2016 ONSC 7094
DIVISIONAL COURT FILE NO.: 16-2 DATE: 20161128
ONTARIO SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Dambrot, Swinton and Hambly JJ.
B E T W E E N :
CIBC MORTGAGES INC., trading as FIRSTLINE MORTGAGES
Applicant (Appellant)
– and –
COMPUTERSHARE TRUST COMPANY OF CANADA
Respondent (Respondent in Appeal)
AND BETWEEN:
COMPUTERSHARE TRUST COMPANY OF CANADA
Applicant (Respondent in Appeal)
- and -
CIBC MORTGAGES INC., trading as FIRSTLINE MORTGAGES and the DIRECTOR OF TITLES pursuant to s. 57(14) of the Land Titles Act
Respondents (Appellant)
Ben Frydenberg, for CIBC Mortgages Inc., trading as FirstLine Mortgages
Christos Papadopoulos and Jeffrey K. Spiegelman, for Computershare Trust Company of Canada
HEARD at Brampton: October 21, 2016
DAMBROT J.:
Background
[1] CIBC Mortgages Inc., trading as FirstLine Mortgages (“CIBC”), Computershare Trust Company of Canada (“Computershare”) and Secure Capital MIC Inc. (“Secure Capital”) each brought an application in the Superior Court to resolve a priority issue in relation to mortgages registered on property owned by Dhanraj and Sumatie Lowtan (“the Lowtans”) under the Land Titles Act, R.S.O. 1990, c. L.5 (“LTA”). The applications were heard together by Murray J., who found that the Lowtans had fraudulently discharged the first mortgage registered on title in favour of Computershare and that Computershare’s mortgage should be restored and given priority over the subsequently registered mortgages in favour of CIBC and Secure Capital. CIBC brought two appeals from this judgment – appealing the dismissal of CIBC’s application, and the granting of Computershare’s application – to the Court of Appeal.
[2] In a judgment dated December 4, 2015 (2015 ONCA 846, 342 O.A.C. 49), the Court of Appeal concluded that by virtue of s. 27 of the LTA, the appeals in this case lie to the Divisional Court, and not the Court of Appeal. Section 27 provides:
Any person affected by an order made under this Act by a judge of the court may appeal to the Divisional Court within 30 days of the date of the decision and, subject to the rules, in like manner as in the case of other appeals to that court.
[3] As a result, the Court of Appeal transferred the appeals to this Court pursuant to s. 110 of the Courts of Justice Act, R.S.O. 1990, c. C.43. This panel heard those appeals.
The Facts
[4] The evidence and the findings of fact made by the application judge were set out in detail in the judgment below. For the purposes of this appeal, it is sufficient to summarize them as follows.
[5] On December 14, 2006, the Lowtans purchased the property known as 40 Chipmunk Crescent in Brampton (“the property”). On November 21, 2008, the Lowtans borrowed $280,801 from Computershare, and Computershare registered a first mortgage on the property as security for the loan. On August 26, 2009, an unauthorized party registered a fraudulent discharge of the Computershare mortgage. The Lowtans continued to make mortgage payments to Computershare as usual until January 2013. The application judge found as a fact that the Lowtans caused the discharge to be registered.
[6] On March 3, 2011, the Lowtans granted a private mortgage in favour of Maria Giovanni and Darlene Geraci in the amount of $87,500, registered against title to the property.
[7] On July 28, 2011, the Lowtans borrowed $252,800 from CIBC, and CIBC registered a mortgage on the property in that amount as security for the loan. CIBC granted this loan based on information provided by the Lowtans that they had aggregate debts of approximately $106,000, which included the amount owed on the $87,500 private mortgage and some other minor unsecured debts. The CIBC mortgage was used to discharge the private mortgage, making the CIBC mortgage a first mortgage registered on title.
[8] On December 11, 2012, Secure Capital provided a further loan for $32,000 to the Lowtans, secured by a mortgage on the property, on the assumption that the only existing mortgage was the CIBC mortgage.
[9] The Lowtans defaulted on all three mortgages by the first week of February 2013.
[10] Computershare discovered the fraudulent discharge of its mortgage on April 12, 2013. By April 25, 2013, the Lowtans had vacated the property and had both made an assignment into bankruptcy.
[11] On May 30, 2013, the Director of Titles registered a caution against the property indicating that the August 26, 2009 discharge might be fraudulent. During the following summer, each of the mortgagees filed an application seeking a determination of the priorities of their respective charges against the property.
[12] The property was sold for $297,754, pursuant to a court order dated December 5, 2013 and obtained by CIBC with the consent of Computershare and Secure Capital. The proceeds are being held in trust pending the final resolution of these applications.
