May 25, 2007
For a while the law certainly appeared to be an ass. The confusion did not start with the Ontario Court of Appeal decision in Household Corp. Ltd. v. Liu (2005) but that case is as good a place to start as any.
Mr. and Mrs. Liu owned their matrimonial home as joint tenants. Mr. Liu went off to the orient for an extended period during which time Mrs. Liu tried her hand at casino gambling funded by mortgages secured by her on the matrimonial home. Mr. Liu was unaware of the mortgages as Mrs. Liu had forged a power of attorney from him to her which she used to execute the mortgages. It was agreed at trial that neither the mortgagees nor Mr. Liu were aware of the forged power of attorney.
Mrs. Liu was unsuccessful at her gambling endeavours, the mortgages went into arrears and the mortgagees sued both the husband and the wife. The husband defended on the basis that he was the innocent victim of a fraud and as he had not signed the mortgages, the mortgages should not be valid.
The Court looked at both sections 78(4) and 155 of the Land Titles Act and concluded 78(4) overrode 155, which Section is prefaced with the phrase “Subject to the provisions of this Act”, so the mortgages were deemed valid. The Court of Appeal held that it did not have to decide the question as to whether the Land Titles Act provides for immediate or deferred indefeasibility of title vesting. It turns out, however, that the answer to that question is at the heart of the fraud solution.
Section 78(4) of the Land Titles Act was first passed in 1960 as part of legislation passed to clean up the Act prior to the publication of the Revised Statues of Ontario (1960). The history of section 155 is much longer and can be traced back to the United Kingdom statute; Land Titles and Transfer Act , 1875.
Section 78(4) reads as follows:
“When registered, an instrument shall be deemed to be embodied in the register and to be effective according to its nature and intent, and to create, transfer, charge or discharge, as the case requires, the land or estate or interest therein mentioned in the register.”
Section 155 reads as follows:
“Subject to the provisions of this Act, with respect to registered dispositions for valuable consideration, any disposition of land or of a charge on land that, if unregistered, would be fraudulent and void is, despite registration, fraudulent and void in a like manner.”
The history of these fraud related cases has been the history of trying to rationalize these two sections.
Next, we have the Ontario Supreme Court trial decision in Lawrence v. Wright (2006) where fraudsters transferred Mrs. Lawrence’s home to a fraudster named Wright pursuant to a phoney agreement of purchase and sale and Wright arranged a new first mortgage with Maple Trust. Mrs. Lawrence’s existing mortgage with the Toronto-Dominion Bank was paid out and discharged from the proceeds of this transaction. Mrs. Lawrence discovered the fraud when she went to the Bank a few months later to discuss the potential sale of the home.
At the trial level the judge confirmed that Mrs. Lawrence was still the legal owner of the home as she was the victim of fraud but that Maple Trust was the holder of a valid first mortgage on the home. The judge felt bound by the Ontario Court of Appeal decision in Household Realty Corp. v. Liu (2005).
Next we have the case of Robi v. Rosu decided by the Ontario Supreme Court of Justice October 31, 2006, and reported in 2007 at 83 O.R. (3d) p. 37. The facts were similar to Lawrence in that fraudsters posed as vendor and purchaser of the true owner’s condominium unit and financed the fraudulent purchase with a mortgage to the Toronto-Dominion Bank.
As with Maple Trust in the Lawrence case, the Toronto-Dominion Bank was not aware of the fraud and again the question arose as to who should be the winner and who should be the loser as between the innocent true owner and the innocent financial institution. This judge clearly felt that it was outrageous that innocent owners should be saddled with a mortgage debt not of their making. The judge distinguished the Household case on its facts as in that case one of the two true owners was not innocent of the fraud. The judge further distinguished the trial judge’s decision in Lawrence as that judge felt bound by the Court of Appeal decision in Household , which Justice Echlin felt did not apply to the facts in Robi.
Justice Echlin felt that as between the innocent true owner and the innocent mortgagee, the innocent true owner was the more innocent of the two. If the Bank had exercised a modicum of due diligence, it could have discovered the fraud. There was absolutely nothing the owner could have done to thwart the fraudsters. The Bank could have done an internal inspection of the unit to be mortgaged. In most cases such an inspection would alert the true owner of the fraudster’s intentions. Now, too often, lenders don’t do those inspections as they take time and cost money. Now the lenders tend to limit their due diligence inspections to computer searches of comparable properties in the neighbourhood to determine the market value of the unit in question. Often the banker does not meet the borrower as the loan is arranged through a mortgage broker. In this case there was a $30,000.00 brokerage fee which the Court also felt should have alerted the Bank that the loan was not on the up and up.
