Law Times

www.lawtimesnews.com Page 10 January 21, 2008 / Law Times FOCUS Mortgage fraud not eliminated by Bill 152 M ortgage fraud is alive and well. But what about Bill 152, one might legitimately ask? Well, Bill 152 did not eliminate mortgage fraud, despite popular perceptions to the contrary. "What Bill 152 did was to affect the growing impact of real estate title fraud on residential homeowners in the province," says Bruce McKenna of Lang Michener LLP. "But innocent purchasers and innocent financial institutions can still be victims of mortgage fraud." Looing at Bill 152 — the Ministry of Government Services Customer Protection and Service Modernization Act, 2006,which became law that October — bears this out. "Bill 152 defines 'deferred indefeasibility' more broadly than did the corresponding common law doctrine," says Sid Troister of Torkin Manes Cohen Arbus LLP. At common law, the theory of deferred indefeasibility held that although someone who was fraudulently registered as the owner of a property did not get good title by reason of the registration, that person could pass good title to an innocent third party. "The concern was always whether you were dealing with the real person who was registered as owner," Troister says. "For that reason, identity was the critical factor at common law." By way of example, if X was the registered owner of the property and a forger came along, forged a deed, and transferred the property to an innocent third party, the transfer would not be valid because it was not the registered owner of the property who signed the deed. "At common law, the conveyance was not valid unless the person who actually signed was the person who was actually registered," Troister says. By the same token, if the innocent party, now the registered owner, mortgaged the property, the charge would be valid. By contrast, Bill 152 defines "fraudulent instruments" and invalidates them regardless of registration. "The definition of fraudulent instrument includes any document essential to perpetrating a fraud," Troister explains. "The result is that not only do you have to be dealing with the registered owner, but that owner has to be honest in the sense of not being involved in the fraud." In other words, identity and intention both come into play. In the example above, however, the result would be the same. The transfer from the forger would not be valid, but the mortgage would stand so long as the third party and the mortgagee were innocent. Initial indications, however, are that "innocent" institutional lenders will be hard to find. In December, Justice John Macdonald of the Ontario Superior Court held that lenders who have the opportunity to avoid fraud and do not do so are not "innocent" parties. To be sure, Bill 152 did not apply to Reviczky v. Meleknia, because the facts preceded the legislation's enactment. Instead, the court applied the common law doctrine of deferred indefeasibility as enunciated by the Ontario Court of Appeal in Lawrence v. Maple Trust Company. But because the concept of "innocence" or "clean hands" is equally applicable to Bill 152 cases, Reviczky will likely become the standard for interpretation of the legislation. Paul Reviczky owned a residential property in Toronto. A fraudster acting pursuant to a fictitious power of attorney posed as Reviczky's relative and purported to sell the property to Pegman Meleknia, who financed the purchase with proceeds from an HSBC Bank Canada mortgage. Reviczky, HSBC, and Melekenia were all innocent victims of the fraud, in the sense that none of them were parties to it. The issue before the court was the validity of the HSBC charge. "Broadly stated, the issue is whether the bank's charge is defeasible or indefeasible, pursuant to the Land Titles Act [as it existed before Bill 152]," Macdonald wrote. As Macdonald saw it, Lawrence refined and changed the traditional analysis of deferred indefeasibility. Rather than applying the doctrine because the lender acquired its interest from the fraudster, the court held that the lender's interest was defeasible, or vulnerable to the true owner's claim, because the lender "had an opportunity to avoid the fraud." By contrast, a deferred owner acquired an indefeasible interest as against the true owner, because a deferred owner had no such opportunity. "To my mind, [the Lawrence analysis] indicates that the opportunity to avoid the fraud is not central to the theory of deferred indefeasibility as a rationale for allocating loss amongst competing parties who claim an interest in land under the Land Titles Act," Macdonald wrote. In the case at bar, Macdonald noted, the bank was "technically" a subsequent encumbrancer. However, it dealt with the fraudster because the bank's lawyer, who was also the purchaser's lawyer, had dealt with the fraudster's lawyer. "That is sufficient to hold that the bank's charge is defeasible in favour of the true owner," Macdonald concluded. Additionally, the bank could have avoided the fraud had its lawyer done anything to scrutinize the power of attorney. "As I have held, scrutiny of it would have led to questions which likely would have avoided the fraud," Macdonald wrote. "However, none of this was done because of a 'business as usual' approach to a transaction which required something more." Macdonald did acknowledge that "legal fault" concepts were not part of the ratio in Lawrence. "Yet, one of the principles on which the decision was based was encouraging lenders to be vigilant when making mortgages," Macdonald noted. As Macdonald saw it, however, premising defeasibility without fault concepts "including causation" could result in anomalies. "If lenders increase their vigilance in mortgage transactions, that will increase the likelihood that they will be in proximity to unidentified fraudsters," he reasoned. "If the fraud is not discovered and a loan is made on the security of a mortgage, the risk of defeasibility is increased by that increased vigilance if fault concepts including causation are not part of the test. "On the other hand, being less vigilant and avoiding inquiries also avoid some of the risk of being in proximity to unidentified fraudsters. If a loan is made on the security of a mortgage, there will be an increased likelihood that the mortgage will be indefeasible." Financial Strength Ratings: Demotech, Inc. A" | Fitch Ratings A + | LACE Financial A At Stewart Title, it's how we work that sets us apart. We deal in title insurance and related products, undertaking no part of the transaction that has traditionally fallen to legal professionals. Since our inception into the Canadian market, you will find that we have consistently combined comprehensive coverage with unparalleled support for legal professionals. We are dedicated to streamlining your practice and increasing your revenue through our programs and innovative technology solutions. At Stewart Title, we know it's our relationship with our customers that determines our success. That's why service is the foundation of our business and integrity, the keystone in all our dealings. Call us today or visit www.stewart.ca. Canadian Head Office (Toronto): (888) 667-5151 Atlantic Canada: (888) 757-0078 Western Canada: (866) 515-8401 Québec: (866) 235-9152 STG_05_LawTimes 8/16/06 8:53 AM Page 1 BY JULIUS MELNITZER For Law Times Bruce McKenna LT *Pages 1-16.indd 10 1/17/08 7:18:45 PM

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