CITATION: CIBC Mortgages Inc. v. Computershare Trust Co. of Canada, 2015 ONSC 543
COURT FILE NO.: 3218/13 4301/13 5501/13
DATE: 2015-01-23
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
CIBC MORTGAGES INC., TRADING AS FIRSTLINE MORTGAGES
Applicant
– and –
COMPUTERSHARE TRUST COMPANY OF CANADA
Respondent
COMPUTERSHARE TRUST COMPANY OF CANADA
Applicant
– and –
CIBC MORTGAGES INC., TRADING AS FIRSTLINE MORTGAGES and the DIRECTOR OF TITLES pursuant to s.57(14) of the Land Titles Act
Respondents
SECURE CAPITAL MIC INC.
Applicant
– and –
CIBC MORTGAGES INC., TRADING AS FIRSTLINE MORTGAGES and COMPUTERSHARE TRUST COMPANY OF CANADA and the DIRECTOR OF TITLES pursuant to s.57(14) of the Land Titles Act
Respondents
Benjamin Frydenberg and Sam Rappos, for the Applicant
Christine Jonathan, for the Respondent
Christine Jonathan for the Applicant
Benjamin Frydenberg and Sam Rappos, for CIBC Mortgages Inc., and Jonathan Sydor for the Director of Titles
Bobby Brykman, for the Applicant
Benjamin Frydenberg and Sam Rappos, for CIBC Mortgages Inc., and Jonathan Sydor for the Director of Titles
HEARD: October 16, 2014
REASONS FOR JUDGMENT
MURRAY J.
CIBC Mortgages Inc. Trading as FirstLine Mortgages and Computershare Trust Company of Canada.
[1] In this application, the applicant CIBC Mortgages Inc. trading as FirstLine Mortgages (hereinafter “CIBC”) seeks, inter alia, the following:
a. an order declaring that the CIBC mortgage granted by the Lowtans against the property municipally known as 40 Chipmunk Crescent, Brampton Ontario securing the sum of $252,800 and registered on title on July 28, 2011 as instrument number PR2045899 is of full force and effect and constitutes a valid and effective first ranking charge against the property;
b. an order declaring that the CIBC mortgage has priority over the Computershare mortgage;
Computershare Trust Company of Canada and CIBC Mortgages Inc., trading as FirstLine Mortgages
[2] In its application, the applicant, Computershare Trust Company of Canada (hereinafter “Computershare”) seeks, inter alia, the following:
a. a declaration that the discharge registered on August 26, 2009 on title to the property municipally known as 40 Chipmunk Crescent in Brampton, Ontario (hereinafter “the property”) and known by instrument number PR1692570 is a fraudulent instrument and correspondingly void and of no force or effect.
b. rectification of the register for the property restoring the charge granted in favor of Computershare as chargee registered on November 21, 2008 and known by instrument number PR1571875 (the “Computershare charge”) in first priority to all other charges/charges on title to the property registered after November 21, 2008.
c. a declaration of the Computershare charge as the first charge on the property.
d. An order directing the Director of Titles to rectify the register relating to the property deleting instrument number PR1692570 and restoring the Computershare charge as if the discharge had not been registered.
Secure Capital MIC Inc. and CIBC Mortgages Inc., trading as FirstLine Mortgages and Computershare Trust Company of Canada and Director of Titles Pursuant to Section 57(14) of the Land Titles Act.
[3] In the application brought by Secure Capital MIC Inc. (hereinafter “Secure Capital”) seeks, inter alia, the following:
a. a declaration that the mortgage granted by the Lowtans to Secure Capital securing the amount of $32,000 and registered against title to the property on December 11, 2012 as instrument number PR230945 is the second ranking charge on the property ranking behind the CIBC charge.
[4] These three applications were heard together. All three applications are brought by secured lenders seeking a determination of priorities of their respective charges registered against the property owned by Dhanraj and Sumatie Lowtan.
Facts
[5] Dhanraj Lowtan and Sumatie Lowtan (the “Lowtans”) owned the property known as 40 Chipmunk Crescent in Brampton, Ontario (hereinafter “the property”). The legal description of the property is as follows:
PCL BLOCK 396-7, SEC 43M1026; PT BLK 396, PL 43M1026.
