Mortgage Litigation

Mortgages are really two separate legal obligations. A mortgage is a type of lien on the property it is registered against, and represents security for the debt. Separate and apart from the security, a mortgage is promise to pay. If a mortgage goes into default the creditor can get paid from selling the real property and/or by getting a judgment on the promise to pay (usually referred to as the covenant).

Typically the creditor (usually called the mortgagee) can seek to be repaid in two ways. He can start a foreclosure proceeding to take title to the property. This is rarely done (in a real estate recession this is a little more common when the debt may be much greater than the property could be sold for to a third party)

Mortgage LawThe more common way to proceed is to serve a Power of Sale (formally called a Notice of Sale under Mortgage). If 35 clear days have elapsed and the debtor (formally known as the mortgagor) has not put the mortgage back into good standing, a lawsuit will be started for possession and for the covenant (the amount of the debt). If judgment is obtained, the creditor takes possession of the property (unusually through a Sheriff’s eviction) and sells the property. If there is a deficiency on sale the creditor will look to the debtor to pay. If there is a surplus after paying all principle, interest and costs and expenses, the debtor will get the surplus.

At Landy Marr LLP we have been acting for lenders and borrowers in mortgage litigation since 1977. Typically when acting for creditors, we act for private lenders, and not for institutional lenders like banks. We also fight for homeowners defending themselves against banks or other lenders.

Mortgage Fraud – A Look at the Case Law

By Samuel Marr and Mark Hartman[1]

To deal with mortgage and other land title frauds, the Ontario government recently passed Bill-152. This Bill only applies to interests in land registered after October 19, 2006, and all mortgages registered before that date will be decided without any application of Bill-152.

This paper will examine the case law with respect to mortgage fraud. The case law is directly applicable to mortgages registered before October 19, 2006, and may also be relevant in interpreting and understanding Bill-152.

I. An Examination of Lawrence v. Maple Trust[2]

Stare Decisis

The principle of stare decisis, “stand by things decided”, is one of those esoteric concepts one picks up in law school. Recently, in the Ontario Court of Appeal, what was an imputable principle of our common law appears to have become a less rigid rule.

In David Polowin Real Estate Ltd. v. The Dominion of Canada General Insurance Co.,[3] the Ontario Court of Appeal re-examined one of its own recent decisions, and quoted from and followed the advice of Lord Denning who once wrote:

“The doctrine of precedent does not compel your Lordships to follow the wrong path until you fall over the edge of the cliff”.

The Court of Appeal decision in Household Realty Corp. Ltd. v. Liu and the cases which followed the precedent, generated a great deal of “press buzz”, particularly in the Toronto Star. Rarely has commercial litigation generated such publicity, or widespread discussion both among members of the legal profession, and also among the public in coffee shops and living rooms across the province.

In Lawrence, the Court of Appeal admitted that it got it wrong. This stark admission caught the eye of the editorial board of the Globe and Mail who weighed in after the reasons in Lawrence were released:

It takes a big person to admit he’s wrong. Thankfully, there were enough big people on the Ontario Court of Appeal to admit the court was “incorrect” when it held an innocent homeowner responsible for paying for a mortgage registered fraudulently in the homeowner’s name. The judges might have also said their colleagues who made the earlier ruling had turned justice on its head, failed to glimpse the forest in the confusion of trees and generally had a bad day at the office. [4]

Overturning Household

In Lawrence, Madam Justice Gillese wrote a unanimous decision. The Bench was not the usual three person panel, but a special five person panel, which included Justice McPherson, who was also a member of the unanimous panel in Household. Justice Gillese did not engage in a lengthy discussion about the history of stare decisis, or the circumstances in which the Court of Appeal could overturn its own decisions, which had been prominent in the reasons in David Polowin Real Estate Ltd. Instead, Madam Justice Gillese, in a matter of fact manner, simply declared Household to be wrongly decided:
“The result in Household Realty, at least in respect of the husband’s interest in the property, is inconsistent with the theory of deferred indefeasibility.
Further, the language in Household Realty fails to recognize that the Act gives statutory effect to the theory of deferred indefeasibility. For the reasons already given, I consider both the result and that reasoning to be incorrect.”
The Facts

