the release of Article 9 of the Uniform Commercial Code in 1952. The original text has been revised on several occasions. For the purposes of this paper, particular attention will be focused on the 1972 Official Text, and incidentally on the 1962 Official Text. Article 9 of the Uniform Commercial Code (UCC) represents the accumulated experience of a country which has encountered inter-jurisdictional conflict of laws problems on a massive scale and over a long period of time. It contains statutory measures designed directly to address the various issues associated with the recognition of "foreign" security interests in mobile equipment.

The two Official Texts of the UCC embody different approaches to the selection of law regarding the creation of a security interest and its efficacy in cases where collateral, other than mobile equipment, has been removed from one state and taken to another. Article 9-103(3), 1962 Official Text, applies the law of the place where the collateral was located on the date the security interest was created to determine the validity of the interest. The 1972 (now 1978) Official Text of Article 9-103(1)(b), however, does not contain recognition rules applicable to the validity of a security interest. Apparently the drafters concluded that, since the substantive secured financing law of all jurisdictions within the United States was largely uniform, there was no need for explicit recognition rules. This decision must now be questioned in the light of changes that secured financing practices will undergo as a result of NAFTA. However, for the purposes of this paper, it is assumed that the current law of the jurisdictions within the United States, applicable to registration and priorities, is also the law applicable to validity. Under the Canadian Acts, the pre-1972 UCC rule has been retained. The law of the jurisdiction in which the property was situated on the date the security interest was created will govern the validity of a security interest in non-mobile goods.

Under the 1972 (now 1978) Official Text of Article 9-103(1)(b), perfection (for the purposes of this paper, it is assumed that perfection involves registration) and priorities are governed by the law of the jurisdiction in which the collateral is located when the last event occurs on which perfection or non-perfection of the security interest is based. In most cases this will be the law of the jurisdiction in which the goods were located on the date the security interest was created. Consequently, although the UCC rule is formulated differently than is the Canadian rule, the result in most cases will be the same.

Under the UCC rules, a security interest perfected under the law noted in the preceding paragraph continues to be perfected in another state for four months "and also thereafter if within the four-month period it is perfected" in the second state. Consequently, State B affords a period of temporary perfection to a security interest in goods brought into and kept in State B if the security interest was properly perfected under the law of State A when the goods arrived in State B. And if the security interest is then perfected in State B before the expiration of four months from the date the goods entered State B, or the expiration of perfection in State A whichever is earlier, the perfection of the security interest will continue, and priority will be determined based on the original date of perfection in State A.

The basic approach is the same under Canadian law, but the periods of temporary perfection when goods are moved into a jurisdiction are calculated differently than are their U.S. counterparts. The period is the shortest of 60 days from the date the goods are brought into State B, 15 days from the date the secured party discovers that this transfer has occurred, or the expiration of perfection in State A. Under the laws of some jurisdictions, where the collateral is sold to a good-faith buyer in State B, the foreign security interest has priority only if it is in fact registered in State B before the date of the sale. In other words, in this situation there is no period of temporary perfection.

Security interests in mobile equipment and certain intangible interests such as debts (accounts) receive special treatment under both Canadian and U.S. law. The 1972 Official Text prescribes the most refined set of rules in this respect. Under Article 9-103(3), the law of the jurisdiction where the debtor is located governs both the perfection and the effect of perfection or non-perfection of security interests in mobile goods. Article 9-103(3) addresses security interests in "goods which are mobile and which are of a type normally used in more than one jurisdiction, such as motor vehicles, trailers, rolling stock, airplanes, shipping containers, road building and construction machinery, commercial harvesting machinery and the like", if the goods are equipment or inventory leased or held for lease by the debtor. For the purposes of determining where to perfect, a debtor is deemed to be located at the debtor's place of business if it has only one, at the debtor's chief executive office if it has more than one place of business, or otherwise, at the debtor's residence. When a debtor changes its location, perfection continues until the expiration of four months after the change, or until perfection ceases in the first jurisdiction, whichever period expires first.

Several Canadian Acts include departures from the U.S. pattern. In all cases, the law applicable to the validity and effect of perfection or non-perfection is that of the debtor's location on the date the security interest was created. Both the change of location of the debtor and the transfer of the debtor's interest in collateral to someone in another jurisdiction trigger the need to register within a specified period of time. The period is the shortest of 60 days from the date that the debtor changes its location, 15 days from the date the secured party discovers that this change has occurred, or the expiration of perfection under the law of the debtor's original location. A failure to register in the new location will result in the security interest becoming unperfected and not, as is the case under U.S. law, merely subordinated to purchasers. If the jurisdiction in which the debtor is located does not provide for public registration or recording of security interests in mobile equipment, and the collateral is not in the possession of the secured party, a security interest in the collateral must be registered in the jurisdiction in order that it be given priority over conflicting rights acquired within the jurisdiction.

