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When Good Lenders Meet Bad Borrowers.

Article Excerpt
Ontario Court of Appeal underscores rights of bona fide creditors for value

Financing is fraudulently obtained from Bank A and used to purchase assets. Those assets are then used as security by the fraudster to obtain credit with Bank B. Millions of dollars of debt later, the fraud is revealed. Which of these two innocent institutional victims is entitled to the proceeds from the pledged assets and which should bear the loss?

Is Bank B equivalent to a bona fide purchaser for value without notice, and thus entitled to retain its interest in the assets? Or has it been unjustly enriched at the expense of Bank A, the institution that was defrauded? In a recent decision, Bank of Montreal v. i Trade Finance Inc.,1 the Ontario Court of Appeal held in favour of Bank B, reinforcing the principle that a bona fide purchaser is generally not required to surrender assets for which it provided value. Ontario's highest court held that a lender that advances funds on the basis of fraudulently-obtained security, but without notice of the fraud, is not required to relinquish its security to the victim of the fraud.

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