The facts in Lawrence were straightforward. A fraudster had “taken” the title of a homeowner (the elderly and very sympathetic Plaintiff, Lawrence). To accomplish the fraud, the fraudster posed as Lawrence and “sold” the property to another fraudster. The second fraudster fraudulently mortgaged the property, defrauding the mortgagee (Maple Trust) of the mortgage funds.

In subsequent legal proceedings, the lender, Maple Trust, took the position that under the law established in Household, the mortgage, once registered, was valid and enforceable against the true owner, Lawrence.

Rejection of the Argument that all fraudulent instruments are void in all circumstances

Lawrence’s counsel urged the Court of Appeal to declare fraudulent instruments to be void for all time and for all purposes. The Court of Appeal rejected this approach:
“In my view, the appellant’s argument that fraudulent documents are void for all time and all purposes, regardless of registration, is contrary to the notion of a land titles system and the provisions of the Act. If accepted, this view would serve to bring back the registry system of land holding. It would negate the mirror and curtain principles and those provisions in the Act[7] that reflect those principles as, notwithstanding the registration of a series of transfers and/or charges, a person could never rely on the register since title would depend on the validity of all past transactions in the chain of ownership. The chain of title would be forever broken by any fraudulent link.
Clearly, the Act is not intended to establish a land registry system. Even if the relevant provisions, narrowly construed, were capable of supporting the interpretation urged by the appellant, I would reject such an interpretation as it would defeat the entire purpose of the Act, which is to establish a land titles system, simplify conveyancing and overcome the insecurity of title inherent in a registry system”

Deferred Indefeasibility

After rejecting this approach, Madam Justice Gillese declared that deferred indefeasibility is the appropriate system governing properties in the Land Titles system in Ontario:
“The theory of deferred indefeasibility accords with the Act and must be taken into consideration in an analysis of s. 155 and its relationship with other provisions in the Act. Under this theory, the party acquiring an interest in land from the party responsible for the fraud (the “intermediate owner”) is vulnerable to a claim from the true owner because the intermediate owner had an opportunity to avoid the fraud. However, any subsequent purchaser or encumbrancer (the “deferred owner”) has no such opportunity. Therefore, in accord with s. 78(4) and the theory of deferred indefeasibility, the deferred owner acquires an interest in the property that is good as against all the world.
Wright never took valid title to the Property because he obtained it by fraud. He was, therefore, not a registered owner. In accordance with s. 68(1) of the Act, only a registered owner may give valid charges on land. Maple Trust is the intermediate owner of an interest in the Property. It had an opportunity to avoid the fraud. It did not take from a registered owner. Therefore, despite registering its charge, Maple Trust loses in a contest with the true registered owner, Ms. Lawrence. Accordingly, the charge against the Property in favour of Maple Trust should be set aside”.
Subsequent Transactions

Imagine a different scenario in which the facts in Lawrence had evolved further, so that a new third party had acquired an interest in land from a bona fide purchaser- for example by buying the property under Power of Sale from Maple Trust (as opposed to directly from the fraudster).

In these circumstances, the result for Ms. Lawrence would have been entirely different. Lawrence also stands for the proposition that in such circumstances, the purchaser’s interests in land is enforceable and valid even against the true owner of the property. If Maple Trust had sold the property under a Power of Sale, the third party purchaser would have acquired good title even against the true owner, Lawrence.