The Legislative Framework
[13] This appeal falls to be determined on the interpretation of certain provisions of the LTA. It may be helpful to set out those provisions now.
Definitions
- In this Act,
“fraudulent instrument” means an instrument,
(a) under which a fraudulent person purports to receive or transfer an estate or interest in land,
(b) that is given under the purported authority of a power of attorney that is forged,
(c) that is a transfer of a charge where the charge is given by a fraudulent person, or
(d) that perpetrates a fraud as prescribed with respect to the estate or interest in land affected by the instrument; …
“fraudulent person” means a person who executes or purports to execute an instrument if,
(a) the person forged the instrument,
(b) the person is a fictitious person, or
(c) the person holds oneself out in the instrument to be, but knows that the person is not, the registered owner of the estate or interest in land affected by the instrument; …
Effect of registration
- (4) 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.
Exception
- (4.1) Subsection (4) does not apply to a fraudulent instrument that is registered on or after October 19, 2006.
Non-fraudulent instruments
- (4.2) Nothing in subsection (4.1) invalidates the effect of a registered instrument that is not a fraudulent instrument described in that subsection, including instruments registered subsequent to such a fraudulent instrument.
Fraudulent dispositions
- Subject to this Act, a fraudulent instrument that, if unregistered, would be fraudulent and void is, despite registration, fraudulent and void in like manner.
The Decision of the Application Judge
[14] The application judge concluded that the Computershare mortgage retained its priority as the first charge on the property despite the discharge and that the CIBC and the Secure Capital charges ranked second and third respectively. He reasoned that:
• The registered discharge of the Computershare mortgage was a fraudulent instrument within the meaning of the LTA.
• Although the Lowtans were the registered owners of the property when they granted first and second charges on the property to CIBC and Secure Capital, they were not the owners of the first charge on the property, which was the “interest in land” they purported to convey to CIBC and Secure Capital, because they had fraudulently conveyed that interest from Computershare to themselves.
• As a result, the Lowtans fell within the definition of fraudulent person in s. 1 of the LTA: they executed an instrument (the mortgages in favour of CIBC and Secure Capital) holding themselves out to be, but knowing that they were not, the owners of the interest in land affected by the instrument.
• Further, the mortgages to CIBC and Secure Capital were fraudulent instruments: instruments that transfer a charge given by fraudulent persons.
• Accordingly, although s. 78(4) of the LTA would ordinarily deem the CIBC and Secure Capital mortgages to be effective, s. 78(4) does not apply here by virtue of s. 78(4.1), because the CIBC and Secure Capital mortgages are fraudulent instruments. The effect of the Computershare mortgage remains valid and is not invalidated by the fraudulent discharge nor the fraudulent CIBC and Secure Capital mortgages.
• The conclusion that the CIBC and Secure Capital mortgages were fraudulent means that although CIBC and Secure Capital were innocent parties, they were in a position analogous to the intermediate owners in Lawrence v. Maple Trust Co., 2007 ONCA 74, 84 O.R. (3d) 94: they took their interests from fraudulent transferees who appeared on the register as registered owners, and who had fraudulently conveyed Computershare’s interest in the property to themselves by registering a fraudulent discharge. The registration of the fraudulent discharge did not give clear title to the fraudsters, nor did it give clear title to the subsequent mortgagees as intermediate owners.
The Grounds of Appeal
[15] The appellant raised four grounds of appeal:
Did the application judge err in interpreting ss. 78(4.1) and 78(4.2) of the LTA?
Did the application judge err in applying Lawrence v. Maple Trust Co.?
Did the application judge err in concluding that the CIBC mortgage was a fraudulent instrument under the LTA?
Did the application judge err in his consideration of business records and in concluding that Computershare did not have actual notice of the fraudulent discharge of the Computershare mortgage prior to April 2013?
[16] In my view, there is substantial overlap among the first three issues, and I prefer to deal with them together, under the following heading:
Was the CIBC mortgage a fraudulent instrument?
Standard of Review
[17] There is no dispute that on this appeal, the standard of review on questions of law and questions of mixed fact and law where there is an extricable legal principle is correctness, and that with respect to questions of fact, the standard is palpable and overriding error (Housen v. Nikolaisen, 2002 SCC 33, [2002] 2 S.C.R. 235).
Analysis
Was the CIBC Mortgage a Fraudulent Instrument?
[18] At the core of this case is a single issue: was the mortgage granted to CIBC a fraudulent instrument? In my view it was not. I begin my discussion of this issue with a brief word about Ontario’s land titles system.
[19] The LTA was enacted in Ontario in 1885, following the introduction of the Torrens registration system in South Australia in 1857, throughout Australia and New Zealand soon after, and in British Columbia in 1869.