PARTS 11, 43, 44, 53 & 54, 43R19433
City of Brampton, Regional Municipality of Peel
PIN 14303-0457
[6] The Lowtans applied to Computershare for a loan to be secured by a first charge on the property. The proceeds of the loan were be used to refinance existing charges on the property. After the charge loan was approved, the principal amount of $280,801.95 was advanced. The majority of funds were used to pay off previous charges registered on title to the property in favor of the Bank of Montréal and CitiFinancial Canada Inc. Coincidental with the advancing of the funds, a charge was registered on title to the property in favour of Computershare on November 21, 2008 as instrument number PR1571875 (the “Computershare charge”). When the discharge of the charges in favor of the Bank of Montréal and CitiFinancial Canada Inc. were registered, the Computershare charge was the first charge on the property. Part of the charge loan agreement permitted the monthly payments to be paid directly to Computershare from Sumatie Lowtan’s bank account.
[7] On August 26, 2009, without the knowledge or consent of Computershare, a discharge of the Computershare charge was registered on title to the property by the registration of a discharge bearing instrument number PR1692750. The discharge shows the discharging party to be Computershare and on the copy of the discharge placed in evidence, a person named Shekh Naeed Pabla represents that she has the authority to bind Computershare. The discharge was signed by Naveena Khanna and was submitted by 6613021 Canada Corp. The address for both Khanna and 6613021 Canada Corp. is shown as 10 Jayzell Drive, Toronto, Ontario. None of the individuals, Pabla or Khanna are known to Computershare. Neither person is registered as a lawyer or paralegal in the Province of Ontario. The numbered company is not known to Computershare. Neither Pabla or Khanna nor 6613021 Canada Corp. were known to or had authority from Computershare to register any discharge. Computershare never received a request to discharge the charge.
[8] After the discharge of the Computershare mortgage was registered, payments continued to be made by the Lowtans pursuant to the terms of the Computershare charge more or less regularly for the next 4 1\2 years until January 2013. On January 4, 2013 the last payment was made by the Lowtans. Thereafter the Computershare charge went into default on account of nonpayment.
[9] On or about March 3, 2011, the Lowtans granted a charge/charge in favor of Maria Giovanni and Darlene Geraci in the principal amount of $87,500 which was registered against title to the lands as instrument number PR1970026.
[10] The Lowtans, through a mortgage broker, contacted CIBC on or about July 12, 2011 to discuss the possibility of obtaining a loan. CIBC was informed by the Lowtan’s agent/broker that the Lowtans were seeking a first charge from CIBC to refinance an existing private charge registered against the lands in the outstanding amount of approximately $87,500 and to obtain a line of credit. Notwithstanding that the Lowtans were making monthly payments to Computershare pursuant to their agreement with Computershare, the Lowtans’ indebtedness to Computershare was not disclosed to CIBC at the time of the loan application. When making their application their application for a first charge from CIBC, the Lowtans advised CIBC that they had aggregate debts of approximately $106,000 an amount which included the amount owed to Giovanni and Geraci. CIBC was advised by the Lowtans that they had no secured indebtedness other than the charge for approximately $87,500 in favor of Giovanni and Geraci. On July 15, 2011, CIBC entered into a commitment with the Lowtans for a loan secured by a first charge on the property. The CIBC charge securing the sum of $252,800 was registered on title on July 28, 2011 as instrument number PR2045899.
[11] The proceeds of CIBC charge were used to discharge the Giovanni\Geraci charge on August 9, 2011.
[12] In December, 2012, the Lowtans approached Secure Capital and sought financing to take additional equity from their residence to be registered as a second mortgage. The Lowtans represented to Secure Capital that they wished some additional financing in order to pay off credit card debt and to provide some immediate financial resources. Secure Capital was informed by the Lowtans that there was one other mortgage registered against the property, that is, the CIBC mortgage registered on July 28, 2011. The Lowtans represented that, in addition to the indebtedness owed to the CIBC, they owed approximately $81,715. No information was provided by the Lowtans to Secure Capital indicating that they were indebted to Computershare. The Lowtans granted a mortgage to Secure Capital in the amount of $32,000 which was the maximum commitment that Secure Capital was prepared to make to them. This loan was secured by a charge registered against title to the property on December 11, 2012 as instrument number PR230945. Secure Capital had no knowledge of any other charge registered against the property other than the CIBC mortgage at the time the Secure Capital mortgage was granted and registered against title to the property. Secure Capital understood that it had obtained a second mortgage against the property with priority to the CIBC mortgage which had been registered against the property on or about July 28, 2011.
