In recent years, cases involving fraudulent conveyances and fraudulent mortgages have garnered intense media attention and come to the forefront of issues in real estate law. Clients and solicitors alike have watched anxiously as courts determined which innocent party must bear the burden of the fraud – the wronged owner or the duped purchaser or lender. In 2007, the Ontario Superior Court case of Reviczky v. Meleknia et. al. (and the follow up case of Khosla v. Korea Exchange Bank of Canada which was released in November 2008) drew attention to a new method by which fraudsters could perpetrate title fraud: a bogus Power of Attorney. The decision of the Court, and its proposition that the party who has the opportunity to avoid the fraud may be forced to bear the risk, has implications for how lenders, purchasers and their lawyers conduct a transaction involving Powers of Attorney.
In response to this issue, the Law Society of Upper Canada and the Government of Ontario have updated their policies with respect to Powers of Attorney to help lawyers and the public avoid some of the risks involved with using Powers of Attorney. Earlier this year, the Law Society of Upper Canada introduced new guidelines for lawyers when dealing with Powers of Attorney, and as part of its Real Estate Fraud Action Plan, the Government of Ontario has updated its requirements with respect to the registration of Powers of Attorney on title to properties.
Reviczky v. Meleknia
In March 2006, Paul Reviczky, an 88 year old man, rented out his residential property in Toronto to new tenants. In April 2006, unbeknownst to Mr. Reviczky, the tenants, posing as relatives of Mr. Reviczky, listed the property for sale with a real estate agent. Later that month they entered into an Agreement of Purchase and Sale with Pegman Meleknia, using a phoney Power of Attorney.
Mr. Meleknia retained a solicitor for the purchase of the property, and was approved by HSBC Bank Canada ("HSBC") for a mortgage in the amount of $300,000.00 to fund the purchase. HSBC, like many lenders of residential mortgages, was also represented by the purchaser’s solicitor. The sale of the property closed on May 15, 2006 and a mortgage in favour of HSBC was registered on title to the property. It was not until June, 2006 that Mr. Reviczky discovered that the property had been sold to Mr. Meleknia, and that HSBC now held a mortgage on his property.
The purchaser’s solicitor had obtained a title insurance policy for the purchase and mortgage, and the title insurance company paid Mr. Meleknia and HSBC for their loss, and then brought an application against Mr. Reviczky to maintain the mortgage on title to the property.
The Court determined that the mortgage registered on title to the property in favour of HSBC was not a valid charge, and issued an order deleting the charge from the property’s parcel register. The Court found that since HSBC had dealt directly with the fraudster it had an opportunity to avoid the fraud, and since HSBC had the opportunity to avoid the fraud, its claim was vulnerable to the interest of the true owner.
In making its decision, the Court examined the theory of deferred indefeasibility to determine whether the bank’s claim in the property was vulnerable to a claim by the true owner (and thus, if the mortgagee’s claim was defeasible). The Court cited the decision of Justice Gillese of the Ontario Court of Appeal, which described the theory of deferred indefeasibility of title in Lawrence v. Maple Trust Co. et al ("Lawrence"):
"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 the opportunity to avoid the fraud. However, any subsequent purchaser or encumbrancer (the "deferred owner") has no such opportunity. Therefore… the deferred owner acquires an interest in the property that is good as against all the world."
Applying this theory, HSBC’s solicitor argued that Mr. Meleknia was the intermediate owner, and that since HSBC was the deferred owner, its interest in the property was valid and indefeasible. However, Mr. Reviczky’s solicitor argued on the basis that HSBC was an intermediate owner because it dealt directly with the party responsible for the fraud, and it had the opportunity to avoid the fraud.
The Court agreed with Mr. Reviczky’s solicitor, and interpreted the decision in Lawrence as stating that the determinative factor in whether an interest in land is defeasible to the claim of the true owner is if the party claiming the interest had the opportunity to avoid the fraud. Justice Macdonald stated that "the opportunity to avoid the fraud is now central to the theory of deferred indefeasbility as a rationale for allocating loss amongst competing parties who claim an interest in land under the Land Titles Act."
Despite the fact that HSBC was actually a subsequent encumbrancer, the Court found that HSBC had dealt with the fraudster directly through its solicitor. More importantly, the Court found evidence that HSBC had the opportunity to avoid the fraud. While HSBC was aware that the vendor was acting under a Power of Attorney, the solicitor HSBC chose to retain did not scrutinize the Power of Attorney. The Court was certain that had the solicitor scrutinized the Power of Attorney, questions would have arose in his mind to bring the fraud to light.
In addition to its finding on this case, the Court warned that Powers of Attorney should always be reviewed with care, because each document is unique in its form. He criticized HSBC’s solicitor for not recognizing that a transaction involving a Power of Attorney requires a level of care and analysis that is more than just "business as usual".
The story of the fraud does not end here. Satwant Singh Khosla was the solicitor who acted for Meleknia and HSBC. Khosla later brought an action on behalf of the title insurance company for conversion against Korea Exchange Bank of Canada (KEBOC), the bank that cashed the cheque for the closing proceeds in the sale. The fraudster had opened an account at KEBOC in the false name used in the Power of Attorney, using ID that was authenticated by KEBOC. Upon the closing of the transaction, the fraudster forged the endorsement of the vendor (the true owner of the property) on the cheque, and deposited the funds into its KEBOC account. KEBOC accepted the endorsement and released the funds.
In a motion for summary judgement, the bank was found liable of conversion and ordered to pay Khosla (the sum of $429,481.26, the amount of the closing proceeds collected by the fraudster). Since conversion is a strict liability offence, the Court did not consider the fact that KEBOC may not have been at fault, that it had performed its regular due diligence or that Mr. Khosla’s negligence may have contributed to the offence.
In conclusion, the law applied by courts when allocating the loss between parties in title fraud cases continues to evolve in Ontario. In Reviczky v. Meleknia et. al, the Court identified a party’s ability to avoid the fraud as the determinative factor in which a party’s interest is trump. The case has not only highlighted the dangers of using Powers of Attorney, but has also put solicitors and their clients on notice that Powers of Attorney must be handled with more care than was previously expected. The related decision of Khosla v. Korea Exchange Bank of Canada is a chilling reminder of just how far reaching the implications of title fraud can be.