[20] The purpose of the LTA was to establish a land titles system, simplify conveyancing and overcome the insecurity of title inherent in a registry system (see Lawrence v. Maple Trust Co., at para. 42). In Lawrence v. Maple Trust Co., the Court of Appeal adopted the following description of the principles underlying a land titles system (at para. 30, quoting Durrani v. Augier (2000), 2000 22410 (ON SC), 50 O.R. (3d) 353, [2000] O.J. No. 2960 (S.C.J.), per Epstein J., at para. 42):
The philosophy of a land titles system embodies three principles: the mirror principle, where the register is a perfect mirror of the state of title; the curtain principle, which holds that a purchaser need not investigate the history of past dealings with the land, or search behind the title as depicted on the register; and the insurance principle, where the state guarantees the accuracy of the register and compensates any person who suffers loss as the result of an inaccuracy. These principles form the doctrine of indefeasibility of title and [are] the essence of a land titles system.
[21] However, the LTA is not a true Torrens system. In fact, the LTA is modeled not on the Australian true Torrens model, but rather on the English Land Transfer Act of 1875. It has been said that the main principle of a Torrens title registration system is the absolute authority of the register, save and except for fraud. The effect of this principle is that so long as encumbrances do not appear on the register, actual notice, no matter how clearly proved, does not affect the clear title of a purchaser for value. In all of the Torrens system enactments that preceded the LTA, an express provision made actual notice ineffective to encumber the registered title to property. No such provision is found in the LTA. Within a few years after the enactment of the LTA, the courts in Ontario had expressed a disinclination to imply such an extinction of the doctrine of actual notice. It was the view of those courts that the LTA did not abrogate or displace the common law as it relates to land law in Ontario, and that such a cardinal principle of property law could not be considered to have been abrogated without the clearest and most unequivocal expression of legislative intention, as was found in the earlier statutes. This view was adopted by the Supreme Court of Canada in United Trust Co. v. Dominion Stores Ltd., 1976 33 (SCC), [1977] 2 S.C.R. 915, 71 D.L.R. (3d) 72.
[22] The extent to which the LTA is a true Torrens system became a live issue a decade ago when a number of homeowners in Ontario were the victims of schemes in which their homes were fraudulently sold and title or an interest in their property was ultimately registered to the benefit of an innocent third party. In such cases, the courts were called upon to determine which of the innocent parties’ interests should prevail. The issue reached the Court of Appeal for Ontario in Household Realty Corp. Ltd. v. Liu (2005), 2005 43402 (ON CA), 261 D.L.R. (4th) 679, 205 O.A.C. 141.
[23] In Household Realty, Liu and his wife Chan purchased a home in Ontario as joint tenants. Chan developed a gambling habit and fell deeply into debt. She executed a fraudulent power of attorney in Liu’s name to obtain a credit line from CIBC for $260,000, secured by a registered mortgage. She used the fraudulent power of attorney again to obtain $96,250 from Household Realty by way of a second mortgage registered against the home. Liu had no knowledge of the gambling debts, the power of attorney or the mortgages. Both mortgages went into default. CIBC and Household Realty commenced actions against Chan and Liu claiming payment of principal and interest owing and possession of the home. Chan and Liu defended and counterclaimed for declarations the mortgages were void. On a summary motion brought by CIBC and Household Realty, the motion judge concluded that the mortgages were valid once they were registered.
[24] Liu appealed, but his appeal was dismissed. The Court of Appeal concluded that the motion judge was correct in finding the mortgages effective, as they had been given for valuable consideration without notice of the fraud. The Court agreed that although the mortgages were void at common law, they were valid once registered. The Court rejected the appellant’s argument that the LTA protects innocent parties who deal with registered owners, as opposed to innocent parties who rely on title. The Court reached this conclusion based on its interpretation of the provisions of the LTA.
[25] The Court rejected the argument that s. 155 of the LTA makes it clear that the registration of a forged instrument does not create an interest in land. The Court stated, at para. 29, that while a forged instrument does not create an interest in land for the fraudster, s. 155 provides that such a document, although fraudulent and void at common law, is subject to the provisions of the LTA with respect to registered dispositions for valuable consideration, including s. 78(4), which deems such a document to be effective according to its nature and intent. As a result, the mortgages in Household Realty, which were given for valuable consideration and without notice of the fraud, once registered, were effective and could be relied on.
[26] The Court acknowledged that there was a debate about whether the Court should follow the doctrine of deferred indefeasibility or the doctrine of immediate indefeasibility (about which more later), but concluded that these theories were largely irrelevant to its task because the LTA determines what is and what is not valid. The resolution of the debate, they said, should be left to others.
