Court File and Parties
COURT FILE NO.: CV-93006-15 DATE: 20160504
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
YING TSUEN TIAO Applicant
– and –
DINO LEONE, JEANETTE LEONE, 2335758 ONTARIO INC., SIMARAN KAUR SIDHU, WEST ROYAL CORP., KONSTANTINO NTENTES, MICHAEL MARRESE, THE COPRORATION OF THE CITY OF VAUGHAN and THE DIRECTOR OF TITLES PURSUANT TO SUBSECTION 57(14) OF LAND TITLES ACT Respondents
Counsel: Christos Papadopoulos, for the Applicant Howard Crosner, for the Respondents Dino Leone and Jeanette Leone P. Polster, for the Respondent 2335758 Ontario Inc. J. Sydor, for the Respondent Director of Titles
HEARD: April 15, 2016
REASONS FOR DECISION
Introduction
1This application is brought by the applicant, Ying Tsuen Tiao, as a result of an alleged fraudulent discharge of a charge/mortgage (the Tiao mortgage) by the respondents Dino Leone and Jeanette Leone (the Leones) that improperly eliminated the applicant’s interest as first mortgagee.
2The applicant asks for an order that the fraudulent discharge be declared void and of no force and effect, and that the court direct the Director of Titles (the Director) to rectify the register by deleting the fraudulent discharge and restoring the Tiao mortgage on title to the property as a charge/mortgage in first position as if the fraudulent discharge had not been registered.
3This relief is not opposed by any of the other mortgagees on title (all of whom are named as respondents in this application). The relief is partially opposed by the Director, who was named as a respondent pursuant to s.57(14) of the Land Titles Act, R.S.O. 1990, c.L.5 1. The Director agrees that the fraudulent discharge should be deleted from the title, but takes the position that the mortgagee cannot be put back into the first position. The reasons for the Director’s position will be set out later in this decision.
4The primary legal issue in this case is whether the deletion of the fraudulent discharge from the register results in the Tiao mortgage being reinstated as a first mortgage as if it had never been discharged, or whether the provisions of the Land Titles Act require that it be reinstated as the third mortgage subsequent to mortgages placed on the property after the fraudulent discharge was registered.
Facts
Introduction
5The property that is the subject matter of the application is 121 Belview Ave., in Vaughan, Ontario (the property). The current registered owners of the property are the respondents Mr. and Mrs. Leone.
6On May 28, 2007, a charge/mortgage was registered in Ms. Tiao’s favour as against the property as Instrument No. YR990860.
7Subsequently, on March 6, 2015 a discharge of the Tiao mortgage was registered as against title to the property as Instrument No. YR2264407. Ms. Tiao was not aware that the discharge was registered and she did not consent. She alleges that the discharge was fraudulent, and the unchallenged evidence presented on this application (which I will review below) confirms this allegation.
8Just prior to (and at the time of) the registration of the fraudulent discharge the Tiao mortgage was registered in first position as against title to the property.
Position of the Respondents
9The respondent 2335758 Ontario Inc. (233 Inc.) holds the charge/mortgage that is currently in first position as against title to the property following the fraudulent discharge of the Tiao mortgage. 233 Inc. takes the position that it does not oppose the relief sought by the applicant, and it takes no position on the application.
10The respondent Simaran Kaur Sidhu (Sidhu) holds a charge/mortgage against the property that is currently in second position and was registered subsequent to the fraudulent discharge of the Tiao mortgage. Sidhu has filed a notice of intention to act in person. Pursuant to a settlement dated March 30, 2016, Sidhu agreed not to file any material in relation to the application and not to take any position on the application. Pursuant to the agreement that was filed with the court, he did not oppose the relief being requested by the applicant.
11The respondents West Royal Corp., Konstantino Ntentes and Michael Marrese (the West Royal respondents) registered a Certificate of Pending Litigation as against title to the property on March 31, 2015. The West Royal respondents have not filed a notice of appearance or any other material and did not appear at the hearing.
12The City of Vaughan was named as a respondent out of an abundance of caution. The city has confirmed that it would not be responding to the application.
Position of the Leones
13This application was commenced on September 10, 2015, and was originally scheduled to be heard on October 2, 2015. At the request of the Leones, the application was adjourned on consent to December 8, 2015, and again to April 15, 2016.