[13] The Lowtans defaulted under the CIBC mortgage on or about February 1, 2013.
[14] The Lowtans defaulted under the Secure Capital mortgage by failing to make payments on February 1, 2013 and thereafter. On April 9, 2013, Secured Capital’s solicitor issued a notice of sale.
[15] On or about April 12, 2013, Computershare discovered for the first time that the Computershare charge had been fraudulently discharged by the registration of the discharge bearing instrument number PR169-2750.
[16] On or about April 25, 2013, both the Lowtans made an assignment into bankruptcy. By April 25, 2013 the Lowtans had vacated the property as they were unable to maintain payments.
[17] On or about May 30, 2013, a Caution was registered against the property by the Director of Titles as instrument number PR2375145 indicating that the discharge of charge registered on the lands on August 26, 2009, as instrument number PR 169-2750 relating to the Computershare charge may be a fraudulent instrument and that no dealings could be had with the property until the matter was resolved.
[18] On or about June 4, 2013 CIBC issued a notice of sale.
[19] CIBC, Computershare and Secure Capital subsequently commenced these applications.
[20] The sale of the property occurred pursuant to court order dated December 5, 2013 obtained by CIBC with the consent of Computershare, Secure Capital, the Lowtans’ trustee in bankruptcy and the Director of Titles. The proceeds of sale, which as of September 23, 2014 amounted to $297,754, are being held in trust pending the resolution of the priorities litigation. Needless to say, the funds being held in trust are not sufficient to satisfy the three claimants, Computershare, CIBC and Secure Capital.
[21] Paradigm Quest Inc. (hereinafter “Paradigm”) is a company responsible for providing services to mortgage companies, including Computershare, which include collections, mortgage administration and the registration of mortgage discharges. Arrangements for the Computershare mortgage were made by the Lowtans through Paradigm. After the discharge of the Computershare mortgage was registered (such registration without the knowledge of Computershare or Paradigm) Paradigm continued to have contact with the Lowtans. For example, in the affidavit of Mario Brown, a recovery officer with Paradigm, Mr. Brown deposes that in late 2011 one of the Lowtans called the recovery department at Paradigm and asked to make a double mortgage payment on January 21, 2012. In addition, there were numerous phone contacts between the Lowtans and representatives of Paradigm in the fall of 2012 when the Computershare mortgage payments were not being made regularly. Dhanraj Lowtan called Paradigm and requested payments on the Computershare mortgage be deferred explaining to the Paradigm representative that he was in financial difficulty. In the course of these conversations, the Lowtans continued to acknowledge their obligation to make payments on the Computershare mortgage.
[22] By early 2013, when the Lowtans failure to make regular mortgage payments had become problematic, a notice of default was sent to them by Computershare.
[23] As a result of the Computershare mortgage being in default, Paradigm referred the matter to counsel for enforcement after which it was discovered that the Computershare mortgage had been discharged. Paradigm does not execute mortgage discharges but rather sends them to the lender for execution by persons authorized to sign mortgage discharges. Paradigm then registers the discharge on title in cases where they are authorized by Computershare to do so. Paradigm does not use third parties to register discharges and has never delegated this task to 6613021 Canada Corp. or to Shekh Naeed Pabla or to Naveena Khanna.
[24] There is no disagreement among the parties with any of the above stated facts. There remains however an issue of whether Computershare knew or ought to have known about the fraudulent discharge prior to the registration of the CIBC charge.
Did Computershare have actual knowledge of the fraudulent discharge prior to enforcement proceedings being commenced in 2013?
[25] CIBC argued that Computershare should be estopped from asserting that the discharge of its charge constituted a fraudulent instrument subject to reinstatement in priority of the CIBC charge because it had learned of the discharge almost 2 years before CIBC advanced funds under its charge and took no steps to reinstate the Computershare charge.
