Executive Summary: Key Legal and Evidentiary Issues

• Whether a pre-bankruptcy judgment debt falls within the Bankruptcy and Insolvency Act, section 178(1)(e), as a debt arising from obtaining property by false pretences or fraudulent misrepresentation
• Characterization of the $600,000 loan transaction and whether the respondent’s use of a corporation justified piercing the corporate veil to impose personal liability
• Assessment of trial findings that the respondent’s conduct was “improper” and “akin to fraud” and whether that is sufficient to meet the fraud/false pretences threshold under section 178(1)(e)
• Use and scope of the record from the earlier civil and appellate proceedings to determine the “nature and substance” of the debt without retrying the original case
• Application of the narrow, “clear case” approach to the statutory exceptions to discharge in bankruptcy, and the required standard of proof for deceit-based findings
• Determination of the appropriate standard of appellate review (mixed fact and law, palpable and overriding error) for a section 178(1)(e) declaration

Factual background

The dispute arises out of a commercial development project involving farmland that was to be developed into a limestone quarry. The applicant, Heather Anne Stewart, was selling farmland to a consortium of investors, including a First Nation, who intended to operate a quarry on the property. As part of advancing the project, Ms. Stewart’s solicitor advanced $600,000 on December 20, 2013, to a corporation called 6551450 Manitoba Ltd. (655), whose majority shareholder was the holding company of the respondent, Susan Margaret Auch. The money was treated as a commercial loan to 655, repayable by March 31, 2015, at ten per cent interest per year. The stated purpose of the loan was to fund expenses needed to secure municipal approval from the Rural Municipality of Rosser for the quarry development.

Use of the loan funds and findings at trial

Instead of being applied to the quarry project, the loan proceeds were immediately redirected. On December 23, 2013, Ms. Auch directed that all of the $600,000 be disbursed to pay her personal debts and expenses. None of the loan funds were used by 655 for the stated development purpose. At trial in Stewart v 6551450 Manitoba Ltd (Stewart 2022), the judge concluded that Ms. Stewart would not have made the loan had Ms. Auch and her husband been candid about their true intentions for the money. The trial judge held that 655 had been used as a vehicle for improper conduct “akin to fraud,” and that the corporate structure should not shield Ms. Auch personally from liability. As a result, the court pierced the corporate veil of 655 and held Ms. Auch personally liable for the $600,000 loan, plus interest.

Procedural history before the bankruptcy

Ms. Auch appealed the trial judgment. The Manitoba Court of Appeal dismissed the appeal in Stewart 2023, holding that the trial judge had made no reviewable error in finding personal liability and in piercing the corporate veil. Attempts by Ms. Auch to obtain leave to appeal to the Supreme Court of Canada were refused in two related leave applications. After the Supreme Court refused leave, Ms. Stewart’s efforts to collect on the judgment debt proved fruitless. In August 2024, Ms. Auch made an assignment into bankruptcy.

Bankruptcy, section 178(1)(e) BIA, and the 2025 application decision

Following the assignment in bankruptcy, Ms. Stewart applied for several remedies to pursue collection of the judgment debt. Crucially, she sought a declaration that the judgment debt would not be released by any order of discharge under section 178(1)(e) of the Bankruptcy and Insolvency Act (BIA). That provision creates an exception to the usual rule that a discharge from bankruptcy releases pre-bankruptcy debts, by preserving the enforceability of any debt or liability resulting from obtaining property or services by false pretences or fraudulent misrepresentation (other than equity claims). The application judge in Stewart 2025 applied the Supreme Court of Canada’s framework in Poonian v British Columbia (Securities Commission), 2024 SCC 28, to determine whether the judgment debt fell within section 178(1)(e). The record before him consisted of the earlier trial and appellate decisions, the pleadings, and affidavits from Ms. Stewart, Ms. Auch, and the trustee in bankruptcy. The judge emphasized that his role was not to retry the civil action but to determine, based on the established findings, whether the debt resulted from deceit as contemplated by section 178(1)(e).

Key arguments raised on the 2025 application

On the application, Ms. Auch advanced three central arguments. First, she said there had been no relevant “representation” made by her to Ms. Stewart, because her husband handled negotiations and the loan was formally between Ms. Stewart and the corporation, 655. Second, she argued that the original statement of claim had not pleaded fraud, and that the civil case was, in substance, a straightforward contract dispute rather than a fraud case. Third, she stressed that the trial judge had described her conduct only as “akin to fraud,” not as fraud itself, suggesting this fell short of the high threshold for deceit under section 178(1)(e).