14The Leones have not filed any responding material, although Mr. Leone did attend an examination under Rule 39.03 of the Rules of Civil Procedure on December 3, 2015.
15At the commencement of the hearing on April 15, 2015 the Leones’s were represented by Mr. Crosner, who advised that he was just retained on April 13, 2016 and requested an adjournment to prepare reply materials. The adjournment was opposed and I rejected the adjournment request on the basis that the Leone’s have known about this case for seven months, and have already received two adjournments. They have had the applicant’s factum since March 23, 2016. There was no valid explanation offered for waiting until two days before the hearing to retain counsel. In my view this was simply another delay tactic on the part of the Leones.
16The applicant would be prejudiced by any adjournment because there is not sufficient equity in the house to pay all of the mortgages on the property, and the applicant will never be able to recover the costs thrown away if another adjournment is granted.
17Given my ruling, Mr. Crosner sought to be removed from the record because he did not have an opportunity to prepare anything in relation to the application. I denied this request and Mr. Crosner did not make any submissions in relation to the application. The respondent, Mr. Leone, was also present in court when the application was argued.
The Tiao Mortgage and the Fraudulent Discharge
18On December 23, 2005, the Home Trust Co. had registered a charge/mortgage as against title to the property for the principal sum of $318,750.00. The Tiao mortgage for the principal sum of $82,250 was registered as against title to the property on May 28, 2007. As such, at the time of its registration, the Tiao mortgage was not the first mortgage on the property.
19A fire took place at the property on January 10, 2008. Later in 2008, the Home Trust Co. commenced power of sale proceedings under the Home Trust mortgage. Ms. Tiao then paid the entire amount outstanding under the Home Trust mortgage (in excess of $318,000) in order to secure the discharge of that mortgage. The Home Trust mortgage was discharged by the registration of a Discharge of Charge on August 21, 2008.
20The principal amount owing under the Home Trust mortgage was added to the principal amount of the Tiao mortgage, with the result that the principal amount owing under the Tiao mortgage was in excess of $400,000. At this point the Tiao mortgage became the first mortgage/charge on the property.
21Mr. Leone was examined on December 3, 2015 and acknowledged these facts and his knowledge of them.
22The insurers of the property at the time obtained an Interpleader Order, dated January 18, 2012 pursuant to which $240,000.00 fire insurance proceeds was posted by them into court. Pursuant to para. 6 of that order the fire insurance proceeds were to remain in court until further order of the court. Ms. Tiao and the Leones were claimants to the fire insurance proceeds.
23The fraudulent discharge of the Tiao mortgage was registered by the Leones through their then lawyer, Ms. McGoldrick, on March 6, 2015. There is no evidence or suggestion that Ms. McGoldrick was involved in or had any knowledge of the fraudulent scheme.
24A lawyer (at the time) by the name of Margaret Anderson-Clark falsely held herself out (or, alternatively, was falsely held out by the Leones) as the lawyer acting for Ms. Tiao in relation to the fraudulent discharge of the Tiao mortgage. Ms. Anderson-Clark has since been suspended by the Law Society of Upper Canada and her status is listed as Suspended (Trusteeship). It is unclear from the record before me whether Ms. Anderson-Clark was actually involved in this transaction, or whether her name was used as a convenient cover for the Leones.
25Ms. Tiao does not know and has never met or spoken to Ms. Anderson-Clark, and Ms. Anderson-Clark was never retained to act for Ms. Tiao on any matter.
26During his examination Mr. Leone confirmed (after being confronted with email correspondence) that he was the one who advised his lawyer that Ms. Tiao was represented by Ms. Anderson-Clark. He confirmed during this examination that he could not provide the basis of his belief that Ms. Anderson-Clark was acting for Ms. Tiao.
27During the examination Mr. Leone also confirmed that the Leones had not made any payments whatsoever to Ms. Tiao prior to the fraudulent discharge of the Taio mortgage.