[26] Fidelity National Financial Canada (hereinafter “FNF”) is a company that provides services to various clients including various branches of the Canadian Imperial Bank of Commerce (hereinafter “the Bank”). The services provided by FNF include performing title searches of properties and preparing mortgage documentation for lenders. In March of 2010, FNF was requested by a branch of the Bank located in Brampton, Ontario to make inquiries with respect to the property in the context of the Lowtans’ request to the Bank for a loan to be secured by a collateral charge against the property. As a result, FNF performed a title search of the property. In the course of the title search, FNF communicated to the branch of the Bank that although the collateral charge was to be a second charge on the property, there was no existing first mortgage registered on title. FNF asked the Bank to confirm the priority of the proposed collateral mortgage as a result of the title discrepancy. Ms. Sherri Frank, a manager of client services at FNF, has given evidence that she believes that she made a call to Paradigm on April 6, 2010 at approximately 10:50 a.m. Her note of the call which was made contemporaneously is as follows: “transferred to Manager, Sean.dacosta@paradigmquest.com x2268, advised of situation and advised once approval received from CIBC, Borrower, we will send an e-mail copy of search, mortgage and discharge. The customer can call him directly as they need to get this mortgage reinstated.” Understandably when examined on February 5, 2014, Ms. Frank had no independent recollection of a conversation but based on her note, Ms. Frank believed she had spoken to Mr. Dacosta and that she would have given Paradigm enough information that they would have understood that there was no charge on title. Ms. Frank confirmed that she did not send an e-mail to Mr. Dacosta and did not send copies of any title or any documentation to FNF. Ms. Frank said that she would not send a copy of the search, mortgage and discharge to Paradigm or to Mr. Dacosta without getting approval from both the Bank and the borrower i.e. the Lowtans. The Lowtans did not qualify for the loan they were seeking from the Bank. FNF then closed its file. In cross-examination, Ms. Frank did not recall whether she had a conversation with Mr. Dacosta or left a voicemail message. Ms. Frank stated that initially she did not call Paradigm but called the number of the company called Merix and believes that she was transferred to Mr. Dacosta’s extension at Paradigm. Merix, as I understand, is a company related to Paradigm.
[27] Mr. Dacosta filed an affidavit in which he confirmed that he was employed by Paradigm and in 2010 was a supervisor of Paradigm's customer service department. Mr. Dacosta has deposed that he has no recollection or record of receiving any call or message from Ms. Frank and that he has no record of making a return phone call to her. In cross-examination, Mr. Dacosta testified that if he had been advised of the potential fraudulent discharge of the Computershare mortgage registered on title not only would he have made a note of it but also would have done something about it. However, if someone told him simply that a Paradigm administered mortgage had been discharged, without saying it had been fraudulently discharged, it would have been of no moment to him because every day Paradigm may be responsible for registering the discharges of numbers of mortgages. Mr. Dacosta did receive a request from the Lowtans on or about April 8, 2010 to provide them with an information statement showing the current status of the mortgage. Mr. Dacosta’s records show that on April 8, 2010 he instructed an employee of Merix, Ms. Katarina Koutros, to prepare and send an information sheet to the Lowtans which gave the current status of the Computershare mortgage indicating that it was in good standing. A copy of that information statement was appended to his affidavit. On April 8, 2010, the Lowtans forwarded the information statement received from Paradigm to the branch of the Bank from whom they were seeking a loan. After reviewing the Statement, CIBC rejected the Lowtans mortgage application. No copy of the parcel abstract showing the discharge or of the discharge of the mortgage was ever sent to Dacosta at Paradigm by anyone at the Bank or by Ms. Frank.
[28] Ms. Frank has no recollection of what, if anything, she said to Mr. Dacosta. Mr. Dacosta has no recollection of ever being advised that the Computershare mortgage had been fraudulently discharged. His instruction to Ms. Koutros to send an information statement regarding the status of the mortgage and his failure to act on such information is inconsistent with his having been informed that the mortgage had been fraudulently discharged.
[29] On the basis of the material before me, I am not prepared to find that Computershare or CIBC ought to have been aware that the fraudulent discharge had been registered. Therefore, Computershare is not estopped from claiming that it was unaware of the registration of the fraudulent discharge in April, 2010.
Were the Lowtans privy to the fraudulent discharge of the Computershare mortgage?
[30] CIBC takes the position that the Lowtans were not privy to the fraudulent discharge of the charge. I disagree.
[31] It is reasonable to conclude that the Lowtans made representations to Giovanni and Geraci that their indebtedness would be secured by a first charge on the property in the amount of $87,500. These representations were made at the same time that they were making monthly payments towards the Computershare charge and were fully aware of their obligations to Computershare.