[27] On December 20, 2006, following the decision in Household Realty, ss. 78(4.1) and 78(4.2) were added to the LTA by Bill 152, enacted as Ministry of Government Services Consumer Protection and Service Modernization Act, 2006, S.O. 2006, c. 34. Section 78(4.1) provides that s. 78(4) does not apply to a fraudulent instrument that is registered. Section 78(4.2) provides that nothing in s. 78(4.1) invalidates the effect of a registered instrument that is not a fraudulent instrument described in s. 78(4.1), including an instrument registered subsequent to such a fraudulent instrument.
[28] If the intent of the legislature is not clear from the words of these provisions, it is certainly clear from the statement made by the Honourable Mr. Gerry Phillips, the Minister of Government Services, when introducing Bill 152 when it was tabled for first reading on October 19, 2006. The legislation was intended to protect innocent homeowners. He said:
One of these important areas is an issue of real concern to property owners across the province: real estate fraud. The people of this province work hard to make a house into a home. They deserve to know that their property is secure. This legislation will ensure that property owners do not lose their home as a result of real estate fraud or become responsible for fraudulent mortgages. If passed, this legislation would ensure that ownership of a property cannot be lost as a result of the registration of a falsified mortgage, fraudulent sale or a counterfeit power of attorney. Instead, an innocent homeowner’s title will be restored to them and the fraudulent document will be nullified. [Emphasis added.]
[29] In addition, the explanatory note for Bill 152 makes clear that the manner in which the new provisions were intended to protect innocent homeowners was by denying the ordinary benefit of registration to fraudulent instruments. The explanatory note reads, in part:
The Bill amends section 78 of the [LTA] so that a fraudulent instrument will not have any effect on the title register. Instruments registered subsequent to a fraudulent instrument are deemed to be effective. A fraudulent instrument is defined to be one under which a fraudulent person purports to receive or transfer an estate or interest in land, one that is given under a forged power of attorney, a transfer of an instrument that is a charge given by a fraudulent person or a type of fraudulent instrument specified by the regulations made under the Act. If an instrument registered on or after October 19, 2006 is fraudulent, the Director of Titles can delete it from the title register. A person prescribed by the regulations made under the Act who thereby suffers a loss can recover compensation from The Land Titles Assurance Fund if the person has demonstrated due diligence and is not otherwise restricted from recovering compensation from the Fund. [Emphasis added.]
[30] I return now to immediate and deferred indefeasibility.
[31] Before discussing the implications of the amendments, I will describe the competing theories that have been said to be reflected in the LTA.
[32] It has been argued that the LTA reflects one or another of three different theories, known as: (1) the common law or registry theory, (2) the immediate indefeasibility theory, and (3) the deferred indefeasibility theory. Each of these was advanced by one of the parties in Lawrence v. Maple Trust Co., and I will borrow from that judgment in order to briefly describe each theory.
[33] Under the common law or registry theory, only the true owner of land can grant an interest in, or charge on, the land, and all transactions arising from fraud are void. A subsequent registered owner who became the owner through fraud cannot grant an enforceable interest in the land. Even if a subsequent transfer or charge is registered, it is not valid. This position reflects the common law principle that a person cannot pass better title than he or she had. Accordingly, if title to an interest in land was obtained through fraud, that title could never form the root of a good and valid claim to the land.
[34] Under the immediate indefeasibility theory, the LTA, like other land titles systems, creates a system of title by registration, not a system of registration of title. A system of title by registration is designed to protect the interests of innocent parties who rely on the register. So, once an instrument is registered, it is effective even if procured by fraud. This view reflects the notion that the fundamental purpose of the LTA is not to protect “true owners” but to protect parties who rely on title, as effected by registration.
[35] As a result, a fraudulent transferee who is a registered owner can grant a valid mortgage to a mortgagee who is acting in good faith without notice of the fraud. Once the fraudulent transfer is registered, it is deemed to be effective: a bona fide purchaser or encumbrancer who gives value for the charge and acts without notice of the fraud is entitled to rely on the transferor’s title and the encumbrancer’s charge would be valid. The charge is “immediately indefeasible” on registration because it is taken from the person that the register showed to be the registered owner. The fraud is irrelevant, insofar as the validity of the ultimate charge is concerned.
[36] Although the Court in Household Realty declined to enter into the debate about immediate and deferred defeasibility, the effect of its decision is to recognize the theory of immediate indefeasibility.
[37] Finally, I turn to the deferred indefeasibility theory, which is somewhat of a half-way house between the other two. Under the deferred indefeasibility theory, 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 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.
