Last year, TheCourt.ca conducted an in-depth review and analysis of the CIBC v Computershare, 2015 ONSC 846, mortgage fraud case. The original owners of a home had fraudulently discharged their mortgage unbeknownst to their lender, Computershare, who continued to receive regular mortgage payments. Subsequently, the owners sought another mortgage from CIBC. As title was clear, CIBC had the expectation that they had a valid first ranking mortgage. The owners eventually defaulted in payment to both Computershare and CIBC, and the lenders were left to fight over priority in recouping their losses. In the litigation that followed, Computerhshare asserted that their mortgage should be reinstated in priority to CIBC’s mortgage.
The Superior Court ruled in favour of Computershare. In its appeal, CIBC argued that it should be given first priority because to allow the Superior Court decision to stand would fly in the face of the basic principles of the land titles system and in particular, the “mirror” and “curtain” principles.
The appeal ruling from the Divisional Court was released in December 2016. The Divisional Court agreed with CIBC and reversed the original ruling.
Today, TheCourt.ca interviews Ben Frydenberg, counsel for CIBC in its successful appeal, and discusses the impact of the ruling on real estate law.
An Osgoode Hall Law School alum and a partner at Chaitons LLP in Toronto, Ben practices in the area of commercial litigation and advocates primarily on behalf of financial institutions, title insurers, asset-based lenders, and trustees-in-bankruptcy.
What was the court’s approach to delivering its ruling?
The court took a historic look at the adoption and evolution of the Lands Titles Act (LTA) to determine how to interpret certain key sections of it, which had been adopted in 2006 (namely, sections 78(4.1) and (4.2) and the definitions of “fraudulent instrument” and “fraudulent person”). For starters, the court noted that with the passage of the LTA, Ontario signaled a clear move away from a land registry system, but it also did not adopt a true “Torrens” system. The LTA is more of a middle ground between the two. Since the LTA became effective, lawyers and the courts have been grappling with the case law to figure out how our “halfway house” legislation might operate, particularly in circumstances involving fraud, and where reliance had been placed on the land titles register by a party with no knowledge of the fraud.
In its ruling, the Divisional Court referenced the 2007 Court of Appeal for Ontario ruling of Lawrence v Maple Trust, 2007 ONCA 74, which reiterated that our land titles system embodies the philosophy of deferred indefeasibility; meaning that, while a fraudster cannot give good title to a purchaser or mortgagee, once that purchaser or mortgagee transfers their interest, their purchaser has good title. The Court of Appeal in Lawrence effectively overturned a previous Court of Appeal ruling, Household Realty Corp. Ltd. v Liu, 2005 CanLII 43402 (ON CA), that seemed to move the LTA more in the direction of an immediate indefeasibility system, whereby an innocent party could acquire valid title directly from a fraudster.
In deciding the CIBC v Computershare case however, the Divisional Court stated that notwithstanding the principle of deferred indefeasibility, which had been the focus of the lower court judge, the relevant provisions of the LTA had to be considered in deciding the case. The Divisional Court rejected the application judge’s primary finding of fact that CIBC’s mortgage was a “fraudulent instrument.” The Divisional Court concluded that, while the property owners had defrauded Computershare through the bogus discharge of its mortgage, they were in fact the true owners of the freehold interest in the property and were therefore in a position to confer a valid mortgage interest to CIBC. Thus, CIBC’s mortgage could not be a “fraudulent instrument,” and the lower court judge’s finding as such was a “palpable and overriding error.”
The Divisional Court, therefore, had to grapple with the issue of how to resolve a priority dispute where it was agreed by all that the Computershare mortgage (registered first in time) had been fraudulently discharged, yet the CIBC mortgage—obtained when title was clear—was a valid and effective mortgage.
The Divisional Court concluded that since CIBC’s mortgage was not a fraudulent instrument, it was entitled to rely on the following two 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 or mortgagee need not search behind title)—in this case meaning that the Computershare discharge could be taken at face value. In interpreting sections 78(4), (4.1) and (4.2) of the LTA, the net effect was that Computershare’s mortgage was restored but subordinate to CIBC’s mortgage claim.
Might there be an appeal to the Court of Appeal for Ontario?
No. The deadline to file a motion for leave to appeal has passed and we have been informed that no further appeal is being pursued.
How can property owners protect themselves from title fraud?
The third basic principle of the land title system is called the “insurance principle.” The Land Titles Assurance Fund (the “Fund”) was established with the enactment of the LTA in order to provide compensation for innocent parties who have suffered losses due to fraudulent dealings with their properties.