Justice Elchin noted that there has been no definitive Court decision as to whether the Ontario Land Titles system was predicated on a doctrine of deferred indefeasibility of title or on a doctrine of immediate indefeasibility. In reviewing the caselaw the Court concluded that it was probably more appropriate to apply the doctrine of deferred indefeasibility. The Court went on however to confuse the issue by saying, “I read the Act as requiring some evidence of due diligence as an element of deferred indefeasibility.” This comment is very confusing as it calls for the exercise of due diligence against the eventuality of fraud. If that is the case, one could never fully rely on the registered title thus making the Land Titles System not unlike the Registry Act System where due diligence is paramount.
The Court in Robi v. Rosu came to the right conclusion on the facts and largely for the right reasons but left a confusing perception as to what was really meant in the concept of “deferred indefeasibility”.
That brings us to the Court of Appeal decision in the Lawrence v. Wright case. This has a rare five- judge panel wherein the Court reversed its recent decision in Household Realty v. Liu and brought clarity to the issues around fraud and the Ontario Land Titles Act.
At the Court of Appeal, Mrs. Lawrence took the position that only the true owner can grant an interest in the property and that any transactions arising from fraud are void. Her position reflected that of the common law that a person could not pass a better title than they held so that an interest obtained by fraud could never be a good root of title. Put another way, fraud forever breaks the chain of title.
Maple Trust’s position, following the Court’s decision in Household Realty , was that registration of its mortgage without any knowledge on its part of Wright’s fraud resulted in its mortgage being valid. They argued that registration under these circumstances rendered its mortgage immediately indefeasible. Their position was that the Land Titles Act stipulated a system of title by registration and not a system of registration of title as under the Registry Act .
The Province of Ontario had intervener status in this appeal and its position was that the Land Titles Act was based on a theory of deferred indefeasibility. This theory holds that there are three classes of parties: “the original owner; the intermediate owner, who is the person who dealt with the party responsible for the fraud; and, the deferred owner, a bona fide purchaser or encumbrancer for value without notice “(of the fraud)” who takes from the intermediate owner. Only a deferred owner would defeat the original owner’s title. This is because the intermediate owner, as the party who acquired an interest in title from the fraudster, had an opportunity to investigate the transaction and avoid the fraud whereas the deferred owner did not. On the theory of deferred indefeasibility, registration of a void instrument does not cure its defect, thus neither the instrument nor its registration gives good title. However, good title can be obtained by a deferred owner from an intermediate owner.”
Based on this analysis, Mrs. Lawrence was the original owner, Maple Trust was the intermediate owner as it dealt with the fraudster and there was no deferred owner in this factual situation. As the intermediate owner, Maple Trust’s mortgage was not valid as against the original owner, Mrs. Lawrence.
The Court of Appeal looked at both section 78(4) and section 155 of the Land Titles Act . In Household Realty the Court of Appeal held that section 78(4) overrode section 155 so the trial judge in Lawrence following the reasoning in Household , held the transfer to Wright, the fraudster, was null and void because of the fraud but that Wright’s mortgage to Maple Trust was valid as Maple Trust had no knowledge of the fraud.
The Court of Appeal looked squarely at the introductory words of section 155, “Subject to the provisions of this Act” and asked the question, what do those words mean? Without those introductory words, section 155 clearly says that an unregistered document, which is null and void because it was the product of fraud, remains null and void upon registration. Section 78(4) says that a document when registered is embodied in the register and is effective according to its nature and intent. In looking at the history of these two sections the Court came to the conclusion that the Legislature in passing section 78(4) was merely tidying up the wording of the Act for the publication of the 1960 consolidation of the Ontario Statutes and did not intend to make fundamental changes in our common law.
It came to this conclusion not only from comments made in the Legislature when section 78(4) was first introduced and then again on second reading of the bill, but also considering the judgment of the Supreme Court of Canada in United Trust Co. v. Dominion Stores Ltd. ,  2 S.C.R. 915.
In that case, United wished to purchase a land titles property on which Dominion was a tenant with an unregistered lease. United negotiated unsuccessfully with Dominion to get Dominion to vacate the property prior to the closing of the United purchase. United closed the purchase and then locked Dominion out of its premises. United argued that it became the registered owner of the property with no notice on title of Dominion’s interest so they took title free of Dominion’s interest. Dominion argued that United took title subject to Dominion’s interest as United had actual notice of that interest prior to the closing. The Court held that section 78(4) was a piece of housekeeping legislation and that the Legislature had not intended to abolish the age-old common law principles of actual notice in passing that section.