The 2025 application judge’s conclusions

The application judge rejected these arguments and held that there was clear and cogent evidence that the judgment debt fell within section 178(1)(e). Relying on Poonian and related appellate guidance, he focused on the nature and substance of the debt, rather than the technical cause of action pleaded. He found, first, that the trial judge’s decision to pierce the corporate veil and impose personal liability on Ms. Auch necessarily rested on findings that the loan was obtained and structured through improper, deceitful use of the corporation as a shield. Second, in the alternative, he accepted that Ms. Auch and her husband had engaged in a common venture to obtain the loan from Ms. Stewart on one understanding (funding quarry-approval expenses) and then immediately use the proceeds for unauthorized personal purposes. In his view, these findings satisfied the statutory requirement that the debt result from obtaining property by false pretences or fraudulent misrepresentation. Accordingly, he declared that the $600,000 judgment debt, plus interest, would not be released by any order of discharge in Ms. Auch’s bankruptcy.

Legal principles governing section 178(1)(e) BIA

On appeal from the 2025 application decision, the Court of Appeal reviewed the governing principles. Section 178(2) BIA provides that, subject to the exceptions listed in section 178(1)(a)–(h), an order of discharge releases a bankrupt from all provable claims. To support the fresh-start objective of bankruptcy law, these exceptions are to be interpreted narrowly and applied only in clear cases. Under section 178(1)(e), the critical question is whether the debt or liability arose from obtaining property or services “by false pretences or fraudulent misrepresentation.” The Court, echoing Poonian, emphasized that deceit—either through affirmative misstatements or the failure to disclose material facts—is central, and that there must be a clear nexus between that deceit and the creation of the debt. Morally objectionable behaviour alone is not enough; there must be deceit that induces the creditor to part with property or services. The appellate court also reiterated that, at the stage of a section 178(1)(e) application, the judge is not confined to the cause of action as pleaded or to explicit references to “fraud” in the pleadings. Instead, the judge may examine the pleadings, the reasons for judgment, and the underlying proceedings to determine whether the evidence and findings are sufficient to amount to fraud or false pretences in substance. At the same time, findings of deceit cannot be made casually or by mere impression; given the seriousness of the allegation and the consequences of a non-dischargeable debt, the evidence must be clear and cogent, even though the ultimate standard of proof remains the balance of probabilities. Where doubt exists as to whether a creditor falls within an exception, the benefit is to go to the bankrupt.

Standard of review on appeal

The Court of Appeal rejected Ms. Auch’s argument that the correctness standard applied. It held that the legal effect of the borrower’s actions under section 178(1)(e), in light of the factual findings from the trial and application record, raises a question of mixed fact and law. There was no readily extricable pure question of law. Accordingly, the appellate task was to determine whether the application judge had committed a palpable and overriding error in concluding that the judgment debt fell within section 178(1)(e).

Application of the principles to the facts

Considering the full context of the civil loan litigation, the Court of Appeal found it was reasonably open to the application judge to characterize the debt as one arising from deceit within the meaning of section 178(1)(e). The key was the trial judge’s conclusion that the loan was entered into improperly by Ms. Auch and her holding company, using 655 as a shield, coupled with the immediate diversion of all funds to personal debts and expenses in contradiction to the stated project-approval purpose. These findings supported the inference that the property (the $600,000 loan funds) was obtained from Ms. Stewart on the basis of misleading pretences about how the money would be used. That deceitful conduct, rather than mere poor judgment or general moral blameworthiness, was what gave rise to the judgment debt. On that basis, the Court of Appeal held that the application judge had appropriately concluded that the debt fit within the narrow fraud/false-pretences exception in section 178(1)(e). Because this was sufficient to uphold the declaration, the Court expressly declined to rule on the application judge’s alternative reasoning about imputing a spouse’s misrepresentation to the debtor in the context of a common venture, leaving that broader issue to a future case.

Outcome and monetary consequences

In its 2026 decision, the Manitoba Court of Appeal dismissed Ms. Auch’s appeal and ordered costs against her, thereby affirming the 2025 declaration that the judgment debt is not released by her bankruptcy discharge. The successful party across the later stages of the litigation—the 2025 application and the 2026 appeal—is Ms. Stewart, who retains the benefit of a judgment for $600,000 plus interest against Ms. Auch personally, with the debt surviving bankruptcy. While the principal judgment amount of $600,000 (plus contractual interest at ten per cent per annum until repayment or judgment) is clear, the appellate reasons do not state the total amount of interest accrued to date or the specific quantum of costs at trial, on the application, or on appeal. As a result, the exact total monetary amount ordered in favour of Ms. Stewart, including all interest and costs, cannot be determined from the available decisions.