Ontario court revisits priorities among multiple victims of mortgage fraud

The Ontario Divisional Court in CIBC Mortgages Inc. v. Computershare Trust Co. of Canada^[1], recently overturned a decision which had held that, where property owners had registered a fraudulent discharge of their existing mortgage and then granted further mortgages, the lender whose mortgage had been fraudulently discharged was entitled to have its mortgage reinstated in priority to the subsequent lenders who had advanced funds and registered their respective interests in reliance on the registration of the discharge.

The Divisional Court included in its analysis a review of the theory of deferred indefeasibility and the competing interests of victims of mortgage fraud within the context of the Ontario Land Titles Act (LTA)^[2]. Deferred indefeasibility holds that there are three classes of parties to be considered when dealing with fraud and competing priorities under the LTA: the original owner, the intermediate owner who dealt with the party responsible for the fraud, and the deferred owner, a bona fide purchaser or encumbrancer for value without notice who takes from the intermediate owner. Only the deferred owner will defeat the original owner's title because the intermediate owner, so the theory maintains, has an opportunity to investigate the transaction and avoid the fraud, whereas the deferred owner does not. The theory also holds that registration of an instrument that would otherwise be void will not cure its defect and neither the instrument nor its registration will give good title except to a deferred owner who takes from an intermediate owner.

The last time an appeal court reviewed deferred indefeasibility was in the 2007 Ontario Court of Appeal decision of Lawrence v. Maple Trust Co.^[3] In Lawrence, a fraudster had conveyed the registered owner's title to another fraudster who in turn had obtained mortgage financing from Maple Trust to fund the sham purchase. The Court of Appeal reaffirmed the LTA embodiment of the theory deferred indefeasibility over the competing theory of immediate indefeasibility, which holds that a bona fide purchaser or encumbrancer for value without notice may acquire valid title directly from a fraudster and defeat the original owner's title. In many ways the approach to the analysis in Lawrence and Computershare is the same albeit on different facts. However, the Divisional Court in Computershare had before it amendments to the LTA specifically dealing with fraudulent instruments, which had been introduced just prior to the Lawrence decision and were not considered by the Court of Appeal in its analysis.

Facts

In 2006, the Lowtans purchased a property in Brampton. In 2008, they granted a mortgage to Computershare for $280,801. In 2009, they registered a fraudulent discharge of the Computershare mortgage while continuing to make the regular mortgage payments. In March of 2011, they granted a private mortgage for $87,500. In July of 2011, they granted a mortgage to CIBC for $252,800. As a result of the fraudulent discharge of the Computershare mortgage, CIBC provided mortgage funds believing the only mortgage on the property to be the private mortgage, which was discharged from CIBC's advance. In 2012, the Lowtans granted a mortgage to Secure Capital for $32,000. In 2013, they defaulted in payment on all three mortgages, Computershare discovered the fraudulent discharge of its mortgage, and the Lowtans vacated the property and made assignments into bankruptcy. All three mortgagees commenced applications in Superior Court for a determination of their respective priorities (i.e., who should get paid first, CIBC or Computershare) and the property was sold for $297,754 with the proceeds held in trust pending the outcome of the applications.

Application Judge's Decision

The application judge concluded that Computershare retained first priority and should get paid first and that CIBC and Secure Capital ranked second and third, respectively. His primary finding in coming to that conclusion was that CIBC's mortgage was a "fraudulent instrument". He reasoned that although the Lowtans were the registered owners of the property when they granted mortgages to CIBC and Secure Capital, they were not the true owners of the "interest in land" they purported to convey to CIBC and Secure Capital because by registering a discharge of the Computershare mortgage they had fraudulently conveyed Computershare's interest in the property to themselves. This made the Lowtans "fraudulent persons" under the LTA and the mortgages to CIBC and Secure Capital were in turn fraudulent instruments because the definition of fraudulent instrument includes an instrument under which a fraudulent person purports to transfer an interest in land and the Lowtans had purported to transfer their interest to CIBC and Secure Capital. Although CIBC and Secure Capital were bona fide encumbrancers for value, in accordance with the theory of deferred indefeasibility they were intermediate owners because they took their interests from fraudulent persons who appeared on the register as true registered owners, but were not. Additionally, the fraudulent discharge was void and its registration did not cure that defect, and neither the discharge nor its registration could give clear title to the Lowtans. CIBC appealed the decision.

Divisional Court's Decision

The Divisional Court disagreed with the application judge's analysis and declared that the CIBC mortgage had priority over the Computershare mortgage and that CIBC should get paid first out of the proceeds of sale, with any surplus to go to Secure Capital and Computershare.

The Court reviewed the theory of deferred indefeasibility and concluded that the amendments to the LTA introduced just prior to the Lawrence decision explicitly spell out that the LTA establishes a scheme of deferred indefeasibility which provides for the invalidation of fraudulent instruments but not instruments registered subsequent which are not themselves fraudulent.

The Court found that the application judge incorrectly concluded that the CIBC and Secure Capital mortgages were fraudulent instruments and disagreed with his analysis in reaching that conclusion. Contrary to the application judge's analysis, notwithstanding the registration of the fraudulent discharge, the Lowtans always remained the true owners of the property and were therefore not fraudulent persons as they did not falsely hold themselves out to be the registered owners of the interest in land affected by the CIBC and Secure Capital mortgages. They were in fact the true owners and were always entitled to put additional mortgages on their property. Their fraud was the concealment of the Computershare mortgage. As a result, CIBC was not an intermediate purchaser of a fraudulently acquired interest registered on title and was entitled to rely on the basic principles of the land titles system: the "mirror" principle (the register is a perfect mirror of the state of title) and the "curtain principle" (a purchaser need not investigate past dealings or search behind title).

The decision has not been appealed.

Conclusion

Computershare does not answer all of the questions for all fact situations. However, the main and positive result to come out of the decision is that lenders and their lawyers will not be charged with the responsibility for increased due diligence to verify all prior mortgages were validly discharged, which was the specter raised by the lower court's decision.