[32] Additionally, as is made clear from the CIBC material, when applying for a first mortgage loan in July 2011, the Lowtans advised CIBC that there was no charge against the lands other than the Giovanni/Geraci charge. Furthermore, the Lowtans advised CIBC that they had debts of approximately $106,000 and that this amount included the amount owed to Giovanni and Geraci. These representations were made to the CIBC at the same time they were continuing to make monthly payments to Computershare pursuant to their obligation under the Computershare charge. The representations made by the Lowtans to CIBC were false and designed to keep secret from CIBC their existing obligations to Computershare.
[33] In December, 2012, when they were paying the Computershare mortgage, the Lowtans sought a loan from Secure Capital to be secured by a second mortgage, the Lowtans represented to Secure Capital that, in addition to the indebtedness owed to the CIBC, they owed approximately $81,715. No information was provided to Secure Capital indicating that the Lowtans were indebted to Computershare. The representations made by the Lowtans to Secure Capital were false and designed to keep secret from Secure Capital their existing mortgage obligations to Computershare.
[34] The Lowtans granted a mortgage to Secure Capital in the amount of $32,000 being the maximum commitment that Secure Capital was prepared to make to them. This loan was secured by a charge registered against title to the property on December 11, 2012 as instrument number PR230945. Secure Capital had no knowledge of any other charge registered against the property other than the CIBC mortgage at the time the Secure Capital mortgage was granted and registered against title to the property. Secure Capital understood that it had obtained a second mortgage against the property with priority to the CIBC mortgage registered against the property on or about July 28, 2011.
[35] The inescapable conclusion is that the reason the Lowtans continued to make monthly payments to Computershare was to ensure that Computershare did not become aware that the discharge of the Computershare charge had been registered on title. The Lowtans knew that default by them in paying the Computershare charge would have led to a discovery by Computershare of the fraudulent discharge registered on title. They continued to make mortgage payments in order to keep the discharge secret from Computershare.
[36] On a balance of probabilities, I have no doubt in concluding that the Lowtans were fully aware of and responsible for the registration of the fraudulent discharge. After the registration of the discharge, they knowingly made false representations to subsequent lenders that their loans would be secured by a first charge in the case of CIBC and a second charge in the case of Secure Capital. The registration of the fraudulent discharge was caused by the Lowtans and relied on by them as part of a scheme to obtain additional financing from subsequent chargees which financing would not otherwise have been available to them. The dishonesty of the Lowtans is made abundantly clear by the evidence.
The Positions of the Parties
The position of Computershare
[37] Computershare argues that the first charge granted to the Lowtans should remain in first position unaffected by the fraudulent discharge and that the subsequently registered CIBC charge should take second position and the Secure Capital charge should take third position. Computershare seeks a declaration that the Computershare charge is the first charge/charge registered against the property and that it stands in priority to the CIBC charge and the Secured Capital charge. Computershare asserts two main arguments:
The Lowtans were responsible for registering the fraudulent discharge of the Computershare charge. CIBC acquired its interest in the property from the Lowtans and is an intermediate owner having had the last and best opportunity to avoid the fraud. The CIBC charge therefore is defeasible in favour of Computershare’s charge. In accordance with section 78(4.2) of the Land Titles Act, the CIBC charge is a valid charge which remains in second position behind the Computershare charge and ahead of the Secured Capital charge;
In the alternative, the discharge of the Computershare charge being fraudulently obtained and registered is void leaving the Computershare charge as a valid and effective first charge against the property.
The position of CIBC
[38] CIBC takes the position that it relied on the discharge registered on title and that its charge should rank first, the Secure Capital charge should rank second and the Computershare charge should rank third. CIBC asserts that it obtained its charge for value and with no notice that the registration of the discharge of the Computershare charge was fraudulent. Relying on the “mirror” and “curtain” principles which inform the Land Titles Act, CIBC asserts that the discharge was not a “fraudulent instrument” within the meaning of the Land Titles Act and that it was entitled to rely on the register when it granted the Lowtans what it believed in good faith to be a valid first charge. CIBC's position may be stated simply as follows:
Even if the discharge is a fraudulent instrument for the purposes of section 78(4.1) the reinstatement of the Computershare charge under section 78(4.1) cannot invalidate the effect of CIBC's charge as a valid and effective first ranking charge because CIBC's charge is not a “fraudulent instrument” as defined in s.(1) of the LTA.
