In CIBC Mortgages Inc. v. Computershare Trust Co. of Canada, the Ontario Superior Court of Justice considered applications from competing mortgagees to a property where the first charge had been discharged by fraud and subsequent mortgages were obtained. The Court decided that although the subsequent mortgagees were innocent parties unaware of the fraudulent discharge on the first mortgage, the first mortgagee retained priority.
In 2008, two homeowners, Dhanraj and Sumatie Lowtan (the Owners) applied for a loan from Computershare Trust Company of Canada (Computershare) secured by a first charge on the property. In 2009, unbeknownst to Computershare, its mortgage was discharged by someone fraudulently claiming to have authority to bind Computershare. In March 2011, the Owners granted a charge in favor of Maria Giovanni and Darlene Geraci, while they continued to make payments to Computershare.
In July 2011, the Owners approached CIBC to obtain a new mortgage. Despite the fact that the Owners were still making monthly payments to Computershare, they told CIBC that the only charge they had was the mortgage with Giovanni and Geraci. CIBC granted a “first” mortgage, on the condition of payout and discharge of the Giovanni/Geraci mortgage. In December 2012, the Owners then approached Secure Capital MIC Inc. (Secure Capital) to register a “second” mortgage. This time, the Owners told Secure Capital about the CIBC mortgage, but still did not disclose the original Computershare mortgage.
Payments on the Computershare mortgage continued until January 4, 2013, after which time the mortgage went into default. Less than a month later, the Owners defaulted on both the CIBC and Secure Capital mortgages. On April 9, 2013, Secure Capital issued a notice of sale.
On April 12, 2013, Computershare discovered that its mortgage had been fraudulently discharged. Shortly thereafter, the Owners filed for bankruptcy and vacated the property. Towards the end of May 2013, a caution was registered against the property, indicating that the discharge of the Computershare mortgage may be fraudulent.
While CIBC sold the property with all parties’ consent, the proceeds were insufficient to satisfy all three debts. As a result, CIBC and Computershare each brought an application seeking a declaration that it had first charge on the property. Computershare also applied to have the discharge declared void. Secure Capital sought a declaration that its mortgage ranked second behind CIBC.
The Court found that the Owners knew about the fraudulent discharge.
In the circumstances, CIBC and Secure Capital unsuccessfully attempted to argue that the charges granted by the Owners to them were not fraudulent pursuant to section 78 of the Land Titles Act (LTA), which confirms that an instrument is effective according to its nature and intent once it is registered. However, subsection 4.1 excludes fraudulent instruments and subsection 4.2 preserves non-fraudulent instruments, including those registered subsequent to a fraudulent one.
The Court found that since the Owners knew about the fraudulent discharge, they did not own the interest in the property which they purported to have secured to the benefit of CIBC and Secure Capital. The subsequent mortgages were therefore fraudulent instruments under section 78 (4.2) of the LTA, and their priority had to give way to Computershare’s prior (though “discharged”) security.
Although the purpose of the LTA is to save those dealing with registered properties from having to check behind the register to investigate the title, that reliance on the registry is “not a one-way street.” In this case, Computershare legitimately expected that it was enough to register its charge on title, which would act as notice to anyone who obtained future charges on title.
The Court was ultimately guided by the “theory of deferred indefeasibility,” citing the decision inLawrence v. Wright (Lawrence). Lawrence effectively did away with the “immediate indefeasibility” theory, which held that the fact that a transfer was obtained by fraud is irrelevant and the subsequent party is entitled to rely on the register. In contrast, the “theory of deferred indefeasibility” sets out three types of parties for the purpose of determining title when there has been fraud on a property: the original owner, the intermediate owner (the one who deals with the fraudster), and the deferred owner (a bona fide purchaser or encumbrance for value without notice who takes from the intermediate owner). Recognizing that the intermediate owner has the opportunity to avoid the fraud, only a deferred owner can defeat the original owner’s title. In this case, CIBC was the intermediate owner, since it acquired an interest from a fraudster, and had the opportunity to investigate the transaction and avoid the fraud. There was no deferred owner, which left Computershare with priority.
Implications of the decision
This decision arguably places the burden of guarding against fraud with the mortgagee closest to the act of fraud itself. In this case, the Court suggested that CIBC could have found out by asking the right questions, such as how the homeowners were able to pay off the Computershare mortgage despite their financial difficulties. It is essential for mortgagees to prudently examine their prospective borrowers’ circumstances to ensure their priority is not jeopardized by fraud perpetrated on an earlier mortgagee.
Mortgagees must also be diligent in following up on any information they receive after granting a loan to a borrower, even if secured by a first charge. In this case, the evidence did not suggest that Computershare should have been aware of the fraudulent discharge. However, despite the continuation of payments, Computershare still had a duty to be vigilant. As the Court observed, a borrower’s ability to continue mortgage payments may be a part of the fraudulent scheme itself.