The Ontario Court of Appeal decision in Bank of Montreal v. Makhija, 2026 ONCA 221 contains a useful summary of the law of civil fraud and fraudulent misrepresentation.  It is also remarkable as being a rare case in which a bank, armed with all the usual apparently ironclad contractual provisions in its favour, managed to lose a claim against a borrower’s principal.  It may also be reflective of an instance in which a borrower’s principal who is himself duped by fraudsters attracts enough sympathy from the Court to get out from under what would otherwise appear to be a very disadvantageous legal position.

In this case, the Defendant applied for a loan from the Bank for his company in 2019.  He signed two (2) limited personal guarantees.  The loan was made in 2019 and went into default in 2020.  The Bank obtained default judgment against the company for the full amount of the debt and against the Defendant for the portion that had been guaranteed.

The action was undefended.

After obtaining the judgment, the Bank found out that the Defendant’s Personal Financial Statement provided in support of the company’s loan application contained false information.  In particular, it suggested that the Defendant was the owner of a certain property when in fact he was not.  The Bank then sued the Defendant for the entire amount of the loan claiming that he had fraudulently misrepresented his net worth in his Personal Financial Statement, and that misrepresentation had induced the Bank to make the loan.  The Bank also alleged that the Defendant had falsely represented that the purpose of the loan would be to finance the startup of a printing business when in fact that printing business did not exist. 

The Bank proceeded by application.  In his Affidavit in response, the Defendant claimed that he himself had been duped.  He claimed that while he was working at a mattress store, a co-worker had introduced him to two fraudsters who had convinced him to apply for financing for a printing business that they would set up and manage.  In return, he would be entitled to a share of the profits of the business. 

Most significantly, he denied that he had either prepared or signed the Personal Financial Statement.  He did sign the loan application because he believed that the printing business would be going ahead based on his interactions with the fraudsters.  The loan was made, the fraudsters absconded with the money, and the Defendant was left with nothing.

The application judge dismissed the Bank’s claim after satisfying himself that the Defendant had not prepared or signed the Personal Financial Statement, and that he had reasonably believed that the other information that he had provided for the Bank was truthful at the time he gave it.  Most significantly, the application judge determined that the only information that the Bank had relied on to make the loan was the information in the Personal Financial Statement which apparently contained the forged signature of the Defendant.

The Bank appealed to the Court of Appeal. 

In order to establish a civil fraud, a plaintiff must prove a false representation made by the Defendant, that the Defendant either knew of the falsehood of the representation or was reckless as to its truth or falsity, that the false representation caused the plaintiff to act, and that the plaintiff’s actions resulted in a loss.

The issue in this appeal was whether or not the application judge failed to consider whether the Defendant had been reckless.

The Court determined that the Defendant had not been reckless with respect to the loan application document that he had signed, and that he had believed the information in it to be true.  He had met with the fraudsters several times where they had shown him their plans for the printing business.  He was told and believed that a lease had been signed.  He had every reason to be believe that the information in his loan application was truthful and that the financing was being sought for a legitimate purpose.

The Bank argued that the application judge should have considered whether or not fraud could be inferred on the whole of the circumstances.  The problem with this argument was that it was clear that the Bank had only relied on the information in the Personal Financial Statement, which the Defendant had never seen and had not signed.  Therefore, even if it could have been determined that the Defendant had been reckless in believing what he had been told by the fraudsters about a business to be started up using the loan proceeds,  and then repeating that information to the Bank, none of this matter because the Bank didn’t rely on it in making the decision to advance the funds.  That decision was based only on what turned out to be false misrepresentations in the Personal Financial Statement, which were not representations that had been made by the Defendant.

This is a somewhat unusual case.  Ordinarily one would not expect a Bank, in providing the Court with its explanation as to the basis for its decision to make the loan, to frame its reasoning quite so narrowly.  Indeed, one would ordinarily expect that a Bank would consider not only the information in the Personal Financial Statement of the borrowing company’s principal but also the big picture around the reason for the loan.  However, it does not seem to be the way that the Bank’s evidence was presented and both the application in the Court of Appeal seemed to have construed the evidence as to the Bank’s reliance in an exceedingly narrow manner.  In the result, as between a Bank that was unable to collect the full amount of its loan after default on the one hand, and a Defendant who had been duped by fraudsters on the other hand, the Bank ended up taking the hit.