In view of the foregoing, a registry search must be conducted in the jurisdiction where the debtor is located rather than in the jurisdiction where the equipment happens to be situated at any particular time or, in the case of debts, the places where the account debtors reside. An assumption underlying the Canadian systems is that a third party who deals with either a debtor in possession of mobile equipment or a person who is offering debts as security or for purchase will appreciate the need to conduct searches in this way. Presumably, for this reason security interests in consumer goods are excluded from these rules. Accordingly, cases in which legally unsophisticated domestic buyers are likely to be involved are governed by the law of the jurisdiction in which the goods were located when the purchase was made. Consequently, such buyers can rely on the registry of that jurisdiction.

III. CHARACTERISTICS OF A REGISTRATION SYSTEM THAT ACCOMMODATES PRIVATE INTERNATIONAL LAW ISSUES

It is not the purpose of this paper to proclaim the intrinsic merit of the approach to private international law registration issues contained within either Canadian or U.S. law. The reason these systems have been described in some detail is to demonstrate the context within which inter-jurisdictional issues arise, and to display at least one approach to their resolution. In the following paragraphs aspects of the various possible approaches to inter-jurisdictional registry issues are briefly assessed.

A. A Set of Universally Accepted Rules

As noted above, a modern secured financing regime must contain rules that provide clear guidance for determining where a security interest is to be registered. Further, in order to realize the full potential of such rules, it is necessary that they be recognized by neighboring states (in this context, the NAFTA states). A modern, sophisticated system of private international law rules will be of little value to secured parties unless the courts of foreign jurisdictions to which collateral has been moved or, in the case of intangibles, is deemed to exist, follow similar rules or are prepared to recognize and apply the rules. (As mentioned above, with some notable qualifications, a significant level of compatibility and mutual recognition currently exists among the jurisdictions of the United States and Canada.)

A secured party must be assured that a security interest registered in accordance with these rules will be recognized in courts of other jurisdictions as having a pre-determined priority position in relation to other claimants to the collateral in which the security interest was taken. At the same time, however, third parties (such as buyers of the collateral or other creditors who take security interests in it) who reside in the same jurisdiction as the secured party, or in other jurisdictions in which priority issues arise, must be assured that the information disclosed by a search of the appropriate registry may be relied upon as a basis for assessing the risk they incur when acquiring an interest in property. In addition, these third parties must be certain as to which priority rules govern their rights in the property.

It will be seen that the realization of the goal of creating such a system involves balancing two, sometimes conflicting, sets of interests. While both secured parties and third parties will seek to have easily-discernable priority rules and a single, readily-available registry, it is not clear that both needs can be fully satisfied. What is an appropriate registry for the purposes of registering security interests (in the case of secured parties) may not be appropriate for the purposes of searching for prior interests (in the case of searching parties).

B. Certificate of Title for Motor Vehicles

As noted above, all U.S. jurisdictions have certificate of title systems for motor vehicles. Under most of these systems a security interest is recorded on the certificate of title to the motor vehicle. This eliminates the need to register the security interest in a public registry.

The merits and problems associated with this approach are not the focus of this paper. It is relevant to note, however, that on two separate occasions Canadian governments have examined the U.S. system and have concluded that it would not be appropriate for adoption in Canada. Currently, Mexico does not have a formal certificate of title system for motor vehicles. Any effort to modernize Mexican secured financing law will necessarily involve a determination as to whether the U.S. system (in a modern form) should be adopted in Mexico, or whether, as in Canada, security interests in motor vehicles should be registered in a public registry along with security interests in other types of collateral.

C. Different Rules for Different Types of Collateral

As noted above, the respective U.S.-Canadian approaches apply different rules depending upon the types of collateral involved.

Non-mobile goods and consumer goods: Generally, where the collateral is goods of a kind that do not normally move from one jurisdiction to another, or consumer goods or inventory, the jurisdiction where the goods were located when the security interest was created is the proper jurisdiction for registration, and the laws of that jurisdiction provide the applicable priority rules.

There can be no doubt that the policy underlying this approach is one of convenience and represents an attempt to realize the reasonable expectations of both secured and third parties. If the collateral is not likely to be moved out of the jurisdiction, it makes sense to provide for the registration of security interests in the jurisdiction where the collateral was located when the security interest was created.

