The appellant i Trade Finance had advanced money to a company,
Webworx Inc., operated by a fraudster. The fraudster used the
advances to the company to buy shares in a BMO Nesbitt Burns
account which, in turn, were pledged to BMO to obtain additional
credit. Both of the parties to this appeal were unaware of the
The appellant brought a civil proceeding against the fraudster
after the fraud was discovered. This resulted in an order that
imposed a constructive trust or equitable lien on all the property
purchased by the fraudster through funds advanced to Webworx. The
appellant was also granted a tracing order that allowed the
appellant to trace assets of the fraudster. The order excluded
assets in the hands of bona fide purchasers for value
without notice. The appellant sought funds in the hands of BMO. At
trial the appellant successfully claimed the funds at issue, but
the trial judge's decision was overturned at the Court of
Appeal. The Supreme Court dismissed the appeal. Its analysis
provides insight into the interaction between the PPSA, equity, and
the legal effect of fraud on a secured transaction.
The Supreme Court held that the key issue was whether BMO could
be described as a bona fide purchaser for value, which
requires a consideration of the nature of each party's interest
in the funds. The court emphasized that the appellant's rights
were based in the tracing order and as such, recovery is based on
whether the funds can be imposed with a constructive trust or
equitable lien. This is an equitable interest and is not governed
by the PPSA.
BMO's interest, however, was based in a pledge by the
fraudster, a transaction meant to create a security interest as
defined by the PPSA. The court noted the key element is whether the
fraudster had rights in the collateral. Fraud makes a transaction
voidable, not void. The court found that Webworx had the consent of
the appellant to use the funds at the time and, as such, the
appellant bore the risk of loss. As a result, the fraudster had
rights in the collateral. The court, therefore, concluded that BMO
had a valid PPSA security interest. Moreover, BMO was a bona
fide purchaser for value as its acquisition of the shares by
way of the pledge falls within both the PPSA and the equitable
definition of "purchaser". As a bona fide
purchaser for value, BMO's funds fell outside the ambit of the
tracing order and, as a result, BMO could retain the funds.
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In Irwin v. Alberta Veterinary Medical Association, 2015 ABCA 396, the Alberta Court of Appeal found that the "ABVMA" failed to afford procedural fairness to a veterinarian undergoing an incapacity assessment.
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