[38] On November 28, 2006, a few weeks after Bill 152 was tabled, but a few weeks before it received Royal Assent, the Court of Appeal revisited Household Realty when it heard argument in Lawrence v. Maple Trust Co. The decision of the Court was dated January 6, 2007, several weeks after Bill 152 received Royal Assent. However the Court could not and did not consider the effect of the amendments to the LTA, because the amendments did not apply to the transactions under review. On its face, s. 78(4.1), and as a result s. 78(4.2), relate only to instruments registered on or after October 19, 2006.
[39] In Lawrence v. Maple Trust Co., Lawrence appealed from the dismissal of her application to set aside a mortgage. The appellant’s property was originally encumbered by a mortgage in favour of TD/Canada Trust. In October 2005, an impostor posing as the appellant retained a lawyer to sell the appellant’s home. The impostor gave the lawyer a forged agreement of purchase and sale under the terms of which the property was to be sold to another impostor, Wright. Wright then obtained a mortgage from Maple Trust for the alleged purpose of funding the purchase of the property. In November 2005, pursuant to the forged agreement of purchase and sale, a fraudulent transfer of the property in favour of Wright was registered. On the same day, Maple Trust advanced money pursuant to the mortgage, the TD/Canada Trust mortgage on the property was discharged, and, after the transfer from the appellant to Wright had been registered, the Maple Trust charge was registered against the property in the amount of $291,924.
[40] In January 2006, the appellant discovered the fraudulent transfer and mortgage, and brought her application to have the fraudulent transfer and mortgage set aside. The application judge declared the transfer of the property to the impostor to be void and of no effect, but upheld the validity of the Maple Trust mortgage.
[41] The Court of Appeal allowed the appeal and set aside the Maple Trust mortgage. It determined that both the result and the reasoning of Household Realty were incorrect. The Court concluded, at paras. 67-68:
[67] The theory of deferred indefeasibility accords with the Act and must be taken into consideration in an analysis of s. 155 and its relationship with other provisions in the Act. 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 an opportunity to avoid the fraud. However, any subsequent purchaser or encumbrancer (the “deferred owner”) has no such opportunity. Therefore, in accord with s. 78(4) and the theory of deferred indefeasibility, the deferred owner acquires an interest in the property that is good as against all the world.
[68] Wright never took valid title to the Property because he obtained it by fraud. He was, therefore, not a registered owner. In accordance with s. 68(1) of the Act, only a registered owner may give valid charges on land. Maple Trust is the intermediate owner of an interest in the Property. It had an opportunity to avoid the fraud. It did not take from a registered owner. Therefore, despite registering its charge, Maple Trust loses in a contest with the true registered owner, Ms. Lawrence. Accordingly, the charge against the Property in favour of Maple Trust should be set aside.
[42] Plainly, the Court in Lawrence v. Maple Trust Co. did what the Court in Household Realty would not do. It entered into the debate about immediate and deferred indefeasibility and decided that the LTA is a deferred indefeasibility scheme. However we must be careful about what we take from this label. We cannot simply look at descriptions of a deferred indefeasibility scheme in the academic literature or cases describing other schemes as determining rights under the LTA. As the Court of Appeal stated in Household Realty, at para. 41, at the end of the day, it is not the theories of the LTA that determine what is and what is not valid; it is the LTA itself that does so.
[43] Similarly, in Lawrence v. Maple Trust Co., although the Court found that the LTA was predicated on the theory of deferred indefeasibility, a theory that permits the common law to remain part of the law of Ontario relating to land unless expressly abrogated, the Court nonetheless made this important point, at para. 31: “While a consideration of the two theories of indefeasibility is inevitable in this case, it is the relevant legislative provisions that must drive the analysis.” The Court identified the relevant provisions as ss. 155 and 78(4). Now, of course, ss. 78(4.1) and 78(4.2) must also be taken into account.
[44] As a result, we cannot simply apply even what was said in Lawrence v. Maple Trust Co. to this case without examining ss. 78(4.1) and 78(4.2). One feature of s. 78(4.2) is notable. While it does not use this language, s. 78(4.2) makes clear that the LTA is a deferred indefeasibility scheme with respect to fraudulent instruments. I say this for the following reasons.
[45] Section 78(4) provides that 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. However, the Court in Lawrence v. Maple Trust Co. concluded that s. 78(4) had to be read in a manner that recognized that the LTA gave effect to the theory of deferred indefeasibility. As a result the Court concluded that an intermediate owner - a party acquiring an interest in land from the party responsible for a fraud - is vulnerable to a claim from the true owner because it has an opportunity to avoid the fraud. However a deferred owner (any subsequent purchaser or encumbrancer) has no such opportunity and acquires an interest in the property that is good against the world.