The position of Secure Capital
[39] Secure Capital agrees with the position advanced by CIBC except that it asks that all interest, expenses, penalties and further costs incurred by CIBC should be stayed as of June 7, 2014 being the date the first application in this proceeding was brought by CIBC by way of notice of application as court file number 3218/13. Secure Capital asserts that the delay and expenses caused by the dispute related to the priority of charges should not create adversely affect subsequent encumbrancers and that it would cause undue hardship to Secure Capital if the further interest, expenses, costs and penalties of CIBC incurred after the commencement of these applications are added to the CIBC charge and rank in priority to what it asserts is a valid second charge.
Analysis
[40] The registration of the discharge of the Computershare mortgage raises questions that were not answered by the parties or by the evidence. How was the security system of electronic registration of documents circumvented? The discharge was filed by 6613021 Canada Corporation. How is it possible that the numbered company could submit a document on behalf of Computershare for electronic registration without being authorized by Computershare or Paradigm to do so? The answer to this question is speculative and this and other questions remain unresolved.
[41] This case is about which innocent party should have the priority of its charge adversely affected because of the fraudulent discharge purported to discharge the first registered Computershare charge. There is no suggestion that CIBC or Secure Capital were aware of the fraudulent nature of the discharge registered on title.
[42] CIBC and Secure Capital assert that they were entitled to rely on the register when it determined to advance mortgage funds to the Lowtans and therefore their mortgages should rate in first and second priority with Computershare having the right to have their fraudulently discharged mortgage reinstated but in third priority to the CIBC and Secure Capital charges. CIBC and Secure Capital are supported in this contention by counsel representing the Director of Titles.
[43] It is obvious that reliance on the registry however is not a one-way street. Computershare also had a legitimate expectation that registration of its charge on title would act as effective notice to any subsequent transferee, mortgagee or other encumbrancer that any subsequently acquired interest in the property would be subject to the priority of the Computershare mortgage.
[44] There is no dispute that the registered discharge was a fraudulent instrument within the meaning of the Land Titles Act, R.S.O. 1990, c. L.5 (hereinafter referred to as the “LTA”).
[45] A fraudulent instrument is defined in s.1 of the LTA as follows:
“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.
A “fraudulent person” as defined in section 1 of the LTA as “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;
[46] As noted above, all parties agree that the discharge of the Computershare charge was a fraudulent instrument. I have found the Lowtans to be responsible for the registration of the fraudulent discharge. The Lowtans made a false document - the Computershare discharge - which was designed to have subsequent lenders rely on it to their detriment. The Lowtans were the registered owners of the property when they granted CIBC and Secure Capital the first and second charges on the property. However, they did not own the property free and clear of encumbrances. The Lowtans knew full well that they were the registered owners of a property which was subject to a first charge in favour of Computershare and that the Computershare charge was intended to have first priority against any other subsequent registered security interest in the property. The interest in the property that they purported to convey to CIBC – a first charge on the property – to their knowledge had already been conveyed to Computershare. The Lowtans were not the owners of the “interest in land” conveyed to CIBC and Secure Capital by the charges registered in their favour. The Lowtans fraudulently conveyed to themselves the Computershare interest in the property and then held themselves out to the CIBC as the registered owners of the property whose interests as owner were not subject to any registered encumbrance.
[47] CIBC and Secure Capital rely on s. 78(4) of the LTA which provides as follows:
78 (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.
[48] Computershare relies on sections 78(4.1) and 78(4.2) of the LTA which provide:
78 (4.1) Subsection (4) does not apply to a fraudulent instrument that is registered on or after October 19, 2006
78 (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.
[49] Computershare also relies on section 155 of the LTA which states:
- Subject to the provisions of this Act, with respect to registered dispositions for valuable consideration, any disposition of the land or of a charge on land that, if unregistered, would be fraudulent and void is, despite registration, fraudulent and void in like manner.
[50] Before turning to the case of Lawrence v. Maple Trust Company, 2007 ONCA 74, 84 O.R. (3d) 94, which instructs us with respect to the interpretation of these sections as well as to the historical and current interpretation of the LTA, I would like to deal with the assertion by CIBC, Secure Capital and by counsel for the Director of Titles that the charges granted by the Lowtans to CIBC and to Secure Capital are not fraudulent documents within the meaning of the LTA with which I disagree.
[51] A person is a fraudulent person within the meaning of the LTA when 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.” As noted above, a “fraudulent instrument” is defined as including an instrument under which a fraudulent person purports to transfer an interest in land. 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. Although I have concluded that the subsequent mortgages to CIBC and Secure Capital are fraudulent instruments, I of course do not mean to imply that CIBC and Secure Capital acted other than in good faith. Their good faith is not challenged by any party and certainly not by this court.
