The Judgment Speaks For Itself: Characterizing a Judgment Debt in Fraud Without a Declaration for Future Bankruptcy Proceedings

Banks have become increasingly subject to cheque-kiting schemes in recent years. In such a scheme, the perpetrator deposits one or more cheques into his or her chequing account, knowing that the cheques will be returned, and then quickly withdraws the available funds. Once returned, the amounts of the cheques are debited from the account, causing an overdraft. A question thereby arises: can the Plaintiff bank obtain a declaration that the debt arises from false pretences or fraudulent misrepresentations pursuant to section 178 of the Bankruptcy and Insolvency Act?

In a default judgment motion brought before the Ontario Superior Court of Justice, Jakob Bogacki successfully argued that the defendant perpetrated a cheque-kiting scheme against Bank of Montreal that caused an overdraft. Although a formal declaration in fraud was not granted, Kurz J. took a different approach to achieve the same result as the declaration with respect to the debt’s survival in a future bankruptcy of the defendant.  

By adopting the reasoning of Rees J. in National Bank of Canada v Pahuja, 2024 ONSC 736, Kurz J. acknowledged the jurisdiction to make the declaration but pointed to cases where it was not granted for various reasons – for instance, it is hypothetical, as it concerns a possible bankruptcy of the defendant in the future. Instead of granting a formal declaration in fraud, Kurz J. stated his “endorsement speaks for itself in setting out the grounds for this judgment”. As such, even without the declaration, the nature of the judgment debt as arising in fraud is made clear for the purposes of future bankruptcy proceedings. This effectively achieves the same result, although it will require a further motion for the declaration should bankruptcy ultimately ensue. If it does ensue, this decision in effect almost guarantees that the declaration in fraud will be granted.

Written by: Jakob Bogacki