[46] However in light of the amendments to the LTA, s. 78(4) no longer needs to be read in a manner that recognizes that the LTA gives effect to the theory of deferred indefeasibility. Sections 78(4.1) and 78(4.2) spell out explicitly, for the first time, that the Act establishes a scheme of deferred indefeasibility only with respect to “fraudulent instruments”. In addition, the two sections spell out explicitly how deferred indefeasibility will work. Specifically, s. 78(4.2) provides that “[n]othing in subsection (4.1) invalidates the effect of a registered instrument that is not a fraudulent instrument described in that subsection, including instruments registered subsequent to such a fraudulent instrument.”
[47] What is important is that the two new sections, taken together, provide only for the invalidation of “fraudulent instruments.” The Court in Lawrence v. Maple Trust Co. held that the party acquiring an interest in land from the party responsible for the fraud is vulnerable to a claim from the true owner. This would only be the case pursuant to the amendments if the party acquiring the interest in land from a fraudster does so by way of an instrument that is a fraudulent instrument. Generally speaking, this distinction will make no difference.[^1] In the circumstance of an innocent person taking an interest in a home to which the grantor of the home had no interest, which was the concern of the legislature when it amended the LTA, the result would be the same in either case. But the fact remains that in deciding a case such as this one, we are called upon to apply the LTA as amended, and not simply the interpretation of the LTA before it was amended, found in Lawrence v. Maple Trust Co. Specifically, we must determine whether or not the CIBC and Secure Capital mortgages are fraudulent instruments.
[48] The respondent concedes that this determination is decisive. It says the following at para. 33 of its factum:
The key wording in subsection 78(4.2) is the wording: “Nothing in subsection (4.1) invalidates the effect of a registered instrument that is not a fraudulent instrument decribed in that subsection…”. The key issue therefore is whether the CIBC Mortgage is or is not a fraudulent instrument, because if it is, it is not afforded the protection of subsection 78(4.2).
[49] In this case, the application judge did in fact consider whether the CIBC and Secure Capital mortgages were fraudulent within the meaning of the LTA. If they were, then of course, by virtue of ss. 78(4), 78(4.1) and 78(4.2), they were not deemed to be embodied in the register and not deemed to be effective to create an interest in the property. He found that they were fraudulent, and therefore that the Computershare mortgage should be rectified and given priority over them.
[50] The application judge reached the conclusion that the CIBC and Secure Capital mortgages were fraudulent by the following reasoning. He began by noting that the definition of a fraudulent instrument in s. 1 of the LTA includes an instrument “under which a fraudulent person purports to … transfer an … interest in land.” He further noted that a fraudulent person is defined as including “a person who executes or purports to execute an instrument if … the person holds oneself out in the instrument to be, but knows that the person is not, the registered owner of the estate or interest in land affected by the instrument.”
[51] The application judge then concluded that the Lowtans fell within the definition of fraudulent persons in their dealings with CIBC and Secure Capital, and that as a result the mortgages given by the Lowtans to CIBC and Secure Capital are fraudulent instruments. He reasoned, at para. 51:
The Lowtans did not own the interest in the property purported to be conveyed to CIBC and to Secure Capital. The Lowtans were fraudulent persons within the meaning of the LTA in their dealings both with CIBC and with Secure Capital. Therefore, I conclude that the mortgages given by the Lowtans to CIBC and Secure Capital were fraudulent instruments within the meaning of s. 78(4.2) of the LTA.
[52] I do not doubt that the Lowtans perpetrated a fraud on CIBC and Secure Capital, by concealing from them, at the time they entered into the respective mortgage agreements, the existence of the Computershare mortgage. But that is not enough to make the Lowtans “fraudulent persons.” To be fraudulent persons in this circumstance, the Lowtans had to have knowingly and falsely held themselves out, in the two mortgages, to be the registered owners of the estate or interest in the land affected by the mortgages.
[53] I cannot agree with the application judge’s analysis. In this case, the Lowtans were the true owners of the estate or interest in the land affected by the mortgage and their ownership was validly registered. They were perfectly entitled to grant an interest or charge on the land by way of mortgage. They did not falsely hold themselves out “in the instrument[s]” to be registered owners of the affected estate or interest. They were the holders of the fee simple. The two mortgages are therefore deemed by ss. 78(4) and 78(4.2) of the LTA to be effective to create interests in the property in favour of CIBC and Secure Capital, and do not fall within the exception in s. 78(4.1).
[54] An examination of the instruments in question confirms my analysis. The CIBC instrument names the property being charged, and accurately names the Lowtans as chargors and CIBC as chargee. It provides that the principal amount of the charge is $252,800, and sets out the calculation period of the charge, the interest rate and related details. There is nothing in the instrument that stipulates that this was a first mortgage or whether or not there were other prior charges. Most importantly, the Lowtans did not falsely hold themselves out in the instrument to be registered owners of the affected estate or interest.