A refined version of this approach has been adopted in several U.S. jurisdictions. In these states, security interests in specified types of collateral must be registered in local (county) registries, while security interests in other types of collateral are to be registered in a central registry, or in the registry of another jurisdiction. This approach has been rejected in Canada where regional registries do not exist. In several provinces, registrations in the data base of the central registry can be effected from regional offices. However, there are no rules dictating that the secured party must use a particular regional office.

The difficulty with this approach is that it must accommodate those situations in which the collateral is actually moved from one jurisdiction to another. When this occurs, and the goods are offered for sale or as collateral, a third party in the jurisdiction to which the goods have been moved will be at a disadvantage. The third party will not know where to search for prior interests, except in the unlikely event he or she knows where the goods were located prior to having been brought into the jurisdiction.

As noted above, Canada and the United States address this problem by giving the secured party a short period of protection after the debtor moves the goods into the jurisdiction during which time the secured party must learn of the collateral relocation and register his or her interest in the new jurisdiction. However, this solution has its own complications. Specifically, during the temporary period of protection, third parties in the new jurisdiction will be vulnerable because the existence of a foreign security interest will not be discoverable through a search of the local registry. As noted earlier, the Canadian approach to this problem is much more solicitous of third party interests than is the U.S. system.

The problems that arise in this context are particularly acute where the collateral is an automobile held as consumer goods. The problem could be minimized by not applying this approach to motor vehicles even when they are held as consumer goods. Alternatively, security interests in all motor vehicles could be registered in a national registry. While on the surface this may appear to be an obvious solution, it is not without difficulties. The sheer number of cars and other vehicles purchased as consumer goods under secured financing arrangements makes the use of a national registry very difficult. National registration of security interests in all motor vehicles would necessitate a very large data base. Canada's experience with computerized data bases demonstrates that the larger the data base, the greater the problem of searching. For example, if the system uses debtor names as the registration-search criterion, a search using a common name might reveal hundreds of registrations. If the system uses the serial number of the motor vehicle as the registration-search criterion, it would be necessary to demand complete precision with respect to the relevant registration information. Any system that attempts to accommodate minor errors by revealing registrations the are very close to the one being searched would likely reveal hundreds of close registrations.

Mobile goods and intangibles: As noted above, under the U.S. and Canadian approach, the registration and priority scheme of security interests in mobile goods and most intangible property are governed by the law of the location of the debtor. In other words, a security interest must be registered in the registry of the jurisdiction where the debtor is located. It does not matter where the collateral is located or, in the case of debts, where the account debtors reside.

In general, where high-value commercial assets (other than inventory and property that is attached to or otherwise closely associated with land) are involved, registry in the jurisdiction of the debtor's place of business is the best approach. The obvious advantage of this approach is that a secured party need not be concerned about having to re-register if the assets are moved to another jurisdiction. The secured party will still, however, be required to re-register should the debtor change his or her residence from one jurisdiction to another.

On the other hand, there are a couple of obvious problems with this approach. First, it may be difficult for a searching party to determine where the debtor resides at the relevant time. Second, a searching party may not appreciate the need to search a foreign registry. Many small business owners, for example, will have neither the legal sophistication nor the financial capability to search a registry in a jurisdiction that is distant from the one in which they conduct business.

D. The Ideal and the Possible

As noted in the preceding paragraphs, centralization of registration, while not without complications, is probably the best approach in the context of the majority of modern secured financing transactions involving commercial assets (other than inventory) and, possibly, highly-mobile consumer goods. The ideal, of course, would be to have a single, central, international registry for all such security interests taken in Canada, the United States and Mexico. However, this is probably not realistic. A second best approach would be to have national registries in Canada, the United States and Mexico that are accessible from any location in any one of the three countries. Given current political and constitutional constraints in Canada and the United States, however, it is unlikely that the present province-based and state-based systems in these countries can be changed in such a dramatic fashion. Mexicans will have to decide for themselves whether this option is one that they are prepared to pursue.

Given the current (and prospective) state of affairs, however, what is reasonably attainable is a substantially uniform set of private international law rules, adopted in all NAFTA jurisdictions, that provide clear guidance as to the source of priority rules, where security interests are to be registered, and where searches are to be conducted.

Measures should be implemented to ensure that all of the prescribed registries are accessible by interested third parties at a reasonable cost. It is one of the long-term goals of the National Law Center for Inter-American Free Trade to examine ways in which to facilitate access to all registries in Canada, the United States and Mexico.