Law Times

Law Times • January 18, 2016 Page 9 www.lawtimesnews.com Fraudulent discharge favours first lender Property scam leaves CIBC in the lurch on mortgage BY MARG. BRUINEMAN For Law Times W hen fraudsters pull off a scam, they of- ten leave someone else holding the bag. In CIBC Mortgages Inc. v. Computershare Trust Co. of Canada, it fell to the court to determine which of the secured lenders would ultimately suffer the loss. The case revolves around Dhanraj Lowtan and Sumatie Lowtan who secured a mortgage for $280,802 on a Brampton, Ont. home from Computershare Trust. The mortgage was later discharged, but the pair contin- ued making the monthly pay- ments. They then sought financ- ing from two other institutions, securing three different mort- gages on the same property. When the house of cards collapsed and the financial in- stitutions discovered the fraud, they turned to the courts. The Lowtans filed for bankruptcy and they vacated the property. The house was subsequently sold for $297,754, falling far short of the money owed to the lenders. CIBC insisted it had first ranking charge against the property and asked for an order declaring that the CIBC mortgage of $252,800 had priority over the Computer- share mortgage. In maintaining that the dis- charge was fraudulent, Comput- ershare sought a declaration that it had first charge on the property and asked that the discharge be deleted from the register. Secure Capital MIC Inc. wanted second ranking to CIBC for its $32,000 mortgage. "It really comes down to, in the Computershare deci- sion, what the court says," says Renée Brosseau, a partner with Dentons Canada LLP whose practice focuses on fraud and real estate fraud. "What is the court supposed to do in a situa- tion like that? It really is between a rock and a hard place." The scam breaks down into two parts. The first was discharg- ing the mortgage without Com- putershare knowing; the second was securing additional mort- gages for the same piece of prop- erty — essentially selling the same property over and over again. The regular payments made for more than four years on a mort- gage that had already been dis- charged served as a clever ruse to cover the fraud and it allowed the pair to access even more money. Lenders follow a criteria set out by the Office of the Superin- tendent of Financial Institutions (OFSI) of what they need to ask those seeking a mortgage. Bros- seau says banks typically follow that script and rarely deviate from it to ask more questions. The Ontario Superior Court of Justice found in favour of Computershare, as the first to issue a mortgage. CIBC, which provided a mortgage after the first was discharged, should have gone beyond the title to ask addi- tional questions, the court added. Justice Ellen B. Murray wrote, "On a balance of probabilities, I have no doubt in concluding that the Lowtans were fully aware of and responsible for the registra- tion of the fraudulent discharge. After the registration of the dis- charge, they knowingly made false representations to subse- quent 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 Capi- tal. The registration of the fraud- ulent discharge was caused by the Lowtans and relied on by them as part of a scheme to obtain addi- tional financing from subsequent chargees which financing would not otherwise have been avail- able to them. The dishonesty of the Lowtans is made abundantly clear by the evidence." "This case is about which in- nocent party should have the priority of its charge adversely af- fected because of the fraudulent discharge purported to discharge the first registered Computer- share charge," wrote Murray. Lisa Laredo, a sole practitio- ner whose law practice focuses on real estate, corporate, and estate law, observes that because the fraudsters kept paying the Computershare mortgage for all those years after it had been discharged, there were no obvi- ous signs of the scam. And any innocent parties who became in- volved after the discharge ended up being defrauded. So it's really up to the third- party lender providing the mortgage to make the neces- sary inquiries to determine that the borrower can take on a new mortgage and that there are no prior undisclosed mortgages. "I would suggest any trans- actions with the title within the past six months must be scru- tinized and questioned so the purchaser can have some com- fort that the vendor is entitled to convey what he is purporting to do," she says. "The inquiry need only go back to the registered owner and his dealings with the property. There is no need to go back two or more prior owners. If the registered owner is acting in a bona fide manner, the fact that he innocently received title from a fraudster will not prevent him from conveying good and marketable title to a subsequent purchaser or mortgagee." At the same time, she adds, a mortgage lender needs to ask the right questions before approving a loan, and a solicitor acting for a lender needs to make similar in- quiries as if acting for the purchas- er. But because it is not practical for solicitors to conduct a detailed investigation, some fraud could initially go undetected, which is where title insurance plays a role to insure against the consequenc- es of successful fraud. Insurer LAWPRO (Lawyers' Professional Indemnity Com- pany) has been issuing warnings to lawyers about real estate fraud for more than a decade. And while Computershare serves as a further warning, LAWPRO's Mitch Goldberg, unit direc- tor and counsel for the special claims department, and policy analyst Nora Rock point out that there were no lawyers involved for placing the CIBC and Secure Capital mortgages. Nor was a lawyer involved in the discharge of the Computershare mortgage. Had a lawyer been involved there would have been potential for a claim by a mortgagee who found itself in second position, Goldberg and Rock add. And this situation differs from most frauds they've examined in that this one was perpetrated by the homeowner. A more typi- cal real estate fraud scenario in- volves imposters. And the twist here is the fraudulent discharge. "What a lawyer should do is ensure there's title insurance in place" for the lenders to ensure they're covered in the event of such a scam, says Goldberg. LT FOCUS ON Real Estate 'Everybody's trying to stop the overwhelming tide of fraud,' says Renée Brosseau. A mortgage lender needs to ask the right questions before approving a loan. 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