[55] As a result, I am of the view that the application judge made a palpable and overriding error of fact with respect to the application of a legal principle to the evidence when he found that the CIBC and Secure Capital mortgages were fraudulent. The error is plainly seen, goes to the root of the challenged finding of fact and is sufficiently significant to vitiate it. There was no basis for the application judge to have found that the CIBC mortgage fell within the exception in s. 78(4.1).
[56] I have said that the issue in this case must be resolved on the basis of the new provisions of the LTA, and not on the basis of the decision in Lawrence v. Maple Trust Co. But even if the decision in Lawrence v. Maple Trust Co. is applied, the result is the same.
[57] After analyzing ss. 78(4.1) and 78(4.2), the application judge went on to consider Lawrence v. Maple Trust Co. He was of the view that it supported his decision. He summarized the theory of deferred indefeasibility adopted in Lawrence v. Maple Trust Co. as follows, at para. 54:
Pursuant to the theory of deferred indefeasibility, registration of an invalid instrument does not make the instrument valid in favor of an immediate purchaser but if the purchaser becomes the registered owner, a purchaser from the immediate purchaser is protected by the statute because the second purchaser is entitled to rely upon the register and need not go behind it. As stated in Falconbridge at p. 203: “Thus, the instrument which is invalid so far as the immediate purchaser is concerned becomes a good root of title in favour of the subsequent purchaser.”
[58] The application judge then stated, at para. 57:
In fact, the Lowtans had conveyed away an interest in the property to Computershare in the form of a first charge. This first charge granted Computershare both an interest in the property and certain statutory rights pursuant to its mortgage to obtain possession and to sell the property in the event of default.
[59] He continued, at para. 58:
In this case, the Lowtans are fraudulent transferees having fraudulently conveyed Computershare’s interest in the property to themselves by the registration of the fraudulent discharge. In my view, the CIBC is, in accordance with the theory of deferred indefeasibility, an intermediate owner. CIBC acquired an interest in title from a fraudster, and had an opportunity to investigate the transaction and avoid the fraud. For example, an inquiry as to how the Lowtans were able to pay off the Computershare mortgage given their financial circumstances might have raised concerns. In any event, according to the Court of Appeal in Lawrence, registration of a void instrument does not cure its defect and a void instrument or its registration cannot give good title. The discharge of the Computershare mortgage was void and registration of that discharge did not give clear title to the fraudsters.
[60] As I understand his reasoning, the application judge was saying that the Lowtans first conveyed an interest in the property to Computershare, then conveyed that same interest back to themselves by their fraudulent discharge, and finally conveyed that same interest, an interest that they didn’t have, to CIBC. Since the discharge was fraudulent, the Lowtans did not reacquire title to the interest they had conveyed to Computershare, and the subsequent conveyance of that interest to CIBC is invalid on the basis of deferred indefeasibility to the immediate purchaser, namely CIBC.
[61] In my view, this analysis fails for the same reason as the s. 78(4.1) argument fails. The mortgage to CIBC was perfectly valid. It was not a fraudulent reconveyance of the Computershare first mortgage to CIBC. It was simply a conveyance of a charge on the property that the Lowtans were the registered owners of in return for a mortgage loan. The fraud was in the concealment of the mortgage to Computershare, and cannot be found in the instrument. If the value of the property had doubled by the time of the defaults in the mortgages, Computershare and CIBC would both be entitled to recover their interests.
[62] In fact, had the application judge carried his logic through to the end, he ought not to have ordered that Computershare’s mortgage had priority over the CIBC mortgage. He ought instead to have declared the CIBC mortgage to be void. Of course that would not be an equitable outcome on any view of the matter. CIBC innocently advanced funds to fraudsters, and ought not be disentitled to collect what it can.
[63] At bottom, what the application judge did, and what the respondents seek in this case is simply not what the doctrine of deferred indefeasibility contemplates, regardless of the terms of the LTA. According to the doctrine of deferred indefeasibility, registration of an invalid instrument does not make the instrument valid in favour of an immediate purchaser, but if the purchaser becomes the registered owner, a purchaser from the immediate purchaser is protected by the statute. This second purchaser is entitled to rely upon the register and need not go behind it. Here the discharge of the Computershare mortgage was fraudulent and invalid. If the discharge had been discovered before the mortgage to CIBC was registered, the Computershare mortgage could have been restored to title. But that did not happen, and the owners of the property gave a further mortgage to CIBC. As I see it, the owners were entitled to put a further mortgage on title, whether or not the Computershare mortgage was discharged. As a result, CIBC is not an immediate purchaser of a fraudulently acquired interest registered on title, and was entitled to rely on the mirror principle (the register is a perfect mirror of the state of title) and the curtain principle (a purchaser need not investigate the history of past dealings with the land, or search behind the title).