On a practical level, bearing the onus of bringing an application under the Fund has proven to be a cumbersome, costly, and difficult process to navigate. This is the case particularly for individuals who have found-out that their homes have been fraudulently transferred and mortgaged. The principle of deferred indefeasibility provides partial protection, in that the immediate party dealing with a title thief (referenced in the case law as the “intermediate owner”) does not acquire good title. Consequently, if the fraud is uncovered soon enough, the innocent home owner is protected at law.
That principle does not, however, extend protection once the intermediate owner has transferred the property. In those instances, the “insurance principle” must come into play.
Arguably, a more effective alternative to the Land Titles Assurance Fund has evolved and grown in the private sector, namely: title insurance. Today, private title insurance products are ubiquitous and are purchased not only by home owners but also by mortgage lenders. Although not by design, the insurance principle of the LTA has, in a practical sense, been subcontracted out by the Province to the private sector.
What will be the impact of this ruling going forward?
If the Divisional Court had allowed the application judge’s decision to stand, we believe this would have seriously undermined both the mirror and curtain principles.
As a practical example, property values have been climbing for a generation, and as a result many homeowners have conducted multiple refinancing transactions on their homes over the years. They refinance to do renovations, consolidate unsecured debt, and so on. I have seen many situations where one owner has undertaken multiple refinancings before a transfer of title takes place.
The implications of the lower court ruling was that, in theory, a lawyer acting for a lender undertaking a refinancing bore a responsibility to go behind the curtain and ensure the validity of every prior mortgage discharge. It was argued before the Divisional Court that this would seriously undermine the efficacy of the land titles system and dealings in land and push the system back to the point where it more closely resembled a land registry system, which does not purport to certify the validity of title.
We believe that the Divisional Court ruling will assist in preventing any further erosion of the bedrock principles of the land titles system.
As for the lenders who might lose their mortgage interest through a fraudulent discharge, that is where the insurance principle comes into play—either by way of application to the Fund or, if applicable, making a title insurance claim under a private title insurance policy.
Do you anticipate other challenges to the LTA?
The Ontario legislature completed the second reading stage of an omnibus bill called the Burden Reductions Act (Bill 27) that seeks to amend a series of unrelated statutes in Ontario. The stated overriding objective is to cut red tape and ease the regulatory burden on the private sector.
One of the effected statutes is the LTA. Bill 27 proposes to repeal the current definitions of “fraudulent instrument” and “fraudulent person” and replace them with only a definition of “fraudulent instrument,” which appears to be broader than the current definition. In fact, it is arguable that if the newly proposed definition had applied in CIBC v Computershare the outcome would have been different.
In my opinion, the problem with the proposed changes to Bill 27 regarding the definitions in the LTA is that they will erode the mirror and curtain principles, which are two of the three bedrock principles of the LTA. If adopted, the changes would represent a step backwards and in the direction of a land registry system.
As an aside, the Director of Land Titles was a party to the proceeding between CIBC and Computershare and supported [CIBC’s] position on the application, albeit they did not join in the appeal. The Director of Land Titles also took the same position in a case argued before the release of the Divisional Court’s decision in CIBC v Computershare: Tiao v Leone, 2016 ONSC 3015. We are frankly puzzled by the proposed changes to the LTA, which we presume reflect some level of input from the Director of Land Titles office.
The omnibus bill is currently at the committee stage with referral to the Standing Committee on General Government. [The bill can be viewed here.]
If this amendment passes, I believe that the LTA and its core principles will be undermined. I am guardedly confident however, that once public input is canvassed during the committee stage, the proposed amendment will be reconsidered or even dropped.
In major Canadian cities, real estate values are increasing at an astronomical rate. Fraudsters likely see opportunities to capitalize in such a market. Are you seeing an increase in mortgage fraud cases in your practice?
As lawyers with a substantial real estate and mortgage enforcement practice we are seeing a lot of mortgage and title fraud cases, although I can’t speak from a statistical perspective. While one of the great benefits of the Teranet electronic land registration system is the efficiency it lends to real estate conveyancing, it is of course also susceptible to abuse. There have been cases where fraudsters have aligned themselves with unethical lawyers, who are essentially the gatekeepers of the system.
Some problems have arisen in the past where lawyers have given their law clerks access to Teranet keys and the law clerks have exploited that for fraudulent aims. In fact, lawyers are strictly forbidden from allowing others to use their Teranet keys.
The bottom line is that fraudsters seem to always be one scam ahead of the regulators. We live in a digital age where there is less hard cash around and we rely increasingly on electronic commercial transactions. One by-product of this evolution is mortgage fraud and identify theft. I also deal with a significant amount of loan fraud cases, where loans are procured under false pretences through various acts of deceit which may involve phony invoices, fake financial statements, and a plethora of other contrivances.
Ben Frydenberg can be reached at ben@chaitons.com or by visiting his page at www.chaitons.com.
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