28On March 4 and 5, 2015 Ms. Anderson-Clark (or someone purporting to be Anderson-Clark) sent correspondence to Ms. McGoldrick attaching a “Mortgage Discharge Statement” and “Revised Mortgage Discharge Statement”, each bearing the forged signatures of Ms. Tiao. These statements indicated that the sum of $130,475.00 was to be paid to a company by the name of Kora International Inc. (Kora Inc.) in order to discharge the Tiao mortgage. This correspondence purported to be from Ms. Anderson-Clark’s law firm at “180 West Beaver Creek Road, Richmond Hill”, although it appears that Ms. Anderson-Clark’s law firm was at that time located at 39 Richvalley Cres., Richmond Hill.
29233 Inc. advanced the sum of $375,000 into the trust account of Ms. McGoldrick. Ms. McGoldrick then prepared a trust ledger statement in reliance on the Anderson-Clark statements setting out how and to which parties the 233 Inc. mortgage proceeds would be disbursed. Mr. Leone confirmed during his examination that the Leones were aware of all of the figures set out in the trust ledger statement and authorized Ms. McGoldrick to disburse the 233 Inc. mortgage proceeds in the manner set out in the trust ledger statement.
30Mr. Leone testified that the Kora Inc. funds were not couriered to Ms. Anderson-Clark. Mr. Leone went to Ms. McGoldrick’s office on March 6, 2015, and volunteered to personally deliver the cheque to Ms. Anderson-Clark’s office at the “180 West Beaver Creek” location, which the applicant alleges is a fraudulent address for Ms. Anderson-Clark. Mr. Leone claims that he left the cheque with a receptionist at that address.
31Ms. Tiao has never received any money whatsoever from Kora Inc. A Corporate Profile Report for Kora, dated March 14, 2016, indicates that the officers of that corporation are Arun Lakhani and Sunil Lakhani. Ms. Tiao does not know those individuals and has never met nor spoken with them.
32The trust ledger statement indicates that the respondent Sidhu received $110,000 to discharge a previous Sidhu mortgage (dated February 26, 2014) for $45,600. Sidhu was then granted the March 9, 2015 mortgage for $55,825.14. The applicant alleges that the current Sidhu mortgage is either invalid or fraudulent in nature. As indicated, the respondent Sidhu did not participate in these proceedings except to confirm that the he is taking no position and does not oppose the relief requested by the applicant. It is not necessary for me to make any findings with regard to the validity of the second Sidhu mortgage.
33According to the trust ledger statement the Leones received the sum of $77,666.07 from the 233 Inc. mortgage proceeds. This was confirmed by Mr. Leone in the examination.
34Subsequent to the registration of the fraudulent discharge, the following charge/mortgages were registered as against the title to the property:
(a) A charge/mortgage registered on March 6, 2015 for $390,000 in favour of the respondent 233 Inc. (registered 27 minutes after the fraudulent discharge).
(b) A charge/mortgage registered on March 9, 2015 for $55,825.14 in favour of the respondent Sidhu.
35Ms. Tiao was completely unaware that her mortgage had been discharged or that the 233 Inc. or Sidhu mortgages had been registered.
36The evidence provided on this application demonstrates, and I so find, that the Leones perpetrated a fraud upon Ms. Tiao by using forged documents to improperly obtain the fraudulent discharge of the Tiao mortgage. This enabled the Leone’s to pay off other creditors and walk away with the sum of $77,666.07 from the 233 Inc. mortgage proceeds.
Fire Insurance Proceeds
37In addition to obtaining the funds from the fraudulent discharge, the Leone’s used the fraudulent discharge together with forged consent documents in order to improperly obtain a court order releasing the fire insurance proceeds into the account of a lawyer by the name of Robert J. Maki. There is no evidence or suggestion in the case before me that Mr. Maki was involved in or had any knowledge of the fraudulent scheme.
38On March 24, 2015, the West Royal respondents commenced an action against the Leones for breach of contract and fraud in relation to the sale of the property in January 2015, for $390,000. Mr. Maki was the lawyer for the West Royal respondents. The West Royal respondents obtained a Certificate of Pending Litigation (CPL) with respect to the property on March 31, 2015. The Leones were noted in default and default judgment in favour of the West Royal respondents in the amount of $85,000 was issued on September 25, 2015.