Similarly, it must be that the Legislature did not intend by passing section 78(4) to override the common law rules governing void instruments. The Court held that “the registration of a void instrument can not cure its defect”.
The Court of Appeal at paragraph 54 states in referring to the United Trust case, “The theory of deferred indefeasibility, on the other hand, is consistent with both the result and reasoning of the majority. United Trust took its title from the registered owner. There is no suggestion of fraud on the part of United Trust. Nonetheless, the majority held that United Trust’s title was subject to Dominion’s unregistered lease. The majority recognizes that the Act creates a land titles system but rejects the notion of immediate indefeasibility. Thus, although not couched in those terms, it appears that the majority subscribes to the theory of deferred indefeasibility, a theory which permits the common law to remain part of the law of Ontario, unless expressly abrogated. Indeed, the majority explicitly states that the common law principles of real property are not abrogated absent clear and unequivocal language to that effect in the Act.”
Furthermore for “policy reasons” the Court of Appeal preferred the theory of deferred indefeasibility. Under immediate indefeasibility Mrs. Lawrence would have no defence to an action for vacant possession by Maple Trust. Yet Mrs. Lawrence on these facts had no chance of avoiding the fraud whereas Maple Trust innocently dealt with the fraudster and had it exercised sufficient due diligence, it could have detected the fraud early on and thus have avoided the damage. A bona fide purchaser from Maple Trust would receive an indefeasible title on registration of the transfer but as the intermediate owner, Maple Trust’s title was defeasible.
In order to make a claim on the Land Titles Insurance Fund, a party must have acquired an interest in land and then lost it for some reason. In the Court’s opinion, Maple Trust could make a claim on the fund because it did as the intermediate owner acquire an interest but as intermediate owner that interest could be defeated by a claim from the true owner. At common law, Maple Trust could not make a claim because the fraud broke the chain of title so it got no interest. Under the Land Titles Act it acquired a defeasible interest which in fact was defeated by the true owner, Mrs. Lawrence.
Finally let’s apply the analysis in the Lawrence case to the facts in an earlier case of Durrani v. Augier 50 O.R. (3d) 2001, p. 353. The facts were that Augier forged a security document and registered this document on the title to Mr. and Mrs. Durrani’s house in Scarborough. He subsequently obtained a default foreclosure judgment and then obtained title in his own name. Next he took steps to sell the property and about this time the Durranis discovered the default judgment against them and they retained a lawyer who served notice on Augier’s lawyer that they would be moving to set aside any default judgment and that no steps should be taken by Augier to sell the property. Augier made several unsuccessful attempts to sell the property using Ms. Jones as his real estate agent. The evidence at trial demonstrated that Ms. Jones knew that Augier was not entitled to be shown as the registered owner of the property. Eventually Augier agreed to sell the property to sisters Melanie and Sophia Zettler who were the daughters of Ms. Jones. With the assistance of Ms. Jones, the Zettler sisters arranged a mortgage with the Royal Bank and the transaction closed. Evidence showed that the Zettlers held the title in trust for their mother, Ms. Jones. Eventually the foreclosure judgement was set aside and Durranis sued to recover the title to their home. The Court held that Augier, the fraudster, had no right and because Ms. Jones had some knowledge of the fraud, the Zettlers also took title with knowledge of the fraud so they too were not entitled to any claim on the title. The Royal Bank had no knowledge of the fraud and the Court held that the Land titles Act gave the Bank a good mortgage security on the title.
Recall that the Lawrence decision held that in these fraud cases there are three classes of parties: the original owner, the intermediate owner and the deferred owner. Only the deferred owner gets good title after a fraud has occurred. In the Durrani case, Mr. and Mrs. Durrani are the original owners, both Augier and the Zettlers are either the fraudster or take title with knowledge of the fraud so they get nothing and the Royal Bank would be the intermediate owner whose title is defeasible on a claim by the original owner. As in the Lawrence case, there was no deferred owner in the Durrani case. So had the Durranis gone to court after the Lawrence case had been decided by the Ontario Court of Appeal, the Royal Bank would not have ended up with a valid mortgage security on the Durrani home.
The Law Reform Commissions of Manitoba and Saskatchewan are urging their respective governments to make numerous changes to their Land Titles legislation including providing for immediate indefeasibility for fee simple interests of bona fide purchasers for value without notice and to permit the payment out of their compensation funds even where those purchasers may have been in part responsible for the loss.