Mortgage fraud litigation focuses on the loss suffered by the lender when it foreclosed on a fraudulently induced mortgage. But in cases of mortgage fraud through valuation manipulation in a rising real estate market, the lender may foreclose but suffer no loss. The fraudster can then defend on the basis that their fraud caused no damage. Superficially, the defence boils down to “no harm, no foul”.

But there is a way of framing a mortgage fraud claim which can overcome this difficulty: the rarely used legal theory of “waiver of tort”. This can work quite well when underlying property values have appreciated since the placement of a fraudulently induced mortgage.

Waiver of tort is essentially a restitutionary remedy. It requires the fraudster to disgorge their ill gotten gains, rather than to compensate the lender for its loss. It usually refers to the situation where a claimant seeks a restitutionary remedy (reversing the defendant’s wrongful enrichment) for a tort, rather than the usual remedy of compensatory damages. It is a misleading term because it has nothing to do with a tort being waived. On the contrary, the fraudster’s wrong is the foundation of the claim. One legal decision describes the concept:

The nomenclature "waiver of tort" is somewhat confusing. A plaintiff is not waiving the right to sue in tort but rather, electing to base his/her claim in restitution. The plaintiff thereby seeks to recoup the benefits that the defendant has derived from the tortious conduct. For example, if the tortfeasor's gain exceeds the quantum of damages that the plaintiff might recover in an action in tort, the plaintiff might well choose to concurrently pursue the alternative (so-called "waiver of tort") remedy founded in restitution .

The opportunities to use this concept continue to expand. In a recent decision, the B.C. Court of Appeal suggested that a claim of waiver of tort might be advanced by a class of claimants as a whole, without requiring proof of individual losses, where the defendant realized a gain as a result of wrongful conduct. At this point, what constitutes “wrongful conduct” in that context has not been fully defined.

If a lender decides to pursue a mortgage fraud claim, it should assemble the evidence of wrongful conduct by all participating parties. This could lead to disgorgement of the benefits each participant received. For some, this could be simple. If a mortgage broker was involved, they may have to disgorge their commission. If an appraiser was involved, they may have to disgorge their fee.

But if a developer or prior owner was involved, the situation could be more complex. Would damages be the difference between the fraudulently appraised value of the property and its real value at the time? Would it be based on the cost of borrowing, had the developer or purchaser disclosed the real value of the property? Would it be the intervening appreciation in the value of the property? Or would it be some combination of the three? Investigation costs could also be a component of the claim.

If there was a conspiracy among several participants, then a mortgage fraud claim has one further interesting dynamic: damages may well be joint and several among all the participants in the conspiracy. Further, a damages award flowing from such a claim may survive a subsequent bankruptcy.

Mortgage fraud comes in many flavors. The common theme is that it causes loss, and increases costs, for all legitimate participants in real estate conveyances. It is only if the financial incentives for such fraud are fully recovered from those who conspire to commit them, or who turn a blind eye to them, that we can hope to reduce this scourge. A claim based on waiver of tort is one way to accomplish that.