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In a recent decision, Forseed Haro Holdings Ltd. v. Bank of Montreal, 2025 BCSC 585, the British Columbia Supreme Court offered valuable guidance on when a secured party may lose security against collateral if such collateral changes form, specifically when pledged cash collateral is invested in Guaranteed Investment Certificates ("GIC").
Background
In 2018, Bank of Montreal ("BMO") provided a $94 million loan (the "Loan") to 1104227 B.C. Ltd. ("110") to purchase a development property in downtown Vancouver. Shortly after, 110 transferred beneficial ownership of the lands to Haro-Thurlow Street Project Limited Partnership ("HTLP").
Forseed Haro Holdings Ltd. ("Forseed") is a limited partner of HTLP. In November 2019, Forseed agreed to guarantee the Loan and provided a pledge agreement (the "Pledge") to the Bank, pursuant to which Forseed pledged $13.625 million in cash collateral (the "Cash Collateral"). Under the Pledge, Forseed pledged to BMO all monies held at any time in a bank account with the account number 001-00040-1765480 (the "480 Account"). Concurrently with Forseed's granting of the guarantee and the Pledge, the Cash Collateral was deposited into the 480 Account.
From November 2019 to October 2023, on Forseed's instructions, BMO invested the Cash Collateral in interest-generating GICs. Each time the GICs matured, the Cash Collateral was reinvested, with the interest deposited into the 480 Account. The account numbers ascribed to the GICs were different from the 480 Account number.
In July 2023, the loan went into default and in August 2023, BMO demanded repayment of the Loan. In October 2023, BMO commenced receivership proceedings and also seized funds that it held as security, applying such funds to amounts then outstanding under the Loan. The seized funds included the Cash Collateral, which at the time of seizure was invested in GICs and not held in the 480 Account. The seized funds also included interest from the GICs which had been deposited into the 480 Account.
Forseed argued that BMO had no right to seize the Cash Collateral because BMO lost its security interest in the Cash Collateral when BMO moved the Cash Collateral out of the 480 Account and invested it in GICs. Forseed's position was that the GICs were not "proceeds" of the Cash Collateral under the British Columbia Personal Property Security Act, R.S.B.C. c. 359 (the "PPSA") or that the investment of the Cash Collateral in GICs was an authorized "dealing" under the PPSA which caused BMO to lose its security interest.
Decisions
The BC Supreme Court first unequivocally determined that the GICs were "proceeds" of the Cash Collateral. "Proceeds" are defined in Section 1 of the PPSA, as follows:
"proceeds" means:
(a) identifiable or traceable personal property fixtures and crops
(i) derived directly or indirectly from any dealing with collateral or the proceeds of collateral; and
(ii) in which the debtor acquires an interest, ...
The Court found that the GICs were unquestionably purchased with the money in the 480 Account. Accordingly, the GICs were identifiable and traceable personal property which fell into the definition of "proceeds" under the PPSA.
To assess Forseed's next argument that BMO lost its security interest in the Cash Collateral because it had authorized a "dealing" when it invested the funds into GICs, the Court considered Section 28 of the PPSA as follows:
28(1) Subject to this Act, if collateral is dealt with or otherwise gives rise to proceeds, the security interest:
(a) continues in the collateral unless the secured party expressly or impliedly authorizes the dealing; and
(b) extends to the proceeds...
The Court concluded that while BMO "dealt" with or authorized the "dealing" of the Cash Collateral by investing it in GICs, it did so without the intent of giving up its security interest in the Cash Collateral. Importantly, BMO invested the Cash Collateral at the specific direction of Forseed so that Forseed could earn interest on the funds while the funds were held by the Bank as collateral. Such an arrangement did not imply a forfeiture by BMO of its security. In other words, in order for BMO to have lost its security in the Cash Collateral, it would have needed to show an intention to give up its security interest. It did not do so here.
Ultimately, the Court found that BMO at all times had a security interest in both the GICs and the interest deposited into the 480 Account, and that BMO was entitled to enforce its rights to seize the funds that it held as collateral.
Takeaway
Forseed is a positive result for lending transactions. The decision assures lenders that the investing of cash collateral into investment vehicles such as GICs would not in itself cause the lender to lose its security interest. This is so even if the account number of such investment vehicle changes and is not referenced in the pledge or cash collateral agreement. The decision thus opens up options for the Borrower to invest cash collateral so that it will not be required to leave monies in a pledged account unused. That being said, when investing cash collateral as done in this case, lenders should take care not to express any intent of giving up its security in the collateral, as doing so may trigger a release of its security under the PPSA.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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