39During his examination Mr. Leone’s evidence was that he reached an agreement with Michael Marrese (one of the West Royal respondents) that the Leones would use Mr. Maki to retrieve the fire insurance proceeds out of court, and that Marrese would receive $15,000 out of those proceeds. In exchange for the $15,000, Marrese would remove the CPL on title, and the balance (approximately $225,000) of the fire insurance proceeds would go to the Leones (who would pay Maki’s legal fees in relation to obtaining the fire insurance proceeds).
40The Leones retained Mr. Maki who prepared a motion record within the same action in which the Interpleader Order was previously obtained in January 2012 to pay the $240,000 fire insurance proceeds into court.
41The motion record included a sworn affidavit of Mr. Leone, dated June 5, 2015, in which he stated that the parties (the Leones and Ms. Tiao) had reached a settlement of the action, Ms. Tiao’s mortgage had been discharged, and that there were no outstanding issues between the parties. He swore that Ms. Tiao consented to the release of the $240,000 being held in court. The motion record contained a signed consent.
42Ms. Tiao’s evidence is that her consent is a forgery; she did not sign the consent to this order and did not consent to have the fire insurance proceeds released from court or paid into Mr. Maki’s trust account.
43On the basis of the forged consent the Leones obtained an order dated June 5, 2015, that the fire insurance proceeds ($240,000 plus interest) be released to Mr. Maki in trust.
44Counsel for Ms. Tiao described Mr. Leone’s evidence regarding Ms. Tiao’s signature on the forged consent as “unbelievable and troubling”. Mr. Leone explained that Mr. Maki prepared the consent and that Mr. Leone picked up the consent and brought it home for he and his wife to sign. He did not return the consent to Mr. Maki, but, once again, Mr. Leone acted as the courier, and took the consent to Ms. Anderson-Clark’s “office” at the 180 West Beaver Creek address. Mr Leone left it with the receptionist at that address. He did not speak to Ms. Anderson-Clark. He has never spoken to Ms. Anderson-Clark or exchanged any email with her.
45Ms. Anderson-Clark did not return the consent to Mr. Maki. Once again Mr. Leone acted as the courier, and a few days later returned to the 180 West Beaver Creek address to retrieve the consent, which now, he claims, had Ms. Tiao’s signature on it. He delivered the signed consent to Mr. Maki.
46The fraudulent disbursement of the fire insurance proceeds is not directly before me on this application. It will be dealt with in another proceeding. On January 12, 2016, Ms. Tiao obtained an order requiring Mr. Maki to repay the fire insurance proceeds back into court. I have reviewed the facts relating to this incident because they are directly related to the narrative of the fraudulent mortgage discharge, and, in my opinion, corroborates the applicant’s assertion that the Leone’s have engaged in a scheme to defraud Ms. Tiao in relation to the property.
Issues
47The issues before the court are:
- Can the register for the property be rectified by deleting the fraudulent discharge and restoring the Tiao mortgage, and;
- Can the Tiao mortgage be restored as the first charge on title to the property.
48The applicant takes the position that both of these questions must be answered in the affirmative. The Director takes the position that only the first question is answered in the affirmative; once restored, the Tiao mortgage must take its place on the register behind any mortgage/charge registered before the rectification.
Land Titles Act and the Theory of Deferred Indefeasibility
49The answer to these questions depends on the interpretation of various provisions of the Land Titles Act. That legislation was considered by the Ontario Court of Appeal in the case of Lawrence v. Maple Trust Company, 2007 ONCA 74; 84 OR (3d) 94; 278 DLR (4th) 698. In that case a person’s home was fraudulently transferred and the property was then mortgaged. The question before the court was whether the charge against the property by the mortgagee was valid and enforceable as against the true owner of the property despite having been acquired from a fraudster. Did the provisions of the Land Titles Act protect the interests of the innocent third party (the mortgagee) who relied on the register or the interests of the true owner?
50The Court of Appeal, at para. 30, quoted the following paragraphs from Epstein J. (as she then was) in Durrani v. Augier (2000), 50 O.R. (3d) 353, [2000] O.J. No. 2960 (S.C.J.), at paras. 40-42, as a summary of the purposes of the Land Titles Act:
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 p. 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 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 the land titles system.
51With those purposes in mind, the Court of Appeal considered the interpretation of sections 78(4) and 155 of the Act. These provisions provide:
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.