Click here to View this chart illustrates the post-Lawrence results following fraudulent transactions

Obiter

Madam Justice Gillese concluded her decision with some obiter comments in which she strongly hinted that an ‘innocent” lender, even if an institutional lender, could make a claim to the Land Title Assurance fund, even though its mortgage was void and unenforceable as against the true owner:
“… [It has been suggested] that Maple Trust, an innocent lender, would be unable to turn to the Fund for compensation. This, it was said, arises from the precondition for recovery under the Act that an applicant must actually receive an interest in the land and then lose it. It was suggested that the theory of deferred indefeasibility leads to the conclusion that Maple Trust never acquired an interest in the Property and, therefore, never lost it. Indeed, this is one of the arguments levied against the theory of deferred indefeasibility on the basis that Maple Trust’s inability to recover from the Fund offends the insurance principle.
In my view, the theory of deferred indefeasibility as reflected in the Act, does not necessarily lead to the conclusion that Maple Trust never acquired an interest in the Property. It is at least arguable that it did acquire such an interest. However, the interest that it acquired was subject to defeat by the true registered owner of the Property, for the reasons already given. The existence of an interest, albeit one that is defeasible in very limited circumstances, is demonstrated by the fact that if a bona fide third party took from Maple Trust, for value and without notice (i.e. a deferred owner), its interest would be indefeasible. Even in an action between the deferred owner and the true owner, the deferred owner would win. If Maple Trust had no interest in the Property, what did it convey to the deferred owner and why would the deferred owner succeed?
… I would hasten to add that these comments are intended only to clarify my views of how the theory of deferred indefeasibility operates, as expressed in the Act. They are not intended to decide the question whether Maple Trust is entitled to compensation from the Fund. That determination is for another body at another time.”

The question of whether the Land Title Assurance fund or the Government of the Ontario would permit lenders, particularly institutional lenders to make such claims is going to make for some interesting litigation and perhaps further legislative intervention in the future.

II. An analysis of how Lawrence would change the outcome of earlier mortgage fraud cases

The balance of this paper will undertake the interesting analysis of a few of the earlier mortgage fraud cases assuming that Lawrence had been decided prior to those decisions.

R. A. & J. Family Investment Corp. v. Orzech.[5]

The fact pattern and implications presented by this case would make for a good moot court competition. Orzech involved multiple frauds over a period of time. The decision of the Court of Appeal is not clear on certain particulars of the frauds; that is who perpetrated the frauds and the beneficiaries thereof.

R. A. & J. Family Investment Corporation (R.A. & J.) held a valid first registered charge which was fraudulently discharged. Relying on title, Royal Bank registered a new first charge subsequent to the fraudulent discharge. It is unclear whether or not non-payment under the mortgage prompted R.A. & J. to discover the fraudulent discharge. However, a couple of years later, R.A. & J. registered a caution on title and then subsequently assigned its interest in the charge to a trustee.

As a result of default under its charge, Royal Bank sold the property under power of sale but subject to the caution registered by R. A. & J. The purchasers of the property granted a first registered purchase money charge to Hurontario Trust, and a second charge to Scotiabank a year later. However, immediately following the registration of the second charge in favour of Scotiabank, a forged postponement of charge was registered, whereby Hurontario Trust postponed its charge in favour of the Scotiabank charge. Shortly thereafter, the owner of the property received an advance from Canada Trust, which was used to obtain a discharge of the Scotiabank charge. Canada Trust was to receive a first registered charge against the property, but its lawyer failed to obtain and register such a charge.

The end of this saga occurs approximately one year later, when on consent, the property is sold and the net proceeds of sale are paid into court pending the outcome of the litigation.

It is interesting to note that Mr. Justice Goudge[6] found that none of the claimants were in any way responsible for the acts of forgery or were in any way negligent.
With respect to the fraudulently discharged R.A. & J. mortgage, Mr. Justice Goudge found as follows:

“The Act also modifies the common law rule that a forged document is a nullity and is void. Section 155 expressly provides that this rule is subject to the provisions of the Act with respect to registered dispositions for valuable consideration.

