Will the Interest of Bona Fida Purchase For Value Without Notice Maintain its Priority Status?: I-Trade v. BMO

On April 1st, 2010, the Supreme Court of Canada granted leave to appeal to I-Trade Finance Inc. v. Bank of Montreal. In a nutshell, financing was obtained from an innocent party through fraudulent means. These assets were then used to obtain credit from a second innocent party. After the fraud was discovered, there were insufficient assets to cover both parties’ debts. The question confronting before the courts was: which of these two innocent parties was entitled to the proceeds from the sale of the assets, and which party should be left to bear the loss?

Factual Background

Innocent Party 1: I-Trade Finance
Roy Ablacksingh et al, through their company Webworx, induced I-Trade to advance more than $11 million to finance contracts for computer services with a non-existent U.S. company. At the time the matter went to court, more than $5 million had yet to be recovered.

Innocent Party 2: BMO
Mr. Ablacksingh and Ms. Ramsackal were joint cardholders of a BMO Mastercard account. They pledged their investment account to BMO as security to increase their credit limit to $75,000. Unbeknownst to BMO, the funds that the pair used to purchase shares in the Investment Account originated from the aforementioned fraudulent scheme. No security agreement was signed or registered under the Personal Property Security Act, R.S.O. 1990, c. P.10(the “PPSA”). Notwithstanding the $75,000 credit limit, the outstanding balance on the BMO Mastercard Account is $138,747.66.

The Disputed Funds
The shares in the Investment Account were eventually sold for $130,771.11.  Since the shares were bought using funds provided by I-Trade, I-Trade claimed priority as the loan can be traced to the Investment Account. If the funds can be traced to anyone other than a bona fide purchaser for value without notice, then I-Trade would be entitled to the money.  I-trade would lose priority, however, if BMO had a valid security interest or was a bona fide purchaser for value without notice.

The Decisions

The motions judge, Kiteley J., ruled in favor of I-trade. In her view:

(1) BMO did not have a security interest in the shares in the Investment account.
(2) BMO was not a bona fide purchaser for value without notice. I-Trade had priority because they could trace their investment to the shares in the account.
(3) I-Trade was entitled to the funds based on unjust enrichment and constructive trust principles.

The ONCA disagreed.  Setting aside the order of the motion judge, Blair J.A. held:

(i) BMO had a valid, perfected security interest that was recognized under PPSA
The ONCA found this case was “not a priority contest between I-Trade and BMO under the PPSA”.  Blair J.A. questioned whether the PPSA was even applicable, as section 4(1) states the PPSA does not apply to a lien given by statute or rule of law. The Court of Appeal contended that a constructive trust would be a lien given… by rule of law.

Nonetheless, Blair J.A. went on to apply the PPSA.  BMO was a “purchaser” (i.e. a person who takes by purchase, including “taking by pledge”), which had taken a security interest in the Investment Account because it secured payment or performance of an obligation, as per section 1(1) PPSA. BMO’s interest in the Investment Account met the three requirements of attachment in section 11(2): BMO had possession of the collateral by virtue of an agency agreement; BMO obtained its right to the Investment Account in exchange for appropriate consideration; and, Mr Ablacksingh had sufficient rights in the collateral at the time it was pledged to BMP. This security interest was perfected by possession, pursuant to section 22(1) PPSA.  Accordingly, the Court of Appeal concluded that BMO had an enforceable security interest in the shares in the Investment Account.

(ii) A Bona Fide Purchaser for Value Without Notice is not affected by fraud 
Having determined that BMO was a perfected secured creditor, Blair J.A.  then confirmed BMO’s claim as a bona fide purchase for value without notice of the fraud interrupted I-Trade’s ability to trace the funds.  While a transferee’s interest in collateral is voidable before the property is transferred to a third party, the transferee’s interest in collateral is no longer voidable once property has been transferred to a bona fide purchaser for value without notice.  The Court of Appeal further held it was irrelevant whether or not the contract between BMO and Mr. Ablacksingh constituted a valid security agreement pursuant to the PPSA, because this is was not a case involving a priority dispute.

(iii) Principles of unjust enrichment and constructive trust do not apply
Finally, Blair J.A. held that I-Trade was not entitled to the proceeds of the sale of shares based on unjust enrichment and constructive trust principles. In order to impose a constructive trust, three requirements need to be met:

(a) A benefit or enrichment of one party,
(b) A corresponding detriment to or deprivation suffered by other party
(c) The absence of any juristic reason for the benefit or enrichment

I-Trade’s argument foundered on this third point. The Court of Appeal assumed BMO was enriched at the expense of I-Trade.  In this case, however, there was a valid juristic reason for such enrichment: the legitimate contractual relationship between Mr. Ablacksingh and BMO.  Accordingly, Blair J.A. declined to find a constructive trust based on principles of unjust enrichment.


Given precedent-based approach to the ONCA’s decision, why the Court chose to hear this appeal is something of a puzzle.  It will be interesting to see what further gloss the Supreme Court of Canada will add to this decision: perhaps a rebalancing of innocents’ interests is in the offing.  Until the final decision is handed down, the Court of Appeal’s decision affirms the legal protection of bona fide purchasers for value of without notice of prior fraud related to that property.  The practical steps a lender should take to protect its interests remain the same: register security interests in assets under the PPSA, and ensure valid personal guarantees are executed by debtors.  Unfortunately for creditors in the position of I-Trade, while subsequent lenders can be put on notice after a third-party’s fraud has been uncovered, by the time the third party’s malfeasence has been revealed the initial lender’s interest might well already be subordinated to another lender’s claim.

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