- Subject to this Act, a fraudulent instrument that, if unregistered, would be fraudulent and void is, despite registration, fraudulent and void in like manner.
52Taken on its own, s. 78(4) would give effect to any registered instrument even if it were fraudulent. The Court of Appeal asked the following question about the relationship between these two provisions (at para. 34):
Put to one side, for the moment, the introductory clause in s. 155. Without that clause, s. 155 provides that a charge on land that would be fraudulent and void if unregistered, remains fraudulent and void despite registration. The challenge is to interpret s. 155 in light of the clause [78(4)]. What does it mean that a registered charge remains fraudulent and void "subject to the provisions of this Act"? In particular, how is s. 155 to be interpreted subject to s. 78(4), which provides that an instrument is deemed effective on registration?
53The Court of Appeal answered this question by adopting the theory of “deferred indefeasibility” as the guiding principle of the legislation. The court explained the theory of “deferred indefeasibility” as follows (at para.21):
On this 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.
54Based on the theory of deferred indefeasibility, the Court of Appeal held that the mortgagee was the intermediate owner. As the party that dealt with the fraudster, the mortgagee had an opportunity to avoid the fraud if it had been diligent. The owner, Ms. Lawrence, had no such opportunity. Therefore the loss should be borne by the mortgagee.
55It is significant, however, that the Court of Appeal expressly rejected the argument (at paras. 41 and 42) that under the Act “fraudulent documents are void for all time and all purposes, regardless of registration”. The Court held that this theory is contrary to the notion of a land titles system of land holding, and “would negate the mirror and curtain principles” in the legislation and “defeat the entire purpose of the Act, which is to establish a land titles system…and overcome the insecurity of title inherent in a registry system”.
56The court concluded that the theory of deferred indefeasibility was preferable for policy reasons. The first of these reasons relates only to the owner of the property, and not to a mortgagee (para. 57):
Under the theory of immediate indefeasibility, the innocent homeowner has no defence to a mortgagee's action for possession. The homeowner is exposed to the loss of her home through eviction with the only available remedy being to make a claim for loss of value of the property from the Fund. The idea that a person who buys a specific parcel of land with a specific house on it should be compensated in damages runs contrary to the notion that real property, in such circumstances, is not fungible. To see a lender compensated in damages does not offend that same notion.
57Taken on its face, this paragraph supports the Director’s proposition that the theory of deferred indefeasibility protects only the registered owner of the property, and not lenders like Ms. Tiao in the present case.
58This position is also supported by s. 68(1) of the Act, which provides that:
- (1) No person, other than the registered owner, is entitled to transfer or charge registered freehold or leasehold land by a registered disposition.
59The second policy reason articulated by the Court of Appeal could apply to either an “original” owner or mortgagee (para. 58):
Moreover, unlike the intermediate owner, the homeowner has no opportunity to avoid the fraud. Ms. Lawrence [the original owner] had no ability to discover that her home was being fraudulently sold and mortgaged. By contrast, Maple Trust made the decision to advance … money and had the opportunity to avoid the fraud. By interpreting the Act in accordance with the theory of deferred indefeasibility, the law encourages lenders to be vigilant when making mortgages and places the burden of the fraud on the party that has the opportunity to avoid it, rather than the innocent homeowner who played no role in the perpetration of the fraud.
60Finally, Ms. Tiao relies on paragraph 67 of the Court of Appeal’s decision, which appears to cast the “deferred indefeasibility” net more broadly so that its benefit could apply to a mortgagee as well as an owner:
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.
61It is important to point out that s. 78 of the Land Titles Act was amended in 2006 to include the following provisions that were not considered by the Court of Appeal in Lawrence:
Exception
78(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.
62These provisions taken together appear to confirm the theory of deferred indefeasibility adopted by the Court of Appeal in Lawrence. The applicant’s position in this case, quite simply, is that the discharge of the Tiao mortgage was a fraudulent instrument, and therefore s. 78(4) does not apply to it.
63Also relevant is O. Reg. 690, R.R.O. 1990 s. 63 under the Land Titles Act, that provides:
- An instrument perpetrates a fraud for the purposes of clause (d) of the definition of “fraudulent instrument” in section 1 of the Act if,
(a) it is a cessation of a charge or of an encumbrance; and
(b) the person who purports to register it is a fraudulent person.