Here, the registered Royal Bank charge was for valuable consideration. It was registered after the registration of the cessation of charge. Hence, with respect to the Royal Bank charge, the cessation of the R.A. & J. charge, though a forgery, is deemed by the Act to mean what it says and to be effective in discharging the mortgage in which R.A. & J. had an interest. The Royal Bank interest in the property is therefore unaffected by any claim by R.A. & J. Nor can R.A. & J. rely on the forgery to prevail over Hurontario and Canada Trust since their claims derive from the Royal Bank charge, and are therefore equally unaffected by any claim by R.A. & J.”

Even if the owner of the property was complicitous in the registration of the fraudulent cessation (in that it presumably was the only party that may have benefited from the fraudulent registration of the cessation of charge), Royal Bank was granted the charge by the true owner. Further, in that the subsequent mortgagees acquired their interest in the property through the Royal Bank charge, their respective entitlements could not be challenged by R. A. & J. either. Accordingly, it does not appear that the decision in Lawrence would have any material effect on the decision of the Court of Appeal in R. A. & J.

Durrani v. Augier [7]

The impact of the Lawrence decision on this case may have led to a different result had Lawrence been decided before Durrani. The fraudster, Augier fraudulently registered a collateral loan agreement against title to the property of the innocent homeowners and ultimately obtained title to the property pursuant to a fraudulently obtained default foreclosure judgment.

Having obtained title this way, the fraudster took steps to sell the property and ultimately sold the property to a purchaser who the court held had actual notice of the fraudulent title. The purchaser had obtained a purchase money mortgage from Royal Bank of Canada.

The court ultimately held that the innocent homeowners were entitled to have the title to the property transferred back into their names and, notwithstanding that the purchaser had actual knowledge of the fraudulent title, the charge given to Royal Bank was held to be valid.

In finding that Ontario is a jurisdiction in respect of which the doctrine of deferred indefeasibility of title applies, Madam Justice Epstein commented as follows:

“42. The philosophy of a land titles system embodies three principles, the mirror principle, where the register is a perfect mirror of the state of title; the curtain principle, which holds that a purchaser need not investigate the history of past dealings with the land, or search behind the title as depicted on the register; and the insurance principle, where the state guarantees the accuracy of the register and compensates any person who suffers loss as a result of an inaccuracy. These principles form the doctrine of indefeasibility of title and is the essence of the land titles system: Marcia Neave, “Indefeasibility of Title in the Canadian Context” (1976), 26 U.T.L.J. 173 at p. 174…

78. Through the doctrine of deferred indefeasibility of title, the land titles registration system reflects a policy choice to protect the security of title of those who are innocent parties who rely on the title. It follows that there may be those who will be deprived of legitimate interests in the land under the operation of the Act.

79. The innocence principle of a title registration system is recognized in Ontario by the establishment and maintenance of the Land Titles Assurance Fund (the “Fund”) as a means of compensating persons prejudiced by the operation of the Act. Generally, the way the Fund is designed to work is as follows. First, the person wrongfully deprived of an interest in land by reason of an entry on the register is entitled to recover what is just from the party responsible for the wrong. Where the individual wrongfully deprived of land is unable to recover just compensation for the loss by other means, the person is entitled to have the compensation paid out of the Fund. Such a claim must be made to the Director of Titles and the liability of the Fund for compensation and the amount of compensation shall be determined by the Director subject to a right of appeal.”

The only fact which distinguishes Durrani from Lawrence is that the fraudster obtained title to the property himself. Epstein J. held that that transfer could not form the basis of any legitimate claim to title on his part and could not therefore form the root of good title.

However, Madam Justice Epstein found that the purchasers from the fraudster would be protected under section 155 of the Land Titles Act if they obtained title to the property for valuable consideration without notice of any fraud; that is if they were innocent bona fide purchasers for value. Madam Justice Epstein, on the facts before her, found that the purchaser from the fraudster had “actual notice” of the invalidity of the fraudster’s interest in the property and accordingly found that the purchaser was not a bona fide purchaser for value without notice. On that basis, Madam Justice Epstein granted a declaratory order that the transfer from the fraudster to the purchaser was void and amended the register to revest title in the innocent homeowners.

