Executive Summary: Key Legal and Evidentiary Issues

• Sea Air sought to invalidate a second mortgage BMO registered against Genesus and Can-Am's real property, alleging it was a fraudulent conveyance.
   
• Whether the mortgage also constituted a fraudulent preference under section 95 of the Bankruptcy and Insolvency Act was a central dispute.
   
• Timing proved decisive: BMO's mortgage was registered on October 12, 2023, before Sea Air had filed or registered its default judgment against Genesus in Manitoba.
   
• Good faith under section 4.2 of the BIA was raised, though the court found it inapplicable to a challenge over mortgage validity rather than BMO's conduct in the receivership proceedings.
   
• Equitable subordination remained a live but unsettled doctrine, requiring proof of inequitable conduct that Sea Air could not establish.
   
• Justice Chartier ultimately dismissed Sea Air's motion, upholding BMO's priority and awarding costs against Sea Air.
   

Facts of the case

Bank of Montreal ("BMO") applied under section 243 of the Bankruptcy and Insolvency Act to have BDO Canada Limited appointed receiver and manager of the assets of Genesus Inc., Can-Am Genetics Inc., and Genesus Genetics Inc. (collectively, "the debtors"), an order granted on June 11, 2024. Sea Air International Forwarders Limited, an unpaid supplier to Genesus, brought a motion within those proceedings seeking a declaration that a mortgage BMO held against Genesus's property was void or unenforceable, or alternatively subordinate to a certificate of judgment Sea Air had registered against the same property. Sea Air had invoiced Genesus for services in May and June of 2023 and, after non-payment, obtained default judgment against Genesus in the Ontario Superior Court of Justice on October 3, 2023, for $319,796.33 plus costs. That judgment was registered against title to three parcels of Genesus's land on December 15, 2023. BMO, meanwhile, had become concerned about the debtors' deteriorating finances beginning in early 2023, when the debtors' account repeatedly ran into unauthorized overdraft. BMO issued formal demand and served Notices of Intention to Enforce Security in June and July 2023. The debtors then negotiated a forbearance agreement with BMO, under which BMO agreed not to enforce its security until January 15, 2024, in exchange for additional security in the form of an $8,000,000 second mortgage against Genesus's and Can-Am's real property. That mortgage was registered on October 12, 2023 — before Sea Air's default judgment had been filed or registered against title in Manitoba.

Policy and legislative provisions at issue

Sea Air's challenge rested on several statutory and common-law bases. It argued the second mortgage was a fraudulent conveyance under section 2 of Manitoba's Fraudulent Conveyances Act, which voids conveyances made with intent to defeat, hinder, delay, or defraud creditors. It further argued the mortgage amounted to a fraudulent preference under section 95(1)(a) of the BIA, which applies where a transfer to an arm's-length creditor is made within three months before an insolvent person's bankruptcy with a view to preferring that creditor. Sea Air also invoked the good-faith obligation in section 4.2 of the BIA, applicable to any interested person in BIA proceedings, and asked the court to apply the equitable subordination doctrine to subordinate BMO's mortgage to its own judgment. BMO, in response, relied on the terms of the forbearance agreement itself — including the debtors' acknowledgment of BMO's existing security, the debtors' consent to BDO's appointment as monitor, and the mortgage as consideration for BMO's forbearance — as evidence the transaction was a legitimate, arm's-length commercial arrangement rather than an improper preference.

Reasoning and analysis

Justice Chartier applied the "badges of fraud" framework recently summarized by the Supreme Court of Canada in Aquino v. Bondfield Construction Co., 2024 SCC 31, which identifies suspicious circumstances — such as grossly inadequate consideration, transfers to non-arm's-length parties, or transactions made in haste or despite an outstanding judgment — from which fraudulent intent may be inferred. The court found none of these badges present: BMO and the debtors dealt at arm's length, the forbearance agreement was negotiated over months through counsel rather than hastily, and BMO was unaware of Sea Air's Ontario action or judgment when the mortgage was registered. The court held the forbearance itself constituted valid consideration, giving Genesus time to pursue a sale of the business rather than facing immediate enforcement. On the fraudulent preference claim, the court applied the three-part test from Logistec Stevedoring (Atlantic) Inc. v. A.C. Poirier & Associates Inc., 2005 NBCA 55, and found the threshold condition unmet, since there had been no bankruptcy or "initial bankruptcy event" involving the debtors, only a receivership. The section 4.2 good-faith argument was rejected because Sea Air's challenge went to the mortgage's validity, not to BMO's conduct in commencing or pursuing the receivership application. Finally, on equitable subordination, the court noted the doctrine's status in Canadian law remains unsettled following Canada Deposit Insurance Corp. v. Canadian Commercial Bank and Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6, but found that even assuming it exists, Sea Air had not shown any inequitable conduct by BMO.

Ruling and overall outcome

Having found no fraudulent conveyance, no fraudulent preference, no breach of the BIA's good-faith requirement, and no basis for equitable subordination, Justice Chartier dismissed Sea Air's motion in its entirety. BMO was the successful party, and its second mortgage priority over Genesus's and Can-Am's real property was upheld. The court ordered costs payable to BMO, though the decision does not specify a dollar amount for those costs — the total monetary award on costs is Not Specified.