64I should also make reference to the definitions of the terms “fraudulent instrument” and “fraudulent person” in s. 1 of the Land Titles 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;
Analysis
65The applicant takes the position that the theory of deferred indefeasibility accepted by the Court of Appeal in Lawrence applies to this case. In Lawrence the original owner was also the victim. The fraudster was a stranger with no interest in the property.
66Applying the theory of deferred indefeasibility to this case, the cast and the players change roles. Ms. Tiao, the first mortgagee, takes the part of the original owner who has no knowledge or involvement in the fraud, the subsequent mortgagees (233 Inc., Sidhu) are the intermediate owners who dealt with the fraudster, and the registered owners, the Leones, are the fraudsters. There are no deferred owners in this case.
67There is no dispute on the record before me that the discharge of the Tiao mortgage was a “fraudulent instrument” under the Act, and I have found that the Leones were the “fraudulent persons” who forged the signature on that fraudulent instrument.
68Ms. Tiao argues that the policy of deferred indefeasibility is that it makes more sense to place the burden on the party, which although innocent of wrongdoing, had some opportunity to prevent the fraud. Having an opportunity to avoid fraud makes the party’s interest in land defeasible in favour of the true owner. (Isaacs v. Royal Bank, 2010 ONSC 3527, at para. 52; Stanbarr Services Ltd. v. Metropolis Properties Inc. 2016 ONSC 1258, at paras. 9 and 10; Reviczky v. Meleknia (2007), 88 O.R. (3d) 699, at para. 65)). In this case, the parties with the opportunity to prevent the fraud were the subsequent mortgagees, and their interest is defeasible in favour of Tiao’s prior interest.
69Accordingly, the registration of the fraudulent discharge of the Tiao mortgage is void under s.155 of the Act, and the theory of deferred indefeasibility would put the Tiao mortgage back to the first priority it occupied prior to the fraudulent discharge. The subsequent mortgagees, who are intermediate owners who dealt with the fraudster, cannot defeat the original owner’s title.
70The Leones, although the registered owners of the property, are “fraudulent persons” under s. 1 of the Act because they “forged the instrument” by forging the signature of Ms. Tiao.
71The discharge qualifies as a “fraudulent instrument” under s. 1 of the Act because it is a transfer or charge, or, under s.63 of the regulation, the cessation of a charge, “given by a fraudulent person”.
72While the Leones are the registered owners of the property, the evidence on the motion before me is that they do not live there. It was an investment property. This is important because one of the policy reasons articulated by the Court of Appeal in Lawrence for preferring deferred indefeasibility over immediate indefeasibility was that under the latter “the homeowner is exposed to the loss of her home through eviction”, a prospect that was deemed to be intolerably unfair.
73The Leones, however, do not face the prospect of eviction. This would obviously be true for many registered owners under the Land Titles Act. They are really in no different position than Ms. Tiao and the subsequent mortgagees: they face the prospect of losing their investment. The Lawrence case makes no distinction, however, between a resident homeowner and a non-resident registered owner. The benefit of deferred indefeasibility would accrue to either. Once we recognize that the benefit of deferred indefeasibility is not limited to resident homeowners, and that all the parties in this case are investors, there is no reason why the theory of deferred indefeasibility should apply to one kind of investor (the registered owner) but not another kind of investor (the registered mortgagee).
74The Director takes the position that the Leones cannot be fraudulent persons under the Act because they were the registered owners and therefore had the right to grant the mortgage/charges to 233 Inc. and Sidhu. Since these are valid mortgages, s.78(4.2) of the Act applies to give full effect to their registered charges and protects their priority even though they were registered subsequent to the fraudulent discharge. The subsequent mortgagees were entitled to rely on the register when they determined to advance mortgage funds to the Leones and therefore their mortgages should rate in first and second priority with Tiao having the right to have her fraudulently discharged mortgage reinstated but in third priority to the 233 Inc. and Sidhu charges.
75The Director cautions that putting the Tiao mortgage back into first priority would defeat the purposes of the Land Titles Act as embodied in the mirror principle and the curtain principle described by the Court of Appeal in Lawrence at para. 30.