[52] The tension between the sections reproduced above has been discussed most recently in Lawrence v. Maple Trust Company, 2007 ONCA 74, 84 O.R. (3d) 94. In Lawrence, the Court of Appeal began its analysis with a description of the purpose of the land titles system. At para. 30, the Court of Appeal adopted the statement of Epstein J.in Durrani v Augier, 2000 22410 (ON SC), 50 O.R. (3d) 353 at paras. 40-42 where she stated as follows:
The land titles system was established in Ontario in 1885, and was modeled on the English Land Transfer Act of 1875. It is currently known as the Land Titles Act R.S.O. 1990, c. L.5. Most Canadian provinces have similar legislation.
The essential purpose of land titles legislation is to provide the public with security of title and facility of transfer: Di Castri Registration of Title to Land vol. 2 looseleaf (Toronto: Carswell, 1987) at 17-32. The notion of title registration establishes title by setting up a register and guaranteeing that a person named as the owner has perfect title, subject only to registered encumbrances and enumerated statutory exceptions.
The philosophy of a land titles system embodies three principles; namely, 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 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 is the essence of the land titles system…
[53] In Lawrence, the Court of Appeal affirmed that under the LTA, it is the theory of deferred indefeasibility that prevails in Ontario. The theory of deferred indefeasibility is consistent with the object of the legislation which is to save individuals dealing with registered proprietors from the trouble and expense of going behind the register in order to investigate the history of title and to satisfy themselves of its validity. See Gibbs v. Messer, [1891] A.C. 248. However, as is stated in Falconbridge on Mortgages, (4th edition) at page 202:
It is important to bear in mind the exact nature of the “main object” of the legislation. A purchaser in good faith is entitled to rely upon the register and need not go behind the title of the registered owner, but, of course, he must satisfy himself that an instrument purporting to be made by the registered owner is itself a valid. Registration will not render an invalid instrument valid in favor of the purchaser therein named. But if the purchaser registers the instrument and becomes the registered owner of an estate or interest, then, even though the instrument as regards him is invalid, a purchaser from him is protected by the statute, because this second purchaser is entitled to rely upon the register and need not go behind it. 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.
[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.”
[55] Applying the theory of deferred indefeasibility in the Lawrence case, the Court of Appeal determined that Maple Trust, which had been granted a mortgage from Wright who had obtained title by fraud, was vulnerable to a claim from the true owner. It is the intermediate owner who has the opportunity to investigate the transaction and avoid the fraud. The Court of Appeal also stated that in accordance with the theory of deferred indefeasibility, any subsequent bona fide purchaser or encumbrancer would have no such opportunity and could obtain good title from Maple Trust.
[56] How does the theory of deferred indefeasibility have application in this case? It is not disputed that the discharge of the Computershare mortgage was fraudulent. I have concluded that the Lowtans were responsible for registration of the fraudulent discharge. The fact that the register showed the Lowtans on title as the registered owners of the property unencumbered by any charge in favor of Computershare is as a result of their fraud. Lawrence confirms that a fraudster can never take good title so as to become an owner.
[57] CIBC relied on the registry that showed the Computershare mortgage to have been discharged. It relied on the fact that the registry disclosed that the Lowtans owned the property without encumbrance. 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.
[58] In this case, CIBC is in a position analogous to that of Maple Trust in the Lawrence case. In Lawrence, Maple Trust was found by the Court of Appeal to be an intermediate owner having received its interest in the property from a fraudulent transferee who appeared on the register as the registered owner. 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.
[59] Meredith J.A. stated in In re Skill and Thompson, [1908] O.J. No. 41, 17 O.L.R .186 (in a passage approved by the Court of Appeal in Lawrence) at paras. 39-40:
The Land Titles Act is not an Act to abolish the law of real property; it is an Act far more harmless in that respect than in some quarters seems to be imagined, at times, at all events, when the wish is father to the imagination. It is an Act to simplify titles and facilitate the transfer of land; and, doubtless, greater familiarity with it will tend to remove a good many false notions regarding its revolutionary character.
Its main purpose is to assure that title to a purchaser from a registered owner; but, surely, it is not one of its purposes to protect the registered owner against his own obligations, much less against his own fraud.