[64] As a result, the application judge made an overriding and palpable error of fact on this basis as well.
Did the Application Judge Err in Concluding That Computershare Did Not Have Actual Notice of the Fraudulent Discharge of the Computershare Mortgage Prior to April 2013?
[65] CIBC led evidence before the application judge that in March 2010, Sherri Frank, an employee of an agent of a branch of the Canadian Imperial Bank of Commerce completed a title search of the property on behalf of the branch, discovered that there was no existing mortgage registered on title because the Computershare mortgage had been discharged and entered notes about this into a computer portal maintained for that particular engagement with the branch.
[66] The notes indicate that Ms. Frank informed Sean Dacosta, an employee of Paradigm, the administrator of the Computershare mortgage, about the discharge. Neither Ms. Frank nor Mr. Dacosta had any independent recollection of these events when they testified on the application. However, Ms. Frank testified that based on her notes she believed that she did convey enough information to Paradigm that they would have understood that there was no charge on title.
[67] Mr. Dacosta testified that if he had been advised of a potential fraudulent discharge of the Computershare mortgage, he would have done something about it, but if he was simply told that a Paradigm-administered mortgage had been discharged, it would have been a commonplace event and of no moment to him.
[68] On the basis of the totality of the evidence before him, the application judge was not prepared to find that Computershare or CIBC ought to have been aware that the fraudulent discharge had been registered. As a result, he rejected the argument that Computershare was estopped from claiming that it was unaware of the registration of the fraudulent discharge in April 2010.
[69] CIBC now says that the application judge should have considered Ms. Frank’s notes through the lens of the “doctrine” of past recollection recorded, admitted them in evidence as an exception to the hearsay rule and given them greater weight since they were reliable business records.
[70] There is no merit to this argument. Past recollection recorded is simply a rule of admissibility. Once admitted, the weight to be afforded evidence admitted on this basis is entirely a matter for the trier of fact. In this case the notes were in fact admitted in evidence. The application judge considered what Ms. Frank said about her notes and what she and Mr. Dacosta said about their exchange of information, and in the end was not prepared to find that Computershare or CIBC ought to have been aware that the fraudulent discharge had been registered. He was perfectly entitled to reach that conclusion on the evidence before him. He made no error, far less a palpable and overriding error. I would not give effect to this argument.
Disposition
[71] For all of these reasons, the appeal is allowed, the decision of the application judge is set aside and an order is granted:
a. declaring that the CIBC mortgage has priority over the Computershare mortgage; and
b. directing that the indebtedness to CIBC under the CIBC mortgage be paid in priority from the net sale proceeds and authorizing disbursement of funds presently held in the trust account of CIBC’s solicitors to CIBC first, in satisfaction of the indebtedness under the CIBC mortgage, with surplus funds, if any, to Secured Capital and Computershare.
Costs
[72] The parties expressed the view that they likely could agree on costs. If they are not able to, they may make brief submissions in writing. The appellant’s submissions shall be served and filed within 15 days of the release of this judgment, and the respondent’s submissions within 10 days of receipt of the appellant’s submissions, all through the Divisional Court Office in Toronto.
___________________________ DAMBROT J.
I agree.
___________________________ SWINTON J.
I agree.
___________________________ HAMBLY J.
RELEASED: November 28, 2016
CITATION: CIBC Mortgages Inc. v. Computershare Trust Company of Canada, 2016 ONSC 7094
DIVISIONAL COURT FILE NO.: 16-2 DATE: 20161128
ONTARIO
SUPERIOR COURT OF JUSTICE
DIVISIONAL COURT
Dambrot, Swinton and Hambly JJ.
B E T W E E N :
CIBC MORTGAGES INC., trading as FIRSTLINE MORTGAGES
Applicant (Appellant)
– and –
COMPUTERSHARE TRUST COMPANY OF CANADA
Respondent (Respondent in Appeal)
AND BETWEEN:
COMPUTERSHARE TRUST COMPANY OF CANADA
Applicant (Respondent in Appeal)
- and -
CIBC MORTGAGES INC., trading as FIRSTLINE MORTGAGES and the DIRECTOR OF TITLES pursuant to s. 57(14) of the Land Titles Act
Respondents (Appellant)
REASONS FOR DECISION
DAMBROT J.
RELEASED: November 28, 2016
[^1]: The distinction made no difference in Lawrence v. Maple Trust Co. In that case the instrument granting the mortgage to Maple Trust was a fraudulent instrument. The property was fraudulently transferred to Wright, who then fraudulently obtained the mortgage from Maple Trust knowing that he had no interest in the land. The Court of Appeal had no need to address the situation where the instrument in question was not fraudulent.