76The applicant relies primarily on Murray J.’s recent decision in CIBC Mortgages Inc. v. Computershare Trust Co., 2015 ONSC 543. The facts in that case are remarkably similar to the facts of the case before me. The registered owners of the property fraudulently discharged a valid first mortgage and subsequently registered two mortgages as against title to their property. Murray J. applied the provisions of the Act and the theory of deferred indefeasibility and ordered the Director to rectify the register of the property by deleting the fraudulent discharge and restoring the previous first mortgage into first position as if the fraudulent discharge had not been registered.
77Murray J. decided that the subsequent mortgages, although valid mortgages granted by the registered owner of the property, were still fraudulent mortgages under the Act because the registered owner did not own the interest in the property purported to be conveyed to the subsequent mortgagees. He held that the registered owners were fraudulent persons within the meaning of the Land Titles Act in their dealings with the subsequent mortgagees, and concluded that the mortgages given by the owners to the subsequent mortgagees were fraudulent instruments within the meaning of s. 78(4.2) of the LTA. He stated (at para. 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.
78The Director takes the position that Murray J.’s analysis is incorrect, and advises that the appeal in this case will be heard by the Divisional Court in October, 2016. The Director takes the position that the subsequent mortgages cannot be both fraudulent instruments and valid mortgages under the Act. I do not agree with this assertion. Fraud, like ownership, is not an all or nothing proposition. Ownership is made up of a great many rights that can be divided up into multiple packages. Transferring a package of rights you do not own is fraud, regardless of what packages of rights you do own. The subsequent mortgage can be a valid mortgage as between the owner and the mortgagee, while still being fraudulent to the extent that it purports to be a first charge when an existing first charge is still extant (but fraudulently discharged). In this regard I agree with Murray J. at paras. 51 and 56 -58.
79Applying that analysis to the present case, the Act defines “fraudulent instrument” as, inter alia, “an instrument…under which a fraudulent person purports to receive or transfer an estate or interest in land”. The Leones, as forgers of the fraudulent discharge, were fraudulent persons, even though they were registered owners of the property. The subsequent mortgages were fraudulent instruments because they were instruments under which the fraudulent persons purported to transfer an interest in land (first priority) that belonged to Ms. Tiao.
80Murray J. applied the Lawrence decision to the case before him as follows:
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.
81In my opinion the same analysis applies in this case. The subsequent mortgagees (233 Inc. and Sidhu) are in the position of intermediate owners having received their interest in the property from a fraudulent transferee. In this case the Leones are the fraudulent transferees, having fraudulently conveyed Ms. Tiao’s interest in the property to themselves by the registration of the fraudulent discharge, and then purporting to transfer that interest to 233 Inc. and Sidhu.
Conclusion
82I conclude that the Tiao mortgage was fraudulently discharged, and that pursuant to s.78 (4), (4.1) and (4.2), it should be reinstated as the first charge on the property and that the 233 Inc. and Sidhu charges should be ranked second and third respectively.
83Section 57(13) of the Land Titles Act authorizes the court to direct the rectification of the register if the court is satisfied on the basis of evidence that a fraudulent instrument has been registered on or after October 19, 2006.
84This Court Orders:
- That the fraudulent discharge registered as Instrument No. YR2264407 on March 6, 2015 in relation to the property municipally known as 121 Belview Ave., Vaughan, Ontario bearing PIN 03286-0311(LT) (the property) is void and of no force and effect;
- That the Director of Titles is directed to rectify the register for the property by deleting the fraudulent discharge (Instrument No. YR2264407) and restoring the discharged mortgage (Instrument No. YR990860) in first position and in priority to all other charges/mortgages registered as against title to the property after May 28, 2007.
Costs
85The applicant is awarded costs against the respondents Dino Leone and Jeanette Leone. If costs cannot be settled between them, the applicant may file costs submissions of no more than 3 pages plus costs outline and settlement offers within 20 days of the release of this decision, and the respondents Dino Leone and Jeanette Leone may respond 10 days thereafter on the same terms. There will be no costs against any of the other respondents.
Justice R.E. Charney
Released: May 4, 2016