The words of Meredith J.A. are apposite in this case: the LTA is not designed to protect the registered owner against his own fraud.
[60] In Lawrence the Court of Appeal decided that the earlier Court of Appeal decision in Household Realty Corporation Ltd. v. Liu, 2005 43402 (ON CA), [2005] O.J. No. 5001 was wrongly decided. I will not set out the facts of Household Realty in any detail. Suffice to say, in Household Realty a matrimonial home was owned jointly by a husband and wife. The wife forged her husband's signature on a power of attorney, naming her as his attorney, and then registered the power of attorney on title. She then mortgaged the property placing two separate charges on the property. The mortgagees both acted in good faith and were both unaware that the registered power of attorney was fraudulent. The Court of Appeal held that the mortgages were immediately effective once they were registered because they were given for valuable consideration and without notice of the fraud and pursuant to section 78(4) of the LTA, they were immediately effective according to their nature and intent.
[61] In Lawrence, the Court of Appeal held that the Household Realty case was wrongly decided. The mortgagees in Household Realty had relied on the power of attorney registered in the land titles office to conclude that the named attorney, the wife, had authority to charge the property. Applying the deferred indefeasibility theory, the Court of Appeal – in reversing its earlier decision – concluded that in Household Realty the mortgages ought to have been invalid as against the true owner. The position of CIBC and of Secure Capital in this case is analogous to the position of the mortgagee in Household Realty.
Conclusion
[62] I conclude that the Computershare mortgage retains its priority as the first charge in the property and that the CIBC and the Secure Capital charges rank second and third respectively.
[63] This court therefore orders that the Director of Titles rectify the register by deleting instrument number PR1692579 being the discharge of the Computershare charge and restoring the Computershare charge (instrument number PR1571875) as if the discharge had not been registered.
Costs
[64] Each party has been an innocent victim of fraud. Each party has acted in good faith. I conclude that no costs should be awarded in this case.
[65] I also agree with the submissions of Secure Capital that the costs of the priorities litigation should not be added to the costs of mortgage enforcement proceedings against the Lowtans. Secure Capital has argued that the delay and expenses caused by the dispute related to the priority of charges should not adversely affect its position as a subsequent encumbrancer and that it would cause undue hardship if the further interest, expenses, costs and penalties incurred after the commencement of these applications are added to the CIBC charges that it conceded ranks in priority to what it asserted is a valid second charge. I agree that with some modification, this is a fair approach.
[66] I therefore order that the further expenses, penalties and costs of the priorities litigation incurred from the commencement of the CIBC application should not be added to the costs of enforcement proceedings against the Lowtans. This will preserve as much as possible of the sale proceeds for the second and third mortgagees, CIBC and Secure Capital. Regrettably, this outcome will probably not help Secure Capital at least with respect to its claim against the sale proceeds because the magnitude of the debt owing under the charges of Computershare and CIBC will likely consume the entirety of the proceeds of sale but it will make a difference to CIBC.
[67] To the extent there is a shortfall in recovery from the proceeds of sale of the property for CIBC and Secure Capital, judgments obtained by CIBC and Secure Capital against the Lowtans on their mortgage covenants should survive bankruptcy of the Lowtans since both mortgages were obtained by fraud.
Murray J.
Released: January 23, 2015
CITATION: CIBC Mortgages Inc. v. Computershare Trust Co. of Canada, 2015 ONSC 543
COURT FILE NO.: 3218/13 4301/13 5501/13
DATE: 2015-01-23
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
CIBC MORTGAGES INC., TRADING AS FIRSTLINE MORTGAGES
Applicant
– and –
COMPUTERSHARE TRUST COMPANY OF CANADA
Respondent
COMPUTERSHARE TRUST COMPANY OF CANADA
Applicant
– and –
CIBC MORTGAGES INC., TRADING AS FIRSTLINE MORTGAGES and the DIRECTOR OF TITLES pursuant to s.57(14) of the Land Titles Act
Respondents
SECURE CAPITAL MIC INC.
Applicant
– and –
CIBC MORTGAGES INC., TRADING AS FIRSTLINE MORTGAGES and COMPUTERSHARE TRUST COMPANY OF CANADA and the DIRECTOR OF TITLES pursuant to s.57(14) of the Land Titles Act
Respondents
REASONS FOR JUDGMENT
MURRAY J.
Released: January 23, 2015