However, on the basis that the purchase money mortgagee was unaware of any irregularities with the title to the property, Epstein J. found that the Bank was a bona fide mortgagee for value without actual notice of any fraud which Her Honour indicated was protected by the provisions of the Act when they relied upon the register as reflecting valid title.

It is submitted that the analysis of the Court of Appeal in Lawrence would lead to a different result in Durrani.

In Lawrence, The Honourable Madam Justice Gillese found as follows:

“55. Deferred indefeasibility is consistent with s. 155, a statutory enshrinement of the common law albeit “subject to the provisions of [the] Act. As previously explained, it is consistent also with an interpretation of s. 68(1) that recognizes the common law principle that a fraudster can never take good title so as to become the owner but also enables Maple Trust to be recognized as the registered owner for the purposes of the deferred owner. As Maple Trust registered its charge and its charge was not obtained by fraud, a bona fide purchaser for value without notice (i.e. a deferred owner) could rely on a combination of ss. 68(1) and 78(4) to take an indefeasible interest from Maple Trust.”

Based on the Court’s analysis, it appears that in order for the Maple Trust mortgage to have been valid, an innocent titled owner would have had to grant the mortgage to Maple Trust. In Lawrence, the titled owner from whom Maple Trust took its mortgage was part of the fraud.

Similarly, the purchaser from the fraudster in Durrani who had actual notice of the invalidity of the fraudster’s title would be unable, on the reasoning of Lawrence, to give a valid charge to Royal Bank.

But, we must query: how would the court deal with a slightly different fact situation whereby the mortgagee, although not having “actual notice” of the fraud, was or ought to have been put on enquiry by documents or information in its possession? Would the mortgage be valid in those circumstances?

The Toronto-Dominion Bank v. Jiang et al.[8]

The decision of Mr. Justice Spence in this case sets forth a fact pattern which is practically identical to that of Lawrence.

The innocent homeowners purchased the property and continued to occupy it for five years before an imposter transferred the property to a fraudster, who mortgaged the property to The Toronto-Dominion Bank which secured a $200,000 line of credit. It was not disputed that the Bank was a bona fide mortgagee for value without notice of the fraud.

Mr. Justice Spence, again relying on the doctrine of deferred indefeasibility and two papers authored by Sydney Troister, rectified the title to the property by declaring the fraudulent transfer void and of no effect but validating the charge registered in favour of The Toronto-Dominion Bank.

It is clear that the decision in Jiang cannot be reconciled with Lawrence, although both decisions base the ultimate result on the application of the doctrine of deferred indefeasibility.

Conclusions

It now appears clear that in order for an interest in title to remain valid, the fraud must be laundered through the transfer of title to an innocent purchaser for value without actual notice of any fraud.

Arguably, the principles underlying the doctrine of deferred indefeasibility have been eviscerated by Lawrence. The mirror may now be cracked, the curtain drawn, and the amendments to the Land Titles Act may be insufficient to improve government-backed insurance sufficiently to assist in preserving the integrity of the land registration system in this province.

Lawyers acting for purchasers and mortgagees may now have to investigate the validity of the title from their client’s vendors. In the highly competitive real estate marketplace the costs and risk exposure to lawyers will likely enure to the benefit of the title insurers.


[1] Samuel Marr, Partner Landy Marr LLP, Toronto, Mark Hartman, Partner Chaitons LLP, Toronto
[2] Lawrence v. Maple Trust Company et al. Ontario Court of Appeal (released February 26, 2007)
[3] (2005) 76 O.R. (3d) 161 (Ont. C.A.)
[4] Globe and Mail, Editorial, Thursday February 8, 2007
[5] (1991), 44 O.R. (3rd) 385 (C.A.)
[6] Mr. Justice Goudge was also a member of the panel deciding Lawrence
[7] 36 R.P.R. (3d) 261 (Ont. S.C.J.)
[8] 63 O.R. (3d) 764